Expansion Into Japan, Korea, And Europe Will Boost Shrimp Exports And Diversify Income Sources

Key Takeaways

• Expanding into Japan, Korea, and Europe could reduce U.S. market reliance and boost revenues through diversified income sources.
  
• Strategic joint ventures and product upgrades in less competitive foods could enhance net margins and revenue growth.
  
• Fluctuating demand, rising costs, and new tariffs threaten profit margins, necessitating market diversification and careful management of investments and operational expenses.

Catalysts

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

• The reduction in raw material costs, particularly fish meal and soybean meal, is expected to improve net margins as these materials constitute significant input costs for Avanti Feeds.
  
• Expansion into new markets like Japan, Korea, and Europe for shrimp exports is anticipated to boost revenues by diversifying income sources and reducing reliance on the U.S. market.
  
• The strategic joint venture with Bluefalo Company Limited for the pet food segment signifies a new growth area, potentially increasing revenues and contributing to net margins once domestic production begins.
  
• Upgradation to value-added shrimp products, which is less competitive and yields higher margins, could enhance net margins and overall earnings.
  
• The expected stabilization and potential growth of the global shrimp market at around 5% annually may lead to increased feed sales volumes, positively impacting revenue growth.

Avanti Feeds Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avanti Feeds's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.7% today to 7.9% in 3 years time.
• Analysts expect earnings to reach ₹5.7 billion (and earnings per share of ₹42.0) by about March 2028, up from ₹4.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹6.5 billion in earnings, and the most bearish expecting ₹5.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.6x on those 2028 earnings, up from 23.3x today. This future PE is greater than the current PE for the IN Food industry at 19.0x.
• 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

• The decrease in feed sales quantity in Q3 FY '25 compared to Q2 FY '25 indicates potential fluctuations in demand and dependency on climatic conditions, which could impact future revenue and income stability.
  
• Increasing raw material prices, particularly for wheat flour, pose a risk to maintaining net margins in the shrimp processing segment if not adequately managed.
  
• The new CVD by the U.S. on shrimp exports is a burden and affects profit margins, necessitating a focus on diversifying export markets, which may increase costs and pressure earnings.
  
• The shrimp processing segment faces increased ocean freight costs and depreciation costs from new plants, which have already impacted profit before tax, affecting net earnings.
  
• The pet food project is still in its early stages with potential investment and production not expected until 2026, leaving a gap in immediate revenue contribution and exposing the company to execution risk.

Valuation

• The analysts have a consensus price target of ₹784.333 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 ₹953.0, 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 ₹72.3 billion, earnings will come to ₹5.7 billion, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of ₹824.3, the analyst price target of ₹784.33 is 5.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.