We upgrade Avanti to Get as (i) revival in shrimp rates in its important market place, USA augurs nicely for shrimp processing/feed business enterprise. Higher shrimp rates outcome in superior profitability of all players in shrimp worth chain (ii) the improve in customs duty on shrimp feed from 5% to 15% in Budget in Feb’21 will advantage domestic feed companies and (iii) due to steep volatility in shrimp rates and profitability, sturdy players such as Avanti are anticipated to acquire market place share from smaller sized players who are impacted more.
The enterprise is also steadily minimizing its dependence on USA and non-USA market place accounts for ~14% of its exports. The stock trades close to its Mean P/E – 1SD offering margin of security at existing valuations. We model Avanti to report PAT CAGR of 13.5% more than FY20-23 and upgrade to Buy with TP of Rs 560 (15x FY23e).
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Revival in shrimp rates in important market place, USA: Post outbreak of Covid, the shrimp rates declined in USA from $14/kg in Mar’20 to $11.35/kg in Oct’20. However, we have observed steady revival in shrimp rates post Oct’20 and the rates are at $11.93/kg in Feb’21. Revival in shrimp rates augurs nicely for the shrimp sector and all players in shrimp worth chain (farmers, feed companies and processing organizations) produce greater profitability.
Increase in customs duty to advantage domestic players: Imports account for 8-10% of total shrimp feed market place in India. Due to improve in customs duty, domestic feed companies such as Avanti are most likely to advantage.
Expect market place share gains: With sharp volatility in shrimp rates and swings in profitability, we anticipate smaller sized players in shrimp exports as nicely as feed to be hurt more than Avanti Feeds. Due to sturdy Balance Sheet (Net money of ~Rs 10 bn on FY21e Balance Sheet), we anticipate Avanti to be a beneficiary and anticipate it to acquire market place share in shrimp feed as nicely as shrimp processing.
Reducing dependence on USA: Avanti is also in the course of action of minimizing the dependence on USA and has began shrimp exports to other nations such as China and Europe. While demand is impacted in USA, recovery in other markets such as China will assistance to strengthen volume off-take. Non USA exports are c.14% of total shrimp exports.
Upgrade to Get: We anticipate Avanti to report income and PAT CAGRs of 8% and 13.1% more than FY20-FY23 and also anticipate its RoE to be steady (~23%) more than the exact same time-frame. We upgrade the stock to Buy from ADD rating with a DCF-based target cost of Rs 560 (implied P/E 15x FY23e EPS).