Equirus Securities

Avanti Feeds (Long)

CMP: ₹328.4

Target: ₹480

Shrimp culture in India declined by 15-20 per cent in FY19 on account of extended winter in the US, increased diseases due to a prolonged summer and a correction in export prices amid higher global supply. In such a difficult year, Avanti Feeds strengthened its technical support to farmers; moreover, with continued focus on maintaining feed quality (even at lower profitability), it added about 1,400 new farmers to its customer base and increased its market share to 47 per cent in FY19 (FY18: 43 per cent). It also started exporting feed to Bangladesh in FY19, though the quantity is minuscule at present. While management expects overall shrimp feed demand in 2019 to remain similar to 2018, AFL would see volume growth led by its market share gains.

Valuation: AFL is trading at 15x/12x our FY20E/FY21E EPS — attractive given its market leadership, improved net cash balance and an expected recovery in earnings. We have a ‘long’ rating on the stock with a September 2020 target price of ₹480 (unchanged).

Key downside risks: 1) Any change in government regulations on shrimp feed prices; 2) change in the government’s export incentive scheme; and 3) a further drop in export prices.