By Niraj Rathi

India Ratings and Research (Ind-Ra) has upgraded Avanti Feeds Limited’s (AFL) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND A+’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital facilities

-

-

-

INR750

IND AA-/Stable

Upgraded

Non-fund-based working capital facilities

-

-

-

INR665.8 (reduced from INR680)

IND A1+

Affirmed

KEY RATING DRIVERS

Strong Credit Profile: The upgrade reflects a substantial increase in AFL’s scale of operations and sustained strong credit metrics. Revenue grew at a CAGR of 43% to INR27.3 billion over FY13-FY17 (FY16: INR20.1 billion) on account of increase in volume and price of feed. The processing division, which contributes about 15% to the revenue, also witnessed an increase in the volume and price during this period. EBITDA margins improved to 12.2% in FY17 (FY16: 11.5%) from a low of 8.0% in FY13 on account of better absorption of fixed costs and ability to protect the margins from volatility in raw material prices. The company remained net debt negative since FY15; interest cover was 68.9x in FY17 (FY16: 68x; FY15: 67.5x; FY14: 25.3x). 

Capacity Expansion Largely Funded by Internal Accruals:
AFL increased its feed manufacturing capacity to 445,000 tonnes in FY17 (FY13: 110,000 tonnes) and processed shrimp capacity to around 20,000 tonnes (2,720 tonnes). The company has so far funded most of its capacity expansion from internal accruals and equity infusions from its strategic partner Thai Union Plc. As of FYE17, AFL had an outstanding term debt of around INR165 million, including INR149 million for capacity expansion of its processing plant; the company did not fully utilise the sanctioned limit of INR300 million for the expansion. The entire debt is payable by FY21. AFL incurred capex of INR2.5 billion over FY12-FY17. 

Improving Business Environment:
Ind-Ra believes that the regulators oversight adds credibility to Indian products and improves competitiveness in the export market. Marine Products Export Development Authority has played an important role in regulating shrimp production through measures such as proper maintenance of ponds, density of cultivation, registration of hatcheries and shrimp ponds, procurement of seeds from notified hatcheries, and increasing traceability of the shrimp to pond and seed level. This has helped in establishing Indian shrimp producers’ competitiveness in the international markets, as well as reducing risk of a catastrophic viral attack. 

Synergies from Strategic Partner
: Thai Union holds 25% stake in AFL and 40% stake in AFL’s subsidiary, Avanti Frozen Foods Private Limited. Thai Union is among the world’s largest shrimp, fish and pet food manufacturer and processed sea food producer, with a strong marketing and sales network worldwide. Thus, the strategic partner provides AFL with technical know-how in feed formulation and shrimp processing, and access to its marketing network. Thai Union benefits from spreading its reach across key sea food producing nations. The joint venture has first right of refusal and non-compete clauses for a period of five years. 

Robust Liquidity
: At FYE17, AFL had a healthy cash balance of INR3.7 billion (FYE16: INR735 million; FYE15: INR826 million; FYE14: INR178 million). The company’s term debt repayment requirement is minimal. Cash flow from operations continued to increase to INR2.9 billion in FY17 (FY16: INR1.3 billion; FY15: INR0.9 billion; FY14: INR0.5 billion) owing to increased scale and robust working capital management. The cash flow from operations is sufficient to fund AFL’s dividend payments and capex requirements. The company uses its fund-based facilities sparingly, about 70% of the sanctioned fund-based facility remained unutlised over the 12 months ended August 2017. 

Raw Material Price Risk:
AFL is exposed to raw material price risk; however, it enjoys pricing power in the feed business, since it dominates the market in Andhra Pradesh, where the company has more than 60% of feed capacity. AFL has exhibited its ability to pass on the raw material price volatility to its customers during FY15-FY17, despite a drop in shrimp prices which impact farmers’ affordability for higher shrimp prices.

Disease Risk:
Indian farmers have shifted focus to Vannamei shrimps, which have a higher cultivation density and are less prone to viral attacks. This has helped reduce disease risk to a certain extent. Further, the spread of shrimp culture to various locations across India has helped AFL to eliminate location-based disease attack, leading to stable shrimp production and the consequent feed demand. However, logistics cost could be a constraining factor. However, in an event of disease outbreak, the impact would be high, affecting AFL’s feed and processing divisions.


RATING SENSITIVITIES

Negative: Deterioration in AFL’s scale of operations and/or EBITDA margins due to industry or company-specific factors, leading to a significant deterioration in the credit metrics would be negative for the ratings.


COMPANY PROFILE

In business since 1993, AFL manufactures and sells shrimp feed, and exports processed shrimp. The company is listed both on NSE and BSE. It has a total shrimp feed capacity of 445,000MTPA, of which 60,000MTPA is in Gujarat and the balance in Andhra Pradesh. AFL hived-off its shrimp processing division into a separate company AFFPL in FY17. ADFFPL has shrimp processing capacity of 20,000MTPA. AFL also has four windmills in Karnataka with a power generation capacity of 3.2MW.

FINANCIAL SUMMARY

 Particulars

FY17

FY16

Revenue (INR million)

27,327

20,183

EBITDA (INR million)

3,319

2,313

EBITDA margins (%)

12.1

11.5

Total debt (INR million)

344

245

Cash and cash equivalent (INR million)

3,708

735

Net debt (INR million)

-3,364

-490

Source: Ind-Ra

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

7 September 2016

6 July 2015

19 May 2014

Issuer rating

Long-term

 

IND AA-/Stable

IND A+/Stable

IND A/Stable

IND A-/Stable

Fund-based facilities

Long-term

INR750

IND AA-/Stable

IND A+/Stable

IND A/Stable

IND A-

Non-fund-based facilities

Short-term

INR665.8

IND A1+

IND A1+

IND A1

IND A1


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Niraj Rathi

    Associate Director
    India Ratings and Research Pvt Ltd 6-3-339, Ozone Complex, 1st Floor Punjagutta Main Road Hyderabad 500082
    +91 40 67661912

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121