This article provides in-depth fundamental analysis of Avanti Feeds Ltd, a shrimp & fish feed manufacturer and processed shrimp producer.
Avanti Feeds Ltd Research Report by Reader
Q: Hi Vijay, Please share your views about the future of Avanti Feeds Ltd. I am interested in investing in it at the CMP (1537). Has its growth phase plateaued?
- A monopolistic player in the shrimp food sector (60%+ market share)
- Tie up and equity stake by world’s largest seafood company Thai Union Frozen Products (Competitive moat)
- Avanti Feeds Ltd has been rapidly expanding its capacity (210,000TPA)
- It has been reporting spectacular results over the last few quarters growing (30%+)
- Recent budget has been positive with sops for Avanti Feeds Ltd. (35% depreciation & 15% investment benefit in Andhra Pradesh)
- Seems to be poised for INR 130 – 140 earnings per share (EPS) for the year, price to earnings ratio (P/E) = 11@CMP1537
- Avanti Feeds Ltd has been having a dream run over the few years on the bourses. (It is not an undiscovered stock.)
- Avanti Feeds Ltd is susceptible to natural calamities & shrimps getting affected by virus and diseases.
- Seems to be riding on benefits accruing from high shrimp prices and farmers shifting to Vannamei shrimps
- Recently Dolly Khanna exited it. (that’s more in jest/joke.. hehe:-))
- NSE De-listing
- Margin pressure with shrimp prices softening. (Similar to cyclical stocks).
Dr Vijay Malik’s Response
Thanks for writing to me!
Financial Analysis of Avanti Feeds Ltd:
Avanti Feeds Ltd has been growing its sales at a brisk pace of 35-70% year on year since FY2009. However, it was witnessing declining sales revenue for years before that. An investor should study the past of the company and identify the changes, which happened around FY2008-09, which led to drastic change in its business performance. Sales growth of the range of 70% are not sustainable for companies in any industry. Such growth rates always come down to more sustainable lower levels.
Avanti Feeds Ltd has been witnessing fast sales growth; however, profitability margins (both OPM & NPM) are low and have been fluctuating wildly. Operating profit margins (OPM) have been improving over the years but fluctuating from 0-12%. Similar trend is noticed in net profit margins (NPM), which are improving but fluctuating from 0-7% over the years.
Such fluctuating margins are found in companies having low bargaining power with their customers. Avanti Feeds Ltd is finding it difficult to pass on the increase in raw material costs to the customers quickly and thus takes a hit on the profitability margins.
The company has been paying taxes at a good rate, which is a good sign.
Operating Efficiency Analysis of Avanti Feeds Ltd:
Fixed asset turnover ratio has been increasing over the years from 2.4 in FY2009 to 14.6 in FY2014. This is a good sign as Avanti Feeds Ltd has added new manufacturing capacities during this period. The new plants seem to have worked better than the old plants leading to efficient utilization of invested capital.
Avanti Feeds Ltd has not been able to convert its profits in to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 143 cr. whereas the CFO over the similar period is INR 115 cr. This is despite declining receivables days over the years. Receivables days have decreased from 28 days in FY2011 to 14 days in FY2014. The company is enjoying overall low receivables days as most of the local feed segment sales are on cash basis and exporters are paying their dues on time (source: India Ratings).
Thus, we notice that despite improving receivables position, Avanti Feeds Ltd is not able to convert profits into cash. This is evident from the declining inventory turnover ratio of the company. Inventory turnover ratio was 10 in FY2012, which has declined to 8 in FY2014. This decrease in inventory turnover implies that business of the company has become working capital intensive and more & more funds are being locked up in inventory over the years.
We can imagine that, if the company were not able to convert its profits into free cash, then it would be relying on other sources of cash like debt or equity dilution. the company has not relied on debt heavily as its debt is almost constant since last 10 years (FY2005-14). However, the company has been doing equity dilution, which is evident from the trend of increase in share capital. The company has not done any bonus shares issue. It seems to have raised equity twice in FY2009 and FY2013.
Investors should be cautious of investing in companies, which are not able to meet their cash requirements from operations. Such companies need to raise funds from alternate sources. Avanti Feeds Ltd has been raising funds from equity dilution until now. However, there is nothing stopping it to look to debt in future for meeting its fund requirements, which are not met through CFO. That might lead to spiraling debt levels. An investor should keep a close watch on further equity dilution or debt raisings by Avanti Feeds Ltd.
Margin of Safety in the market price of Avanti Feeds Ltd:
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, Avanti Feeds Ltd seems to be a company growing at a fast pace but unable to maintain its profitability margins due to low bargaining power with its customers. Avanti Feeds Ltd is not been able to convert its profits into cash, which it seems to be resolving through frequent equity dilution. An investor should keep a close watch on the inventory turnover ratio as additional requirements of funds, which are locked in working capital, might lead to Avanti Feeds Ltd resorting to debt to meet the cash shortfall.
These are my views about Avanti Feeds Ltd. However, you should do your own analysis before taking any investment related decision about the company.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.