Avanti Feeds rating – Buy: Revival in shrimp prices in the US augurs well

We upgrade Avanti to BUY as (i) revival in shrimp prices in its key market, USA augurs well for shrimp processing/feed business. Higher shrimp prices result in better profitability of all players in shrimp value chain; (ii) the increase in customs duty on shrimp feed from 5% to 15% in Budget in Feb’21 will benefit domestic feed manufacturers; and (iii) due to steep volatility in shrimp prices and profitability, strong players such as Avanti are expected to gain market share from smaller players who are affected more.

The company is also steadily reducing its dependence on USA and non-USA market accounts for ~14% of its exports. The stock trades near its Mean P/E – 1SD providing margin of safety at current valuations. We model Avanti to report PAT CAGR of 13.5% over FY20-23 and upgrade to Buy with TP of Rs 560 (15x FY23e).

Revival in shrimp prices in key market, USA: Post outbreak of Covid, the shrimp prices declined in USA from $14/kg in Mar’20 to $11.35/kg in Oct’20. However, we have seen steady revival in shrimp prices post Oct’20 and the prices are at $11.93/kg in Feb’21. Revival in shrimp prices augurs well for the shrimp industry and all players in shrimp value chain (farmers, feed manufacturers and processing companies) generate higher profitability.

Increase in customs duty to benefit domestic players: Imports account for 8-10% of total shrimp feed market in India. Due to increase in customs duty, domestic feed manufacturers such as Avanti are likely to benefit.

Expect market share gains: With sharp volatility in shrimp prices and swings in profitability, we expect smaller players in shrimp exports as well as feed to be hurt more than Avanti Feeds. Due to strong Balance Sheet (Net cash of ~Rs 10 bn on FY21e Balance Sheet), we expect Avanti to be a beneficiary and expect it to gain market share in shrimp feed as well as shrimp processing.

Reducing dependence on USA: Avanti is also in the process of reducing the dependence on USA and has started shrimp exports to other countries such as China and Europe. While demand is impacted in USA, recovery in other markets such as China will help to improve volume off-take. Non USA exports are c.14% of total shrimp exports.

Upgrade to BUY: We expect Avanti to report revenue and PAT CAGRs of 8% and 13.1% over FY20-FY23 and also expect its RoE to be stable (~23%) over the same time-frame. We upgrade the stock to Buy from ADD rating with a DCF-based target price of Rs 560 (implied P/E 15x FY23e EPS).