Tuesday, January 31, 2012

Avanti Feeds Ltd - In Shrimp We Trust

Avanti Feeds Ltd (AFL) is a leading manufacturer of Shrimp & Fish Feeds in India. It is also a Shrimp Processor and Exporter.

AFL started its commercial operations in 1993 in technical collaboration with Pingtai Enterprise, Taiwan. Later the company expanded the capacity and enhanced technical and marketing capabilities by bringing on board Thai Union Frozen Products PCL (TUF) of the Thai Union Group , Thailand, one of the world's largest seafood manufacturers. Today TUF is closely associated with AFL with equity participation, technical collaboration and a marketing tie-up in India.

Avanti Feeds Units

AFL has two Shrimp Feed manufacturing units and one Fish Feed manufacturing unit, certified ISO 9001:2008, in Kovvur and Vemuluru, West Godavari District, Andhra Pradesh, India with a capacity of 70,000 MT per annum. AFL produces nutritionally well balanced and high quality feed, consistently, catering to the Indian prawn and fish farmers, at their door step.

AFL also has a Shrimp Processing and Exports Unit, certified ISO 22000: 2005 located in Gopalapuram, East Godavari District, Andhra Pradesh, India . This unit confirms to HACCP, USFDA, EU & BRC Global standards. It is also Aquaculture Certification Council (ACC) Certified for best aquaculture practices.

Avanti Thai Aqua Feeds Pvt Ltd (ATAFPL)

AFL & TUF entered into a JV to set up a shrimp feed manufacturing facility Avanti Thai Aqua Feeds Private Ltd, in Gujarat, India to cater to the demand for shrimp feed in the west of India. This company is now being merged with the parent. This merger is beneficial to AFL shareholders as it achieves a good increase in capacity for the merged entity, without a significant increase in equity, due to cancellation of cross-holdings.

Ready To Eat / Ready To Cook foray

AFL has ventured into domestic RTE/RTC market with an object of providing export quality shrimp ready to eat and ready to cook , by launching "PRAWN KING" brand products.

AFL envisages to cater to the prawn consumption of Hotels, Restaurants and households with these products.

It also aims to establish eateries-cum-shops to popularise shrimp products, and with this in mind, AFL has started an eatery in "Eat Street", Necklace Road, Hyderabad. AFL plans to open similar outlets in Hyderabad, and thereafter expand to other cities in phased manner


AFL has also put up 4 windmills in Karnataka state. The electricity from these mills is being sold to the Karnataka Power Transmission Corporation under PPA.

White Shrimp (P. Vannamei) introduction in India - The Game Changer

In late 2009, the Indian government announced that it would allow the cultivation of the pacific white shrimp Penaeus Vannamei from the following stocking season, starting Feb 2010. This followed pilot projects undertaken by the Central Aquaculture Authority. Till then, Indian shrimp farms had been allowed to cultivate only the Indian Tiger Prawn (P. Monodon).

The reason for this decision lies in the Advantages the P. Vannamei species has over the P. Monodon, namely
  • More Disease Resistant : SPF (specific pathogen free) / SPR (specific pathogen resistant) white shrimp , though not totally disease-free, are more disease resistant than tiger prawn . Tiger prawn is prone to white spot disease.
  • Lower Cost : P. Vannamei requires a lower protein (20-35 percent) - and hence cheaper - diet during culture than P. Monodon (36-42 percent), and are more able to utilize the natural productivity of shrimp ponds, even under intensive culture conditions.
  • Higher Stocking Density : P. Vannamei can be cultivated at higher stocking density. P. Vannamei are amenable to culture at very high stocking densities of up to 150/m2 in pond culture, and even as high as 400/m2 in controlled re-circulated tank culture. Although such intensive culture systems require a much higher degree of control over environmental parameters, it enables the production of high numbers of shrimp in limited areas, resulting in better productivity per unit area than that currently achievable with P. Monodon in Asia.
  • Better Growth Rates : Under commercial conditions in Asian earthen ponds, P. Vannamei has displayed good growth & survival rates. In contrast, the growth (and survival) rate of P. Monodon has been declining in recent years.
  • Salinity Tolerance : P. Vannamei are tolerant of a wide range of salinities (0.5-45 ppt) and more amenable to inland culture sites than P. Monodon
  • Temperature Tolerance : P. Vannamei are more tolerant of low temperatures (down to 15°C) than Tiger prawn, enabling them to be cultured in the cold season. Thus increased yearly harvests are possible. Nevertheless, they grow better in warmer temperatures, (best between 23-30ÂșC comprising the majority of the tropical and subtropical world), hence in India, the typical season may be considered Feb-March to Oct-Nov.     
  • Ease Of Breeding : P. Vannamei is an open thelycum species, meaning that they can be induced to mate and spawn easily in captivity (unlike the closed thelycum P.      Monodon) which enables the culturist to close the life cycle of the shrimp, facilitating genetic selection (i.e. for improved growth rate and disease resistance) and domestication programmes. This feature permits much more control and enhancement of the cultured stock and allows the development of SPF and SPR stocks, which are already commercially available. This in turn relieves the expense, disease implications, environmental concerns, unpredictability and waste of relying on wild broodstock.
  • Larval Rearing : Higher survival rates in hatchery of 50-60% for P. Vannamei compared to P. Monodon (20-30%).
  • Marketing : White shrimp generally preferred over tiger shrimp in the US market due to taste. Strong local demand for white shrimp in Asia. Meat yield is higher for P. Vannamei (66-68%) than for P. Monodon (62%) .
Disadvantages include :
  • Growth rate of P. Vannamei slows after reaching 20 g, making production of large-sized shrimp slower. P. Monodon can grow to larger size, commanding higher price than P. Vannamei.
  • High competition on international markets for P. Vannamei as production is world-wide.
  • Handling, transportation and processing of P. Monodon is easier.
Shrimp culture in general is subject to the un-certainties of climatic conditions, diseases (even post SPF/SPR seed), international price fluctuations, foreign exchange fluctuations & anti-dumping duties.

Fallout Of The Momentous Government Decision

Prior to the introduction of P. Vannamei shrimp, the Indian shrimp production had been steadily declining, because of frequent virus attacks hitting the wild tiger prawn species.

But with the new change, the 2010 season saw a turnaround in the fortunes of the Indian shrimp farming industry (and consequently the shrimp feed industry). Taking cognizance of the opportunity, AFL entered in to a tie-up with TUF for technical knowhow & cost effective formulations, to make the most of the trend of switchover from Tiger Prawn to P. Vannamei.

If 2010 saw a revival of the Indian Shrimp industry, the next year 2011, saw the industry bloom, bolstered further by some special factors - disease hitting the Vietnamese shrimp, floods in Thailand leading to lower output - which led to Indian exporters capturing a greater share of the shrimp market. AFL made the most of this, reporting brilliant numbers for the financial year 2011-12 (9 month period).

While these special factors are unlikely to repeat in 2012, Indian shrimp manufacturers are expected to consolidate their position in the world markets.

Importantly, P. Vannamei having a lower unit-cost compared to tiger prawn, it has also opened up the possibility for greater domestic consumption in the country. With prices now comparable to other meats, domestic consumption of shrimp, especially in the RTC/RTE category, could throw up a big opportunity over the next decade.

The overall advantages of P. Vannamei shrimp over Tiger Prawn makes P. Vannamei farming 2-3 times more profitable than Tiger Prawn farming . With more & more farmers continuing to switch-over to P. Vannamei cultivation, and many new players entering the shrimp farming industry, looking to the excellent performance/profits of incumbents, there is now a scarcity of shrimp feed to meet the demand, which can only benefit shrimp feed players like AFL, which looks set to continue to do well.

Obviously, new entrants are announcing their entry into the shrimp feed industry also. But by tying up with TUF , whose pedigree the author feels is unimpeacheable, AFL should be able to maintain it's standing as one of the market leaders, for at least a few years to come. Besides having vast experience and expertise in P. Vannamei Hatchery, Feed and Culture, TUF also has a large wholesale and retail net work in USA, and will also support AFL in expanding it's processing and export market .
In fact, in it's last Annual report, the company has said it expects shrimp feed sales to increase yearly by 25% , and export of shrimp to grow at 10% per annum, till 2014-15.

Thai Union Frozen Products (Thai Union Group), Thailand - Brief Facts

AFL's collaborator TUF will hold 25.12 % of AFL's post-merger equity of Rs 9.08 Cr (post the merger of ATAFPL with AFL).

TUF Website : http://www.thaiuniongroup.com
  • Global Seafood Player, Global Workforce : 32000
  • The largest Asian (ex-Japan) seafood processor in sales value.
  • The world’s largest and most integrated canned tuna manufacturer
  • Brands - Chicken Of The Sea, Mareblu, Petit Navire, John West, Sealect, Century Tuna, Belotta, H. Parmentier, Fisho etc
  • Strategic Shareholders - Mitsubishi Corporation (Japan), Hagoromo Foods (Japan)
  • 9 month sales (2011) - USD 2.4 Billion
TUF's Recent Awards & Recognition From Financial Community :

BCG 100 Global Challengers List
Boston Consulting Group
Best-Managed Thai MidCap
AsiaMoney Magazine's Best Managed Companies Poll
Acquisition of MW Brands – Best Thailand Deal
AsiaMoney Magazine's Best Managed Companies Poll
One of the top 3 Best Asian Companies in the Food, Drink and Tobacco category
Euromoney Magazine’s Annual Best Asian Companies Poll
Best CEO & Best CFO in Food & Agro Sector
Securities Analysts Association Of Thailand

Avanti Feeds Ltd - In Brief

Company Website : http://www.avantifeeds.com/


BSE Scrip Code : 512573

CMP : Rs 97.45 (closing price, BSE 31st Jan, 2012)

FY11 EPS : Rs 4.24

FY11 Dividend : 10% (Rs 1/- )

FY12 (9 Months EPS) : Rs 30.37

Recommendation :

Avanti Feeds Ltd has put in a brilliant performance for the current year, even discounting the special factors (Thailand floods, Vietnam disease problems) that bolstered the Indian shrimp industry this year. Though Q4 is generally a slack quarter, AFL should end the year with an EPS in the Rs 30-Rs 35 range.
With the merger of it's JV with itself, AFL adds new capacity without much equity dilution. So even without the special factors listed above, this author feels that AFL should report similar or near similar numbers next year too. At it's current price, it discounts current year's (FY11-12) earnings just 3 times.

Seafood (including shrimp) consumption the world over is rising yearly, due to increasing world population & also because seafood is considered a healthier alternative to meats, and so the shrimp & shrimp feed industry should do well in the future too. By tying up with TUF, which is one of the largest producers of canned & frozen seafood in the world, AFL is assured of the best industry knowhow & practices.

This author feels that management integrity & capability of both AFL & TUF appears to be above board, and shareholders can expect both to be treated fairly & be part of a robust future.

Post Q3 results, AFL share price has fallen, probably because retail investors expected a similar result to the bumper Q2 results, not factoring both the seasonal nature of the industry, where H1 is always better than H2, nor the special factors (mentioned above) that dictated Q2's splendid performance. There is a possibility that Q4 results may also bring a similar reaction from retail investors.

However if discerning investors are convinced of the merits of an investment in AFL post their own research, the author suggests that it might be prudent not to wait for the "best possible price", as one but rarely achieves the same. Rather, they can start accumulating in small quantities in a staggered manner.

Author : Bosco Menezes

Recommendation Date : 31.01.2012

Disclaimer/Disclosure :
At the time of writing this article the author has a position in the stock covered by this report. The author or any of his dependent family members may make purchases or sales of the securities mentioned in the report while the report is in circulation. Readers/recipients of this report are strongly advised to do their strict due diligence, and should be aware that the value of investments can go down as well as up. The author shall not be liable for any direct or indirect losses arising from the use of the contents of this report, and readers are therefore cautioned to use the information contained herein at their own risk. In fact, readers would do well to seek the advice of a qualified independent advisor. The author certifies that all of the views expressed in this report accurately reflect his personal views about the subject company at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com