Avanti Feeds Limited (512573) Earnings Call Transcript & Summary

A very warm welcome to all present on the call. We thank you for your participation in the Q3 FY '20 post-results earnings call. Firstly, on behalf of Avanti Feeds Limited and KFin Technologies, we'd like to wish each one of you a prosperous 2020. The call will be initiated with the management remarks on Q3 results, followed by the Q&A. Management team is represented by Mr. C. Ramachandra Rao, Joint Managing Director; Mr. Alluri Nikhilesh, Executive Director Avanti Frozen Foods Private Limited; Mr. Venkateswara Rao, GM, Corporate Affairs; and Mr. K. Paidi Raju, GM, Finance & Accounts. I now hand the call over to Mr. C. Ramachandra Rao. Thank you, and over to you, sir.

Thank you, Mr. Sherwin. Good evening, ladies and gentlemen. We extend a warm welcome to you for this investors conference call today to review the unaudited financial results of Q3 FY '20. Along with me here are Mr. K. Paidi Raju, GM, Finance & Accounts; and Mr. M. V. Rao, GM, Corporate Affairs and other team members. Mr. Nikhilesh Chowdary, Executive Director, is joining through conference call as he's out of station today. The results of Q3 FY '20 are already with you for some time now, and we are sure that you have already would have gone through them. Before taking up the analysis of results, I would like to make a mention of some of the key indicators from the financial results. Consolidated financial results, the comparative performance of Q3 FY '20 with that of Q2 FY '20 and Q3 FY '19 have been given in the presentation already circulated. Gross revenue from the operations and other income of Q3 FY '20 has marginally decreased compared with Q2 FY '20 and it marginally increased when compared to Q3 FY '19. However, considering the nature of the industry, it would be more appropriate to compare the performance of 9 months FY '20 with that of 9 months of FY '19 as this will show a comprehensive performance for the first 9 months of the FY '20. The gross income from 9 months of FY '20 is INR 3,139.10 crores as compared to INR 2,664.46 crores corresponding period of previous year, registering a growth of 17.81%. For the same period, the PBT is INR 358.86 crores as compared to INR 325.51 crores in the corresponding period of previous year, with an increase of INR 33.35 crores. The PBT decreased to 11.43% on gross income from 12.22% over the previous period, mainly due to increase in RM prices, raw material prices in both feed and processing business. The PAT also grew from INR 230.42 crores in 9 months of FY '19 to INR 287.57 crores in 9 months of FY '20, registering an increase of INR 57.15 crores. The PAT increased to 9.16% from 8.65% on gross income which is mainly due to opting for reduced tax under new tax ordinance -- new tax regime in AFL. Feed financial results. The gross income from 9 months of FY '20 is INR 2,445.06 crores as compared to INR 2,107.51 crores in the corresponding period of the previous year, registering a growth of INR 337.55 crores at 16.02%. The PBT for 9 months of FY '20 has been increased to INR 280.45 crores as compared to INR 255.28 crores, including exceptional items in the corresponding period of the previous year with a marginal decrease of 11.47% from 11.11% on gross income. The PAT went up from INR 167.75 crores in 9 months of FY '19 to INR 216.72 crores in 9 months of FY '20, with an increase of INR 48.97 crores, with an increase of 8.86% from 7.96% on the gross income. Now we come to the reasons for steep fall in the gross profit and PBT in Q3 FY '20 compared to Q2 FY '20 and also Q3 FY '19 for feed business. You must have been surprised to see a steep fall in the gross profit of Avanti Feeds in Q3 FY '20 compared to Q2 of FY '20 and also Q3 of FY '19 which is to the extent of INR 76 crores and INR 42 crores, representing a drop of 56% quarter-on-quarter and 42% on a year-on-year basis, respectively. The major contributing factor is increase in the raw material price, discounts given to dealers on sales and further due to decrease in sales volume. The composition of these 3 factors is increase in raw material price to the extent of INR 31 crores, increase in discounts to the extent of INR 17 crores, and decrease in margin due to decrease in sales is to the extent of INR 28 crores. Total, it is INR 76 crores. Now let me explain what each one of them really mean. Increase in raw material prices. If you look at the RM cost per tonne of feed in Q3 FY '20 compared to Q2 FY '20, it shows that the RM cost per tonne is INR 55,240 in Q3 FY '20 as compared to INR 52,220 per tonne in Q2 FY '20, an increase by about INR 3,020 per tonne. This increase in cost has accounted for INR 31 crores reduction in the margin of Q3 FY '20 over Q2 FY '20 on a sale of 103,874 tonnes of feed in Q3 FY '20. However, over a period of past 3 years, the raw material cost has gone up by about INR 4,500 per metric tonne due to increase in RM prices alone. In order to recover the increase in this RM cost, the sale prices of all varieties of shrimp feeds has been increased by INR 4,800 per metric tonne effective from 27th January 2020. In this context, I would like to share with you that the prices of soya bean meal kept on increasing unabatedly during Q2 and Q3 of FY '20, in spite of the fact that the fresh crop arrives into market by end of October and in November which is delayed during the period in which normally the prices tend to come down. This is attributed to shortage of soya bean crop by about 25% to 30% this year due to unseasonal rains and floods and also lesser oil content in the seed. Further, the minimum support price was also increased by the government by 10%. As a cumulative effect, the soya bean meal price increased by about INR 4 per kg in these 2 quarters. The prices of fish meal also increased due to reduced catches and also shortage for about 45 days due to agitation by fish meal manufacturers against imposition of 5% GST on fish meal. The increase was about INR 3 per kg in Q3 FY '20. The wheat flour also kept increasing month-on-month basis, adding to the cost of raw materials. So overall, the cost has increased. The price of wheat flour is about INR 2 per kg, the increase is INR 2. Increase in discounts. Now coming to the other contributing factor is the discount. The margin in Q3 FY '20 decreased by about INR 17 crores compared to Q2 FY '20 due to increase in the amount of discounts given to the feed dealers. It is a trade practice that the discounts are crystallized on the basis of volume of sales made by a dealer during a calendar year, January to December. During 2019, the discounts accounted for INR 15,196 per tonne as against INR 14,849 per tonne in previous year, that is 2019, with an increase of INR 347 per tonne. In order to increase the sales volume, market share and improve the sales against payment in the highly competitive and credit market environment, the company had to increase the discounts in the form of a turnover discount, early or prompt payment discounts by undertaking rationalization of discount structure in 2019. This has resulted an increase of discounts by about INR 347 per tonne. As the crystallization of actual discounts are made as on 31st December of every year on the basis of the actual sales, any increase gets loaded into this quarter which is almost the applicable for the -- throughout the year. This is a normal practice. And since there is an increase in discounts in 2019 over 2018, the impact is seen in Q3. This strategy of personalizing the discount structure worked out effectively, which could be seen from the increase in sales of 2019 at 4,74,294 metric tonnes as compared to 4,20,334 metric tonnes 2018, registering an increase of 50,960 metric tonnes. This discount structure is reviewed every year and formulated taking into consideration the market situation and other factors. The third and very important contributing factor for decreasing the margin is a decrease in sales volume. The [indiscernible] profit to the extent of about INR 28 crores is attributable to the decrease in volume Q3 FY '20 as against Q3 FY '20 (sic) [ Q3 FY '19 ]. The decrease in sales is a seasonal factor and normally in the October, November, December, which is a receding season for shrimp culture as all of you know. Coming to the shrimp processing financial results. The gross income during the 9 months of FY '20 grew to INR 695.91 crores from INR 560.53 crores in 9 months of FY '19, registering an increase of INR 135.38 crores at 24.15%. The PBT in the 9 months of FY '20 is INR 77.72 crores as compared to INR 69.50 crores in 9 months of FY '19 with an increase of INR 8.22 crores. However, in terms of percentage, the PBT has declined to 11.17% on gross income from 12.40% on the corresponding period of the previous year, mainly due to increase in RM prices without corresponding increase in the export realization. Coming to the shrimp hatchery. Long-awaited and much delayed hatchery with 200 million seed capacity as the first phase, the construction has almost been completed, awaiting certain statutory clearances to start. It is expected to commence production in a couple of months from now. Coming to the industry overview. In the just completed 2019 year, the shrimp culture in India saw much needed stabilization compared in highly volatile and uncertain conditions in 2018. The shrimp production estimated to have registered a growth of about 9% to 10% over 2018 at 7.40 lakh tonnes compared with about 6.75 lakh tonnes in 2018. Shrimp feed consumption is estimated to have registered growth of about 8% at 11,50,000 tonnes in 2019 compared to 10,20,000 tonnes in 2018. Coming to the sales of the company. As you know, we have -- the company has not only been keeping its farmers base intact, it is also adding new farmers and new areas to its sales network year after year. As a result, the market share of the feed has gone up from 45% to 48% during the 9 months of FY '20 and this will assure about 5 lakh tonnes sales as against 4.22 lakh tonnes in FY '19 as the culture [ derivative ] is not expected to major changes this quarter of Q4 FY '20. Shrimp processing and exports. As per the presentation made at GOAL during the global aquaculture -- what is it -- during last quarter in Chennai, shrimp aquaculture production is projected at CAGR of 4.9% from 2015 to 2021. Accordingly -- according to this report, after recording a growth of 5% in 2018 over 2017, 6% to 11%, the growth is projected flat with a nominal increase of 1% in 2019. Thereafter, it is projected to grow at 5% annually till 2021. However, basing on shrimp production and exports from India in 2019 which is estimated to be around 7.50 lakh tonnes to 8 lakh tonnes. It is estimated that in 2020, the shrimp production may go up to -- go up 8.50 lakh tonnes with an anticipated growth of -- by about 8.50% over -- 8.25% over 2019, subject to stable export market and shrimp prices and favorable shrimp price environment. As far as the company is concerned, during the 9 months FY '20, 9,781 tonnes of processed shrimps were exported as compared to 8,215 tonnes during the corresponding period of FY '19, registering an increase of 1,566 tonnes with a growth of 19.06%. The combined capacity utilization of both the plants during 9 months of FY '20 is 66% as compared to 50% during the corresponding period of FY '19. The company envisages to achieve a combined capacity utilization of more than 70% by end of '20 -- FY '20. During 9 months of FY '20, 2,712 tonnes of value-added products were exported as compared to 2,021 tonnes during the corresponding period of FY '19, registering a growth of 34.19%. This endeavor of the company to focus on export of value-added products will also increase export to other than U.S. market. Government support. As anticipated, recent budget presented in the Lok Sabha by Honorable Finance Minister on 1st February 2020, emphasis has been laid on the need for focus on growth of fisheries sector with a target of fishing product exports to INR 1 lakh crores by 2024-'25 and proposed to involve youth in fishery extension to 3,477 Sagar Mitra and 500 fish farmer producer organizations. Further details of the measures going to be adopted by the government is awaited. Hopefully, these measures implemented in the right earnest will go a long way in the growth of the seafood industry. With this preamble, now we will take up the questions from you.

[Operator Instructions] Our first question from [ Falguni Dutta ] from Jet Age Securities. It looks like participant line is not active. I'm moving to the next question. We have next question from [ Ayush Mittal from NAPL Value Investing Fund ].

Sir, in reference to the price increase taken by the company to offset the raw material price increase, can you share about -- more about how the price increase has been taken by the market? Other players also increased the price or only Avanti has increased the price as of now? How's the reaction as of now from your dealer network?

See, as far as -- I mean, we know till now, almost all have them -- all the feed manufacturers have increased their prices, most of them -- all the -- I'm talking about big players. They all -- all of them have increased.

It's a uniform increase of INR 4 to INR 5 approximately per kg is that...

That we cannot. See, because each company has its own policy of pricing, therefore naturally it differs from company to company. So they -- so more or less, we can say between, say, INR 4.80 and INR 5. Within that range, everybody has taken. Again, it depends upon the individual structuring of the pricing and all, the increase will be determined. There is no uniform increase like that.

Okay. Okay. Sir, second question is, like, now we are in February and this is the start of the new key season that starts. So as per you estimate, you have shared about that you're expecting 10% industry growth. Is that the right number? What kind of expectations are you seeing for the upcoming season, basically?

See, the coming season means I would put it this way, Mr. [ Ayush Mittal ]. The thing is that the culture, as you know, is on the basis of calendar year. We always take it from January to December. So we had about 4,27,000 tonnes of feed sales in 2019. We are expecting about slightly maybe more than about 5 lakh tonnes -- about 5 lakh tonnes. So that would mean about what, 70,000 tonnes, 75,000 tonnes increase in the sales which accounts for about roughly 12%. Yes, about 12% increase, this 5 lakh tonnes.

Volume increase of 12% you are expecting for the coming year, calendar year 2021?

Yes. 2021.

Okay. Fantastic. Sir, in reference to the coronavirus in Chinese market, has this impacted any of the export market or the pricing as of now?

Which one?

Chinese.

Yes, Nikhilesh.

Am I audible?

Yes. Yes.

So [ Ayush ], it's very, very preliminary to answer anything. There's no movement in the market. It's stable right now. The Chinese are not working because the government has extended the lunar holiday. And the only news that we have from the Chinese market right now is that they're not working any containers on the -- on transits. Please ask for the extra free time for demurrage because even the ports and everything, it's -- the country is in a kind of a crisis at the moment. So they're just waiting to see how it progresses. But as of now, the market is stable.

Okay. Nikhilesh, one more question for you on the processing side. As we can see from the numbers and performance, we are doing very well on the processing side and doing more value-added products. What is your expectation for the coming year on the processing side?

So as I -- we've said in the past several investor calls, we expect to keep building on this. That is what we're looking at in the coming quarters as well, coming years as well. We're still building up our capacity utilization, adding more accounts into the -- into our company and adding more products. And that is the focus going forward as well. And I'm very confident we can move as positively as we're moving today.

Okay. And any risk on the incentive that we get from the government on this [ side ]?

So as of now -- so they have -- the government has already given their idea saying that they are going to remove certain export incentives but they have also said with the same breath that they will compensate on -- in other ways and they are working on it. So there's nothing for me to comment at the moment.

We have next question from Sahil Doshi from Birla Sun Life.

Am I audible?

Yes.

This is Nitesh over here, not Sahil. I don't know why it is -- I mean, still calling in. Maybe because the number is already there. Any which ways, sir, so I have 2 questions. Number one is on the movement of raw material prices, both the soya as well as fish meal. What is the trend now? I mean, are they continue to go up even in Jan and Feb? Or they are at the similar level what you would mention in Q3?

Yes. See, the present situation is that the crop is down by about 20%, 25% -- 25%. So the -- but we are expecting that the prices will stabilize because the only -- the other suppliers like Brazil and all the U.S. suppliers of soya bean meal, the import is not allowed into India because they are all GMO soya bean meal. So that's why the Indian product is, to the extent whatever is available, is only for Indian consumption. So the soya processors expect that price will stabilize 5% that way or this way in the coming months. See, because normally, the crop comes in the month of October, November. So whatever that -- is there, it is now being reaped but there was a holding in the initial stages. But we expect that this holding of seed will now ease because there was a rumor that the government again go for another increase of MSP. But so far, nothing has happened. So the -- we are expecting that the prices will more or less stabilize at this level, maybe 5% this way or that way.

Okay. And what about fish meal, sir?

Yes. Fish meal is again the -- they have levied 5% GST from 1st October 2019. So the catches are now stable. The earlier -- the last couple of months, there was shortage of catches also. Now it's slightly improved. But still the catches are not stable, they are on and off because the shortage is there. But the price is same, around 98, 99, it is around that.

Okay. So just to put it, I mean, in some other word, the price hikes, the feed price hike which you have taken, I mean, from January, does it adequately compensate for the increase in raw material prices which you have seen in Q3 as well as in, say, Jan-Feb? Or what details are required?

Yes. See, what we have -- no, see, as you know that we have not resorted to price increase for the last -- past 5 years. We have been just waiting because we are supporting the farmers, the industry, the aquaculture activity for 5 years. But the situation has come to the state that it is beyond limit -- I mean beyond our control to really hold on to that side. So we had to take the increase and we have convinced the dealers and the farmers also. They are also -- for the -- prices are going up. But here, I would like to say that the price component is around [ INR 4.55 ] over the past 3 years -- 3 to 4 years and there is a GST component which is coming to around INR 2.5 to INR 3 which still we are taking into our account because we have not been able to pass on this GST because the GST is not did on feed. Feed is exempt from GST. So this INR 2.5 to INR 3 is still borne by us. But this has already been factored into our accounts ever since the GST has been introduced. Only addition is the fish meal which is another 5%. But we continue to take that burden. And nevertheless, we'll be able to maintain the margins. We have been maintaining '17,'18 and '18,'19 because these factors have already been taken into account. As far as the raw material increase is concerned, this increase, we hope will take fully -- will take care of it fully.

We have the next question from Aniruddha Joshi from ICICI Securities.

Yes. Sir, regarding the Chinese market, so are we also impacted in terms of, means, our revenues are also impacted in China? And the second question, is the company has taken some increase in price hikes? So is the price hike equivalent to the entire increase in raw material prices? Basically, per tonne, have we raised the same prices already now?

See, I'll first answer this -- your question regarding the price, and Nikhilesh will answer you about the Chinese market. The one is -- the price that we have taken now will fully take care of the raw material price increase. Only that which is uncovered is the GST portion of it. GST will remain to be absorbed by the company because we cannot [indiscernible] on that. GST is taking care of it. But as far as the raw material price asset increase, this increase will take care of it.

Okay. So if the GST is implemented and there is no GST on our products, right? So we cannot really set off the GST that we are paying with any GST that we can [ pend ]?

Correct. Correct. So there are some quarters, at the moment, being proposed to levy GST on the feed also. But because being an agri-based product, rural economy and all, they may or may not levy the 5% GST. If they levy 5% GST, then we will set off the entire GST that we are paying from our -- on the inputs. We'll get the treat for it to the entire amount and we'll only be ending up paying only INR 0.50 to INR 0.75 on per tonne -- per kg GST.

Okay. And sir, in terms of China, do you see the demand from China hurting entire global demand-supply cycle of shrimp?

Nikhilesh?

So coming into the Chinese market, there are a 2 things that you've asked. The first one, whether it impacts the company directly. So the -- if you see the presentation that we've provided, the total amount of space that go to Chinese market of 4% of the total sales. So the volume exposure is very little. But then the potential of the market to grow in China and it being a driver for the growth of the company is very high because we've been telling this for a long time. But I don't see any large impact. If anything, it can be only a temporary effect. Because on the long-term, Chinese market will continue to consume. Seafood is a big driver in the Chinese market, lot of big population, good buying power, lot of openness of eating seafood predominantly. So nothing -- no major impact in the long run, definitely because we don't [indiscernible] see anything. And on the flip side, I'm looking at it more optimistically. Once all this is over, I think there will be more demand since they have to replace all the product which is produced in China or what's there in the X markets with product from outside. That's what how I see it.

I may add to what Nikhilesh said. Just we -- as far as we are concerned, our company is concerned, our exposure to Chinese market is very minimal because we have -- mostly we are going by U.S. So there is no -- practically no impact on our exports, our export market. Am I right, Nikhilesh?

Yes, sir. Only 4% that can be easily diverted to another market.

Yes. So it's negligible. And moreover, what we see in the news and all, there's lot of effort being made to contain the spread of this coronavirus and I'm sure that Chinese will be capable of doing it. And once this is controlled, I think normalcy will be restored. And as Nikhilesh said, it will pick up again in a short while from now. Yes. Okay.

We have next question from Nitin Awasthi from East India Securities.

Just speaking ahead, the question that was asked before, although our exposure to China seems limited and I agree that in the whole space of things, we are a more U.S.-focused company. I just wanted your thoughts on whether Ecuador's product could hurt the market because Ecuador could be in a season where it was proposed to supply a lot to China and because this halt has happened, could that hurt the overall thing -- scheme of things?

To answer your question, Ecuador's primary market to export is China. They do not produce -- they don't -- a large portion, I mean, more than 70%, 80% of the production is the head-on, shell-on or the headless shell-on which they don't really get into the value-added products. So for them, to directly -- so like I was saying before, what we see in the Chinese position is a very temporary phase. It's not a long-term effect. But even for them to go into the U.S. market, they're not equipped to get into the value addition processes. It's too short for them to get in overnight. So I don't see a major effect. But definitely, we need to look at how the virus and everything is panning out over the next several weeks because that would alter the dynamics not only of the seafood business but the whole global trade situation.

And Nikhilesh, if I could add, as to the previous question, how are the inquiries for the U.S. after the new year, the post new year inquiries which you're getting for the product? Have they halted? Or have they started and resumed picking up product for the new year?

So this season traditionally is the low season. The inquiries are lower compared to the previous quarters. That is, historically, it's the same. There's no big change. The demand that we're -- the demand that we're -- the inquiries that we're given -- we're getting is more stable. The thing that even we need to focus on is even the buyers in the U.S., the whole trade, they're looking at how this virus pans out because even in the U.S., there is an emergency; even in China there is emergency. So that -- even they are trying to assess what's happening. Right now, people are assessing. But the inquiries are still there. We're still getting inquiries. We're still talking to customers. We're still sending out samples for next year to -- for the new contracts. So the business is as normal. But on the inquiries, people are seeing what's happening in the market before concluding any big deals, and that's very, very, very normal.

Okay. And sir, just last -- one last question. On the export incentives, what is the current rate that we got for the quarter?

Can we check and get back? I'm not in the office right now. I'm currently...

7% [indiscernible], 2.7% [indiscernible].

See, at present, we are getting the [indiscernible] of 7% and 2% -- 2.4%...

2.7%.

2.7% of duty drawback. These are the incentives now.

To 30%.

To 30%. That is for [indiscernible], yes.

We have next question from [ R. K. Laddha ] from Yash Investments.

I just want to know that is there any -- hello, can you hear me?

Yes. Yes. We can hear you. Please.

Sir, is there area under cultivation is increasing?

I'm not -- no, it's not clear. Can you please be a bit louder? I'm not -- you're not audible.

Hello?

Hello.

Hello. Can you hear me now, sir? Can you hear me, sir?

Now it's better. Yes.

Hello. Whether there is area under cultivation is increasing substantially or it is very slow process?

No. See, there is no significant increase in the area but there is -- the production is increasing because the farmers are going for bigger size of shrimps with the tonnage going up. That's how the feed consumption as well as the production goes up. The area still remains more or less on the same level. We have to see this season. This current year, we have to wait and see. But the last thing, there was no big increase in the area.

Okay. Okay. Sir, and next question is, what are the farm gate prices trend?

Farm gate prices, I think...

The farm gate prices are stable.

They are stable.

Are they about INR 450 to INR 480?

It depends on what size you are looking at.

We have next question from Shalini Gupta from Quantum Securities.

Sir, I just wanted to be sure about what is your outlook for the year, that is the calendar year 2020. Sir, if I've understood it correctly, you're saying there's going to -- likely going to be a 12% increase in volumes and you have taken a price hike. So you should be able to maintain margins. Is that correct?

Yes. Yes. Yes.

Okay. And sir, I wanted to understand, I mean, this year, your margins have broadly -- if I look at it on a long-term basis, this year, your margins are back to where they have been on a long-term basis. So these are the kind of margins we should expect going forward?

See, the margins will be the same. It will not -- neither decrease nor increase. It will be the same level because whatever the price increase that we have taken is only to recover the raw material prices. The percentage -- the profit in terms of percentage remains almost stable in 2020.

Sure. And sir, the second question is that, see, we've had a -- we've had one soya bean crop in around October, November. Now when is the next soya bean crop expected?

There is only one crop, madam, per year, which comes in October. The sowing starts somewhere in March, April -- April, it comes in September, October. That is the only one crop.