From fishing to bottom fishing!

What’s your perfect formula to beat scorching summers?

Many of you may simply like to pack your bags, land in Goa (or Bora Bora, if you thought you should aim further), play water sports, have a canful of chilling cola and eat lip-smacking fish curry with steamed rice (pardon us if you are a vegetarian).

Well, this isn’t a travel blog or a note on the hospitality industry.

Let’s talk curry and culture today!

India has a coastline of a little over 7,500 kilometers which makes fishing an important profession in the coastal areas. However, the dependence on capture fishing has been on a decline, thanks to the growing popularity of fish culture. India is one of the leading exporters of shrimps. You might be surprised to know shrimp accounts for roughly 75% of India’s marine products exports.

By clocking USD 420 billion of merchandise exports, India overshot its target by 5% in FY22. This development has caught the eye of policymakers and experts alike. Similarly, India’s marine products exports touched an all-time high of USD 7.74 billion in FY22. But this development failed to attract the media’s attention.

The Marine Products Export Development Authority (MPEDA) has set an ambitious target of USD 14 billion (Rs 1 lakh crore), to be achieve by FY25.

Speaking about the representation of the sector in the listed space, Avanti Feeds, Apex Frozen Foods and Waterbase are some of the prominent names that come to the fore. Avanti Feeds has been the industry leader in the segment.

India’s largest shrimp feed producer, Avanti Feeds enjoys a market share of 48%-50%. Nearly 80% of Avanti Feed’s revenue comes from the shrimp feed business and the remaining from shrimp processing. The contribution of the shrimp hatchery and power business is insignificant so far.

Avanti Feeds has an installed feed manufacturing capacity of 6 lakh metric tonnes at present. The company has been expanding its capacity by 1.75 lakh metric tonnes by incurring a capex of Rs 125 crore. The facility is expected to commence commercial operations in June 2022.

The hatchery division of Avanti Feeds began its operations in December 2020. With this, the company supplies not only feeds but also the seeds.

Avanti Feeds operates its frozen foods business through its subsidiary—Avanti Frozen Foods Pvt. Limited. The company possesses two highly advanced and export oriented shrimp processing facilities with a total installed capacity of 22,000 Metric Tonne.  It offers a wide range of products—raw shrimps, cooked shrimps and value-added shrimps.

The company has been planning to add new processing capacity of 7,000 metric tonnes at a capex of Rs ~80 crore.

Avanti Feeds has immensely benefited from its association with Thai Union, one of the world’s leading processors and exporters of frozen and canned seafood. Thai Union Group PCL holds a 15.44% stake in Avanti Feeds and 40% in Avanti Frozen Foods. On top of that, Thai Union Asia Investment Holding Limited holds another 8.77% stake in Avanti Feeds.

This collaboration helps the company keep up with the technological advancements in shrimp culture, feed manufacturing and processing thereby offering it an edge over its competitors.

The company has a network of 20,000 small and medium shrimp farmers spread across the country. Avanti Feeds not only offers them shrimp feed but also helps them with value-added services such as pond preparation, selection of quality seeds and advice on best aquaculture practices. The company leverages this network to procure raw shrimps for its processing business.

But not all’s hunky-dory.

In the Budget for FY23, the government lowered the customs duty on imported feed from 15% to 5% which is considered to be a drag for the domestic shrimp feed industry.

Shrimp culture is a seasonal industry. The crop-1 for the year starts in mid-January. Harvesting happens between the end of April and July. Similarly crop-2 for the year begins in June and September and December is the harvest period.

Going by the published records of the management’s interactions with the media/analysts, it seems of late there have been some reservations about a few management decisions. The red flags include high unutilized reserves, a jump in the remuneration of directors and the promoter group participation in unrelated businesses.

Besides the challenging business environment, these events seem to have affected the stock price performance of Avanti Feeds negatively.

At an Extraordinary General Meeting (EGM) for FY22 held on March 23, 2022, the management sought a hike in maximum managerial remuneration payable from 11% to 16%. This proposal doesn’t seem to have gone down well with analysts (not associated with Ventura) tracking the company. The company management has suggested that it’s complying with the rules of the Companies Act dealing with the structure of managerial remuneration.

Clarifying the preference for maintaining high reserves on the books, the management stated that it draws comfort from excess reserves during tight market conditions. It’s noteworthy that the company is virtually debt free despite adding capacities from time-to-time.

The promoter group of Avanti Feeds has participated in a tri-party joint venture by picking up a 30% stake where Thai Union and R&B Food Supply are the other two companies.

According to the management of Avanti Feeds, the promoter group decided to keep the JV outside Avanti’s purview because it’s not related to the existing aqua culture business of Avanti Feeds. The JV is expected to be more focused on poultry and meat and it’s more a trading company, unlike Avanti, which has a strong focus on manufacturing and direct customer marketing.

The company is hopeful about the business prospects for the next couple of years and has guided for a 15% top line growth and 10% EBITDA margins. In 9MFY22, the company has clocked 6% EBITDA margins, which were hit primarily by rising input costs. It largely consumes three raw materials— fish meal, soybean meal and wheat flour.

The average price of soybean meal was Rs 70/kg in the first 3 quarters of FY22 as against Rs 43/kg in FY21. And as compared to Rs 89/kg in FY20, fish meal prices jumped to Rs 102 in FY22.

The company has managed to pass on nearly 80% of the prices to its buyers but had to absorb a rise of around 20% in the raw materials costs. The management is hoping to see some stability coming back to raw material prices in FY23 and beyond.

End note

India’s rising focus on marine exports and tailwinds to the sector offered under the Production Linked Incentive (PLI) scheme may keep shrimp culture companies in the limelight.

Speaking about Avanti Feeds, its technical collaboration with the Thai group and frequent capacity additions may bode well for the company.

However, the commoditized nature of business makes Avanti Feeds a cyclical company although these cycles may not be as volatile and unpredictable as those in metals. Seasonality, climatic conditions, monsoon and of course, raw material prices, can significantly affect the company’s prospects.

Lastly, monitoring the company’s further response to the issues highlighted as red flags will be crucial.

Do you think Avanti Feeds is a bottom fishing candidate or a good catch? Do let us know.

You may also like to read: Should you bet on these 5 Nifty Next 50 Jewels?

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