After a decline of nearly 17 percent in 2022 so far, shares of Avanti Feeds can rally over 55 percent in the next 1 year, predicts domestic brokerage house Equirus Securities.
The brokerage remains 'long' on the stock with a target price of ₹720 per share, indicating an upside of 55.5 percent from its current market price of ₹463.
This comes despite an earnings miss by the firm in the June quarter due to high raw material costs which led to margin pressure. However, the company's volume guidance remains strong, noted the brokerage.
The stock fell around 12 percent in the last 1 year against an 8 percent rise in Nifty. However, it has not been the best investment option for long-term investment and has lost nearly half of its investment wealth since October 2017.
Avanti Feeds posted a net profit of ₹73 crore in the first quarter ended June 30, 2022, as against ₹76.45 crore in the corresponding quarter last year. Its net income came in at ₹1,569.30 crore in the quarter under review versus ₹1,408.80 crore in the comparable quarter last year.
Avanti Feeds is a small cap company with a market capitalisation of ₹6693 crore. The company is into the manufacturing of prawn and fish feeds and is a shrimp processor as well as an exporter. Its major products are shrimp feed and processed shrimp.
The brokerage, in its report, stated that feed revenues for the firm grew 5 percent YoY driven by a 13 percent YoY increase in realizations. Volumes however declined 7 percent YoY due to delays in the commissioning of the new feed capacity. Volumes would have risen 10-15 percent if not for these delays, it noted.
Though raw material prices have corrected since June, the feed industry has rolled back price hikes by ₹2-2.5/kg since July; this move is set to nullify any margin improvement, earlier expected in Q2FY23, Equirus pointed out. Over August last week, the industry is likely to decide on further price hikes, aiding margins in case these do happen, it added.
Meanwhile, the company's processing revenues jumped 56 percent YoY driven by a 33 percent YoY increase in volumes, and a 17 percent YoY rise in average realizations, said Equirus. Avanti's export share to the US, however, declined to 61 percent versus 75 percent in 1QFY22. But, going ahead, the firm expects shrimp exports to grow by 13 percent YoY in FY23 and margins are also likely to improve with a higher contribution of value-added products, added the brokerage.
"Given the current supply-demand scenario, management has guided for 13 percent YoY growth in FY23 shrimp processing volumes. In the feed segment, management foresees a 6 percent YoY increase in CY22 volumes; also, given the 3 percent YoY volume decline in H1CY22, implied growth in 22HCY22 works out to be 18 percent YoY – helped by the new 1.75L MTPA feed capacity expected to commission in September," stated Equirus.
While overall volume guidance remains strong and intact, the brokerage cut FY23 margin assumptions given the Q1 performance and current scenario. "Our investment thesis of volume & margin recovery, while remaining unchanged, has been delayed by 3-4 months," it noted.
The brokerage also highlighted that Avanti Feeds has outperformed the industry, both in the good times (FY18) and the bad (FY19, FY21). In its view, given the opportunity size, and technical and marketing assistance provided by TUF, the company is well-positioned to scale new heights.
However, key risks, as per the brokerage, include 1) Disease outbreak: Production of P. Vannamei shrimps is susceptible to various diseases, including the white spot syndrome. 2) International shrimp prices: Shrimp prices have been highly volatile, and any further correction may put pressure on realizations. 3) Increase in raw material prices which may be difficult to pass on to the farmers.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.