We initiate coverage on Avanti Feeds (Avanti), market leader in shrimp feed and a growing player in shrimp exports. Avanti benefits from: 1) numerous moats such as strong brands, established distribution, multiple manufacturing units and sub- segmentation strategy; and 2) relationship with global sea food major, Thai Union.
We expect India’s shrimp exports (value) to grow in mid-teens and Avanti to be a major beneficiary of this trend. With strong financials (>35% return ratios and FCF/PAT of 66% over FY13-18), we expect Avanti’s earnings growth to resume in FY20E after a decline in FY19E due to lower margins.
We initiate with a BUY rating and DCF based target price of Rs 1,901 (implied target P/E 20x FY20E EPS). India’s shrimp export growth has been propelled by three factors: 1) the government in 2009 allowed cultivation of the much-in-demand L. Vannamei shrimps, 2) rising shrimp consumption in the US (4% CAGR over CY12- CY17) with just 1.1% inflation in shrimp prices compared to 2.3-7.3% in other meat products during the same period, and 3) collapse of Thailand’s shrimp exports after outbreak of EMS disease in 2012. India’s shrimp exports in value terms grew at a CAGR of 28.5% over FY11-FY17 and we expect it to grow in mid-teens on the back of: 1) consumption growth of 4-5% pa in the US, 2) market share gains from South- East Asia, 3) higher exports to Europe and the Middle East, and 4) better realisation with shift to value-added products and rupee depreciation.
Avanti’s moats include: 1) strong brands; 2) wide distribution network; 3) multiple manufacturing units to reduce freight costs, and 4) sub-segmentation strategy. The company’s market share in shrimp feeds industry has grown from 26.1% in FY13 to 43% in FY18. Avanti benefits immensely from its association with Thai Union, a global sea food major, which holds 25% stake in the company and 40% stake in Avanti’s shrimp export subsidiary.