Avanti Feeds

This is what I was able to come up with after doing some reading here and elsewhere (AR, earnings call, research articles, etc). A huge thanks to those who really dug and put up the information here in the previous posts. I have not read extensively but had a glance at Avanti Feeds and Sharat Industries and so the analysis is in the context of the shrimp sector mainly. Those of you who have been following the stock for a while, kindly correct/comment. A nice video on differences in productivity between the shrimp producing countries: https://www.youtube.com/watch?v=UnUci4BF97k&t=1213s)

What’s against the industry:

1. Competitively priced shrimp from Ecuador
2. The perception of Ecuadorian shrimp being better than Indian shrimp
3. If the US (AD and CVD) investigations concludes that government subsidies by both Ecuador and India are either “equal” or Ecuadorian subsidy is “less than Indian” subsidy or even after introducing the additional import tariff and dumping duty, Ecuadorian shrimp is still more competitively priced relative to the Indian shrimp.
4. Apart from Ecuadorian shrimp productivity (and output) already being superior to the Indian shrimp productivity (and output), if Ecuador ventures into Value added products and is able to scale, the Indian shrimp will further lose its competitiveness
5. Volatility in price of the 3 raw materials in addition to government intervention (in the form of minimum support price for Wheat and Soyabeans and a non-conducive policy for fish meal production/import)
6. Raw material prices remain relatively high throughout and do not come down as anticipated (Feed business is left with mediocre margins)
7. Inability to raise prices as farmers are price sensitive (shifting to fish, etc) and government intervention to protect farmers
8. A disease or virus affecting shrimp production in India (and asia/globally)
9. India is unable to adopt the technological advances for increased productivity (automatic feeders, mechanical harvesting, availability of electricity, lack of vertical integration and large-scale farming), hence loosing against Ecuador.
10. Although management has skin in the game, but slightly exorbitant salaries may indicate something – Are good times behind us? / Is Growth coming to an end?
11. Management becomes dumber: Either under pressure to meet market expectations or in order to justify the increased pay, they might expand into new areas (destroying capital or taking on debt). This might be unlikely but you never know with certainty with new blood coming in.
12. Their ability (and probability) to return to their original (or normalized) margins depends entirely on the upturn of the cyclical-nature (revival) of the shrimp industry in India. (THE UNKNOWABLE)
13. How bad could it get? (THE DEADLY UNKNOWABLE) i.e. The probability of the Indian shrimp sector being wiped out as a result of the fast and aggressive ascent of Ecuadorian shrimp sector, which has advantages of higher productivity, large vertically integrated players and proximity to US and Europe.

What’s in the favour of the industry:

1. The company has no debt and plenty of cash (most likely can withstand a prolonged downturn)
2. Capitalism at Play: If you consider the US to be the cradle of capitalism, and if the AD &CVD investigation levels the playing field for India and Ecuador, then there is a very good chance that things might get back on track with an upturn in the cycle. (The investigation against Ecuador and Indonesia is for selling in the US at less than fair value and govt. subsidies whereas the investigation against India and Vietnam is for govt. subsidies). If allegations prove to be true and the outcome/result of the investigation plays out positively, with the former two countries put at a greater disadvantage than the later, then this might result in the Indian shrimp becoming competitive and growth might continue with the upward turn in the cycle.
3. (For Avanti) Management has a proven track record of not making dumb decisions, being conservative and has skin in the game (I am fine with them hoarding cash). They might be slow, but are cautious – slow for not recognizing Ecuador as a threat and cautious for keeping cash for opportunities and not giving it out either as dividend or buybacks along with a strong reluctance to using bank debt (aversion to paying interest – I personally like that).
4. (For Avanti) The new areas of pet food and care are accretive to volume, growth and revenues – difficult to put a probability on how this might play out in the Indian market.
5. Adoption of shrimp as a part of staple food in India – a distant possibility, unlikely to happen in the short term
6. (For Avanti) – Growth from shrimp feed being consumed by Bangladesh and Sri Lanka – again very unlikely. (Pros – low cost of labor; Cons- lower productivity)
7. High returns on tangible capital (if the cycle turns normal)
8. (For Avanti) All the negative and uncertain aspects discussed above are priced in the stock (This is true from a valuation perspective only if you are investing on the basis of reversion to mean and an upturn in the cyclicality of the business/industry). However, it certainly is not cheap considering the above negatives – On a TTM basis AVANTI commands a PE of 16, an EV/EBIT of about 10 and an acquirer’s multiple of 14; and the fact that I cannot predict the normalised earnings with a reasonable degree of confidence. One might say it’s fairly valued with no debt and management with a decent chunk of skin in the game. (Multiples were calculated on a standalone basis for the core business and hence excludes other income form investments).
9. If the business cycle is up by the time the new processing facility comes online in March 2024, this could help them scale revenues, earnings and growth (both for Sharat and Avanti)
10. There was a recent month on month increase in US imports of shrimps from India – could indicate an uptick in the cycle (however, difficult to say/judge with Ecuador being a worthy opponent)
11. A new initiative of fish feed – this might need a while before it can be considered to be on the cards.
12. Freight costs have come down – but doesn’t help much overall
13. The raw material costs could decrease gradually once the new crop comes in, with prices of soyabean and wheat normalizing. However, this is speculation.
14. I could be wrong/inaccurate here: “The import of brood stock fell by as much as 40% from December to march 2023.” Might indicate lower overall output → decreased supply resulting in higher prices → more farmers in action next season → more consumption of feed → bumper supply before the cycle turns down again. The key would be to get out before the cycle changes direction, but the pot might be sweetened if the US investigation permanently shifts the scale on our side (this is too much to ask btw).

@harsh.beria93 @lakshay_agarwal @spatel @shyamdsundar – Any insights are highly appreciated. Thanks