Avanti Feeds Q2FY18: Growth story intact; revise to ADD on rich valuations | Quarterly Results | Fundamental Analysis | Indianotes.com

Avanti Feeds Limited (AFL) reported 2QFY18 sales of Rs 8.54bn (+25% yoy and -5% vs. EE). Growth in the domestic feed business moderated to +18% yoy (1Q: +40% yoy) but was compensated by strong acceleration in the processing business (+55% yoy vs. +25% yoy in Q1). EBITDA margins remained strong at 22% helped by benign RM prices and better volumes. In our view, the revenue growth momentum shall remain strong on the back of new capacity additions, but the margins may come under pressure when RM prices start firming up. We raise our FY18/FY19 EPS estimates by +10%/+14% but revise down our rating on the stock to ADD (from LONG) due to rich valuations. Our Mar’19 TP of Rs 2,950 (Dec’18 TP of Rs 2,450 earlier) is based on 28x TTM EPS of Rs 105.

New feed, processing capacities to keep growth momentum strong:
Feed segment growth moderated to 18% yoy (vs +40% yoy) as realizations declined due to product mix changes, even as volume growth improved to 22% yoy. AFL has already started working on increasing its feed capacity by 175,000MTPA, which shall be operational by Mar’18. The company is confident on achieving total feed sales of 525,000-550,000MT in FY19, implying 25-30% volume growth. Growth in the processing segment accelerated to +55% yoy (vs. +25% yoy in Q1) as the new processing plant (15,000MTPA capacity) started commercial operations from Aug’17. AFL expects 40-50% utilization of this additional capacity in FY18.

EBITDA margins remain strong on benign RM prices, better volumes
: EBITDA margins came in at 22% helped by benign RM prices (Exhibits 5-8). As per management, prices of both soyameal and fishmeal have started inching up but remain well below FY17 levels. AFL is trying to improve its margin profile by (1) increasing the share of high-margin value-added products, (2) starting own farming (on experimental basis) for backward integration and (3) selling products directly to retailers rather than distributors in the export market.

Remain watchful of future capital allocation and RM prices; revise to ADD: FY18 has proven to be a great year for AFL so far, both in terms of sales and profitability, which in turn has strengthened its balance sheet further. The company has net cash of Rs 6.5bn (1HFY18) and is currently looking at various options to deploy the same. We remain bullish on AFL’s medium-to-long-term prospects but remain watchful of RM prices even as they remain benign as of now. We roll over to a Mar’19 TP of Rs 2,950 based on 28x TTM EPS of Rs 105 (Dec’18 TP of Rs 2,450 earlier). Downside risks: (1) A sharp increase in RM prices, (2) a drop in shrimp demand, and (3) cyclones or any disease outbreaks. Upside risks: (1) RM prices remain benign and margins hold up at current levels (2) Announcement of any further expansion plans by AFL.
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