Avanti Feeds is the largest manufacturer of shrimp feed in India. Based in Andhra Pradesh, the Company is the dominant player in India’s aquaculture sector. Avanti Feeds is a great survivor in Indian aquaculture industry rebounding from death & obscurity

How Avanti became a leader?

In 2009, the Government made a decisive move to change the course of shrimp farming in the country. It allowed commercial cultivation of the whiteleg shrimp, also known as Litopenaeus vannamei. For this variant grew faster, was more resistant to disease than the black tiger shrimp and was more lucrative to cultivate. On the ground, Avanti spearheaded this change It convinced the farming community to get into the cultivation of vannamei shrimps. It partnered Thai Union Group, one of the largest global seafood companies to manufacture feed for white leg shrimp By 2017, the production of white leg shrimp touched 4.5 lakh tonnes in 2017, from 10,000 tonnes in 2010. While the production of black tiger shrimps, which was at 50,000 tonnes in 2009, was eventually stopped by 2015. Avanti emerged as the largest producer of shrimp feed in India

From -2019 Annual Report 

 

Like many other agri and aqua-based companies, Avanti feeds is a low gross margin business, In fact historically over the last 7-8 years it has spent almost 70-80% of sales just on raw materials. Even when you hear management commentary raw material prices often take centre stage

Consolidated financial results for FY ’19 as compared to FY ’18 and FY ’17. You may notice that where the top line in FY ’19 registered a marginal increase of over FY ’18, that is INR 3,541.61 crores in FY ’19 from INR 3,441.15 crores for FY ’18. The PBT has decreased steeply to INR 428.02 crores in FY ’19 from INR 704.50 crores in FY ’18. This steep decrease was mainly due to increase in raw material prices over the previous year.

From – Concall Transcript Q42019

 

In cases like Avanti Feeds tracking raw material prices is extremely important, In fact, for me, it was the single most important variable to track. Low gross margins business always have a sword hanging on their head a few percentage movements in their key input material prices and their profits evaporate.

For Avanti feeds their key materials are Soyabean and Fish Meal, Thanks to the Internet and website like this one can easily track prices of raw material inputs.

What I did was to create a simple RM sensitivity analysis for Avanti Feeds like below

 

I kept Jul’2014 as my base for RM score = 100 this was built on prices of Soyabean and Fishmeal, A dip below 100 would mean raw material prices are declining and vice versa. The above graph showed a strong correlation of RM score with gross profitability. Another correlation that came handy due to this data was that impact to gross margins is usually followed by a 4-6 months lag from increase/decrease in raw material prices.

March 2017 was the first quarter were gross margins went up significantly from their long term statistical average. This wasn’t a surprise as the green line (RM score) was falling from the last 6 months. We kept tracking and next 2-3 quarters were blockbuster quarters for the company.

Was it new normal?

If one would have kept their focus on raw material prices then the answer was clear. The raw material prices started picking up in June -17, so no it wasn’t new normal and the gross margins would move back to their historical averages

In such situations, you ignore the hype (upper circuits, management interviews on CNBC, etc) and fold cards and take money off the table

 

We were lucky to make a 6X in a very short period of time by focussing on the correct variable

The management stated the same in the recent concall

The PBT was 12.09% in FY ’19 as compared to 20.74% in FY ’18. However, it is very relevant to notice here that during the financial year ’18, the current raw material prices unusually went down very steeply, increasing the margins phenomenally. It was there something like a jackpot year.

From – Concall Transcript Q42019

However, by the time results were declared the price has already corrected to a third and most of the gains would have been lost. In a low gross margin business always keep a hawk-eye on key input variables.

From Avanti’s perspective there gross margins will slowly improve

• as they move up the value chain in exports and as exports become a larger share of their revenue In FY19 itself they increased the sales volumes of value-added products by 347% over the previous year
• as they get advantages of scale

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barring major disease disruption the company should continue to give 18-20% growth to investors