Avanti Feeds Limited (512573) Earnings Call Transcript & Summary

Good evening to everyone present on the call. I welcome you all to the Avanti Feeds Q3 FY '21 Results Con Call. On behalf of Avanti Feeds and KFin Tech, we'd like to send out our best wishes of the new year to each one of you. From the management, we have with us Mr. A. Indra Kumar, Chairman and Managing Director; Mr. A. Venkata Sanjeev, Executive Director; Mr. Alluri Nikhilesh, Executive Director, Avanti Frozen Foods Private Limited; Mrs. Santhi Latha, GM, Finance and Accounts; and Ms. Lakshmi Sharma, Company Secretary, Avanti Frozen Foods Private Limited. And now, I hand over the call to Mr. Indra Kumar sir. Thank you, and over to you, sir.

Good evening, ladies and gentlemen. I extend a warm welcome to you for this investor conference call today to review the unaudited financial results of Q3 FY '21. Along with me here are Mr. Venkata Sanjeev; Mr. Nikhilesh; and Mrs. Santhi Latha, GM, Finance and Accounts; and my other team members. The results of Q3 FY '21 are already with you for some time, and now we are sure that you would have already gone through them. Here are some of the key indicators from the financial results of Q3 FY '21. Comparative performance of Q3 FY '21 with that of Q3 FY '20 and Q2 of FY '21 has been given in the presentation already circulated. Gross income in Q3 FY '21 is INR 944 crores as compared to INR 1,150 crores in Q2 FY '21, a decrease by INR 206 crores at 18% as compared to INR 942 crores in Q3 FY '20, a marginal increase of INR 2 crores. The PBT is around INR 108 crores in Q3 FY '21 as compared to INR 162 crores in Q2 FY '21, a decrease by 33%. As compared to INR 73 crores in Q3 FY '20, there's an increase of -- by 48%. Increase in PBT when compared to the corresponding quarter Q3 FY '20 are account of increase in sales realization and gross margin. Stand-alone financials of feed and processing divisions, Q3 FY '21 results. The gross income for the Q3 FY '21 is INR 697 crores as compared to INR 674 crores in the corresponding quarter of Q3 FY '20, resulting in a growth of INR 23 crores at 3%. PBT of Q3 FY '21 is INR 78 crores as compared to INR 43 crores in the corresponding quarter of Q3 FY '20, an increase of INR 35 crores at 81%. Shrimp processing division, Q3 FY '21 results. The gross income of the Q3 FY '21 is INR 233 crores as compared to INR 265 crore in the corresponding quarter of Q3 FY '20, registering a degrowth of -- by INR 32 crores at 12%. The PBT for the Q3 FY '21 is INR 32 crores as compared to INR 30 crores in the corresponding quarter of Q3 FY '20, a marginal increase of INR 2 crores. Industry overview, future forecast. The aquaculture industry like any other industry breathed a sigh of relief on the significant decline of fresh COVID-19 cases during last 2 months, coupled with giving COVID vaccine to frontline workers like doctors, nurses, paramedical staff in the first phase during the past 1 month and continuing vaccinations to others like sanitary workers, police and other administrative staff with promise to extend to above 50 years age group from first half of March '21. Administration of vaccine to a large population in mass scale is first of its kind in the world and being implemented very effectively. Even globally, COVID vaccines are being administered in a fierce manner. And except some sporadic instances, the fresh cases of COVID-19 is, by and large, decreasing giving confidence to global economy to stage a comeback. These 2 factors have given immense confidence to the people, industry and the government alike to bounce back with a rejuvenated energy and work for growth and prosperity. The year 2021 started with promising significant improvement in the overall performance of the aquaculture industry compared to the bygone year 2020. The severe impacts experienced in the first half of 2020 due to COVID-19, lockdown, et cetera, are not there now, and the stakeholders are confident of results and of attributes on par with the pre-COVID period during the current year globally. As a result, industry performance is expected to improve significantly in this year. In India, the main reason of shrimp culture started in January with a positive note of stable farm gate prices of shrimps and export prices, good rainfall in the previous year, availability of good quantity. The farmers were very hopeful of continued favorable conditions of shrimp culture this year, particularly the main season during the first half of the year. Shrimp production and feed consumption in 2020. As per GOAL survey, the global shrimp production in 2020 was estimated about 3.5 million tonnes compared to 4 million tonnes in 2019, a decline by about 10%. However, the survey forecast a production of 3.8 million tonnes in 2021, a growth by 8.5%. In India, the estimated production of shrimps in 2020 is about 6 lakh metric tons to 6.5 lakh metric tons as compared to 8 lakh metric tons in 2019, a decrease by around 19%. During the current year, 2021, the production is expected to grow by 10% to 15% with an average estimated production of 7 lakh to 7.5 lakh metric tons. Shrimp feed consumption in India declined to about 9.55 lakh tonnes in 2020, compared to 12 lakh tonnes in 2019, down by about 20%. However, during 2021, the feed consumption is expected to grow by 10% to 15% with an average estimated consumption of around 10.5 lakh metric tons. The company feed sales during 2020 is about 4.55 lakh metric tons and expected to be around 5 lakh metric tons in 2021. The company is expected to maintain its market share of 46% to 48%. Shrimp processing and export. Shrimp production and exports from India in 2020 is estimated around 6 lakh tonnes -- 6 lakh metric tons to 6.5 lakh metric tons as compared to 8 lakh metric tons in 2019, a decline by 19%. During the current year, 2021, the production and export of shrimp is estimated of around 7.5 lakh metric tons, a growth of 10% to 15% over the previous year. The company's shrimp exports in 2020 is about 12,192 metric tons. The estimated exports in 2021 is about 12,500 metric tons. As the global markets are gradually recovering from the impact of COVID-19 and the economies are showing signs of improvement, the demand for shrimp consumption is almost -- is expected to pick up as customer turnout in restaurants, malls and public eating places is increasing. The company continues to focus on export of value-added products and exploring new markets. [Technical Difficulty] shrimp feed and fish feed to 15% from earlier 5% to regulate import of feed and concession custom duty, encouraging large scale imports, incremental to the domestic feed mill industry. This is a long waited welcome decision by the government, which has been achieved by consistent persuasion with the government. The Government of India is working on providing production-linked incentive to the industry to promote export of global quality shrimps at a competitive price in a global market. This is a positive move, and the details are yet to be formulated and announced by the government. The central government approved a financial layout of INR 10,900 crores to the Ministry of Food Processing for processing industries over 5 years for the food processing sector, which includes marine processing -- marine food processing. As all of you know, the government has totally discontinued MEIS incentive on export of shrimps with effect from January 1, 2021, which was capped at INR 2 crores for the last 4 months from September 1 to 31st December, which was 5% from the earlier. The abolition of MEIS has a significant impact on financial performance of the export industry. However, the government is in the process of introducing an alternative incentive scheme, known as RoDTEP, Remission of Duties and Taxes on Exported Products. The state government of Andhra Pradesh has enacted 3 registrations for regulating aquaculture sector in AP state: Andhra Pradesh State Aquaculture Development Authority Act; Fish Feed Quality Control Act; and Aquaculture Seed Quality Control Act. No doubt such regulatory measures are required for sustainable growth of the industry, but enormous compliance requirements and intensive interference by the officials in pursuant -- in pursuit of implementation of these acts may cause unavoidable hardships to the smooth operation of industry. I would like to conclude with the positive note that the aquaculture industry is poised for a growth in 2021. Thanking you. Now we can take up the question and answers.

[Operator Instructions] First question comes from Nitin Awasthi from East India Securities.

So just to understand the basic question first, could you just share the trend of fishmeal prices and soya meal prices? What they were during the previous quarter and how they are shaping up right now?

The fishmeal and soya meal prices have been stable for quite some time, and now they are increasing -- both fishmeal and soya meal prices have been -- are slightly increasing -- in increasing trend.

Okay. Could you quantify, sir, what they were during the previous quarter and what they are right now?

Previous quarter -- see, in the first quarter, it was around INR 94 -- the fishmeal was around -- average price was around INR 94.25. In the second quarter, it was INR 92.74. And now again, it is around INR 94.8. And soya was around INR 42.17 first quarter and INR 40.84 in quarter 2. And now it is INR 43. And wheat -- yes.

Sir, no, continue, sir, wheat?

Yes, wheat reduced slightly, yes.

Okay. Okay, sir. Sir, on the budgetary announcement, how much market share was with the foreign players who were directly importing feed and not manufacturing it in the country, who this new law will affect?

See earlier -- see the feed was allowed to be imported on a concession duty of 5%. Now in this budget, they have made it -- they increased around 10%, which made it 15%. See, in total, the imports were around 10% to 15% -- 10% to 15%. Around -- say, in the year 2020, around 1 lakh to 1,15,000 tonnes was imported. Of the total 9,50,000, 1,00,000 to 1,15,000 was imported. Now with the -- because it was being imported from China and Vietnam at much lower prices and because they were getting some export benefits and the duty was in a concessional duty what India was imposing on that. Now with the increase of that, those will get affected, and they will be stopped.

Got it, sir. Sir lastly, given that the industry is under some stress at this point of time and your balance sheet is so strong, would you look to spread your wings into by acquiring companies or getting into different fields? And if I may continue with this question, is there any conflict of interest into entering into certain segments because of promoter entities?

Pardon me. Can you repeat again?

Yes, sir. Given that the industry is under some stress as of now, and Avanti has such a strong balance sheet, which -- and such a strong business model, will it look to spread its wings into different geographies or different products within the industry? And if not, is there a conflict of interest between the promoter or holding entity of the Avanti Group or company because of which it is not doing so? Because every other peer is doing so in the industry, who has a strong balance sheet.

We are looking at expanding our listing into -- earlier, we have already informed you -- informed the -- in our AGM and this thing, we are looking at fish feed and other feeds, entering into fish feeds and other feeds and also bringing in the new species. Because last year was a difficult year. Because of COVID and all, we couldn't really progress on that. But our plans are there. And this year, we are taking it up.

Could you specify? When you say other feeds, you mean other animal cattle feeds apart from fish feeds?

I said fish feed and maybe we are looking at some pet foods.

Pet foods, okay. And on bringing in new species when you say, new species of shrimp or fish?

New species of fish. Fish.

[Operator Instructions] Next question comes from Punit Mittal from Global Core Capital.

Congratulations for a good set of numbers in this difficult time. I only have 1 question, which I think I have raised previously in previous conference calls as well. Given the strong balance sheet and the large cash that the company is holding and good generation of operational cash flow from operations, would the company -- why is the company not looking at buybacks given the valuation of the company also not properly reflected in the market?

We have not yet -- see, the right moment, we'll take a decision. We have not -- we have -- most of the funds we are using for working capital, and we are looking for a good opportunity for organic and inorganic growth. And we'll definitely -- we are looking at different options here.

Would the management be able to take any decisions anytime soon because, with due respect, sir, it's been the same thing for last many quarters? And actually, we are just highlighting as shareholders because we do think that the company is not rightly valued by the market and the company has strong cash on its balance sheet.

Yes. We have some expansion programs on mind and that we are working on it. And we require diversification or acquisitions. We are looking for the opportunities. Definitely when opportunity comes, we have to take it, and we have to have right cash at the moment as -- when opportunity comes.

Next question comes from Depesh Kashyap from Equirus Securities.

Sir, I just want to understand what kind of problems or, let me put it like, changes you're seeing on the ground because of the AP government regulatory framework? And are you seeing any farmers moving to other states? And are you thinking of putting a new plant in other states also?

No. See, Government of India -- Government of Andhra Pradesh putting up a regulation and bringing up the act -- the aquaculture act and feed control act and the other acts, I think it will be more of a promotional activity because the major activity in Andhra Pradesh today is aquaculture. They don't want any [ flamboyant ] operators to come in with -- they want strong people -- the company -- strong people and save kind of farmers' interest also. The farmers are not moving away from the state. That's the -- actually, during the COVID time also, a lot of period, the government has come up to help them out also. And definitely, there may be some hiccups in the beginning of the implementation of the act, but slowly, the regulatory system should help in the growth of the industry, if we take it in positive way.

Understood. Sir, you talked about the fish feed segment in the last question. But historically, also, you have tried to get into fish feed segment, and that has not worked out and you closed it. So are you seeing any changes of ground because of the government initiatives that you again want to venture into it?

No. See, we have not closed it. In fact, we have not closed it. We can produce 1 variety of the fish feed, which is sinking feed, but we need also floating feed. This is the other segment. See, we didn't want to catch up to the low valued fish. Now there's a lot of interest in considering high-valued fish like the grouper, sea bass and other species, which are now being encouraged by the Prime Minister with the last year -- in last budget last year, Prime Minister had announced the fisheries act and supporting the fisheries. The new fishes are being encouraged in India, and we are being developing these fishes which are high valued, high-protein fish. I think then the feed requirement for the processing side, it is more advantageous for the big players like us.

Great. Lastly, sir, 1 question to Nikhilesh I just want to ask. Nikhilesh, despite the lockdown and the restaurants not operating at full capacity in the U.S., the actual shrimp imports, if you look at in U.S., have increased by 7% in the last calendar year. So just wanted your view. Was it the actual demand of shrimps or they have built up an inventory that may hurt the demand next year?

So there are 2 things. The imports have definitely increased up. And if you look very carefully into the numbers, imports from Ecuador have gone significantly up. And that is mainly because the Chinese market has closed, and Ecuador has put in a lot of the product into the U.S. market at very cheap prices. So that is 1 factor. And also, the retail sales have gone up significantly, compensating the closure of the foodservice segment. There was inventory buildup in December and early January, but then they are up now. But like frankly speaking, any time you talk to the buyer, they say that we have a lot of inventory, but then like there are a lot of indications like the warehouse is accepting product and the numbers like our customs broker informing us about the movement of products. So right now, it's more smooth, stable, back to normal, but we need to see how the sales go in this period, February, March, before the new season starts.

Okay. And are we becoming uncompetitive due to the higher freight rates that we are seeing? India is becoming uncompetitive because of that or customer is ready to take the price hike if you are able to process?

So that's -- it's not only India. The freight rates have gone up worldwide. Even if you take Thailand and Vietnam and Indonesia, the freight rates have gone up significantly. Like they're very, very high. And right now, the industry is trying to pass on the cost to the consumer. It's very early because the freight rates have again increased in January. So we are waiting -- we are quoting higher prices, explaining the customer about the new freight increases, and negotiating with them. So right now, it's very early. Someone -- definitely some should be passed on to the consumer.

Depesh, see, the freight rates across the world have gone up, and this shortage of containers in the space in the shipping lines. So the -- as Nikhilesh has explained, the prices have really gone up. And now I think not the India -- not only India, like other countries also facing the similar situation. And we are taking up with the Government of India -- we are also taking up with the Government of India to help in regulating the prices.

[Operator Instructions] Next question comes from Ashish Thavkar from Motilal Oswal.

Sir, the harvest season in India has started in last month. So how is the mood among the farmers now?

Harvest season is over. The saving season has started. Now the saving is going on. The mood of the farmers -- yes, it is going on very -- the farmers are very active, and their saving is going on actively.

Okay. Sir, another question would be on the Chinese New Year. Since -- is the relationship between like whatever shipments used to happen from Ecuador to China, has that changed or Ecuador continues to supply a large part of it to the U.S. itself?

Nikhilesh?

So from what -- so right now, the Chinese market is completely closed because of the Chinese New Year. And the Chinese government also has banned some of the very large Ecuador exporters. So right now, like during December and early January, there were some purchases, but it's not in the scale that it used to be like before COVID when Ecuador supplied a lot of product to China. So we need to see there is not major change, but with the easing of COVID and the vaccine rolling out, hopefully, like the Chinese government slowly takes back some of the policies that they're using to import seafood.

Okay. And Nikhilesh, like the commentary that we have got at the start of the call on a positive outlook for the next financial year. So what gives you the confidence? Is it that the distributors have already had a word with you? And so in that regard, if you could help us understand what gives you the confidence?

You mean regarding feed?

Yes, regarding feed and processing, both.

Regarding feed, yes. See, we keep monitoring the seed -- the offtake and the distributors of the feed are getting ready for the -- because they also finance part of the farmers. And the seed -- see, actually, we also -- as you know, we -- company has also started a hatchery, and our seed sales have started. And the seed offtake is quite good. It all depends on how the seed is being taken and how the farmers are preparing their farms. And they -- we have our staff going around in the market. And the farmers are already prepared for the stocking of the seed and they're waiting for the seed. Actually seed offtake is quite good.

Okay. Sir, this is very helpful. Just 1 last question from my side. On this recent regulatory policy by Andhra Pradesh government, how far we are behind in terms of quality compliance when we compare ourselves to someone like Vietnam, Ecuador?

We are much far ahead than any of the foreign companies. Like we are much better. Like see, when you compare with the Vietnamese or the Chinese feed, which is coming into India, our feed's performance and quality is much better.

So sir, you believe with this kind of a regulatory framework in place, are larger players like us who have a better control on the quality and are more compliant, they could be winners at the end of the day?

They should be. That is what the government -- they don't want -- I can say that they don't want a [ flamboyant ] operator coming and taking the advantage of the demand and supply and vanishing. They want consistent player and quality to be given to the farmers, and this is what the government's idea is. And definitely, when the companies comply to the standards what the government has prescribed, it will be good for them.

[Operator Instructions] The next question comes from Ayush Mittal from MAPL Value Investing Fund.

Sir, it's really good to see Indra Kumar sir on the call. I hope you would be present in future calls too. And congratulations to team Avanti for a good performance, given when we look at the performance of peers, we have done much better in a challenging environment. Sir, my few questions are. First, sir, I see that the international shrimp prices have been hovering lower or they have been stagnant at certain level. While if we see that the export incentives have reduced and the new incentives have not been announced. Similarly, on the feed side, we are seeing that the raw material costs are going up. So it feels like, overall, there is a squeeze in the margin for the whole value chain of the shrimp industry. Sir, given this, what is your outlook for the industry going forward? How are you seeing the new season come up? And how will you protect the margins and growth in the feed and processing segment both individually?

Yes. See, definitely, there was an impact, certainly, when the government has announced withdrawing the MEIS, 5% MEIS, and we are all waiting for the new scheme from -- which they have announced from 1st of January. That is the RoDTEP, R-O-D-T-E-P. Definitely, we are looking at a good -- the scheme will be good. And the government also announcing the PLI scheme. That also will encourage the industry. This PLI scheme is for the value-added products. See, you do more valuation, you'll get the production incentive. And where the government has announced around -- recently around INR 10,900 crores first to the food processing industry, then the seafood industry is also a part of it. So the government has removed the MEIS, and they are coming back with new schemes like increase of value-added products to make in India and all these things. Earlier, see, India was supplying head-on, shell-on shrimps, which further value addition was done in Vietnam or China. Now, see, most of the companies have come up and a few companies are doing it in India. We have started, and we are more concentrating on those products. And see, definitely, this scheme -- PLI should be helpful for us. We want to see -- not -- details of it have not yet come out. Recently around a week back, they announced the amounts for the industry. And regarding the shrimp feed prices, there are always up and down. Say, 1 month, there will be a shortage of increasing and when they correct themselves and ultimately the industry corrects itself. And to the price, the shrimp feed price has been increased last year. And this year, at the end of the year, because of COVID, we have given relief to the farmers on a promotional scale, which will be adjusted as we grow further.

So any change in the feed price as of now because the raw material prices have moved up quite a lot, I think? Both [indiscernible] has gone up and fishmeal has gone up.

Yes, see compared to 2018, '19, 2018-'19, the prices were same as today. Same as today.

So no change as of now? Okay.

No change as of now, and we have witnessed some payout. As I told you, we have done some promotion schemes. That will be adjusted in the next this thing.

Okay. So you mean that the promotion discount you were giving or adjustment that will be reduced as the raw material price has increased now?

Yes. Yes.