We note the stock price correction of 30% over the past four months offers an attractive entry price and we retain our 'Buy' rating with a DCF-based target price of Rs 400.
Avanti Feeds (Avanti) has articulated its strategy of market share over margins in its FY19 annual report. Its Ebitda margin declined from 20.1% in FY18 to 11.7% in FY19, but market share in shrimp feed rose to 47% in FY19 from 43% in FY18.
The Ebitda margin is back in its historical band of 11-12% and we expect it to remain stable over FY20-21. In case of shrimp exports, Avanti is focusing more on (1) value-added products as they grew 374% in FY19, and (2) higher revenue from non-USA countries. Revenue contribution of non-USA countries grew from 15% in FY18 to 26% in FY19. It has also managed to reduce working capital investment from 29 days in FY18 to 26 in FY18.
We note the stock price correction of 30% over the past four months offers an attractive entry price and we retain our ‘Buy’ rating with a DCF-based target price of Rs 400 (implied P/E of 14.6x FY21E). The prices of shrimp feed have remained the same at Rs 64/kg over FY15-19. Stable shrimp feed prices as well as improving quality have helped the company in gaining market share from ~40% in FY15 to 47% in FY19.
The company plans to focus more on market share gains in FY20 via (1) improving technical support to farmers, and (2) improving feed conversion ratio (FCR). The company has started selling to countries such as Japan and China to reduce dependence on the USA. The revenue share of non-USA markets expanded from 15% in FY18 to 26% in FY19. It has also focused more on exports of value added shrimp products and reported 374% growth in FY19.
We note the company’s Ebitda margins moved up from long-term average (FY11-17) of ~12% to 20.1% in FY18 and declined back to 11.7% in FY19. However, we believe, margins are sustainable at ~12%. We expect the company to report an Ebitda margin of 12.1% in FY20. The working capital days have declined from 29 in FY18 to 26 in FY19. Though revenue share of shrimp exports, which requires higher investment in working capital, has gone up from 17.1% in FY18 to 21.6% in FY19, Avanti has managed to reduce working capital days due to lower inventory days.