What Is Dolly Khanna’s Game-Plan In Buying Avanti Feeds?

First, let’s do a quick status check of the YOY performance of Dolly Khanna’s portfolio.

Latest portfolio of Dolly Khanna

Recent additions to Dolly Khanna’s portfolio

As you can see, out of the 11 old stocks in her portfolio, Dolly has gained more than 100% in 9 stocks. Two of these stocks have given 200%+ gain. The balance two stocks have given average returns of 48% and 23%.

The overwhelming number of winner stocks in the portfolio tells you all you need to know about Dolly Khanna’s stock picking ability.

The one thing that will strike you as you gaze at this magnificent portfolio is that Dolly Khanna is, at heart, a conservative investor. She prefers to put her money in stocks with a predictable earnings pattern and with no external risks. That is probably why Dolly has studiously avoided Pharma stocks (because of risks arising from DPCO price control and FDA approvals) and Bank/ NBFC stocks (risks of interest rates, RBI rules and NPAs). Instead, she has stuffed her portfolio with makers of pressure cookers, plastic chairs, bathroom tiles, paper, shoes, milk etc, where the only risk arises from the competition and not from uncontrollable external factors.

Her latest stock pick, Avanti Feeds Ltd, appears to go against this grain.

Avanti Feeds is a small cap company with a market capitalisation of Rs. 737 crore. It is engaged in the manufacture of Prawn and Fish Feeds and processing of shrimps. It has established a joint venture with Thai Union Frozen Products PCL, Thailand, the world’s largest seafood processors and manufacturers of prawn and fish feeds. Avanti also has a 3.2 MW wind farm in Karnataka.

Dolly bought a chunk of 91,500 shares of Avanti Feeds in the period from April to June 2014.

Avanti Feeds has already been an incredible multi-bagger. In the past one year itself, the stock has given a mind-boggling return of 358%. Over 2 years, the return is 484%. Over 5 years, the return is an astounding 4357%.

The best part is that despite the explosive gains, Avanti Feeds is still quoting at a P/E of 10 times the TTM EPS of Rs. 77.54. The company also has a high ROCE of 48% and a low debt:equity ratio of 0.31. On all counts, the stock is expected to do very well in the foresaable future.

However, what differentiates Avanti Feeds from Dolly Khanna’s other stock picks is the fact that Avanti faces grave risk from external factors over which there is no control.

Avanti’s own annual report points out that the nature of shrimp culture activity, on which shrimp feed and shrimp processing and export is totally dependent, is highly volatile. The shrimp culture success depends on climatic conditions, availability of good quality seed, free from attack of any disease and good culture practices by the farmer. It is also pointed out that the international export price of the shrimp also influences growth of culture to a great extent. The report also states that India has seen in earlier years, failure of shrimp culture activity due to wide spread diseases, steep fall in international prices of shrimp, levy of anti dumping duty by USA etc., due to which the profitability of feed and processing activity dropped significantly leading to loss or inadequacy of profits.

It is also pointed out that natural calamities like floods and cyclones during the culture season can have serious impact on the prospects of successful culture.

There was a major scare in November 2013 when Marine Products Export Development Authority (MPEDA) ordered a temporary suspension of shrimp farming in India to prevent early mortality syndrome (EMS) amongst shrimps. Fortunately, the scare did not last long and things got back to normal very fast.

However, when the dreaded “EMS” disease or other diseases like the “white spot” disease will wipe out your shrimp crop is not known. It is also not known when your shrimp ponds could be a victim of a cyclone or flood or drought or any other such calamity. Also, what if some big-ticket consumer country like the USA or the EU decides that the Indian shrimps are not hygienic and bans them? This has happened in the past when the EU rejected Indian shrimps on the ground of “poor hygiene”. Japan also created a scare recently when it threatened to ban shrimps from India on the ground that they had “ethoxyquin”, an antioxidant, in them.

So, I am not sure why someone like Dolly Khanna, who is so jittery of external factors like DPCO, FDA & RBI, would venture into something so blatantly risky like Avanti Feeds.

Of course, we can’t second-guess this savvy investor. All that we can do is compliment her for her risk-management technique. The amount that she has invested in Avanti Feeds (her cost price of each share must be about Rs. 400+) is just about 3% of her total portfolio size.