Avanti Feeds Management Q&A : July, 2013

Management Q&A

THE JOURNEY

We have been following Avanti from about 2009 when the aquaculture industry was at one of its worst time. Its really great to see that the company had at that time talked about the development of new specie – Vannamei which could be a game changer for the industry going forward. Things played out perfectly and the company has well capitalized the opportunity and has grown its turnover from just 96 Cr in 2010 to 648 Cr in 2013. Kindly take us through this journey.

Fundamentals for Aquaculture in India have always been strong. India is ideally suited – with a suitable tropical environment, a long coastline and land with brackish water that can sustain aquaculture.

In the last two decades and more we have seen a growing preference for fish and fisheries products, worldwide. Incidences of Foot & Mouth disease (primarily in EU), mad cow, and then Bird Flu in Asian countries have caused the slow decline in consumption of red meat and Fish was back in favour. Scientific evidence for Omega-3 Fatty Acid – found plentiful in fish – started to be cited for helping control cholesterol/heart diseases. Shrimps also were considered in the same category. And global demand for fish and fisheries products surged dramatically.

In the early 90’s aquaculture technology was not so perfected. Indian Government tried to usher in what is known as the BLUE REVOLUTION with a focus on Integrated Aquaculture. In 1994-95 many public limited firms were floated. Focus was on all 4 main activities – Feed, Processing, Hatchery, Farming in the integrated aquaculture.

We scouted for a suitable partner and were lucky to find Ping Tai Enterprises, a well known company from Taiwan, primarily into Feeds. 70-80% of their business came from Aqua Feed. They advised us to focus on Feed manufacture as that is the most important ingredient for shrimp culture.

By 2002, dominance of Taiwan in aquaculture had declined. Continuous upgradation of technology in feed product substitution which is a very dynamic activity (cost vs protein content substitution – Soya & then fish meal saw other countries like Thailand taking the lead. We tied up finally with Thai Union Frozen Products, Thailand which is into Shrimp Hatchery, feed and processing and export of shrimp, fish and other marine products and Thai Union group was a very established partner. It is one of the largest marine products exporter to US & Japan. In 2002 this started as a technology collaboration, the association has grown stronger and has seen equity participation by them in 2008-9.

In 2006-07, the whole aquaculture industry suffered big setback. Most companies folded up. We have managed to keep fundamentals intact and survive that period. We have been transparent to the investors about the state of the industry, our outlook and strategies planned for coping with the same. Having survived that torrid period, today we are onto better times!

As per the reports, the current favourable change in business is due to adoption of Vannamei species v/s the earlier black tiger. Why was black tiger popular before? Why is Vannamei better? What are the differences?

Yes, the increased volume of production of Vannamei shrimp which was introduced in India in 2009, has been the main reason for the turnaround since then. In 2012 and beyond, Indian shrimp farmers were able to increase their production.  Before introduction of Vannamei culture to tropical climatic conditions, it was Black Tiger which was the native specie and fast growing.  However, by genetic improvement, Vannamei which was cold water and slow growing shrimp has been made cultivable in tropical climatic conditions, and fast growing and specific pathogen free brood stock was developed.

Though Vannamei is a native to the Pacific coast of Central and South America, one of the major reason for its popularity is due to the availability of fast growing improved quality specific pathogen free seeds. Vannamei has the potential to grow under intensive culture conditions. For the same pond area, the production/density of Vannamei is much higher than black tiger (~ 2x) and hence the cost reduces and the activity becomes remunerative for the farmer. Also Vannamei tolerates a wide range of salinities & temperatures and requires lower protein diet. It is generally considered to be more resistant to diseases and can mate and spawn easily under captivity and the survival rates during rearing are generally higher. Also Vannamei, the white shrimp variety, is more accepted worldwide.

How long do you think this current journey with Vannamei is going to last? What has generally been the history, Is this likely to change, How soon? How long can this adoption and switch to Vannamei continue? What about disease risk. etc. in this species?

4 years back in 2009, there was lot of resistance for introducing Vannamei culture in India as it was not native species and the view was that domestication may become problematic. However, seeing tremendous success stories in Thailand, Malaysia, Vietnam and China various industry bodies like Sea Food Exporters Association, Hatcheries Association, Shrimp Farmers and Feed Associations made re-presentations to Government for adoption of Vannamei – essentially arguing the case – if it has been successfully adopted in Thailand, Malaysia, Vietnam and China, why not in India. The Govt. of India after careful study decided to introduce Vannamei Culture in India.

Vannamei Aquaculture industry in India is in a strong footing today, thanks primarily to steps taken by the Government and designated agencies such as Coastal Aquaculture Agency, MPEDA which have established processes, strict enforcement, and complete traceability in the system.

1. The broodstock – sourced only from specified broodstock sources approved by Coastal Aquaculture Authority (CAA)

2. Quarantine – MPEDA – Tested for disease by Rajiv Gandhi Center for Aquaculture  (RGCA) in Chennai, and only then released

3. Hatcheries – Registered with CAA

4. Seed sales Record – To whom it is being supplied, with complete traceability

The Coastal Aquaculture Authority (under the Ministry of Agriculture) ensures very strong systems and enforcement. They do checks and have the mandate to destroy hatcheries, if found in violation/non-compliance and also order for closure of Hatcheries.

With such strong systems, disease outbreaks will be rare & certainly controllable.

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INDUSTRY

Aquaculture was a fancy industry during late 90s and early 20s. But the industry self-destructed and hardly any major profitable player got left. What were the reasons and problems?

Prior to 2009, by and large, Aquaculture in India was poorly regulated. Industry was not  well organised, also there were no stringent  bio-security measures in place. Import of say specified approved broodstock to ensure shrimp quality, proper checks and balances in the system, and regulatory oversight was absent. The Industry dependent on the Black Tiger variety which was predominant, had very loose knitted policies in place for ensuring standardisation, quality and/or bio-security measures for prevention/control of disease out-breaks or rising up to any challenge collectively, by the industry as a whole.

Government support and state agencies such as the Coastal Aquaculture Authority, MPEDA, Rajiv Gandhi Centre for Aquaculture, the various industry associations as mentioned before have played a big role in taking the Industry to its robust position as it exists today.

Who are the biggest players of this industry? What is the total market size in India? Indian production of shrimps and total exports annually?

Mainly 5 players in the feed industry. CP Food Products is the No#1 player. AVANTI FEEDS comes next. Grobest, Water Base, Godrej have been other main players. In the last couple of years some 5-6 more players have emerged such as Cargill, Nexus Feeds, Growell, Unipresident Feed, etc.

AVANTI has produced 59,000 Tons feed in 2011-12, 105,000 MT in 2012-13 and expected to produce 125,000 MT in 2013-14. 20-25% growth is comfortably achievable overall in the industry.

Reports and your own figure of 150, 000 Tons in 2014-15 seem to suggest growth in line with growth in industry.

Kindly educate us on the role played by MPEDA in the growth and sustainability of this industry?

Covered before.

Cluster Farming/Contract Farming on a larger scale? Any possibilities on that front?

Yes this should eventually happen in India. We have had discussion with Micro Finance agencies. We said 10 or more farmers with small 2-3 acre land holdings can come together – they form a co-operative society, a legal entity. We told them that we will organise supply of Feed and Technical assistance to the farmers and  you provide the Finances and we will assist them in sale of their produce. The farmers can invest 20% of Seed Capital and Micro Finance can provide finance for infrastructure and operational expenses such as feed. So far these attempts have not succeeded, response has been poor.

EMS Shrimp disease – its impact and the global demand/supply game? Kindly educate us on that.

Researchers found that EMS Shrimp Disease or Early-Mortality-Syndrome is caused by a bacterial agent, which is transmitted orally, colonizes the shrimp gastrointestinal tract and produces a toxin that causes tissue destruction and dysfunction of the shrimp digestive organ.

As we understand it, EMS can occur thru infected broodstock and also can spread due to lack of  proper bio-security measures. A senior professor from Thailand, rated as one of the best Aquaculturists in the world has found that the spread of the disease has something to do with the Parent brood stock. Certain bacteria get transmitted from the Mother breed that attacks the intestines.

EMS was first reported in China in 2009, it has slowly spread to Vietnam, Malaysia and Thailand, and now causes huge annual losses in these countries. EMS outbreaks typically occur within the first 30 days after stocking a newly prepared shrimp pond, and mortality can exceed 70%.

What is the solution, then?

No specific solution seem to have not been found so far as a permanent solution. Still the research is going on.

Shrimp Info Systems (SIS) is considered to be one of the best broodstock supplier from which fresh broodstock can be drawn.

India seems to be in a happy position currently with the other big exporters floundering with EMS situation. How serious is the purported risk of spreading from country to country as it has in the Asian countries like Vietnam, Malaysia and Thailand?

Yes, in India we do not have the EMS disease problem, as of now. As mentioned before Government ensures import of broodstock only from well known suppliers. Also with proper bio-security measures in place and strict enforcement by Authorities, chances of outbreak of disease is considered remote and certainly controllable, we think.

The Coastal Aquaculture Agency plays a big role in containing the risk (check-destroy-closure powers vested in them) from rogue hatcheries or what are known as “Backyard Hatcheries”.

Do we have new markets opening up for Shrimp from India? We heard South Africa and Chinese are actively buying from India?

Yes, new markets such as China, South Africa and even Russia are developing.

How does it look for next 2-3 years for shrimp feed/processing business in India?

For India, next 2-3 years should be good. Shrimp prices have been going up, but RM has also been going up. We need to do a good balancing act.

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PRODUCT SEGMENTS

The two main product segments -Shrimp Feed and Shrimp Processing have different characteristics. 80% of the Revenue contribution comes from Feed and 20% from Processing. Shrimp Feed segment has much faster volume growth with low margins whereas Shrimp Processing has higher margins but comparatively lower growth. Kindly educate us on the characteristics of both segments.

Shrimp Processing and Shrimp Feed industry are inter-related. If shrimp prices globally are higher and shrimp processing segment does well, the Shrimp Feed segment can also do well as the farmer is inclined to grow more shrimp – requires higher feed consumption.  However, the Shrimp Processing market is more like a “Trading” market. Margin performance depends entirely on the Global Market prices and prevailing raw shrimp prices. These price changes can be very dynamic and very sharp. Raw material availability is very closely monitored (on a global level) by the big players.

Shrimp Processing is a seasonal industry. Depends primarily on 3 factors – Raw material availability, Labour availability coupled with the Demand in the Market. Nov-Dec-Jan-Feb are the lean months. With advent of Vannamei culture, now has become effectively a 10-month season from the earlier 8 months.

Currently global prices have been rising. Seafood Exporters Association monitors raw material prices. All members generally follow this maybe with +/- Rs 10/kg. But also consider the effect of dollar volatility, rising interest costs. Freight costs have gone up abnormally. We need to ensure the farmer too gets a fair price. It’s important for him to survive. On the other hand consider big raw material price volatility on the feed front. Soya meal prices have been going up tremendously. Even Fish meal prices are also steeply rising.

We have to ensure that the farmer still is able to make money after the price hike, so as to let this trade survive/prosper.

EBITDA margins is usually in the range of 8-10%. Sometimes can go down to even 5-6%. Depends entirely on this balancing act that we have to do depending upon culture scenario. Achieving 15% EBITDA margin is considered exceptional performance.

Shrimp Feed is a manufacturing industry and consistent quality to the farmer is very important – for different seasons and water conditions. Feasibility/cost to the farmer is of prime importance. But Raw material is not in our control at all.

Please educate us on the complexities of the Feed formulation technology? How difficult it is?

Feed manufacturing is not very complex, but at the same time, formulation cannot be made easily to manufacture feed because Feed formulation differ from region to region and within regions from area to area depending upon the water, soil and climatic conditions. Technical support/ensuring proper mix in Feed is very important.

Why is someone like CP such a dominant player? And how is Avanti placed in this segment?

CP is one of the largest Feed producer in the world and has strong market presence. AVANTI has also gained market reputation on par with CP now in India.

CP has a huge lead in terms of experience base around the world. It invests a lot in R&D. One has to be on top of RM trends and ensure timely substitution – COST vs PROTEIN content. And thirdly Feed productivity is very important. The farmer will always prefer the feed that provides the best FCR (Feed Conversion ratio) – quantity of feed consumed to shrimp meat production. AVANTI has also a need-based R&D facility and strong technical staff to support the farmer.

Shelf life of Feed product? and for Processed Shrimps?

3 months for Feed. Processed shrimp can be kept frozen for upto 2 years.

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BUSINESS AND OPERATING MODEL

Please give us an idea about your main export markets with break-ups?

80% of export business is with the United States.

Andhra Pradesh, Tamilnadu, Gujarat, Orissa, West Bengal Shrimp Feed markets. Kindly educate us more on the regional breakups?

As explained before the Feed market consumption in India by and large today is 60:40 Vannamei:Black Tiger. Andhra Pradesh is the fastest growing market with 80% conversion to Vannamei expected this year from earlier 60% levels. Gujarat with a 50/50 share last year is expected to race ahead to a 60 to 70% conversion this year. West Bengal has been 70/30 in favour of Black Tiger and will continue to remain a slow converter for Vannamei. Tamilnadu is expected to pickup in conversions this year.

Terms of the Feed Sales segment? How much is Cash sales and Credit Sales?

When we started Credit Sales used to be 90%, with 10% CASH. Today this is at 50/50. And for the 50% Credit Sales we ensure credit only in the last 60 days of culture. Typically it takes 120-130 days for the larvae to reach 40 gm size. The first 60 days cash sales ensures there is some upfront investment from farmer and progress to the 2nd phase ensures safety.

Please educate us on the the seasonality in Sales seen.

April -September (Q1 & Q2) used to be the main season contributing 60% of Sales. Now, also Q1 and Q2 continue to be major season and part of Q3 and Q4 also have culture due to Vannamei Culture.

The margins have been quite volatile in the history. What do you think would be realistic operating margins for longer term?

Anything between 10-15% EBITDA is considered exceptional performance on margin front for this industry. 5-8% margins is what is happening now. Over coming years, we see Feed and Shrimp processing segments contributing roughly 50:50 to EBITDA.

The volatility in margins comes due to raw material prices. We did a calculation of RM cost over the years. Please comment

Particulars FY13 FY12 FY11 FY10 FY09 FY08
RM/Sales % 76.38 70.30 87.56 81.01 72.31 71.71

Raw material price rise has been exorbitant last year – FY13. Soya prices rose more than 2 times in less than 6 months and hence the margins got affected. This is a major risk factor for us, where we do not have any control as mentioned before. We have increased prices marginally – that should help.

Fish meal avg prices Fy13- Rs 58/kg; fy 12 – Rs 50. Soya meal Fy13 avg – Rs 34 /kg fy 12 – Rs 22 . What are current levels? Will the industry be impacted badly from soya or fish meal pricing? What is the outlook for the year as the soya meal prices have corrected? And what about Fish meal pricing?

Though, Soya meal prices corrected back for a short period have gone up again. Similarly, Fish meal prices have also gone up dramatically from Rs 60/kg to Rs 87/kg. Fish meal likely to come down after Aug-Sep provided good catches are available otherwise expected to remain at high level.  These raw material prices are highly volatile and un-predictable.

The Shrimp Feeds business seems like a difficult business, and yet there are players like CP and Avanti which dominate the market. What are Avanti’s differentiators?

There are two main factors. First you need Top Quality product and secondly you need to be the Farmer’s choice. You can only do that by staying close with the farmer, assisting him with technical inputs and timely response to dynamic issues faced – we have discussed some of these before. AVANTI has established a good market reputation in respect of these factors.

Quality Feed is 50% of the job. There is something called FCR – Feed Conversion Ratio – 1 kg of Feed producing how many kgs of Shrimp mass. Typical FCRs vary between 1.35 to 1.5 for 1 kg of shrimp mass produced. Now if farmer gets a FCR of 2 he is going to be extremely unhappy. But if he gets to an FCR of 1.2 or 1.15 he is very happy.

There are many costs for Farmer. Feed cost followed by power costs and labour and overheads. Feed cost can be 60-70% of total costs. 

Timely technical guidance is the next 30%. Next comes Marketing skills which can account for say 20%.

Dynamically changing global shrimp prices, and Feed cost can play major spoilsports. This is a very price sensitive market.

What kind of technical staff do you employ?

150 Trained staff – mostly BSC/MSC Fisheries.

What kind of R&D do you have to engage in?

This is an ongoing process, mostly on feed raw material/substitution/technical support front. We have sufficient equipment in Lab for analysis. There is obviously no requirement for basic Genetics R&D.

You pay some Royalty to Thai Union for the Feed?

Yes we pay Royalty fees to Thai Union for their feed formulation. We also use Pro-Feed one of their brands.

Let’s talk about Shrimp processing segment. In shrimp processing Q2FY13 margins at 20 %. Kindly comment? Now since shrimp prices have gone up sharply, will it contract margins further from FY13 13% blended levels?

As mentioned before 13% operating margin is a good performance in a good year. Such margins are tough to replicate. We will be happy if we can do 10%.

Shrimp processing targets this year and next year?

6000T this year, and 8000T next year

Over last 5 years, Operating Cash flow has generally been poor and has not kept pace with Earnings, with the exception of FY12, kindly comment.

Actually 31st March figures are not indicative. Season starts in Feb, March so there is lot of Inventory build-up that starts happening in Jan-Feb-Mar for April-Sep which is our primary season. Besides there was big price volatility in fish meal, so we kept higher stocks. Our Debtors position is usually at 2 months.

There has been considerable increase in inventory and debtors this year. If Sales have increase by x, both Inventory and Debtors have increased 2x – also resulting into cash flow from operations becoming negative. What is expectation going forward?

Covered above.

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CAPACITY EXPANSIONS/PRODUCTIVITY

The FY12 annual report was very optimistic and the company had undertaken following expansions a) Shrimp processing capacity expansion from 2700 MT to 8000 MT/10000 MT b) Shrimp feed capacity expansion from 52,000 MT to 1,10,000 MT c) Buying of new land 5 acres to set up new plant of 50,000 MT but this plant hasn’t come up till now and as per latest AR, it would be available in Jan, 14. What is the latest status?

Shrimp processing capacity is at 8000 MT. Additional Shrimp Feed capacity will come on by Nov2013/Jan 2014 timeframes. Machinery is already there.

What is the current utilisation levels? Do we see greater ramp up speed in Shrimp processing segment?

Yes, this year we are seeing a lot of demand due to EMS in other Asian countries, there is shortage globally. China is a net importer today. There is additional demand from China. Hence we are seeing good opportunity in Shrimp processing segment and hope to do 6000 MT this year if everything goes well.

As the new Shrimp Feed capacity is not available during the peak season of FY14, will capacity be a constraint for growth in FY14?

We are at about 130,000 MT capacity today and did about 103,000 MT during 2012-13. This year we can do about 120,000-125,000 MT.

Fixed Asset Turns (2.4x to 12.7x) and Capital Turns (~1x to 4.3x) have seen tremendous improvements over last 5 years. Please share the company’s philosophy, processes, and how you have gone about implementing such extraordinary productivity and efficiency improvements.

Firstly we have been prudent in setting out initial good capacities. Preventive maintenance with periodic replacements ensure longevity and life of the assets. We keep making small improvements in incremental ways – like ensuring higher productivity by upgrading the Pellet Mill, or other de-bottlenecking measures. We have kept modernising/making small incremental investments over the years.

Is this an asset-light business model? Is this sustainable?

Sustainable – Absolutely.

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NEAR TERM PRICING/OTHER OUTLOOK

We came across shrimp pricing in international markets and it seems the prices have nearly doubled over last 6 months to $13 or so Is it right? If yes, isn’t this a game changer?

Steep increase in prices will have definitely impact on the market.

US Govt has recently imposed an anti-dumping duty of about 6%. How does it affect the co and long term prospects?

There are two components. First is the anti-dumping duty which is now at 3.49%.

Recently US has imposed Countervailing duties (CVDs) of 5.91%, also known as anti-subsidy duties, as trade import duties imposed under World Trade organisation (WTO) Rules to neutralize the negative effects of subsidies. It will be factored in the price mechanism.

What subsidy is the Indian Government providing?

We get 3.50% duty drawback and 5% under VKGUY – Vishesh Krishi Gram Udyog Yojana -scheme.

Because of the EMS disease spread in other exporting countries, are Indian exporters in a better position to bargain?

To some extent.

As per recent industry article, MPEDA has projected marine exports to be at $4.5 Bn vs $3.5 Bn last year and major driver for this growth is expected to be growth in shrimp exports. Does this indicate that we may see 30%+ growth in export of Vannamei in FY14?

There is possibility of 30% growth, provided, the favourable conditions continue.

When will the company go in for Value Added – Branded products/exports?

Efforts are being initiated to plan value added products but no specific date is set till now.

How strategic is the domestic value-added retail foray for Avanti?

Developing domestic market for both frozen raw shrimp as well as value added shrimps is essential in the long run for the Indian industry as the dependence on total exports is not desirable.

Is Thai Union with you for the domestic foray? Do they also believe in this?

Does TUF  have value-added processed shrimp products to offer?

Yes. They have value added products for their domestic as well as export market.

Does TUF buy processed shrimp from you in India?

Yes, sometimes.

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RISKS

On one hand there is volatility in raw materials, and on the other volatility in processed shrimp end-prices? Which is a bigger risk and why?

Some risks are controllable, and some are uncontrollable. On the costs front, RM cost is a major variable cost on which we have no control.  Feed pricing mechanism will take care of this aspect to some extent.

As far as end-prices of shrimp exports is concerned, that’s really uncontrollable. Pricing is completely dominated by global market.

Any long term contracts for RM sourcing in order to reduce risks

We have well known suppliers on our Vendors list and we source raw materials from them. Price depends on market rates.

This is a volatile industry. There are disease risks and there are RM and end-price risks – all of which are pretty dynamic in nature. Please educate us on how do bankers determine, evaluate and manage risks for your industry.

Till recently this was considered a Risky industry to finance by the banks.  However, now they have revised to favourable industry status for finance.

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CAPITAL ALLOCATION/FUTURE OUTLOOK

Your debt has increased? Reasons?

We don’t have any long-term debt. Only working capital requirements.

Your company has considerable investments in some power projects. One of them is doing decent but the other has been making losses. Kindly comment.

As you know the Power Sector has gone through a sea change in recent years. Market is not so good. Small projects are considered not so profitable. Only big projects are considered profitable.

What is the strategy going forward? Why don’t we sell them and get out of what looks like a non-core area?

Yes we are working on divesting this off.

Srinivasa Cystine ltd. – Subsidiary. What is the main business of this company? Is it correct that this company has announced a Biotech division catering to shrimp medicines, etc.?

Srinivasa Cystine Limited is not a subsidiary of AVANTI.  They are engaged in the business of Trading in Aquamedicines, Water sanitizers for mineral deficiencies in the water for shrimp culture.

Isn’t it true that this could be supplied to your same customers, why do this through a subsidiary?

This is not the main business of AVANTI nor is the business significant. It is only a small trading activity which we do not want to tag on to the main activities of shrimp feed and exports. It is not a mandatory requirement of the farmer to use medicines.

What is the expected size of business from this division?

8-10 Cr

Does TUF have any stake in Srinivasa Cystine as well? for what products?

No stake.

What is the reason for diminished presence in fish meal segment? How easy or difficult is it to get into related fields like Animal Feed, etc?

Fish feed is not a profitable business as of now.  Hence, no interest is evinced.

Any other market or vertical we are planning on entering? What are the sources of future growth?

Processing Plant expansion. Today we do 25-30 T/day. Plan is to go for 75 T/day in 2-3 years from a different location. And Hatchery – That has been in the planning and will be a good value addition to Farmer.

There has been lot of delays on the Hatchery front. We had got land but did not proceed? Kindly comment.

Yes, we had got very good land in Chennai but that had some legal issues, so we could not proceed with our plans. Now, we are in the process of identifying some other land.

Domestic Value-Added retail foray? How far off is that really?

No ready plans as of now.

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INDUSTRY SUSTAINABILITY/AVANTI FEEDS BUSINESS SUSTAINABILITY

So far we have discussed what is a very happy situation for Indian shrimp processors and feed manufacturers. This is due to a) EMS disease spread in China, Thailand, Malaysia, Vietnam and their inability to export in any bulk b) Shrimp prices going upto $8 from $6 before. The higher shrimp prices have ensured better pricing for shrimp processors from India and in turn better prices for shrimp farmers, leading to the production build-up in the country.

In our view, it is not correct to say that the happy situation for Indian shrimp culture prevailing to-day is solely on account of EMS disease spread in China, Thailand, Malaysia and Vietnam and their inability to export in any bulk. The good time for Indian Shrimp culture revived with introduction of Vannamei culture in India as the farmer was making good profit in Vannamei culture even before out break of EMS in those countries. We believe that in the long run the shrimp culture activity will be sustainable to all the stakeholders because there will always be balancing mechanism between export price and the shrimp prices.  It is important that the farmer continues with shrimp culture as long as the activity is profitable to him.

Now what happens when Shrimp prices correct back to $5-6 internationally – for whatever reasons? How does the economics of this business change and what effect does it have down the chain – profitability for farmers and hence production, feed demand, etc? Will the industry in India in general and Avanti feeds in particular, be able to grow volumes at a sustained level at these prices?

As stated in our answer to earlier question, we strongly believe that in the long run the shrimp culture activity would be sustainable to the farmer in view of the fact that the global shrimp demand will keep increasing and the price mechanism is only a balancing phenomena. The high export prices prevailing now is mainly on account of spurt in demand due to shortage of production due to EMS in some of the Asian countries which we believe will get settled in course of time and production increases will start balancing demand and supply. We strongly believe that the industry as well as AVANTI will grow in volumes both in respect of feed and exports.

Tell us something – The domestic feed market also is directly correlated to export demand/global pricing, right? So if export demand/pricing falters in a major way, its not only the shrimp processors that get affected, the local feed market will also falter, right? Isn’t that likely?

We do not foresee such a situation as mentioned by you as the demand for the shrimps globally keeps increasing and cost of production of feed as well as shrimp and also export price is dependent on dynamics of input costs and market demand from time to time and we do not believe that the export prices will crash to such an extent that the shrimp culture activity becomes economically unviable to the farmer in the long run.

Okay, understood. But if prices were to say correct tp $3-4 levels, that would significantly affect the overall economics for the industry, right? So how likely or unlikely is that event in the near-to-medium term given current visibility?

In our opinion, such a situation is most unlikely in the next atleast 3 to 5 years.

So what we are seeing is that the real issue is about aquaculture viability for Farmers. At what point does it really become unviable for the Farmer? What’s the cost of Production for the Farmer – $2.75? And could it happen again, like it did in 2008? why or why not?

The production cost would be around $2.75 to $3.00 per KG. In 2007 & 2008 India had different problems like outbreak of disease and high cost of production of Black Tiger in India compared to Vannamei in other countries which made Indian product non competitive in the global market which made the shrimp culture unviable to the farmer. However, the situation is different now and we do not foresee such a condition repeating.

But, what about a new country source emerging – what is Avanti Feeeds confident of achieving in such a scenario?

We believe AVANTI FEEDS would be able to retain its position by virtue of its quality, service and competitive pricing irrespective of new country source emerging in future.

Is there any case for a drop in buying from India/exports from India in next 2-3 years. why, or why not?

There is no reason to anticipate drop in buying from India in the next 2 to 3 years as the global shrimp demand keeps increasing and the production in other Asian countries likely to take time to recover from the effects of EMS and to regain their normal production levels. As such we do not foresee any drop in exports from India in next 2 to 3 years.


Disclosure(s)

Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 2 years;
Tirumal Rao: No Holdings in the Company; ;
Davuluri Omprakash: No Holdings in the Company; ;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 1 year;

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