Ashish Chugh’s HIDDEN GEMS

……. in search of Market Beating Stocks

@hiddengemsindia

May 27, 2013

Avanti Feeds Ltd.

CMP – Rs. 109 BSE Code –512573 NSE Symbol - AVANTI

With Equity, Technical & Marketing support from Thai Union Group, one of the
world’s largest seafood producers, EPS of Rs.33, PE of 3.5 and a dividend yield of
6%, Avanti Feeds is an investment candidate from an industry expected to grow at
20-25% over the next 2-3 years.

First of all, a word of caution – the stock of Avanti Feeds is a small cap stock with a
market cap of under Rs.100 crores which besides risks of Equity investing also carries
risks associated with investing in small caps – including liquidity risk & high impact
cost in trading. It is therefore recommended for investors with high risk appetite and
is recommended for slow accumulation at the current levels and on declines for long
term holding.

Established in 1993, Avanti Feeds Ltd (AFL) is the leading manufacturer of Prawn and
Fish Feeds and Shrimp processor and exporter from India. 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 (www.thaiuniongroup.com), 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.

Prawn and Fish Feed Manufacturing Units

Avanti has Three Prawn and a Fish Feed Manufacturing Units, certified ISO
9001:2008, in Kovvur, Vemuluru in West Godavari District, Andhra Pradesh and Pardi
in Valsad District, Gujarat, in India with a capacity of 90,000 MT per annum. Avanti
produces feed catering to the Indian prawn and fish farmers.

Shrimp Processing and Exports Unit

The Shrimp Processing and Exports Unit, certified ISO 22000: 2005 is located in
Gopalapuram near Ravulapalem, East Godavari District Andhra Pradesh, India and
confirms to HACCP, USFDA, EU & BRC Global standards. It is also an ACC Certified for
best aquaculture practices.

The company has state of art technology coupled with quality consciousness, storage
facilities & logistics capabilities, and caters customers in USA, Europe, Japan,
Australia & Middle East.

Financials

The latest financials of the company are given as under :-

QUARTERLY - LATEST RESULTS - Avanti Feeds Ltd (Curr: Rs in Cr.) As on

26/05/2013

Quarter Year Ended Yr Ended Year

Quarter Quarter Ended (Mar 13) (Mar 12) Ended
Particulars (Mar 13) (Mar 13) (% Var) (12) (12) (%Var)
Ended Ended

Sales 156.2 77.24 102.2 639.18 381.82 67.4

Other Income 0.35 0.24 45.8 2.58 3.35 -23
Other Operating Income
PBIDT 13.47 7.56 78.2 52.5 47.17 11.3
Interest 1.28 1.2 6.7 3.37 3.14 7.3
PBDT 12.19 6.36 91.7 49.13 44.03 11.6
Depreciation 1.4 1.59 -11.9 4.98 4 24.5
PBT 10.79 4.76 126.7 44.15 40.03 10.3
Tax 4.18 1.82 129.7 13.96 11.96 16.7
Deferred Tax 0 0 - 0 0 -
PAT 6.61 2.94 124.8 30.19 28.07 7.6
 SHARE PRICE - LATEST EQUITY - Avanti Feeds Ltd (Curr: Rs in Cr.)
As on 26/05/2013

Latest Data
Latest Equity(Subscribed) 9.08
Latest Reserve 87.49
Latest EPS -Unit Curr. 30.45
Latest Bookvalue -Unit Curr. 106.35
Face Value 10
Book Value (with YTD NP) - Unit Curr. 132.32

Stock Exchange BSE NSE

Latest Market Price--Unit Curr. 109 108
Latest P/E Ratio 3.58 3.55
Latest P/E Ratio -cons 3.62 3.59
Latest P/BV 1.02 1.02
Latest P/BV - cons 1.05 1.04
52 Week High -Unit Curr. 210.9 225.6
52 Week High-Date 26-09-2012 09-11-2012
All Time High -Unit Curr. 210.9 225.6
All Time High-Date 26-09-2012 09-11-2012
52 Week Low -Unit Curr. 83.5 93.15
52 Week Low-Date 13-05-2013 15-04-2013
All Time Low -Unit Curr. 3 21.2
All Time Low-Date 25-10-1996 16-06-2010
Market Capitalisation 98.97 98.06
Dividend Yield -% 5.96 6.02
Dividend Yield -% - cons 5.96 6.02
Price Date 24-05-2013 24-05-2013

(Source – Capitaline)

Risks & Investment Rationale

KEY RISKS

Lets talk about the risks first. The key risks associated with investing in the stock of
Avanti Feeds are :-

 Shrimp Culture is subject to un-certainties of climatic conditions.

 Volatility of international prices of sea food and fluctuating foreign exchange
rates
 Raw material prices –especially soyabean.
 Susceptibility of virus and other diseases for sea food
 Anti-dumping duty on sea food
INDIAN SHRIMP INDUSTRY
Introduction of Vannamei (White Shrimp) – Game Changer for the Industry

The Indian Shrimp industry was passing through difficult times till 2009 when the
Indian government announced that it would allow the cultivation of the pacific White
Shrimp “Penaeus Vannamei” from the stocking season, starting Feb 2010. Till then,
Indian shrimp farms had been allowed to cultivate only the Indian Tiger Prawn (P.
Monodon).

The reason for the decision lies in various advantages the P. Vannamei (White
Shrimp) species has over the P. Monodon (Tiger Prawns), namely

a) Better Disease Resistance (than Tiger Prawns)

b) Lower Cost in terms of lower protein requirement in Diet
c) Higher Stocking Density & hence better productivity
d) Better Growth & Survival Rates
e) Other advantages include – Better Salinity & Temperature tolerance, and ease of
breeding.

Moreover, since White Shrimp is generally preferred over Tiger Shrimp in the US due
to its taste, it makes marketing of the product easier.

A few disadvantages include :

a) Growth rate of White Shrimp slows after reaching a certain size, making
production of large-sized shrimp slower. Tiger Prawns on the other hand can
grow to larger size, commanding higher price.
b) High competition on international markets for White Shrimp as production is
world-wide.

Fallout Of The Government Decision

The result of the government’s decision was a revival in fortunes of the industry.
Prior to the introduction of P. Vannamei shrimp, the Indian shrimp production had
been steadily declining, because of frequent virus attacks hitting the Tiger Prawn
species.

The introduction of Vannamei to India benefited in augmenting the marine shrimp

production from a level of around 88,000 MT worth Rs 1,915 crore in 2008-09 to
about 145600 MT worth Rs 3,585 crore in 2010-11 and to about 224500 MT valued
at Rs 6,600 crore in 2011-12. The industry thus registered a 3 fold growth in 3 years.
The prospects of Indian shrimp producers were further bolstered in 2011 due to
disease hitting Vietnamese shrimp and floods in Thailand.

The growth in shrimp farming led to a turnaround in the fortunes of the Indian
shrimp feed industry too.

Avanti Feeds – Partnership with One of the Largest Seafood Producers

AFL has partnered with Thai Union Frozen Products PCL.,

(www.thaiuniongroup.com), one of the world's largest seafood processors and
leading manufacturer of prawn and fish feeds in Thailand with integrated facilities
from Hatchery to Shrimp & Fish processing and Exports. TUF increased its holding in
Avanti Feeds from 14.99% to 25.12 % in July 2012 pursuant to the merger of the
joint venture company Avanti Thai Aqua Pvt. Ltd. with Avanti Feeds. TUF thus
currently holds 25.12% in Avanti Feed’s Rs.9.08 cr Equity, while the Indian promoters
hold 41.76%.

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

A few quick facts about TUF are given below :-

 Website : www.thaiuniongroup.com
 Global Seafood Player, Global Workforce : 32000
 Global Network – 4 Continents – Asia, America, Europe & Africa with 10
manufacturing bases
 The largest Asian (ex-Japan) seafood processor in sales value.
 The world’s largest and most integrated canned tuna manufacturer
 Brands – Owns world’s Leading 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)
 Sales (2012)- USD 3.44 Billion (Roughly Rs.19,000 cr)
 PAT (2012) – USD 15.5 Million (Roughly Rs.850 cr)

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.
New Business – Dometic Market Foray - Ready to Eat/ Ready to Cook

AFL has ventured into the domestic market with an objective of providing export
quality shrimp ready to eat and ready to cook product to Indians by launching
"PRAWN KING" brand products. It envisages catering to the prawn consumption in
hotels, restaurants and household. It has started an eatery in Hyderabad and plans to
open similar outlets in other cities in phased manner.

Conclusion

From Sales revenue of Rs.70 crores and loss of Rs.7 crores in FY 09, Avanti Feeds
has registered a Sales Revenue of Rs.640 crores and a PAT of Rs.30 crores in FY 13 –
that’s a jump of over 9 times in Sales and a significant improvement in profitability.
The company has announced a dividend of 65% for FY13.

In the short term, softening of raw material prices (Soyabean) may be positive for
company. The biggest risks for the business however remain a) Banning of White
Shrimp (Vannamei) from India for any reason (like anti-oxidant, virus or antibiotic
issues) and b) Outbreak of a disease.

The company also faces threat from new entrants which are announcing their entry
into the shrimp feed industry and competition may increase in the future.
However, by tying up with TUF, we believe Avanti Feeds should be able to maintain
it's leadership position in the industry. Besides having vast experience and
expertise in P. Vannamei Hatchery, Feed and Culture, TUF also has a large
wholesale and retail network in USA, and will also support AFL in expanding it's
processing and export market .
The company expects a demand growth of 20-25% for the next few years and has
over the last two years doubled its Shrimp Feed manufacturing capacity and has
tripled the Shrimp Processing capacity.

The company has, each year, in the last 2 years distributed 25% of the profits
earned (PAT) as dividend (plus dividend distribution tax). If the company continues
with this payout & maintains this track, we believe this will lead to a change in
perception and gradual rerating of the stock. We believe that with an EPS of Rs.33,
PE of less than 3.5, CAGR of over 70 % (over last 3 years), and a dividend yield of
6%, the stock merits investment at the current valuations.
Ashish Chugh is an equity analyst and investment consultant based at New Delhi,
INDIA. At the time of writing this article, he, his firm and dependent family members
donot have a position in the stocks mentioned above. The author, his firm or any of
his dependent family members may make purchases or sale of the securities
mentioned in the report while the report is in circulation. The author invites readers to
send him email and welcomes comments, feedback & queries at
nexgenfin@yahoo.com.

This report has been prepared solely for information purposes and the
information contained herein may not be deemed to be an investment advice.
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