Avanti Feeds Limited (512573) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm Bharti, moderator for the conference call. Welcome to Q1 FY '22 Earnings Conference Call of Avanti Feeds Limited hosted by KFin Technologies. [Operator Instructions] Please note, this conference is recorded. I would now like to hand over the floor to Mr. Sherwin Fernandes of KFin Technologies. Thank you, and over to you, sir.

Thank you, Bharti. Good evening, everyone. Welcome to the Avanti Feeds Q1 FY '22 Post Results Earnings Conference Call. From the management, we have with us Mr. C. Ramachandra Rao, Joint 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. I now request the management to take over the call. Thank you.

Thank you, Mr. Sherwin. Good evening, ladies and gentlemen. We extend a warm welcome for this investors conference call to review the unaudited financial statements for Q1 FY '22. Along with me here are Mrs. Santhi Latha, GM, Finance and Accounts; Lakshmi Sharma, Company Secretary, Mr. [ Mitcham ] Reddy; and K.S. Reddy, Finance team; and Mr. Nikhilesh Chowdary and Venkata Sanjeev are joining through VC call. The results of Q1 FY '22 are already with you for some time now, and we are sure that you would have already gone through them. The Chairman and Managing Director has already dealt with most of the important aspects of the financial results for the year ended, as well as quarter ended Q1 FY '22 during the interaction with the shareholders in the AGM held very recently on 14th of August '21. However, I would like to share with you some of the key indicators relevant for our discussion today. Q1 financial '22 results of consolidated financial statements. The comparative performance of Q1 FY '22 with that of Q1 FY '21 and Q4 FY '21 have been given in the presentation already circulated. Gross income in Q1 FY '22 is INR 1,430 crores as compared to INR 1,116 crores in the previous quarter, Q4 FY '21, and increased by INR 314 crores at 28.14% compared to Q1 FY '21 gross income INR 983 crores, an increase of INR 447 crores at 45.47%. The PBT is INR 99 crores in Q1 FY '22 as compared to INR 93 crore in Q4 FY '21, and increased by 6.45% compared to Q1 FY '21 PBT of INR 147 crore, a decrease by 32.65%. Decrease in PBT year-on-year basis is on account of increase in raw material prices. It should be noticed that the gross income of feeds division has assisted a significant increase of about 58% over corresponding quarter of the previous year and 40% over previous quarter. However, the AFFPL revenue has gone down by 5% over corresponding quarter of the previous year and 19% from the immediate previous quarter. The consolidated PBT has come down by 33% on year-on-year basis and 6% on a quarter-on-quarter basis. Now this is the consolidation position. Let us go to our stand-alone financial results of feed and processing divisions. First, let me take the feed division. Q1 FY '22 results, the gross income for the Q1 FY '22 is INR 1,257 crores as compared to INR 795 crore in the corresponding quarter of Q1 FY '21, registering an increase of INR 462 crore at 58%. The PBT for the Q1 FY '22 is INR 93 crores as compared to INR 112 crore in Q1 FY '21, a decrease of INR 19 crores at 17%. You may notice that in spite of significant increase in gross income, the PBT has come down by 17% compared to corresponding quarter of the previous year; compared to the previous quarter, a marginal increase of 12% in PBT is recorded. As in the recent past, the uncontrolled steep increase in raw materials prices, particularly soybean meal and fishmeal and their products such as soya lecithin and fish oil have been the major contributing factors for the drastic fall in the margins in spite of increase in sale of feed. Fishmeal price has gone up to 95% per kg in Q1 FY '21 as compared to 91% per kg in Q4 FY '21 and now it is around INR 115 per kg. Due to increase in soybean meal price, consumers like poultry industries has shifted to fishmeal and soybean meal -- from soybean meal. However, with announcement of permission to import soybean meal, lifting of ban on fish catches, which commenced from 1st of August, the industry is expecting stabilization of fishmeal prices in due course. The soybean meal price, which was at INR 46 per kg in Q4 FY '21 shot up to INR 65 per kg in Q1 FY '22 and went further up to INR 105 per kg recently. After the announcement of import of soybean meal, the prices started coming down about 95 [indiscernible]. For importing soybean meal, custom certification regarding procedures for import is awaited. Hopefully, with imported soybean meal and local fresh crop commencing -- the fresh soy crop commencing from second half of September, the industry expects the stabilization of the price in due course. The company after a long time increased the feed price by just 2 paise to 15 paise per kg in April '21 and by INR 3 per kg in May '21, and further increase of INR 4.25 in August '21 to recover RM cost partially, the impact of which can be seen in Q2 FY '22. I mean August '21 increase of INR 4.25 will have an impact in the current quarter -- ongoing quarter. The positive impact of softening of RM price, if any, can be seen only in Q3 FY '22. Shrimp processing division. Coming to the shrimp processing Q1 FY '22 results. The gross income for the Q1 FY '22 is INR 175 crores as compared to INR 189 crores in Q1 FY '21, registering a decrease by INR 14 crores at 7.41% due to non-availability of containers and slowdown in the export by initiating more quality checks in view of the U.S. FDA recall. The PBT for the Q1 FY '22 is INR 8 crore as compared to INR 34 crores in Q1 FY '21, a decrease of INR 26 crores, mainly due to withdrawal of MEIS scheme, increase in marketing expenses on account of steep increase in the ocean freight, impact of MEIS withdrawal. The gross income includes export incentives of 5% in MEIS and 3% duty drawback on FOB value of growth, which were contributing significantly to the PBT of the company. However, the Government of India withdrew MEIS in 2 cases, firstly restricting MEIS legislatives from September '20 to December '20 to INR 2 crores for 4 months and from January '21 onwards it was completely withdrawn. On account of withdrawal of MEIS incentives, there is a reduction in the income by about INR 8.10 crores. The Government of India had announced in place of MEIS -- it has announced, in the place of MEIS, incentive -- new incentive scheme called Remission of Duties and Taxes on Export Products called RoDTEP would be introduced, which is effective from 1st January '21. However, considerable time has been taken to announce the new scheme and recently as on 17th of August 2021, the Government of India announced the RoDTEP scheme officially tradable each scrips at 2.5% of FOB value on exports, subject to a cap of INR 16 per kg. As a result, the company's effective benefit would be only at about 2% on account of the cash of INR 16 per kg, which has not been taken into consideration in Q1 FY '22 results. Effectively, 3% net disadvantage to the company on withdrawal of MEIS scheme will have the impact on the financial statements of the company -- results of the company. And the necessary rules and procedures regarding grants of plaint application -- time period for application records-keeping, etc., will be notified by the CBIC in due course. I mentioned, there has been very steep elevated increase in the ocean freight, growing by about 300% over the earlier freight rates. The company, along with other exporters, have made several representations to the government to various other agencies like [ APEDA ], to take initiative to cut this elevated freight increase. Any conceivable results are yet to come. The volume of exports during Q1 FY '22 compared to Q1 FY '21 decreased on account of shortage of containers availability, slowing down of export of cooked shrimp for strengthening of quality control systems in U.S. FDA, exceptional item of INR 4.10 crores taken a profit and loss for Q1 FY '22 on account of product recall. Income consisting mainly exchange fluctuations and ease on investment of [indiscernible] funds has decreased by about INR 4.68 crore due to decrease in ease on mutual funds and other investments and also the foreign exchange fluctuations. The general industry overview, the world as we know has suffered the impacts of the first wave and the effects of second wave appears to have receded to a great extent now and the economies of countries limping back to normalcy. But the threat of a third wave COVID-19 is looming large, and the countries are getting ready to face it to prevent major impact by vaccinating their populations and other preventive measures. During the phase of second wave, the economic activity was not disturbed as much as it did in the case of first wave though India had higher number of positive cases and fatalities. The industrial growth also picked up in almost all sectors, except maybe industries like tourism, hospitality, etc. The demand for the products and services picked up fast, supporting the manufacturing sector. Seafood industry is no exception to this. The restaurant's food services, etc., got back to normalcy with the increase in demand for seafood, including processed shrimps. During the first half of '21, the shrimp culture has been very good and expected to continue during the second half also. The demand for the product also is likely to increase in second half due to occasions like Thanksgiving Day, Easter, Christmas, New Year, Chinese New Year, etc. Therefore, the future of the industry looks quite promising. Coming to the production and feed consumption. The shrimp feed consumption in India declined to 9.55 lakh tonnes in 2020. However, as the demand for shrimps is expected to increase in 2021 due to return of normalcy and favorable shrimp culture conditions, shrimp feed consumption is expected to grow by about 10% to 15% over the previous year, with an estimated consumption of shrimp feed around 11 lakh tonnes during '21 -- 2021. The company's feed sales during 2020 was about 4.55 lakh metric tons and expected to be around 5.25 lakh metric tons in 2021, an increase of 15%. The company's expected market share in the feed of 48% to 50%. With regard to processing and export, the shrimp production and exports from India in 2020 was 5.75 lakh metric tons in 2020. However, during the current year, that is 2021, the production and exports of shrimps is estimated at around 6.5 lakh metric tons, a growth of about 10% to 15% over the previous year. The company's shrimp export in 2020 is about 12,192 metric tons. The estimated exports in 2021 is about 12,700 metric tons, maintaining almost the same level as in 2020. The recall -- now let me just explain the issue of recall of some of the containers of shrimps shipped by Avanti processed foods processing division. The company has issued a corporate announcement a couple of days back communicating the status of initial recall and also expanded recall of cooked shrimp products from potential for contamination due to the presence of Salmonella in the recalled product. As stated in Q1 FY '22, a sum of INR 4.10 crores has been charged off as returned and destroyed product as against the total value of INR 16.11 crores in the initial recall. Since the recall is more than 45 days as of now, further returns of the products for refunds appear to be not significant. However, the recall is open till the expiry date of the product, which is a year from now. As far as the expanded recall is concerned, the quantity is 613.8862 metric tons with a value of INR 50 crores -- INR 50.12 crores totaling products imported into U.S. from November '20 to May '21. The company is in the process of understanding the inventory of the products with consignees, distributors, etc., and evaluate the possibility -- the exchange possibility and the exchange of returns that could come. The process is on because the recall was announced very recently. We have now -- we got only information about 70 tonnes is in the warehouse. This is what the information that we have right now. But we have to wait for some more time the -- how much -- what is the returns that we are going to get from this second recall. At this stage, I would like to conclude with positive note that the aquaculture industry is poised for a promising growth. I think whatever the recall, it's not a normal thing. It's something which has happened as an aberration. And I think in the course of time, we will be able to resolve these issues. And we have already put a lot of -- we have taken a lot of efforts to strengthen our checks and systems and engaging the food -- the safety, public health, consumer safety and regulatory compliances. And they have all been giving very fruitful results, and we should be able to resolve these issues very soon and come back to normalcy. And we do not foresee any serious impact on account of this in the -- our image or the company or reputation of the company since this kind of a situation never happened in the past 2.5 decades, and this is the first time this is happening, and we are confident that in consultation and discussion with our customers, we will be able to establish the -- whatever the necessary steps are taken, we'll do it and give them the confidence that such a situation will never arrive. I think with this, I would like to conclude and go into question and answers now.

[Operator Instructions] First question comes from Aniruddha Joshi from ICICI Securities.

Sir, first of all, what is likely to be the maximum impact on our profitability considering the shrimps that are getting rejected? So obviously, the maximum impact immediate accounted or not, but what is the fair assumption on the loss that we may have to incur on this account? Point number two, the MEIS benefit were around 5% and the RoDTEP benefits are 2.5%, that too, considering the cap will be around 2%. So how do you see the 3% gap that will be bridged? Or it will be an impact on the profitability initially and then it will get absorbed in the shrimp value chain, that is farmers, feed manufacturers and exporters, all 3? Yes. So these are the 2 main questions from my side.

The first question that the impact of this recall, Mr. Anirudh, that's -- we mentioned in our corporate announcement, in the first, that is initial recall as it is about INR 16 crores in all, we have received about INR 4 crores, say, I would say, around roughly 25% is the impact. And what we see is that the initial recall was made way back in June 25th, until now almost we have 2 months time that we have only got only this value, about INR 4 crores only, we have received and we have written off that amount already in the profit and loss account. Further, there is definitely -- since the recall is still open, we may get some more such claims, but we do not foresee a significant impact on the profitability of this because of such claims. So we have only -- as far as the product returns, we see that we have completely taken care of all the products that have been returned and destroyed -- there may not be any more left out in the initial -- the primary initial recall over and above that. Then coming to the second recall, we see -- it is about INR 50 crores, which is a financial impact and 613 tonnes are involved. See, this has been issued, and we are just waiting and listening. We have to really -- we are not in a position to exactly figure out how much is going to be the return. It happens like this, if you look at the normal process when it is distributed from the consignees' warehouse to the distributors to ultimate the retailers and then to the customers, we don't know the entire channel. So normally, how much time it takes and all the -- though there is a shelf life of the product, which is there for 1 year or 2 years, but that does not mean that it remains in the stores or in the refrigerators in the houses till that period. Normally, the tendency is that you take the -- buy the goods, buy the products, particularly food products, you consume it as soon as possible. It cannot go for more than 2 weeks maximum in the refrigerators. So I -- we don't see that this's going to be a big impact. But as you asked, what is the maximum? The maximum could be 50%, the minimum could be 0%. See -- so that is a range. So if you take what has happened in the first -- the initial recall, it's around 25%. Okay, let us say, 25% to 30%. 30% means about INR 15 crores to -- INR 15 crores. That may be our very, very preliminary assessment as of now, but we have to wait and see that we cannot give any guarantee as of now, but it could be anywhere between INR 15 crores -- INR 20 crores maximum, it may not be that. It is only our assessment -- guess work, but we have to wait and see how the things develop. Then the second question comes regarding just price -- when we lose this 3% deficit in the incentives that the government has announced. As you rightly said, it's normally in the course, it should get distributed among the -- all the 3 stakeholders, the processors or the farmers or the buyers. They -- it has to get adjusted in the course of time. I think we are expecting that it will happen in due course.

Okay. Sir, just last question on this. So now the benefit is retrospective from 1st of January. So do you see that the industry, including Avanti, will be posting a onetime -- because it is not yet accrued income, so we will be accruing all the income in September quarter for the January to September period?

See -- yes, you're right. Because, see the -- because this has come into effect from January '21 -- '21 January, the first quarter, the value is about INR 3 crores 88 lahks 50,000. That is what we have worked out and estimated, and that is the first quarter, that is Q1 in the calendar year, that is January to March. Coming to the second quarter, it is INR 4 crores 65 lahks, that is the April, May, June quarter. So total, it will be -- for the first half of the year, it will be INR 8.53 crores, which pertains to the earlier period. Coming to the current quarter, we are yet to get full information. Only in July, it is about INR 1 crore 96 lahks. So total as of now, the benefit which we have -- we are estimating is about INR 10.50 crores; added to that August and September also, we have to see. And once the government announces the scheme, how it should be, they are talking that it will come automatically, it will be created along with the shipping bills, it will be created. But as you know, the government, we have to see the processes and how they are going to do it, and it is automatically credited or accounted, that's what they are saying. E-scrips are given, they are tradable scrips. So this can be utilized for payment of duties against imports of the products which are notified. I mean it is, by and large, in the same lines as it was in the MEIS. So we hope that maybe with a discount of another 5% or so on this, that overall, let us say, INR 10 crores 50 lahks, you have to give a discount of about 4% to 5% in the cost of that trade, that is when selling it, so we may get the net benefit of about INR 10 crores, we should be able to get from this, January to July. So this INR 8.53 crores belonging to the first 6 months of this calendar year, add into that these 3 months, July, August, September, will be reflected in this current quarter, that is Q2 of the year, FY '22. Yes, yes, you are right. Yes, yes, you're right.

Okay. So this is very helpful. Just lastly, can you indicate on the loss that we may have to get -- will that be get booked in FY '22 or it may get booked in FY '23 itself?

I don't think -- I'll tell you that most of the things should happen, in the recalls, whatever, it may not take so much time, by end of this year. Maybe by December we should -- all these things should get settled. It should not go beyond that. That's what we are expecting because we are in the month of August, see, we are now September, October, November, December, we have got 4 months here. So in the 4 months' time -- see, the recalls -- mostly, it will not take time. If there is any other consequential liabilities or anything like that -- anything is there, it may take some time. But certainly, I think by December, we should have a very clarity. And beyond the December, in the Q4, it may not be much -- Q3, we should be able to settle everything.

Next question comes from Ayush Mittal from Mittal Analytics.

First of all, congratulations on a good performance given the circumstances. It was very heartening to see the strong growth in 3 segments, and you had mentioned about this in the earlier call also. So sir, can you give us some idea as to the strong volume growth that we have seen in this quarter? How much of this do you see to be maintained in coming season -- in coming quarters?

Mr. Ayush, we don't see any reason why this should not be maintained. See, we have seen only growing. We have not seen it going down. We have been maintaining, and we continue to maintain. We have got all wherewithal to maintain this growth and this -- you can't get a super group growth. But definitely, the growth, which we have shown, it will now not go down. It depends upon the reason that it will be -- share will be about 48% to 50%. The 48%, 50% share will be maintained in the -- overall in the coming quarters also.

Understood. What I'm trying to understand is the volume growth in the absolute change is very high. The absolute number around the quantity that we are doing. So this kind of year-on-year change, do we expect to see for the coming times also?

Yes, now I understood your question that -- what you said that the consumption of the feed depends on the culture. Because what happened was the last year, the culture was very, very down because of the COVID impact. But this year, the climate was good, the culture conditions was good and good prices were there, farm gate prices were there, and the farmers felt very confident of [ cutting up ], and they started up early in February itself -- January and February, they started the culture. And also the climate has really helped a lot, and the growth was very good. And the -- most of the -- our feed also performed very well, it has given very good results. We had not only the -- compared to the previous quarter -- previous quarter, of course, as you know, this will be the -- beginning it will not be there, but the second quarter, naturally, the peak quarter, it will be there. Normally, the consumption is good. This time, what has happened is, because compared to last year, there is a -- the area has gone up, the results were good. And a lot of conversions also have taken place because our feed performed very well. So these are the reasons which we have been able to see a significant growth in 2 aspects. One is, if you compare with the corresponding quarter of the previous year, because of the reason of the COVID impact last year, we are finding the increase and the -- as far as the previous quarter is concerned, this quarter, naturally, the April, May, June quarter is the peak season for aquaculture. Added to that, we had good conversions and good performance during the quarter that's helped us to record this. And if this kind of -- the trend of consumption continues, we continue to have our shares as it is announced.

So sir, it also means that the industry, because shrimps have also grown at a very high rate in this quarter, so overall, industry in India has grown at a very high rate for the season. Is that right?

Yes. Because it all depends upon the conditions, they start from the good availability of good seed, then you'll have good climatic conditions, then good farm gate prices, good export prices. I mean the chain, all things come in favor, naturally, everyone will be enthused to go with a larger area and the higher -- naturally, it results in higher consumption and higher production of shrimps.

Sir, second, around the contamination issue that we have had in our shrimp processing business. It has been unfortunate and we're trying everything to bring things back in control, but have you been able to study any other companies that have gone through this issue? And how does this impact the volumes going forward for us? Like are we facing lower volumes from our customers for coming quarters or season, given this uncertainty that has brought for the company?

Nikhilesh, can you answer this question, Nikhilesh?

Yes. I will try. So I hope you're doing well. So on the impact, so we've been engaging senior food safety consultants, including a lot of ex-FDA compliance officers in assisting us to build a robust and the most advanced food safety system in the world. I'm not talking not only in India but the world. These include people from the Canada Food Safety Association, the U.S. FDA, the Indian counterparts, etc. So as we discussed with them, the first thing is that it's a food processing industry, major food processors, including Tyson Foods who had to recall about 9 million pounds of chicken today or Kellogg's or [indiscernible]. These are in the U.S. market, the regulatory environment is continuously increasing. The inspections have increased substantially this year. So it is a continuous phenomenon. But definitely, the FDA and the regulatory authorities work with the facility to ensure the food safety system is upgraded. And we are presenting to them the most robust food safety system, implementing new equipment, doing testing, the U.S. FDA tried using their own -- same existing they do to have more accurate results as they would. So coming to, would it impact the volumes on the long term? Definitely not because once -- we've already got tremendous results on the new systems that we've implemented and the corrective actions that we've taken. We are in constant communication with our customers about the updates, and they have also, in turn, been -- actually, we've tested almost around 40 to 45 containers with FDA and found to be no contamination. So things are going in the right direction. This is a short-term impact, but definitely when the system -- as the system shows its results, any other long-term impact would be mitigated. I hope that answers your question.

Yes, yes. One final question from my side. Given the growth in the industry that you are seeing after the gap of 2, 3 years, are we setting further CapEx for expansions for both of our segments?

As far as this feed is concerned, we do -- we have brands, we wanted to implement -- increase the capacity by 1 lakh tonnes, and we are also planning to have feed -- fish feed also. We are planning with -- in fact, this has been delayed as our CMD mentioned in the recent AGM that because of this COVID situation, and there's no proper communications and all with the suppliers of the machinery. We are now in touch with them. And as soon as the things improve, we want to go out with that. Most probably, once we have the quotations or we are getting quotations from them for the machineries and all, we plan, maybe in the next quarter or so by end of this year, we'll come out with the details of the plan.