Avanti Feeds Ltd. Absolute : Long Relative : Outperform Initiating note Regular Coverage 31% ATR in 12 months. Sales ( Rs mn)

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1 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY Equirus All rights reserved. Rating Information Price (Rs) 821 Target Price (Rs) 1,7 Target Date 31st March, 218 Target Set On 1th April, 217 Implied yrs of growth (DCF) 15 Fair Value (DCF) 1,485 Fair Value (DDM) 521 Ind Benchmark SPBSMIP Model Portfolio Position - Stock Information Market Cap (Rs Mn) 37,293 Free Float (%) 56.5 % 52 Wk H/L (Rs) 848/396.1 Avg Daily Volume (1yr) 45,45 Avg Daily Value (Rs Mn) 25 Equity Cap (Rs Mn) 91 Face Value (Rs) 2 Bloomberg Code AVNT IN Ownership Recent 3M 12M Promoters 43.9 %. %. % DII 3.7 %.4 %.8 % FII 29.4 %.3 %.4 % Public 23. % -.6 % -1.2 % Price % 1M 3M 12M Absolute 16.1 % 47.5 % 15. % Vs Industry 9. % 32.5 % 69.8 % Waterbase Ltd 13.1 % 3.8 % -5.2 % Consolidated Quarterly EPS forecast Rs/Share 1Q 2Q 3Q 4Q EPS (16A) EPS (17E) Avanti Feeds Ltd. Absolute : Long Relative : Outperform Initiating note Regular Coverage 31% ATR in 12 months Time to add shrimp in your menu Avanti Feeds Limited (AFL) is leading shrimp feed manufacturer in India with market share of ~45%. AFL has been the key beneficiary of the shrimp aquaculture wave that came in the country post 29. AFL has seen revenue/ebitda CAGR (FY13-16) of 46%/65% respectively. Despite such strong growth, company has been able to maintain a strong balance sheet and has strong return ratios (RoE ~47% in FY16). With operationalizing of new shrimp processing facility in early FY18, Avanti is all set to ride the next phase of growth. We estimate revenue/eps CAGR (FY17E-19E) of 27% and 28% with RoE of 35%/34% in FY18/19 respectively and initiate coverage with a Long rating and a Mar 18 target price of Rs. 1,7 (22x its FY18 EPS of Rs.49). Shrimp industry in India still has large untapped potential: With the introduction of P.Vannamei in 29, Indian aquaculture has been gaining momentum. In absolute terms, India s shrimp production has increased from.1mn tons in 21 to.4mn tons in 215 implying a CAGR of 32%.US imports ~15% of the global shrimp production and is also India major export market. India s share in US shrimp imports has risen from 5% in 21 to 25% in 216 and India s share in the global production has increased from 2.8% in 21 to 1.2% in 215. Given the large coastline, suitable tropical climate along with strong IRR s for shrimp farmers we believe that shrimp production in India will be on strong footing thereby benefitting AFL. Shrimp feed business to witness steady growth due to increasing shrimp farming in India: Sales of AFL s shrimps feed business have increased from Rs.55mn in FY1 to Rs. 17,318mn in FY16 post the introduction of P. Vannamei in 29. Another major factor for increase in sales has been the technical/marketing tie-up with Thai Union Foods (TUF). It helped AFL manufacture better feed with lower FCR which led to market share gains in India. Besides that AFL has a very strong relationship with shrimp farmers giving it an advantage over other players. With such strong factors in place along with increasing production we expect this business to witness revenue CAGR of 16% over FY17E-19E. Shrimp processing business to drive growth going forward: Avanti has setup its subsidiary, Avanti Frozen Food Products Limited (AFFPL) in collaboration with TUF, mainly to increase focus on growing its processing business. AFL is increasing its processing capacity from 6, MTPA to 21, MTPA (likely to be operational by Apr 17), and with strong marketing tie-ups of TUF, Avanti will be able to fully utilize the increased capacity in our view by FY2. We estimate revenues in the segment to increase from Rs. 2,861mn in FY16 to Rs. 12,335mn in FY19. Key risks: Volatility in raw material and shrimp prices, any disease outbreak. Consolidated Financials Consumer Discretionary Rs. Mn YE Mar FY16A FY17E FY18E FY19E Sales 2,183 26,176 33,97 42,178 EBITDA 2,293 2,719 3,726 4,884 Depreciation Interest Expense Other Income Reported PAT 1,575 1,73 2,27 2,845 Recurring PAT 1,536 1,73 2,27 2,845 Total Equity 3,845 5,538 7,213 9,374 Gross Debt Cash 735 1,781 2,638 3,971 Rs Per Share FY16A FY17E FY18E FY19E Earnings Book Value Dividends FCFF P/E (x) P/B (x) EV/EBITDA (x) ROE (%) 47 % 37 % 35 % 34 % Core ROIC (%) 48 % 4 % 4 % 43 % EBITDA Margin (%) 11 % 1 % 11 % 12 % Net Margin (%) 8 % 7 % 7 % 7 % Sales ( Rs mn) April 11, 217 Analysts: Depesh Kashyap, CFA ( )/ Dhaval Dama ( ) Page 1 of 38 Before reading this report, you must refer to the disclaimer on the last page.

2 Company Snapshot How we differ from Consensus EPS Sales PAT Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months - Equirus Consensus % Diff Comment FY17E % There is hardly any coverage on the FY18E % stock, so consensus may be misleading FY17E 26,176 26,427-1 % FY18E 33,97 3,92 7 % FY17E 1,73 1,651 5 % FY18E 2,27 1, % Our key investment arguments: 1. Shrimp industry in India still has large untapped potential: In absolute terms, India s shrimp production has increased from.1mn tons in 21 to.4mn tons in 215 implying a CAGR of 32%.US imports ~15% of the global shrimp production and is also India major export market. Given the large coastline, suitable tropical climate along with strong IRR s for shrimp farmers we believe that shrimp production in India will be on strong footing thereby benefitting AFL. 2. Shrimp feed business to witness steady growth due to increasing shrimp farming in India: Sales of AFL s shrimps feed business have increased from Rs.55mn in FY1 to Rs. 17,318mn in FY16 post the introduction of P. Vannamei in 29. Another major factor for increase in sales has been the technical/marketing tie-up with Thai Union Foods (TUF). It helped AFL manufacture better feed with lower FCR which led to market share gains in India. Besides that AFL has a very strong relationship with shrimp farmers giving it an advantage over other players. 3. Shrimp processing business to drive growth going forward: Avanti has setup its subsidiary, Avanti Frozen Food Products Limited (AFFPL) in collaboration with TUF, mainly to increase focus on growing its processing business. AFL is increasing its processing capacity from 6, MTPA to 21, MTPA (likely to be operational by Apr 17), and with strong marketing tie-ups of TUF, Avanti will be able to fully utilize the increased capacity in our view by FY2. Risk to Our View: 1. Disease breakout in aquaculture ponds 2. Adverse climatic conditions such as cyclones, floods and poor rainfall Key Triggers: April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 2 of 38 Government participation in solving infrastructural problems like power supply and cold storages Shrimp realization improving in export market and lesser dependence on costlier RMs like fishmeal DCF Valuations & Assumptions Rf Beta Ke Term. Growth Debt/IC in Term. Yr 6.8 % % 5. %.6 % FY17E FY18E FY19-21E FY22-26E FY27-31E Sales Growth 3 % 26 % 21 % 17 % 15 % NOPAT Margin 7 % 7 % 7 % 7 % 7 % IC Turnover RoIC 39.8 % 39.7 % 42.6 % 42.5 % 43.2 % Years of strong growth Valuation as on date (Rs) ,316 Valuation as of Mar' ,16 1,485 Based on DCF, we derive fair value of Rs. 1,485 as on 31 st Mar 18. Company Description: Avanti Feeds Limited (AFL) is a manufacturer of high quality shrimp feed and processor and exporter of frozen shrimp. It manufactures shrimp feed and sells it to farmers which in turn use it to grow shrimps in aquaculture. AFL purchases these shrimp from farmers and after processing them, it sells them in the export market. Major destinations of processed shrimp are USA, European Union and Japan. It earned ~86% revenue through the sales of shrimp feed in India and rest ~14% through exports of frozen shrimp in FY16. It has annual shrimp feed and processing capacity of ~.4mn tons and 6, tons respectively. Comparable valuation EPS P/E BPS P/B RoE Div Yield Mkt Cap Price Target Company Reco. CMP Rs. Mn. Target Date FY16A FY17E FY18E FY16A FY17E FY18E FY16A FY17E FY16A FY17E FY18E FY16A FY17E Avanti Feeds Limited(AFL) LONG ,293 1,7 31st March, % 37 % 35 %.9 %.9 % Waterbase Ltd , % - -. %

3 Exhibit 1: Sales growth of Avanti saw a turnaround post the introduction of Pacific White shrimp (P. Vannamei) farming in India 13% 11% 9% 7% FY11: Recovery in shrimp culture began as India farmers started cultivating Vannamei shrimp; International prices also started moving up 116.% 89.4% FY12: Shrimp culture grew by ~25% as many farmers converted to Vannamei from Black Tiger shrimp 64.7% 74.6% FY14: Indian shrimp exports increased by 1%; Domestic market also started picking up 5% 3% 1% FY1: Imports by USA and EU started increasing as effects of global recession started waning 31.7% FY13: Remunerative shrimp prices started encouraging farmers to take up shrimp farming FY15: Shrimp feed sales grew by ~56% whereas processed shrimp sales grew by only 3.6% by volume due to inordinate delays to check antibiotic residues in USA 57.4% 13.3% -1% -3% -22.2% -15.5% -29.% FY9: Indian shrimp production and area under cultivation reduced by ~28% and ~11% respectively mainly due to steep fall in export prices FY16: Shrimp culture remained stagnant after five years of ~2-25% growth due to lack of adequate rainfall and diseases to culture -5% FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Revenue Growth April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 3 of 38

4 Contents Aquaculture is driving the sea food supply globally... 5 Global shrimp aquaculture is projected to register a healthy CAGR of ~4.6% during E... 6 P. Vannamei changed the dynamics of India Shrimp farming post Key factors to drive further growth for Indian shrimps ) Shrimp aquaculture might be at an inflection point in India ) Economics of shrimp farming is attractive for farmers ) US continues to grow while other markets are also opening up ) Increasing per capita fish consumption in India can open up a whole new domestic market for Shrimps ) Government s push on developing aquaculture in India Avanti feeds: Key beneficiary of growth of shrimp culture in India How Avanti was able to turn around its business? Fully vertically integrated model helps business economics Shrimp feed business led the growth in the past few years: Revenues from shrimp feed to increase at CAGR (FY17E-19E) of 16% EBIT margins in feed business estimated to be in the range of % Shrimp processing to drive next phase of growth:... 2 Revenues from shrimp processing to increase at CAGR (FY17E-19E) of 78%.. 22 EBIT margins in processing business estimated to be in the range of % Hatchery and fish feed business are some other opportunities in the making 24 Solid performance of Avanti expected to continue Revenue estimated to grow at CAGR (FY17E-19E) of 27% EBIDTA Margins are estimated to remain stable in the range of % Working capital management is best in the industry Avanti s performance much better than peers Valuation... 3 Investment risks... 3 April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 4 of 38

5 Aquaculture is driving the sea food supply globally Global aquaculture market is broadly categorized in 5 product segments: (a) Carps, (b) Mollusks, (c) Crustaceans, (d) Diadromous fish and (e) Others. Market share of Crustaceans in overall aquaculture market was 23.6% by value and 1.3% by volume in CY15. Shrimp falls into Crustaceans segment with other popular Crustaceans being Prawns, Crabs and Crayfish. Aquaculture is driving the sea-food supply as consumers search for better quality food World fisheries production grew at a CAGR of 2.5% from 2 to 214 to reach ~167mn tons in 214. While aquaculture contributed only ~7% of total seafood production in 198, it contributed ~44% in 214 and in volume terms stands at 74mn tons (see Exhibit 2). Total aquaculture production (both inland and marine combined) grew at a CAGR of 8.4% during while total capture production grew at a dismal rate of 1.% during It is expected that all the future growth in seafood production will come only from aquaculture. If we assume aquaculture to continue to grow at its current run rate of 2.5%, in absolute terms, it would imply an incremental supply of 4-5mn tons per annum. Exhibit 2: Seafood supply will be driven by aquaculture going forward 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 93% 7% 87% 13% 74% 26% Source: FAO, Equirus Research 62% 6% 6% 58% 57% 56% 38% 4% 4% 42% 43% 44% Aquaculture Wildcatch Total production (mn tonnes)(rhs) Consumers in both developed and developing countries are becoming more dependent on aquaculture products because of their high nutrition value. Per capita consumption of aquatic products has doubled from 196 to 215 (2 kg/person per year in 215). Governments in developing countries such as India, Indonesia, Vietnam, Bangladesh and Chile have been supportive to the industry both in terms of creating infrastructure and adopting suitable policies. According to industry estimates, the global aquaculture market shall grow at 7% CAGR (215-2E) leading to incremental supply of ~5mn tons per annum. Developed world drives the demand and developing countries are the suppliers Developing countries in Asia and LATAM are the main suppliers. Share of developing countries in aquaculture exports was only ~43% in 198; it has steadily risen to ~6% in 214 mainly due to lower cost of production as it is a labor intensive industry. With such factors in play, we believe India is at an advantage over a longer period of time. Exhibit 3: Developed countries are major importers, though countries like China have also become net importer now 1% 8% 6% 4% 2% % Source: FAO, Equirus research Exhibit 4: The share of developing countries in exports has been rising 1% 8% 6% 4% 2% % 26% 29% 74% 71% 43% 57% Source: FAO, Equirus research 53% 57% 58% 6% 47% 43% 42% 4% Developed countries 38% 42% 44% 63% 58% 56% Developed countries Developing countries Developing countries April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 5 of 38

6 E 217E 218E E 217E 218E million tons Million Tons Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months Global shrimp aquaculture is projected to register a healthy CAGR of ~4.6% during E According to industry estimates, Shrimp aquaculture production in CY15 was ~3.9mn tons which is expected to reach ~4.5mn tons by the end of CY18E at a CAGR of 4.6%. Exhibit 5: Led by developing countries, shrimp aquaculture is on a rise Source: FAO, Equirus research SE Asia China India Americas Others Within Developing countries, Asia leads LATAM in global shrimp supply Nearly 77% of the global farmed shrimp supply is contributed by Asian countries and rest by countries in LATAM (see Exhibit 6). Due to outbreak of various diseases in Thailand and Vietnam, the supply in Asian countries has suffered in the last few years. LATAM s global shrimp supply has grown at a healthy CAGR of ~7.6% over whereas in the same period Asia s growth has been only ~.9% although on a much higher base. Among all Latin American countries, Ecuador s performance has been stellar. Between 213 and 215, Ecuadorian exports have risen at a CAGR of 24.4% and 38.5% by value and volume respectively. Its major export markets have been Vietnam and USA. Within Asia, India has been an outlier growing at CAGR (21-15) of 32% Though Asia s shrimp supply has been stagnant in the last 4-5 years but India has been an outlier and has grown at CAGR (21-15) of 32%. This growth can partly be attributed to disease outbreak in Asian countries like Thailand which led to loss of their market share, but the main reason for such stellar growth has been introduction of P. Vannamei (White leg shrimp) in India. In absolute terms, India s volumes have increased from.1mn tons to.4mn tons growing at CAGR (21-15) of 32% (see Exhibit 5). Exhibit 6: Asia contributes 77% of global shrimp supply, however due to several disease outbreaks in Asian countries, LATAM has grown faster lately Source: Rabobank, Equirus research Exhibit 7: India s shrimp aquaculture has been gaining momentum; market share has risen to 1.2% in 215 (from 2.8% in 21) and is expected to reach 11.1% by 218E 7% 6% 5% 4% 3% 2% 1% % Source: FAO, Equirus Research F 216F India (% share) Asia LATAM 42.3% 2.8% South East Asia (% share) 35.6% 37.8% 1.2% 11.1% April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 6 of 38

7 % share in US imports Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months P. Vannamei changed the dynamics of India Shrimp farming post 29 South East Asian countries such as Vietnam, Thailand and Indonesia had ramped up the production of cheaper P. Vannamei species in the second half of the 21-1 decade. That had severely started affecting the demand and profitability of India s Black Tiger shrimp. Also survival rate of Black Tiger had reached as low as 4% due to various shrimp diseases. Therefore the GOI allowed the cultivation of non native Pacific White shrimp although its global prices were very much lower than the Black Tiger variety. India s share in global shrimp production stood at only ~2.8% in 21, but after the introduction of P. Vannamei in 21 it has been on the upward trajectory and expected to reach ~11.1% by 218E. Due to Early Mortality Syndrome (EMS) outbreak in parts of Asia and LATAM, production in China, Thailand and Mexico declined in Indian shrimp culture was unaffected by EMS and therefore was able to pick up the slack and increase its market share in the globe (see Exhibit 8) Exhibit 8: Indian shrimp exports to USA picked up pace after EMS outbreak in South Asian countries Exhibit 9: India was unaffected by EMS outbreak even as several South Asian countries and Mexico were impacted by it 4% 35% 3% 25% 2% 15% 1% 5% Breakout of EMS led to downfall in Thailand and introduction of P. Vannamei led to gains in India 26.2% 14.5% 12.% 4.1% Source: Biomin, Equirus Research Major reasons for India being unaffected by EMS are: Indian shrimp farms are mostly disjointed from one another, so if disease occurs in a farm, it can be controlled easily Average shrimp farm size in India is only 1.15 Ha resulting in more efficient farm management Government of India taking special control on hatcheries and quarantines any disease affected seeds % India Thailand Vietnam China Source: NOAA, US Department of Commerce; Equirus Research April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 7 of 38

8 Thousands Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months Exhibit 1: Advantages and disadvantages of the culture of P. Vannamei and P. Monodon in Asia: Parameter P. Vannamei P. Monodon Growth rate Grows faster (1-1.5 g/week) Grows at 1 g/week up to 2 g Stocking density Easier to culture in very high densities (typically 6-15/m 2, but up to 4/m 2 ) Stocking density is significantly lower than that of P. vannamei Salinity tolerance Protein requirements and FCR Temperature tolerance Disease resistance It is tolerant of a wide range of salinities (.5-45 ppt) Require 2-35% lower protein feed than P. Monodon; Food Conversion Ratio (FCR) of 1.2 Tolerates a wide range of temperatures between o C, therefore can be cultured in the cold season; grows best between 23-3 o C Survival rates with P. vannamei are currently higher than P. monodon in Asia and production is more predictable. Larval rearing Higher survival rates in hatchery of ~5-6% It can tolerate salinities between.2-7 ppt, but growth becomes slower at low salinities Feed Conversion Ratio is higher at 1.6 Can sustain temperatures up to 37.5 o C; mortalities occur below 12 o C only P. Monodon is refractory to TSV and IHHNV Survival rates in hatchery are low at ~2-3% Source: FAO, United Nations; Equirus research, FCR means feed required to gain one unit of body mass India is quickly replacing P. Monodon with P.Vannamei which should increase its competence in the world market Government of India allowed the cultivation of P. Vannamei (Pacific White Shrimp) in FY1. P. Vannamei which is not a native species of Asia but due to its superiority over Black Tiger species (see Exhibit 1), it was genetically modified and tried in Asian tropical climate. Its production proved to be very successful in South East Asian countries, due to which Indian government also allowed its production. It proved to be very successful and its production surpassed the production of P. Monodon (Black Tiger Shrimp) during FY13 and FY15. Pacific White s yield is almost 7 times that of Black Tiger as of FY15 (see Exhibit 11). States of Andhra Pradesh, Tamil Nadu, Gujarat, Orissa and Maharashtra have adapted to Pacific White whereas West Bengal and Kerala still grows Black Tiger variety predominantly. Exhibit 11: Popularity of Pacific White shrimp is increasing in India due to its higher yield and lesser cost of production Source: MPEDA, Equirus Research Tiger Shrimp Production (' tons) Pacific White Shrimp Production (' tons) Tiger Shrimp Yield (tons/hectare)(rhs) Pacific White Shrimp Yield (tons/hectare)(rhs) Indian shrimp exports are rising faster than any other marine item due to its higher realisations India s shrimp exports have grown at a CAGR of ~2% both in volume and value terms over the last 5 years and stood at ~USD 3,97mn and ~374, tons respectively in FY16. As shown in Exhibit 12 and Exhibit 13, it has outpaced overall marine exports which have grown at a CAGR of 3.1% and 1.4% by volume and value respectively over the last 5 years. Share of shrimp exports in overall marine exports had dipped during FY9-11, but from there on it has been increasing steadily and currently stand at 39.5% by volume and 66.1% by value (Exhibit 14).In our view, the major reason for the faster growth of shrimps than any other marine product is that more numbers of farmers are taking up shrimp farming due to its higher realizations and higher profitability (discussed in the sections below) and also with rising per capita income of people, demand for shrimps (which is considered to be healthy source of protein) is increasing worldwide April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 8 of 38

9 USD million US$ Millions Volume in ' tons Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months Exhibit 12: India s shrimp exports have outpaced all other marine exports to grow at ~2% (by volume) in last 5 years Exhibit 14: Share of frozen shrimp in India s overall marine exports is on the rise 8% 7% 6% 5% 4% 3% 2% 1% % 41.4% 19.2% 66.1% 39.5% Source: MPEDA, Equirus Research Exhibit 13: India s shrimp exports have outpaced all other marine exports to grow at ~2% (by value) in last 5 years Source: MPEDA, Equirus Research Frozen Shrimp Frozen Fin Fish Frozen Cuttlefish Frozen Squid Dried items Live items Chilled items Others Frozen Shrimp Frozen Fin Fish Frozen Cuttlefish Frozen Squid Dried items Live items Chilled items Others Source: MPEDA, Equirus Research Frozen Shrimp Export Quantity (%) Frozen Shrimp Export Revenue (%) India has the highest market share in USA shrimp imports in value terms US shrimp imports (~USD 5,77mn in CY16) have grown at CAGR of ~2.% during 211 to 216 whereas India s exports to US have grown at a CAGR of ~23.3% for the same period (from ~USD 525mn in 211 to ~USD 1,498mn in 216). India s share in US shrimp export was ~1% in 211 and currently stands at ~26% at the end of CY16 highest among all the countries. In the last 5 years, India and Indonesia have gained market share mainly from Thailand. Exhibit 15: US shrimp imports have grown at a CAGR of ~2% in value terms during , 7, 6, 5, 4, 3, 2, 1, 5,77 Source: United States Department of Agriculture, Equirus Research April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 9 of 38

10 ' Tonnes Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months and also in volume terms US shrimp imports (~.6mn tons in CY16) have grown at CAGR of ~.9% during 211 to 216 whereas India s exports to US have grown at a CAGR of ~26.1% for the same period (from ~48,225 tons in 211 to ~153,984 tons in 216). India s share in US shrimp export was ~8% in 211 and currently stands at ~25% at the end of CY16 highest among all the countries. In the last 5 years, India and Indonesia have gained market share mainly from Thailand. Exhibit 16: US shrimp imports have grown at a CAGR of ~1% in volume terms during Exhibit 17: India s share in US shrimp imports has risen from 1% to 26% in last 5 years 6% 1% 6% 1% 12% 13% 211 Thailand 1% 33% India Indonesia Vietnam Ecuador Mexico China (Mainland) Other countries Source: United States Department of Agriculture, Equirus Research 1% 4% 5% 12% India has gradually gained market share in US shrimp imports 8% 216 Thailand 15% India 2% 26% Indonesia Vietnam Ecuador Mexico China (Mainland) Other countries Source: United States Department of Agriculture, Equirus Research April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 1 of 38

11 Maharashtra Gujarat Goa Pondicherry Tamil Nadu West Bengal Kerala Andhra Pradesh Orissa Karnataka Total Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months Key factors to drive further growth for Indian shrimps Exhibit 19: Large coastline of India offers huge untapped potential for shrimp farming 1) Shrimp aquaculture might be at an inflection point in India India s shrimp aquaculture has already gained momentum with the introduction of P. Vannamei species. Brackish water aquaculture presents another opportunity to accelerate the growth witnessed in last 4-5 years as it is mostly based on P. Vannamei farming. India has ~1.2mn ha brackish water area which is suitable for shrimp farming, but currently ~.12mn ha (only ~1.2%) is under shrimp cultivation. Among coastal states, West Bengal and Gujarat have the majority of this brackish water area (~66%) with the current utilization levels of 8.6% and.9% respectively. Therefore, a lot of scope exists for farmers in these states to take up shrimp aquaculture as their main source of earning. Exhibit 18: India s ~9% of brackish water area is unused which can be utilized for shrimp farming 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 99% 99% 96% 95% 95% 91% 1% 1% 4% 5% 5% 9% 77% 23% 67% 65% 56% 33% 35% 44% 9% 1% Gujarat Daman and Diu Dadra and Nagar Haveli No. of farms: 51 Farm Area: 652 Ha No. of farms: 36 Farm Area: 1138 Ha Rajasthan Jammu and Kashmir Punjab Maharashtra Himachal Pradesh Haryana Chandigarh Uttarakhand Delhi Madhya Pradesh Uttar Pradesh Telangana Bihar Jharkhand West Bengal Odisha Bay of Bengal Sikkim Assam Meghalaya Arunachal Pradesh Nagaland Manipur Tripura Mizoram No. of farms:79 Farm area: 488 Ha % area under cultivation % unused area Source: Government of Gujarat; Equirus research Arabian Sea No. of farms: 18 Farm Area: Lakshadweep 56 Ha Goa Andhra Pradesh Puducherry Tamil Nadu No. of farms: 585 Farm Area: 5655 Ha No. of farms: 123 Farm Area: 144 Ha Andaman and Nicobar Islands Colour Gradient Lowest (White) to Highest (Blue) Indian Ocean Map not to scale Source: Equirus research, CAA, No. of farms and farm area for P. Vannamei shrimps from 29 to 214. April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 11 of 38

12 2) Economics of shrimp farming is attractive for farmers FCR suggests that Shrimp farming is economically better than any another meat for producers Feed Conversion Ratio (FCR) is a commonly used indicator in all types of farming. It indicates how cost efficient it is to produce a particular livestock. It is defined as feed required to gain one unit of body mass. Since Shrimps have the lowest FCR, it implies they require least amount of feed per unit of body mass, hence are most profitable for farmers. Exhibit 2: Shrimp has the lowest FCR in all meat categories and so is most profitable Cattle Pigs Broiler Chickens P.Vannamei Source: National Geographic, Equirus research 1 unit of body mass Exhibit 21: Estimated financial outlay for setting up a shrimp farm (5 Ha) Capital Cost In INR lakhs Earth work for construction (2 m3) Rs.25/m3 5. Lining of feeder canal.7 Water inlet structure for ponds (2 Nos.).5 Water outlet structure for ponds (1 Nos.) 1. Main outlet sluices (2 Nos.).3 Pump House, generator shed cum workshop etc 1. Office, laboratory and stores 2. Watchman shed.2 Drinking water storage and supply network.7 Pumps (3 Nos. Mixed flow pump of 25 HP each) 2.5 Aerators (1 Nos. 1 HP) 2. Electrical installations 2. Generators (7 nos. X 3 KVA) 4. Lab and farm equipment 1. Miscellaneous expenditure 1. Total capital cost 24. Operational cost for the first crop Rs.3/1 Nos. for 2 lakh 3. Rs.4/kg for 15, kg 6. Chemicals and manures for pond preparation (@Rs.15,/ha).7 Fuel and electricity 1.5 Repairs and maintenance Seed + Feed form 6-7% of.5 the total operational cost Harvesting.2 forfarmers Labour for pond preparation.2 Staff salary for 4 months.9 Office and misc. expenses.5 Total Operational Cost 13.6 Total Outlay for a 5 Ha farm 37.6 Source: Government of Gujarat, Equirus research April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 12 of 38

13 ' Tonnes USD Million Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months Exhibit 22: Financial Analysis for Shrimp Culture in 5 Ha Farm (In INR Lakhs) Year Fixed Cost 24 Recurring Cost Total Cost Yield (kg/ha) No of hectares Production (Kgs) for 5 ha Price (per kg) Total revenue (Rs lakhs) Interest cost (Rs lakhs) Net profit (Rs lakhs) IRR 64% Source: Government of Gujarat, Equirus research Assumptions taken: 1. Farmer would be able to utilize only 5% of capacity available in the first year of operation; thereafter he would be able to utilize full capacity. 2. Yield would be 4,5 kg/ha for one full year of operation. 3. We have not factored in any increase/decrease in price realization going ahead. 4. Farmer would be taking a loan of 75% of total investment (at 15% interest rate) required in the first year and would repay it within 5 years of farm operations entirely from internal accruals. Exhibit 21 and 22 suggest that Internal Rate of Return (IRR) that farmers make on shrimp farm investment is in the range of 6-7%, which is very lucrative for any farmer. This is the main reason why more number of farmers are taking up shrimp farming in India and there is a big potential for others to follow. 3) US continues to grow while other markets are also opening up USA s total shrimp imports have risen at a healthy CAGR of ~5% during in value terms (see Exhibit 23). In terms of quantity, the imports have grown at CAGR (21-16) of ~1% but given the demand size of.6mn tons of US (in 216), even 1% growth per year shall easily be able to accommodate increasing supply from India and other countries. Exhibit 23: USA s shrimp imports (in terms of value) are growing in line with global shrimp aquaculture 8, 7, 6, 5, 4, 3, 2, 1, Source: United States Department of Agriculture, Equirus Research Exhibit 24: USA s shrimp in volume terms is also growing steadily , Source: United States Department of Agriculture, Equirus Research April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 13 of 38

14 USD Million Million tons Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months China becoming a net importing country opens up new opportunities for Indian exporters Apart from USA, Europe and Japan are also major importers of shrimps. Also, with the rise in per capita income of Chinese consumers, China has become a net importer of shrimps. China s per capita fish protein intake is ~9 gm/day against the world average of 5.4 gm/day (in CY13). Although its shrimp production in 215 stood at ~1.4mn tons, it had to import ~59, tons of shrimp in 215. China s shrimp imports have grown at a staggering CAGR of ~42% between 212 and 215. Ecuador and Argentina s shrimp exports to China have grown at a CAGR of ~65% while India has lagged behind with a grow rate of only ~39%. India has a huge scope of improvement in this regard as Chinese shrimp exports contribute only ~2% in India s total shrimp exports. Exhibit 25: China s shrimp imports have picked up a pace and have grown at a CAGR of ~42% during Source: UN Comtrade Database, Equirus research Ecuador Indonesia India Argentina Thailand Others (Jan to Oct) 4) Increasing per capita fish consumption in India can open up a whole new domestic market for Shrimps India s food consumption per capita is set to increase at a higher rate than the rate of population growth due to rising per capita income. Demand for food grains is projected to reach ~355mn tons by 23 from ~192mn tons in 2 at a CAGR of 2.1%. However, demand for livestock and dairy items are expected to rise at a higher rate because of its nutritious value and increasing purchasing power. Demand for Meat/Fish/Eggs/Milk is expected to clock a CAGR of 4.1%/3.3%/4.1%/3.% respectively. Exhibit 26: Demand of fish and related product is expected to rise at a much higher rate than food grains Source: ICAR, Equirus Research If domestic market for shrimps and other seafood increases, then such high dependence on exports will reduce April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 14 of 38

15 5) Government s push on developing aquaculture in India Blue Revolution Neel Kranti Mission The ministry of Agriculture and Farmers Welfare has merged all the ongoing schemes under the umbrellas of Blue Revolution and approved a total outlay of Rs. 3bn for the implementation of the scheme during to The goal is to substantially increase India s market share in global marine exports by tapping the full potential and enhancing the productivity of both inland and marine aquaculture. It aims to triple total marine production and exports earnings of the country by 22 with the benefits flowing to fish farmers and fisheries through institutional mechanisms. The scheme proposes to double the income of fish farmers and fisheries by increasing productivity and creating better infrastructure enabled by technology. Merchandise Export from India Scheme (MEIS) MEIS was launched as a part of new Foreign Trade Policy and it has replaced 5 similar schemes available under earlier foreign trade policy. Under MEIS, Government has allocated more than Rs. 22bn per annum for exports. Incentives are provided at a specified rate on FOB value lower of (a) Realized FOB value of exports in foreign currency, (b) FOB value of exports as given in the shipping bill in foreign currency. Percentage incentives are in the range of 2-5%. Development of various agencies like CAA, MPEDA and Rajiv Gandhi quarantine center to ensure sustained growth Various government bodies ensure very strong systems and processes for aquaculture in India and strictly enforce them. Some of its efforts are as follows: Control over quality of seed hatcheries: All the hatcheries have to be registered with CAA Sourcing of broodstock can only be done from sources approved by CAA Rajiv Gandhi Quarantine centre regulates the introduction of nonnative P. Vannamei in India to prevent the entry of disease Complete traceability: Proper records are kept of the seeds i.e. from where it came and to whom it was supplied, to ensure traceability. Avanti feeds: Key beneficiary of growth of shrimp culture in India Avanti Feeds Limited (AFL) has been a major beneficiary of the growth that shrimp culture in India has seen. The Company is a leading manufacturer of shrimp feeds and also is a shrimp processor. Company has seen strong revenue CAGR (FY9-16) of 61% and it has continuously increased its market share (currently being No.1) in the feed business in India. Exhibit 27: Avanti s revenues have grown at CAGR (FY9-16) of 61% How Avanti was able to turn around its business? April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 15 of 38 25, 2, 15, 1, 5, ,77 3,934 6,48 11,316 2,183 17,87 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Sales ( Rs mn) Great management: Pre 29, when aquaculture industry in India was going through difficult times, Avanti was able to survive and keep its fundamentals intact. Post 29, the highly experienced management team was able to spot the changing trend early and was able to capitalize on it. Company s revenue have grown ~3x from Rs. 73mn in FY9 to Rs. 2,183mn in FY16, and all this growth has been managed without leveraging the balance sheet. The successful ride of Avanti though tough times and the good times speaks a lot about the quality of its management team. Better economics of P. Vannamei: Introduction of P. Vannamei shrimp in India in 29 was the main reason of turnaround of the company and the industry as a whole. Before 29, Black Tiger shrimp which is native species was mainly grown in Indian farms. The survival rates of Black Tiger shrimp was low due to which

16 Thousands Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months farmers were mainly able to do only 1 crop a year. Also, the feed requirement of Black Tiger shrimp was higher and their stocking density was less (which means less number of shrimps per hectare of land). Due to all these reasons, the cost of production for farmers was higher and they were not able to compete in exports market and had low profitability. On the other hand, P. Vannamei shrimp which is native to the Pacific coast of Central and South America had higher survival rates, higher stocking density and had lower feed requirement. In 29, P. Vannamei shrimp was introduced in India and through its genetic improvement; it was made cultivable in Indian tropical climatic conditions. Due to its lower cost of production, the profitability of farmers improved and large number of farmers took to shrimp farming which led to this significant growth in aquaculture industry in India. Exhibit 28: P. Vannamei culture has grown sharply in India due to higher profitability Area under cultivation Export production TUF partnership and expansion into other states at turnaround time: Company had entered into a technical and marketing collaboration with Thai Union Foods (TUF) early in 22. But in 29, when government of India was about to introduce P. Vannamei species in India, Company sensed the opportunity and made a smart move by selling ~15% equity to TUF and got their technology and funds at the turnaround time. TUF already had experience with P. Vannamei in Thailand, their expertise gave an early start to Avanti and it was able to capture market share. Also, till 29, Avanti was mainly present in Andhra Pradesh but it expanded its sales force and distributor/dealer network into other states of Tamil Nadu, Karnataka, Kerala, Gujarat, West Bengal etc. April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 16 of 38

17 Fully vertically integrated model helps business economics Exhibit 29: Avanti is involved in the entire value chain of shrimp farming Shrimp Hatcheries Trading of raw materials ( Fishmeal, Soyameal) Feed manufacturing Shrimp farming Processor/ Exporter Destination country Stages in a value chain Agents (Consolidation of procurement) Avanti touch points in value chain Source: Equirus research April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 17 of 38

18 FY2 FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Avanti Feeds Limited Absolute Long Relative Outperform 31% ATR in 12 months Through its fully-integrated business model, company is involved in the entire value chain of shrimp farming (see Exhibit above) and hence has been able to build strong relationship with the farmers. Company is into shrimp feed manufacturing and sells it to farmers which in turn use it to grow shrimps in aquaculture. Once crop is fully grown and harvested, Company purchases these shrimps from farmers, does the processing and finally sells the shrimps in the export market. Avanti s business is organized mainly into two main business segments Shrimp feed: It is manufactured and marketed to the farmers Shrimp processing (Exports business): Shrimps are purchased from the farmers and are processed and exported to various countries Though feed segment is a manufacturing division and processing is more of a trading division but both are interdependent. If shrimp prices rise globally, more farmers take up shrimp farming to increase their profitability. As shrimp farming rise, more feed is required so the feed segment does well. With more produce, more processing is done and with higher export prices, the processing division also does well. With presence in both the segments, Avanti is able to build strong relationship with farmers. They provide high quality feed to farmers, then they also provide technical assistance to farmers and finally they purchase the harvested shrimps from farmers to process them and export them across the world. Exhibit 3: Feed business contributed ~86% of total sales (FY16) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 57.2% 42.8% 65.1% 69.6% 34.9% 3.4% Source: Company, Equirus research 77.8% 76.% 22.2% 24.% 84.7% 85.8% 15.3% 14.2% FY1 FY11 FY12 FY13 FY14 FY15 FY16 Shrimp processing ( exports) as % of sales Shrimp feed (domestic) as % of sales Shrimp feed business led the growth in the past few years: The main players in the shrimp feed business in India are Avanti Feeds, CP aquaculture (India), The Waterbase, Grobest Feeds, Nexus Feeds and Godrej Agrovet. With the introduction of P. Vannamei in India in 29, more number of farmers took to shrimp farming as the cost of production of P. Vannamei shrimp was lesser as compared to Black Tiger shrimp previously, which led to better profitability for farmers. As shrimp farming increased, the demand for feed increased and Avanti was a key beneficiary of the increased feed demand (See Exhibit below). In FY1, the ratio of revenues from feed and processing business was 6:4 respectively, but due to strong growth that the feed business has seen since then, the ratio has skewed towards feed business as 86:14 (FY16). Exhibit 31: Avanti s feed business has seen phenomenal growth post FY P. Monodon era Feed sales ( Rs mn) P.Vannamei era Feed business saw exponential growth as shrimp culture in India grew post 29 Revenues from shrimp feed to increase at CAGR (FY17E-19E) of 16% We remain optimistic about the potential of growth of shrimp culture in India and being the market leader in feed business, we expect Avanti to grow in line with the industry. But, we also note that the kind of growth that Avanti has seen in the last few years will be difficult to replicate and being a market leader it will be difficult to capture market share going forward. Due to rising demand, Company has further expanded its feed capacity by 125, MTPA in FY17E that has commenced operations since August 216. According to our analysis, Company is able to earn ~Rs. 7,mn for every.1mn MTPA increase in capacity at current realizations. We are estimating revenue from feed business to increase from Rs 17,318mn in FY16a to Rs 29,844mn in FY19e growing at CAGR (FY17E-19E) of 16%. April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 18 of 38

19 Exhibit 32: Due to strong demand, Company has been continuously increasing its feed manufacturing capacity % 58% 94% 75% Exhibit 33: Volume CAGR (FY17E-19E) estimated at 1% and realizations CAGR (FY17E-19E) of 5% % 92% 86% 85% 94% FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e Installed feed capacity ( MTPA) Capacity utilisation (%)(RHS) 1% FY13 FY14 FY15 FY16 FY17e FY18e FY19e 95% 9% 85% 8% 75% 7% 65% 6% 55% 5% Exhibit 34: Revenues from shrimp feed estimated to increase at CAGR (FY17E-19E) of 16% ,39 8,592 15,91 17,318 22,262 25,781 EBIT margins in feed business estimated in the range of % 29,844 FY13 FY14 FY15 FY16 FY17e FY18e FY19e Shrimp feed revenue(rs mn) Feed mills generally sell their feeds mainly through distributors and a network of dealers. Big Corporate farms tend to buy from the feed mills directly. Shrimp feeds have protein levels ranging from 3-4% and fat levels of 5-6%. The main raw materials for shrimp feed are fishmeal and Soyabean meal, the prices of which are highly volatile. The Company sources these raw materials from entities in the organized sector and though it tries to pass on the cost to farmers but when there is high volatility, it may not be always possible to pass on the cost. The Company has to continuously monitor raw material prices and try to balance the cost vs. protein content of the feed. For farmers, productivity of feed is most important factor and they always prefer feed with a lower FCR (Feed conversion ratio) i.e. quantity of feed consumed to shrimp meat production. So, Companies need to invest in R&D continuously to remain at top of their game. Source: Company, Equirus research Shrimp feed volumes ( Tons per annum) Shrimp feed realisation (Rs/kg)(RHS) April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 19 of 38

20 Exhibit 35: Company generally passes on the increasing cost of raw materials to farmers but if the increase is as sharp as in FY13, it may affect the margins 6% 5% 4% 3% 2% 1% % -1% -2% Source: Company, Equirus research Exhibit 36: EBIT margins in the Shrimp feed business estimated to be in the range of % 12.% 11.% 1.% 9.% 8.% FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Shrimp feed realisation(y-o-y %) Fish meal Soya DOC 9.3% 8.4% 1.% 11.2% 1.1% 1.9% 11.4% Shrimp processing to drive next phase of growth: Avanti started shrimp processing and exports in 1999 with a capacity of 3, MTPA and through modernization it has taken its capacity to 6, MTPA currently. In the processing business, farmers are the suppliers of shrimps to the company. Once the crop is harvested, the farmers put them in cold storage, so that they can be transported to a processing facility. If the farmer is not having cold storage, they take help of agents who aggregate the harvest from various small farmers and put them in cold storage and then transport the same to a processing facility. Once the processing is done, the shrimps are exported to destination countries. As Company successfully spotted the turnaround in shrimp feed business in FY9, in a similar manner Company is expecting the next growth story to be driven by the processing division. Collaboration with Thai Union Foods (TUF) gives Avanti a strategic advantage in the processing business: With effect from 1 st Nov, 215, through a business transfer agreement, Company had transferred its shrimp processing business to AFFPL at a slump sale value of Rs. 1,28mn. In 216, company sold 4% equity of AFFPL to Thai Union Foods (TUF) for Rs. 1,254mn and formed a 6:4 JV to expand its processing business. Avanti currently has processing capacity of 6, MTPA which it is now expanding to 21, MTPA (expected to start operations from April 1, 217). Thai Union Frozen (TUF) products PCL is a global seafood leader with annual sales of ~USD 4bn (FY16). The company was founded in 1977 and is a major exporter of processed seafood to all the major countries across the world. Shrimp and related business contribute ~42% to its revenue. The Company has stated its vision of reaching USD 8.bn sales by 22 and major driver for the same will be emerging market expansion through tie-ups and acquisitions. In India, TUF has chosen Avanti as its partner and has increased its stake over the years (see Exhibit 37) in the company. Collaboration with TUF will give Avanti a big strategic advantage as TUF can not only help Avanti with its technical expertise but also help in its marketing initiatives. 7.% 6.% 5.% 4.% 5.1% FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e Shrimp feed-ebit margins(%) In our view, just as selling ~15% stake to TUF in FY9 gave Avanti an advantage over peers in its feed business, in a similar fashion; collaboration with TUF for its processing business will give Avanti an advantage over its peers. TUF has a rich experience of exporting frozen seafood products across the globe and apart from proving its technical expertise, Avanti can gain a lot in improving its marketing capabilities across the world. Source: Bloomberg, Equirus research April 11, 217 Analysts: Depesh Kashyap, CFA ( )/Dhaval Dama ( ) Page 2 of 38