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Premium: The Meteoric Rise of a Shrimp Exporter - Will it Last?

Deepak Shenoy6 min read
Quick Facts
What is "Premium: The Meteoric Rise of a Shrimp Exporter - Will it Last?" about?
What category is this article in?
Premium
Who wrote this article?
Deepak Shenoy, Capitalmind's research team.
When was this article published?
Published 21 February 2014.
How long does this article take to read?
6 min read
What does the "First, the Technicals" section say?
The stock is at a new all-time high. There is no technical indicator that gives you a bearish notion and the trend is very very strong. I can guarantee that the stock will come down, but come down from where? This is not a useful thing to measure because technicals measure the stock’s move in relation to past moves, and honestly, it’s breaking away from its past.
What does the "Fundamentals are very strong" section say?
In Q3, Avanti doubled revenues from the previous year, and increased profits 5x from the Q3 2012-13, with about Rs. 22 cr. in profits on 274 cr. of revenues.
What does the "The Shrimp Story" section say?
Avanti Feeds sells Shrimp (Prawn) and Shrimp Feed. They own 60% of India’s installed capacity, with their two plants in Gujarat and AP adding up to 140,000 tonnes. (Source: Economic Times). These plants are running at near full capacity because demand has gone through the roof, as have prices! Look at the international shrimp price: (Source)
What does the "But Will This Last?" section say?
As you can see in the table above, average margins are only 4-6% (Net Profit as a % of Revenue) but in the recent quarter margins went up to 8%. That, and the fact that volumes were more have resulted in the increase in profits. The risk #1 is: will this continue?
What does the "The Temporary Global Shortage" section say?
I bought and I did before I did any of the analysis. I usually buy first and analyze later - was - it was making new highs and I like buying stocks making new highs. It worked out and I’ve now figured out why. I call this a “one-time global shortage” syndrome, and we’ve seen this very recently in another field: Thin Film.
What does the "Cut to the chase: Worth a Buy?" section say?
At Capital Mind Premium we don’t judge people by the kind of trades they make or want to. Trying to speculate for a very short term profit is not a bad thing. In that context, we would keep our minds open to a trade. The news has just started to become mainstream, with the Economic Times coverage being the first I’ve seen on the stock. That means retail investors are probably getting itchy about buying the stock.
What does the "Any Other Stock?" section say?
There’s one more stock I like: Shilpa Medicare. Look at the chart.
What does the "Disclaimer" section say?
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Archived for Capital Mind Premium subscribers, sent on 21 Feb 2014. (Subscribe now!)

Sometimes there are seemingly awesome stocks and just looking at them makes you wonder, “If I had invested even Rs. 10,000 in 2009….”. But among these are stocks that see both awesome returns and huge heartbreaks. And when a stock goes up 30% in a week, you have to ask whether the bus still has some distance to go or have you missed it?

[level-capmind-pro]

The story today is of a stock called Avanti Feeds. First, I will apologise for not mentioning this stock earlier. I’ve been watching it since Rs. 240 and wondering where it will go from there. The stock went to Rs. 350 - and I bought in, with a very high risk trade. After all the stock had shot up in a short time and in such stocks, it’s wise to exert caution. That was also the reason I didn’t mention it in Premium because it almost seemed too good to be true.

Well, the stock’s at Rs. 470 today, a 30% rise from when even I bought it last week. But is it a good buy today?

First, the Technicals

The stock is at a new all-time high. There is no technical indicator that gives you a bearish notion and the trend is very very strong. I can guarantee that the stock will come down, but come down from where? This is not a useful thing to measure because technicals measure the stock’s move in relation to past moves, and honestly, it’s breaking away from its past.

Fundamentals are very strong

In Q3, Avanti doubled revenues from the previous year, and increased profits 5x from the Q3 2012-13, with about Rs. 22 cr. in profits on 274 cr. of revenues.

This has resulted in a Trailing Twelve Month (TTM) EPS of Rs. 68.1, which makes even the current stock price of Rs. 470 look cheap with a P/E of 7.

(Source: screener.in)

The Shrimp Story

Avanti Feeds sells Shrimp (Prawn) and Shrimp Feed. They own 60% of India’s installed capacity, with their two plants in Gujarat and AP adding up to 140,000 tonnes. (Source: Economic Times). These plants are running at near full capacity because demand has gone through the roof, as have prices! Look at the international shrimp price: (Source)

Why are prices rising? A harmful bacteria is causing Early Mortality Syndrome (EMS) in Shrimp in the world’s largest shrimp exporter, Thailand, and Vietnam and China. This has curtailed supply and obviously prices have moved up. Indian exporters like Avanti will benefit as long as this continues, and Avanti is expanding capacity by adding 85,000 tonnes in this quarter. This will increase potential output by 50%.

But Will This Last?

As you can see in the table above, average margins are only 4-6% (Net Profit as a % of Revenue) but in the recent quarter margins went up to 8%. That, and the fact that volumes were more have resulted in the increase in profits. The risk #1 is: will this continue?

Answer: May not do so for more than a year. Already, there is talk that Thai production will increase by 20% in 2014 after falling 50% in 2013. The disease is under control, they say, and it’s likely that supply will return to the market in a year. That should reduce the price rise, though Avanti may still sell elevated sales levels this year.

Secondly the disease could hit India as well. I don’t know if there’s a reason why Indian shrimp is not impacted, but the disease has been moving westwards, starting from China, then Vietnam and now Thailand.

Thirdly, the margins are too tiny for any headroom. Even in the best of times, margins are 8% (net profit divided by sales). At regular times, margins fall to 4%. This is too small. Just a tiny change can impact them hugely on the upside, and just as easily take them down too.

The Temporary Global Shortage

I bought and I did before I did any of the analysis. I usually buy first and analyze later - was - it was making new highs and I like buying stocks making new highs. It worked out and I’ve now figured out why. I call this a “one-time global shortage” syndrome, and we’ve seen this very recently in another field: Thin Film.

In 2010 there was a worldwide shortage of “thin film”, or Biaxially Oriented PolyEthylene Terephthalate (BOPET) after supply shortages as some of the large US/European producers had to cut their plant numbers or shut them down. This helped Indian poly film producers like Polyplex, UFlex and Jindal Poly, whose prices and profits doubled in a very short time. But guess what happened:

I actually made a very quick return on this stock, but exited when the prices of PET film plateaued and started to retreat.

Cut to the chase: Worth a Buy?

At Capital Mind Premium we don’t judge people by the kind of trades they make or want to. Trying to speculate for a very short term profit is not a bad thing. In that context, we would keep our minds open to a trade. The news has just started to become mainstream, with the Economic Times coverage being the first I’ve seen on the stock. That means retail investors are probably getting itchy about buying the stock.

A short term trade would be to catch this momentum and ride it over the next week, and exit on a trailing stop.

The idea is to not focus on the fundamentals. This is a Hyderabad company, so that’s another warning for you on the fundamentals. The trade is only about chasing momentum, and it’s quite likely the move is as crazy on the downside. If I were to buy this stock today is:

  • Get small in size. I would put 1/4th of my normal position on this stock.

  • Be nimble. My exit point is a 20% drop in price or a change in the market price of shrimp or a disease notification in India or such. Don’t make a short term trade a long term investment!

I would personally not buy any further. For this and the “nimble” issue, I’m not adding it to the Capital Mind Premium portfolio - just writing a post takes a lot of time and there’s no easy way to talk about developments. Having said that the portfolio is only about education - it isn’t meant to be something you follow.

Any Other Stock?

There’s one more stock I like: Shilpa Medicare. Look at the chart.

![](https://content.capitalmind.in/wp-content/uploads/2013/11/Sh

ilpa-Chart.png)

I’ve bought as a small position. The analysis is ongoing. We’ll add this to the portfolio only when the analysis is presentable. But this is another very high risk stock!

Here’s how the Capital Mind Portfolio is doing.

Disclosure: We have these positions, and this is not advice!

Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

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