By Prateek Goyal

India Ratings and Research (Ind-Ra) has affirmed Avanti Feeds Limited’s (AFL) Long-Term Issuer Rating at ‘IND AA-’. The Outlook is Stable. The instrument-wise rating actions are as follows:

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

Affirmed

Non-fund-based working capital facilities

-

-

-

INR665.8

IND A1+

Affirmed

The agency has taken a consolidated view of AFL and its subsidiary Avanti Frozen Foods Private Limited (AFFPL) to arrive at the ratings for AFL.

KEY RATING DRIVERS

Strong Credit Profile: The affirmation reflects AFL’s ability to sustain its strong credit metrics and increase its scale of operations, while consolidating its position as the market leader in the domestic feeds category (43% market share in FY18). Consolidated revenue grew at a CAGR of 39% to INR33.9 billion over FY13-FY18 (FY17: INR27.3 billion) on primarily on account of an increase in volumes. 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 20.1% in FY18 (FY17: 12.6%) from a low of 8.0% in FY13, on account of better absorption of fixed costs and low raw material prices. However, FY18 was a positive outlier year in terms of profitability, as the industry benefitted from strong global shrimp prices and low raw material prices. Ind-Ra expects EBITDA margin to normalise between the 10%-12% range in FY19, driven by increasing raw material prices and subdued global shrimp prices. The company has remained net debt negative since FY15; interest cover was 172.0x in FY18 (FY17: 76.7x; FY16: 68x; FY15: 67.5x).


Capacity Expansion Largely Funded by Internal Accruals: AFL increased its feed manufacturing capacity to 600,000 tonnes in FY18 (FY13: 110,000 tonnes) and processed shrimp capacity to around 22,000 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. AFL did not use the full sanctioned limit of INR300 million for the expansion of its processing plant capacity. At FYE18, AFL had no outstanding term debt and a vehicle loan of INR32.6 million was outstanding. AFL incurred a capex of INR2.5 billion over FY15-FY18.


Volatile Business Environment: The shrimp industry is impacted by global demand supply economics, which remains volatile. However, 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 the risk of a catastrophic viral attack.


Fiscal 2018 was a particularly strong year for the company, though it has been followed by weakness global demand since the beginning of calendar year 2018, which impacted the 1st half results of the consolidated entity versus solid results a year ago. For 1H19, AFL reported revenues of INR18,522 million (1H18: 17,948 million) while EBITDA margins dropped drastically to 11.4% (1H18: 22.2%).


Synergies from Strategic Partner: Thai Union holds a 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 manufacturers and processed sea food producers, 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 the first right of refusal and non-compete clauses for a period of five years.


Robust Liquidity: At FYE18, AFL had a healthy cash balance of INR5.6 billion (FYE17: INR3.7 billion; FYE16: INR735 million; FYE15: INR826 million). The company’s term debt repayment requirement is minimal. Cash flow from operations continued to increase to INR2.9 billion in FY18 (FY17: INR2.82 billion; FY16: INR1.26 billion; FY15: INR0.9 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 with the fund-based facilities remaining unutilised in FY18, while the average utilisation for Avanti Frozen Foods during the 12 months ended September 2018 was about 30%.


Raw Material Price Risk: AFL is exposed to raw material price risk; however, it has the pricing power in the feed business, since it dominates the market in Andhra Pradesh, where the company has more than 50% of market share and over 60% of the installed capacity. AFL has exhibited its ability to pass on the raw material price volatility to its customers during FY15-FY18, despite a drop in shrimp prices, which impacts farmers’ affordability for higher shrimp feed 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. Also, 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, 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, all on a sustained basis, 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 National Stock Exchange Limited and BSE Ltd. It has a total shrimp feed capacity of 600,000MTPA, of which 60,000MTPA is in Gujarat and the balance in Andhra Pradesh. AFL hived-off its shrimp processing division into a separate company Avanti Frozen Foods in FY17 which has a shrimp processing capacity of 22,000MTPA. AFL also has four windmills in Karnataka with a power generation capacity of 3.2MW.


FINANCIAL SUMMARY


Particulars

FY18

FY17

Revenue (INR million)

33,929

26,157

EBITDA (INR million)

6,826

3,301

EBITDA margin (%)

20.1

12.6

Interest Expense (INR million)

29.6

30

Interest coverage (x)

172.0

76.7

Net leverage (x)

-0.8

-1.0

Source: Ind-Ra, AFL


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

22 September 2017

7 September 2016

6 July 2015

Issuer rating

Long-term

 

IND AA-/Stable

IND AA-/Stable

IND A+/Stable

IND A/Stable

Fund-based facilities

Long-term

INR750

IND AA-/Stable

IND AA-/Stable

IND A+/Stable

IND A/Stable

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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