Avanti Feeds

Avanti Feeds might be at or reaching cyclical bottom. There could be a bit more pain and re-rating could be slow due to macro conditions. But, from a 2 year horizon, this seems to be a good time to accumulate.

Some of my rationale for identifying this as cyclical bottom:

• Input costs for Avanti has increased due to increase in prices of fishmeal, Soybean, Wheat and Cereals. This is also affecting the poultry sector (you can check margins of Venky’s India as well). As a result, EBIDT & OPM margins are at 10 year lows for Avanti.
• US FDA restriction on cooked shrimp is also lifted. But, it hasn’t resulted in export growth yet. Also, China is just opening up and consumption is expected to revive.
• Freight costs might be coming down, adding some cost savings.
• COVID has been a terrible period for the shrimp industry with demand faltering and production constrained. This has forced many farmers out of business and many going for a crop holiday till April 2023.
• Industry is still grappling with negative sentiments from farmers (demand side). The problems got worse to the extent that government needed to step in to mediate pricing on feed as well as offtake.
• This resulted in Avanti not being able to increase feed price and at the same time forced to absorb high raw material cost.
• There is severe lack of automation and technology use in shrimp farming. 60% of farmers are small and marginal.
• Indian domestic consumption has not been tapped well. Given that Indian diet largely misses animal protein (with poultry as the primary source), there is a good scope for shrimps to fill in the gap
• Meanwhile, Ecuador is proving to be a tough competitor recently, capturing India’s export market share. To me, this is a significant reason for the downcycle to be a bit more prolonged.
• Lastly, the frequency of posts in this thread is also at bottom , indicating negative investor sentiment.

Positives going ahead

• On a long term aspect, India has huge land availability for shrimp farming. Coupled with increased domestic consumption, I am optimistic on sustainable growth rate of above 10% (might take a while to dig out of current cycle)
• Govt has reduced duties on fish feed and is trying to support the industry through policies
• CAPEX and commissioning of new plant will yield good topline growth and better ROCE
• Potential to look into fish feed market which would be another leg of growth
• Potential for margin expansion from value added products
• Stock price is reaching attractive levels now (PE<20) compared to the potential earnings going ahead
• Company has enough cash to survive and exploit the cyclical nature of industry. They are also rightfully holding the cash for working capital purpose than just to reduce cash in balance sheet

Not sure if Avanti is applying waste management processes. For example, shrimp heads can be reused in feed, shrimp shells can be used to extract chemicals for pharma and paper industry.

Reference
A good overview on Indian Shrimp industry and recommendations to govt and industry

Disc: Started nibbling with SIP