Category: case study

This post is not BUY/SELL/HOLD advice but a statement of my personal views and opinion. I am invested in AF and my views are biased. Please consult a SEBI registered adviser.

Recency bias is powerful. I purchased Avanti Feeds back in July 2018, after what I thought was a significant correction in price of a mid cap stock that had been the darling of the bull run.

I was always interested in the shrimp business and had been tracking it for some time. I had missed out and my buying decision had to do with the fear of missing out again.

Time and the sobriety that comes with reflection proved some of my initial theories wrong-

• Non-Cyclicity: I believed firmly that it was more of an FMCG business than a cyclical business. In this view I was alone. My thought was shrimp had become a food staple globally and with limited quality suppliers, and together with its non-seasonality – it could not be cyclical
• Temporary not structural slowdown: An unusually long winter in the US and reversion to mean in soy prices seemed factors that would ease with time and the market was overreacting

As the price has since languished, I have had a lot of chance to question my assumptions. I am sharing some of my notes on the business and revised beliefs.

The significance of Farm Gate Prices

Cyclicity is introduced by Farm Gate prices: Farm Gate prices are the key incentive in this business. Shrimp farming in India is still discretionary and farmers weigh the risk / reward of seeding a shrimp harvest based on the prices they would get by selling the harvest to wholesalers or packagers. So what factors impact farm gate prices and make them cyclical?

• Demand/supply – Like any raw material prices are determined by end user demand and available supply. Shrimp is cultivated everywhere from Ecuador to Saudi Arabia to Vietnam and consumed everywhere from China to EU to the USA.
• Discretionary factors – Flooding, disease, import duties, raw material prices etc

In 2017 for instance, due to muted demand in the US and spike in raw material prices, the farm gate prices fell so low that farmers could not break even on their operating costs. The operating costs consist of the following –

• Buying larvae – Shrimp larvae must be purchased
• Feeds – Shrimp need a healthy and customized diet of protein and carbohydrates composed of soy meal, wheat and fish-meal. The prices fluctuate as soy meal is a volatile commodity and its price is not allowed to be hedged by feed suppliers, who must then pass on any increase in price. Shrimp also require different types of feed as per their stage of growth.
• Electricity and antibiotics – Pumps and medicine to keep shrimp ponds oxygenated and healthy. Also refrigeration costs if applicable
• Opportunity cost – growing some substitute crop

However farm gate prices have been slowly recovering and they look somewhat like this: Indian prices – 8 $, Indonesian – 12 $, Argentine/Equador – 6 $

Competition

In terms of quality and price, Argentinian and Equadorian shrimp are particularly competitive due to higher perceived quality and lower prices but there are caps on the metric tons of shrimp they can produce. Thailand used to be a major player but their shrimp culture has been suffering due to disease and their leadership has since been ceded to India and Vietnam.

China is not a major net exporter as it is a larger consumer of shrimp. Saudi Arabia and Mexico are the new players on the scene to watch out for. However in terms of scale – only Indonesia, Thailand and Vietnam offer real threats to Indian dominance in exports that is amplified due to limited local consumption (unlike South East Asia, where shrimp is a staple diet).

Where does Avanti Feeds fit into the Shrimp story?

Although there have been a lot many IPOs, Avanti Feeds remains a proxy to Indian shrimp story, which in turn depends on Farm Gate prices. Shrimp feed is highly customized and critical to the success of shrimp produce.

Shrimp feed therefore has qualities of a specialized commodity that must be customized to stage of shrimp growth and geographical needs.

Avanti has close to 48% market share in this space. Avanti is also established in other parts of the shrimp culture value chain – from hatcheries to processing.

It has been directionally focused on Shrimp processing and exports in the past few years in tie ups with large MNCs (Red Lobster/Thai Union) and with a focus to capture the quality trace-ability requirements of the EU and US such as SIMP better than its competitors.

However there are as many threats to AF as there are opportunities.

Medium term threats –

• MNCs like Cargill, CP, Godrej Agrovet etc. stall or erode Avanti’s market leadership in feed
• Farm gate prices fail to become viable in 2020

Long term threats –

• Indian market fails to keep up with SE Asian growth in exports
• Disease destroys Indian shrimp culture like EMS did to Thailand
• US market stops expanding
• US duties on shrimp are increased
• EU ban on Indian shrimp
• Chinese market captured by Vietnam

What could go right? (triggers for price)

• Farm gate prices increase steadily through FY2020, leading to pricing power for feeds
• Record monsoon cools of Soy prices like in 2017 (unlikely due to minimum support prices)
• Packaging: Avanti Feeds captures 50% or more of Thai Union/Red Lobster packaging from India
• Increased quality and scrutiny by importers puts other unorganized and smaller feed players plus processors out of business
• Dollar, EUR furthers strengthens against INR
• Ample cash with Avanti Feeds is deployed to increase capacities or extend credit to farmers hence protecting market share

Strengths and Advantages

• ROIC highest in industry
• Leadership in most Indian states on east coast (west coast needs improvement)
• Excess cash to invest in capacities, fence out competition and cut prices if required
• Latent pricing power in its customized feeds business, relationships with farmers, distributors and also in its wide geographical plus vertical integration
• Management is nimble and a focused capital allocater – for instance they won’t pay dividends if they see a better use of the cash. They have deployed it strategically in the past and the same can be expect going forward

Conclusion

As long as farm gate prices are on the upswing and shrimp culture in India does not contract, Avanti will remain the ideal play on Indian aquaculture.

I recently had the privilege to present an idea at a value investor meet in Bengaluru city. Please read the standard disclaimers that apply.

 

This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further

• Taneja Aerospace and Aviation Limited (TAAL) operates the Hosur Airstrip, 30 minutes from Electronic City Bengaluru
• The airstrip is 2km long and can accomodate Boeing and Airbus class of narrow-body aircraft, with in-house hangar and repair facilities
• The government under its low cost flying or UDAN (Uday Desh Ka Aam Nagrik) scheme recently airmarked TAAL’s Hosur Aerodome as a hub for low-cost domestic flights
• Inspite of many triggers in place TAAL has historically failed to produce returns on assets making it a speculative grade stock

Continue reading “Taneja Aerospace: Speculation’s swift knife, whither will it turn?”

The African nation of Ethiopia is famous for its cuisine, long distance runners and arabica coffee. Few however think of Ethiopia as a rising African power.

• Since 1990, the rate of return on foreign direct investment in Africa has averaged 29%, nearly tripling FDI in Europe.
• The Ethiopian economy has grown at a rate of 10% over the last 10 years.
• Ethiopia has its own space program.

Continue reading “The New World: Karuturi Global and how (not) to invest in Ethiopia”