Rising shrimp prices positive for Avanti Feeds

ET Intelligence Group: Recovery in shrimp prices augurs well for India’s largest aquaculture company Avanti Feeds. After declining in 2018, international shrimp prices have risen near 20 per cent in the past six months suggesting that a revival is on the cards.

Higher shrimp prices would encourage shrimp cultivation among Indian farmers, thus resulting in higher demand for shrimp feeds. Avanti is expected to benefit from this since it is the largest feed producer with nearly 50 per cent market share. In the September quarter, it reported 41.1 per cent revenue growth and a 154 per cent net profit growth year-on-year.

The shrimp feed business which is about 80 per cent of Avanti’s revenues grew by 51 per cent, while the processed shrimp export business grew by 15 per cent. Shrimp feed prices rose 3 per cent in the quarter after declining for three consecutive quarters. Another positive is that the processed shrimp business, which it entered only three years ago, reported 19 per cent volume growth, a double-digit growth for the tenth consecutive quarter.

The operating margin before depreciation (EBIDTA margin) was 12.1 per cent, higher by 250 basis points year-on-year. Assuming a sustained trend in shrimp prices and EBIDTA margin, analysts expect the company to deliver 12.5-14 per cent compounded sales growth and 20-24 per cent compounded earnings growth for the next three years. At Tuesday’s closing price of Rs 462, the stock was traded at 16 times FY20 estimated earnings. The valuation is reasonable given industry scalability, market leadership Avanti enjoys and the strong business model with return on capital of 30 per cent and a consistent dividend paying track record.

Shrimps are usually cultivated in the hot weather and India is the fastest growing shrimp exporting country taking market share from the Southeast Asian countries. Of 8,000 km coastline and access to 1.2 million hectares of brackish water, less than 15 per cent is utilised as of now. Given that most of the major consuming countries have colder weather, except China, India has an advantage.