Aquaculture Firm May See Margins Pressured By Rising Costs But Will Pursue Opportunities In Pet Food And New Export Markets

Key Takeaways

• Uncertainty in raw material prices and U.S. duties could pressure Avanti Feeds' margins and export growth.
  
• Environmental changes and competition in the pet food segment could threaten revenue growth and market share.
  
• Avanti Feeds' diversification into new markets and product lines, along with a strong financial performance, positions it well for future revenue and profit growth.

Catalysts

Manufactures and sells shrimp feeds in India, Europe, the United States of America, Japan, Korea, China, Russia, Canada, and the Middle East.

• Uncertainty surrounding raw material prices, such as fish meal and wheat flour, could lead to margin pressure for Avanti Feeds. If these prices increase unexpectedly, this could negatively impact net margins.
  
• The imposition of countervailing duties (CVD) by the U.S., Avanti's largest export market, may limit export growth and compress margins in the shrimp processing and export division.
  
• The company's reliance on favorable climatic conditions for aquaculture suggests vulnerability to environmental changes, which could impact shrimp production volumes and, consequently, revenue growth.
  
• Rising operational costs and the need for significant capital expenditures, particularly in developing the pet food segment, could strain earnings if returns on these investments do not materialize as expected.
  
• The introduction of imported pet food might increase competition, impacting Avanti's pricing strategy and market share, thereby pressuring revenue growth in their feed segment.

Avanti Feeds Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avanti Feeds's revenue will grow by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.7% today to 7.6% in 3 years time.
• Analysts expect earnings to reach ₹5.5 billion (and earnings per share of ₹40.67) by about February 2028, up from ₹4.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, up from 21.0x today. This future PE is greater than the current PE for the IN Food industry at 20.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

Avanti Feeds Future Earnings Per Share Growth

Risks

• Avanti Feeds has successfully managed to increase its gross income and PBT both quarter-on-quarter and year-on-year, signaling a strong financial performance which could boost investor confidence and potentially lead to maintaining or increasing share prices. (Impact on revenue and earnings)
  
• The company experienced better capacity utilization and increased shrimp feed consumption despite challenging industry conditions, suggesting resilience and an ability to capitalize on favorable circumstances, which may contribute to future revenue growth. (Impact on net margins and revenue)
  
• Avanti's strategy to enter the growing Indian pet food market with a joint venture and plans to expand its product range and production capacities could open new revenue streams and improve profit margins as the domestic pet food market is expected to grow at 20% CAGR. (Impact on revenue and net margins)
  
• The company's focus on value-added shrimp products and expanding its export markets beyond the U.S. to regions like Japan, Korea, the EU, and the Middle East could mitigate risks associated with the U.S. market and improve overall profit margins. (Impact on revenue and net margins)
  
• Avanti Feeds aims to stabilize and potentially increase its shrimp feed production by optimizing costs and focusing on core areas of strength, which could sustain or enhance profitability despite fluctuations in raw material prices. (Impact on net margins and earnings)

Valuation

• The analysts have a consensus price target of ₹631.0 for Avanti Feeds based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹715.0, and the most bearish reporting a price target of just ₹566.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹72.5 billion, earnings will come to ₹5.5 billion, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of ₹741.15, the analyst price target of ₹631.0 is 17.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.