CMP Rs. 109 BSE Code NSE Symbol - AVANTI

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1 @hiddengemsindia May 27, 2013 Ashish Chugh s HIDDEN GEMS. in search of Market Beating Stocks Avanti Feeds Ltd. CMP Rs. 109 BSE Code NSE Symbol - AVANTI With Equity, Technical & Marketing support from Thai Union Group, one of the world s largest seafood producers, EPS of Rs.33, PE of 3.5 and a dividend yield of 6%, Avanti Feeds is an investment candidate from an industry expected to grow at 20-25% over the next 2-3 years. First of all, a word of caution the stock of Avanti Feeds is a small cap stock with a market cap of under Rs.100 crores which besides risks of Equity investing also carries risks associated with investing in small caps including liquidity risk & high impact cost in trading. It is therefore recommended for investors with high risk appetite and is recommended for slow accumulation at the current levels and on declines for long term holding. Established in 1993, Avanti Feeds Ltd (AFL) is the leading manufacturer of Prawn and Fish Feeds and Shrimp processor and exporter from India. AFL started its commercial operations in 1993 in technical collaboration with Pingtai Enterprise, Taiwan. Later the company expanded the capacity and enhanced technical and marketing capabilities by bringing on board Thai Union Frozen Products PCL (TUF) of the Thai Union Group, Thailand ( one of the world's largest

2 seafood manufacturers. Today TUF is closely associated with AFL with equity participation, technical collaboration and a marketing tie-up in India. Prawn and Fish Feed Manufacturing Units Avanti has Three Prawn and a Fish Feed Manufacturing Units, certified ISO 9001:2008, in Kovvur, Vemuluru in West Godavari District, Andhra Pradesh and Pardi in Valsad District, Gujarat, in India with a capacity of 90,000 MT per annum. Avanti produces feed catering to the Indian prawn and fish farmers. Shrimp Processing and Exports Unit The Shrimp Processing and Exports Unit, certified ISO 22000: 2005 is located in Gopalapuram near Ravulapalem, East Godavari District Andhra Pradesh, India and confirms to HACCP, USFDA, EU & BRC Global standards. It is also an ACC Certified for best aquaculture practices. The company has state of art technology coupled with quality consciousness, storage facilities & logistics capabilities, and caters customers in USA, Europe, Japan, Australia & Middle East. Financials The latest financials of the company are given as under :- QUARTERLY - LATEST RESULTS - Avanti Feeds Ltd (Curr: Rs in Cr.) As on 26/05/2013 Particulars Quarter (Mar 13) Quarter (Mar 13) Quarter (% Var) Year (Mar 13) (12) Yr (Mar 12) (12) Year (%Var) Sales Other Income Other Operating Income PBIDT Interest PBDT Depreciation PBT Tax Deferred Tax PAT

3 SHARE PRICE - LATEST EQUITY - Avanti Feeds Ltd (Curr: Rs in Cr.) As on 26/05/2013 Latest Data Latest Equity(Subscribed) 9.08 Latest Reserve Latest EPS -Unit Curr Latest Bookvalue -Unit Curr Face Value 10 Book Value (with YTD NP) - Unit Curr Stock Exchange BSE NSE Latest Market Price--Unit Curr Latest P/E Ratio Latest P/E Ratio -cons Latest P/BV Latest P/BV - cons Week High -Unit Curr Week High-Date All Time High -Unit Curr All Time High-Date Week Low -Unit Curr Week Low-Date All Time Low -Unit Curr All Time Low-Date Market Capitalisation Dividend Yield -% Dividend Yield -% - cons Price Date (Source Capitaline) Risks & Investment Rationale KEY RISKS Lets talk about the risks first. The key risks associated with investing in the stock of Avanti Feeds are :- Shrimp Culture is subject to un-certainties of climatic conditions. Volatility of international prices of sea food and fluctuating foreign exchange rates Raw material prices especially soyabean. Susceptibility of virus and other diseases for sea food Anti-dumping duty on sea food

4 INDIAN SHRIMP INDUSTRY Introduction of Vannamei (White Shrimp) Game Changer for the Industry The Indian Shrimp industry was passing through difficult times till 2009 when the Indian government announced that it would allow the cultivation of the pacific White Shrimp Penaeus Vannamei from the stocking season, starting Feb Till then, Indian shrimp farms had been allowed to cultivate only the Indian Tiger Prawn (P. Monodon). The reason for the decision lies in various advantages the P. Vannamei (White Shrimp) species has over the P. Monodon (Tiger Prawns), namely a) Better Disease Resistance (than Tiger Prawns) b) Lower Cost in terms of lower protein requirement in Diet c) Higher Stocking Density & hence better productivity d) Better Growth & Survival Rates e) Other advantages include Better Salinity & Temperature tolerance, and ease of breeding. Moreover, since White Shrimp is generally preferred over Tiger Shrimp in the US due to its taste, it makes marketing of the product easier. A few disadvantages include : a) Growth rate of White Shrimp slows after reaching a certain size, making production of large-sized shrimp slower. Tiger Prawns on the other hand can grow to larger size, commanding higher price. b) High competition on international markets for White Shrimp as production is world-wide. Fallout Of The Government Decision The result of the government s decision was a revival in fortunes of the industry. Prior to the introduction of P. Vannamei shrimp, the Indian shrimp production had been steadily declining, because of frequent virus attacks hitting the Tiger Prawn species. The introduction of Vannamei to India benefited in augmenting the marine shrimp production from a level of around 88,000 MT worth Rs 1,915 crore in to about MT worth Rs 3,585 crore in and to about MT valued at Rs 6,600 crore in The industry thus registered a 3 fold growth in 3 years.

5 The prospects of Indian shrimp producers were further bolstered in 2011 due to disease hitting Vietnamese shrimp and floods in Thailand. The growth in shrimp farming led to a turnaround in the fortunes of the Indian shrimp feed industry too. Avanti Feeds Partnership with One of the Largest Seafood Producers AFL has partnered with Thai Union Frozen Products PCL., ( one of the world's largest seafood processors and leading manufacturer of prawn and fish feeds in Thailand with integrated facilities from Hatchery to Shrimp & Fish processing and Exports. TUF increased its holding in Avanti Feeds from 14.99% to % in July 2012 pursuant to the merger of the joint venture company Avanti Thai Aqua Pvt. Ltd. with Avanti Feeds. TUF thus currently holds 25.12% in Avanti Feed s Rs.9.08 cr Equity, while the Indian promoters hold 41.76%. Thai Union Frozen Products (Thai Union Group), Thailand - Quick Facts A few quick facts about TUF are given below :- Website : Global Seafood Player, Global Workforce : Global Network 4 Continents Asia, America, Europe & Africa with 10 manufacturing bases The largest Asian (ex-japan) seafood processor in sales value. The world s largest and most integrated canned tuna manufacturer Brands Owns world s Leading Brands - Chicken Of The Sea, Mareblu, Petit Navire, John West, Sealect, Century Tuna, Belotta, H. Parmentier, Fisho etc Strategic Shareholders - Mitsubishi Corporation (Japan), Hagoromo Foods (Japan) Sales (2012)- USD 3.44 Billion (Roughly Rs.19,000 cr) PAT (2012) USD 15.5 Million (Roughly Rs.850 cr) Seafood (including shrimp) consumption the world over is rising yearly, due to increasing world population & also because seafood is considered a healthier alternative to meats, and so the shrimp & shrimp feed industry should do well in the future too. By tying up with TUF, which is one of the largest producers of canned & frozen seafood in the world, AFL is assured of the best industry knowhow & practices.

6 New Business Dometic Market Foray - Ready to Eat/ Ready to Cook AFL has ventured into the domestic market with an objective of providing export quality shrimp ready to eat and ready to cook product to Indians by launching "PRAWN KING" brand products. It envisages catering to the prawn consumption in hotels, restaurants and household. It has started an eatery in Hyderabad and plans to open similar outlets in other cities in phased manner. Conclusion From Sales revenue of Rs.70 crores and loss of Rs.7 crores in FY 09, Avanti Feeds has registered a Sales Revenue of Rs.640 crores and a PAT of Rs.30 crores in FY 13 that s a jump of over 9 times in Sales and a significant improvement in profitability. The company has announced a dividend of 65% for FY13. In the short term, softening of raw material prices (Soyabean) may be positive for company. The biggest risks for the business however remain a) Banning of White Shrimp (Vannamei) from India for any reason (like anti-oxidant, virus or antibiotic issues) and b) Outbreak of a disease. The company also faces threat from new entrants which are announcing their entry into the shrimp feed industry and competition may increase in the future. However, by tying up with TUF, we believe Avanti Feeds should be able to maintain it's leadership position in the industry. Besides having vast experience and expertise in P. Vannamei Hatchery, Feed and Culture, TUF also has a large wholesale and retail network in USA, and will also support AFL in expanding it's processing and export market. The company expects a demand growth of 20-25% for the next few years and has over the last two years doubled its Shrimp Feed manufacturing capacity and has tripled the Shrimp Processing capacity. The company has, each year, in the last 2 years distributed 25% of the profits earned (PAT) as dividend (plus dividend distribution tax). If the company continues with this payout & maintains this track, we believe this will lead to a change in perception and gradual rerating of the stock. We believe that with an EPS of Rs.33, PE of less than 3.5, CAGR of over 70 % (over last 3 years), and a dividend yield of 6%, the stock merits investment at the current valuations.

7 Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members donot have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him and welcomes comments, feedback & queries at nexgenfin@yahoo.com. This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.

PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%) BUY CMP 469.40 Target Price 540.00 AVANTI FEEDS LIMITED Result Update (PARENT BASIS): Q2 FY16 DECEMBER 12 th 2015 ISIN: INE871C01012 Index Details Stock Data Sector Food products BSE Code 512573 Face Value