Avanti Feeds Ltd Management Discussions

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Avanti Feeds Ltd Share Price Management Discussions

Caveat

This section of Annual Report has been included in adherence to the spirit enunciated in the code of Corporate Governance approved by the Securities and Exchange Board of India ("SEBI"). Though, utmost care has been taken to ensure that the opinions expressed by the Management herein contain its perceptions on most of the important trends having a material impact on the Companys day-to-day operations, no representation was made that the following presents an exhaustive coverage on and of all issues related to the same. Further, the discussion following herein reflects the perceptions on major issues as on date and the opinions expressed here are subject to change without notice. The Company undertakes no obligation to publicly update or revise any of the opinions or statements expressed in this report, consequent to new information, future event, or otherwise.

Global Economy

The Global Economy in the year 2022 has been a mixture of positive and negative developments contributing to moderate growth. It was expected that the Global Economy would revive after facing severe impact of COVID-19 in the year 2021 and register a comeback to normalcy. However, the world economy belied expectations and had to face several challenges of after effects of COVID-19, protracted confrontation and war between Ukraine and Russia, high inflation leading to steep fall in growth all over the world. Even in the first half of the current year, 2023, things have not improved as expected. The Inflation continues to haunt almost all over the world making growth plans un-achievable. The rest of 2023, also appears to follow suit, alerting the Planners to make strategic changes to adopt to revive the economies, which is in the offing.

Industry Overview

In 2022, Food & Agriculture Organization ("FAO") of United Nations, realizing the prevalence of moderate raising food insecurity exacerbated by COVID-19, has identified 17 Sustainable Development Goals (SDGs) and their related targets and indicators, central to the achievement of inclusive, sustainable economic growth that encompasses environmental, and economic and social concerns. "The Sustainable Development Goals and Fisheries and Aquaculture" play a significant role in mitigating the global food shortage.

The Fisheries & Aquaculture Sector are increasingly recognized for their essential contribution to global food security and nutrition in the 21st Century. Further, expansion of this contribution requires the acceleration of transformative changes in policy, management, innovation and investment to achieve sustainable and equitable global Fisheries and Aquaculture.

The 2030 Agenda of ("UNFAO") for Sustainable Development continue to shape the strategies for development of Fisheries and Aquaculture.

"Blue Transformation", a vision for transforming Aquatic Food Systems. Aquatic Foods offer highly accessible and affordable sources of animal proteins and micro nutrients, playing a vital role in the food and nutrition security of many, particularly, vulnerable coastal population.

Through the "Blue Transformation", Aquatic Food Systems can:

• Support the provision of sufficient Aquatic Foods for a growing population in an environmentally, socially and economically sustainable manner.

• Ensure the availability and accessibility of safe nutritious aquatic food for all, especially vulnerable populations and reduce food loss and waste.

• Ensure that Aquatic Food System contribute to improving the rights and incomes of dependent communities to achieve equitable livelihoods; and

• Support resilience in Aquatic Food Systems, which are highly influenced by dynamic human and environmental processes, including climate change.

The three core objectives of "Blue Transformation" are as follows:

1. Sustainable Aquaculture expansion and intensification - to support global food security targets and satisfy global demand for nutritious aquatic food and equitable distribution of the benefits.

2. Effective Management of all Fisheries - to deliver healthy stocks and secure livelihoods.

3. Upgraded value Chains - to ensure the social, economic and environmental viability of Aquatic Food Systems and secure nutritional outcomes.

According to FAO, in the next 10 years, aquaculture must expand sustainably to satisfy the gap in global demand for aquatic foods, especially, in food- deficit regions, while generating new or securing existing sources of income and employment.

It is evident from the strategic emphasis on Aquaculture and Fisheries by FAO, that the demand for aquatic food is ever green.

Aquaculture Sector - Indian Scenario

Aquaculture continues to be an important sector in Indian Economy, contributing to not only for Food Security but also providing employment to large scale coastal habitants while earning valuable Foreign Exchange to the country. The Govt. of India recognized transformation of Shrimp Culture in India as "Blue Revolution", way back in late 80s and early 90s. Large coastal region of India has been brought under Shrimp Culture since then and the export of processed shrimp is growing year after year. The production of seafood and Shrimp over the past 3 years i.e. from 2019-20 to 2021-22 is given below:

Exports during the Year

Total Seafood

Frozen Shrimp

Qty (in Mts) Value (Rs in Crores) Qty (in Mts) Value (Rs in Crores)
2021-22 13,69,264 57,586.48 7,28,123 42,706.04
2020-21 11,49,510 43,720.98 5,90,275 32,520.29
2019-20 12,89,651 46,662.85 6,52,253 34,152.03

The year 2022 presented some challenges for shrimp production and exports from India. Overall, production declined to around 700,000 tonnes compared to 850,000 tonnes in the previous year.

The major contributing factors for decline in exports during 2022 were decline in demand from main markets like USA, Europe and China etc., caused by high inflation, impact of COVID-19, Ukraine- Russia war, slow moment of inventories.

Despite these challenges, India remains one of the major producers, processors, and exporters of shrimp globally. The country benefits from multiple factors such as its long coastline, conducive climate, and government incentives, which have driven a growing interest in the sector. The availability of large tracts of land serves as an incentive for the farming community to engage in shrimp culture and reap the benefits.

The global increasing demand for seafood consumption is a key driver for the growth of the shrimp exports from India. The changing dietary preference like opting for white meat to red meat which is considered healthier. Further, Policies of Government such as CAPEX Subsidies, incentive for incremental production have encouraged the stakeholders to increase the production capacities in India.

Furthermore, the widespread adoption of technology in the shrimp industry, such as advanced breeding techniques, feed management, and disease control measures, is fostering a positive outlook for the stakeholders of the industry across India.

Shrimp Feed Consumption

The Shrimp Feed consumption in India decreased to 11 Lakhs MTs in Financial year 2022-23 as compared to 12 Lakhs MTs in Financial year 2022. The forecast is that the consumption would further decrease by about 10%-15% in Financial year 2023-24.

The Companys feed sales during the Financial year 2023 was 4.97 Lakh MTs as compared to 5.41 Lakhs MTs in Financial year 22. With sustained efforts, the Company is targeting to achieve about 5.20 Lakhs MT of

Feed Sales in Financial year 24 which would, if achieved, resulting an increase of Feed sales by 5% over the previous year.

Increasing Cost of Raw Materials

The feed business profitability is highly dependent on fluctuating raw material prices as the increase in feed price being in line with increase in inputs is not workable, since most of the time, the cost of the feed major input for Shrimp culture for the farmer and the price beyond a certain level becomes un-affordable to the farmer to continue the Shrimp Culture. Therefore, the Feed producer should exercise utmost care in resorting to increase of Feed price. The other important factor is farm gate price of shrimps which determines the profit margin for the farmer, which ultimately is determined by the Processors depending on international prices. In a nut shell, the raw material prices for feed manufacture play a vital role in this Industry.

Shrimp Processing and Export

Shrimp processing and exports from India are expected to experience a marginal decline in 2023 due to multiple factors. The main reason being continued inflation almost all over the world resulting in decline in consumption due to non-affordability leading to piling up of inventories in Warehouses. It is taking considerable time in the Supply Chain Management to liquidate the piled up stocks. Till these stocks are not liquidated, the fresh orders would not be generated. Added to this, the rising logistic costs and slow recovery in demand from China and increased production in Ecuador have impacted Indian Shrimp Exports.

Strengths, Weaknesses, Opportunities and Threats:

Strengths

Avanti Feeds is pioneer in Indian Shrimp Industry having over three decades of operations. The company has strong and long lasting collaboration with Thai Union, a multi- national company in Global Seafood Industry. The Company is in constant interaction with Thai Union in exchange of developments in Aquaculture industry, bringing into India and to the door step of the Indian farmer to reap the best results in Aquaculture. The Feed formulation, Disease Management, Global market developments are exchanged periodically and Strategies are formulated to be the best provider of services to the farmer. This has resulted in a strong base of loyal farmers to the Company.

Avanti is well-equipped to meet the comprehensive needs of farmers. It has built a strong PAN-India feed dealership network and established partnerships with channel partners, processing units, and hatcheries. Regular interactions with stakeholders ensure seamless integration of operations. The company maintains constant communication with aqua-farmers, offering outreach programs and round-the-clock services through its qualified and experienced technical staff.

These initiatives have propelled Avanti to achieve a dominant position with a nearly 50% market share in the shrimp feed sector. The company is taking further steps to not only maintain but also increase its market share. Its subsidiary, Avanti Frozen Foods Private Ltd., focused on shrimp processing and export is expected to experience significant growth in both traditional and value-added products. The processing facilities are being expanded, with a particular focus on cooked and value- added products. Avanti is strategically focusing on exploring new export markets for both shrimp feed and shrimp exports.

To achieve these goals and more, Avanti has devised a strategy that allows for rapid scaling up of production through high-value capital expenditure (CAPEX) investments. This strategy positions the company to capitalize on the growing demand and opportunities in the shrimp industry.

Weaknesses:

Despite being a significant sector in the Indian economy, the aquaculture industry faces several challenges and weaknesses. These include high production costs, inadequate infrastructure facilities, power supply issues, unregulated cost of raw materials, and shortage of cold storage facilities, and rising cost of ocean freights.

In addition, highly fluctuating raw material costs, dependence on climatic conditions and international developments on Shrimp prices, the Company is put to severe hardship, more often than not, due to factors beyond its control.

While the aquaculture industry and its stakeholders are aware of these challenges and taking measures to address them, government policies are slowly coming into play to help overcome some of these issues. For

instance, in the Union Budget 2023-24, the government announced a reduction in customs duty on key inputs for producing shrimp food, which is expected to boost marine exports gradually. Similarly, the ongoing "Productivity Linked Incentive Scheme" for the marine products industry, which provides incentives based on increased sales year after year, has also proven beneficial. Avanti Frozen Foods has been granted this incentive scheme.

Furthermore, the Government of India is offering grant-in-aid for new processors to cover technical civil works and plant and machinery costs, up to 35% of the total cost with a cap of Rs10 crores. AFFPL has been granted this aid.

Avanti Feeds is aware of these weaknesses and challenges and is pro-actively preparing to overcome them through sustained measures. The company remains confident in its ability to address these issues and mitigate their impact on its operations.

Opportunities:

The global seafood market has been witnessing a continuous uptick in recent years riding on recognition of its benefits to health. The growing awareness of the health benefits of seafood, with its nutritional and protein content, presents a favorable environment for increased consumption.

Health experts promoting seafood as a healthier alternative to red meat, which is being associated with challenges to human health, further contributes to the markets potential. Additionally, the rising purchasing power of the middle class and their desire for diverse food choices create opportunities for the seafood industry, including shrimp.

India, with its long coastline, farming community, and availability of land and labor, has emerged as a major player in the global shrimp industry. The Marine Products Export Development Authority (MPEDA), under the Union Ministry of Commerce, has drawn up a plan to achieve marine products exports worth Rs1 Lakh crore by 2025, showcasing the governments commitment to supporting and promoting the industrys growth.

However, recent international market challenges, such as high inflation in developed nations, the Russia- Ukraine conflict, and lock downs in China, have posed supply chain and price challenges in the short term. As a result, the rapidly growing shrimp export industry in India has come under pressure.

To mitigate the risks associated with excessive reliance on exports, there is a need to focus on promoting and expanding domestic consumption and markets. Avanti Feeds has recognized this need and is preparing itself accordingly. The company has taken proactive steps, including product innovations, exploring new distribution channels, embracing e-commerce and home deliveries, and optimizing supply chains. These measures have strengthened the companys position and demonstrated its preparedness in anticipation of market trends. The companys performance over the past two years, with increased top-line growth, is a testament to its readiness to tap into domestic opportunities and adapt to market dynamics.

Threats

The aquaculture industry, including shrimp farming, faces various threats and challenges that need to be addressed for sustainable growth. These threats can be categorized into climate-related risks, production costs and disease control, market volatility, and external factors.

1. Climate-Related Risks: Aquaculture is highly dependent on favorable climatic conditions, and events like floods, cyclones, and other natural disasters can disrupt production. Climate change poses long-term risks to the industry, including changes in water temperatures, ocean acidification, and rising sea levels, which can impact shrimp farming.

2. Production Costs and Disease Control: Farmers face challenges related to the cost of production, including feed costs, availability and quality of seeds, disease prevention and control measures, and ensuring food safety standards. Disease outbreaks can cause significant economic losses and affect the overall sustainability of the industry.

3. Market Volatility: The international shrimp market is subject to price volatility, which can impact the profitability of shrimp farmers and exporters. Fluctuating foreign exchange rates and increasing raw material costs, including feed ingredients, can further add to market uncertainties.

4. External Factors: Factors such as high inflation in importing nations, restrictions due to the COVID-19 pandemic, and increasing ocean freights can impact international trade and export opportunities. Dependence on imported Specific Pathogen-Free (SPF) Vannamei broodstock raises concerns about the long-term impact if international cargo movements are restricted.

To mitigate these threats and achieve sustainable growth, Avanti Feeds focuses on the following:

Diversification and Domestic Market Opportunities: Explore and tap into the potential of the domestic market to reduce reliance on volatile international markets. Developing strategies to meet the growing demand for seafood within the country can help de-risk the industry.

Also diversify into production of formulated Fish Feed for mainly domestic market.

Traceability and Pond Management: Implementing strict traceability systems and adopting scientific pond management practices can enhance productivity, reduce disease risks, and ensure compliance with food safety standards. This can help build consumer trust and confidence.

Forex Management: Managing foreign exchange risks through effective forex management strategies can help mitigate the impact of fluctuating exchange rates on profitability.

Research and Development: Continued investment in research and development is crucial to developing disease-resistant shrimp varieties, improving feed formulations, and implementing sustainable farming practices.

By addressing these threats and implementing necessary measures, Avanti minimizes risks and works towards long-term growth and sustainability.

Future Outlook for Indias Aquaculture Sector:

The Indian aquaculture market reached a size of 12.4 million tonnes in 2022. According to market Analysts the country will be able to sustain an average CAGR of over 8% during 2023-28 to reach a market size of 20 million tonnes by 2028.

The country achieved a record fish production of 162.48 lakh tonnes during 2021-22 with an impressive growth rate of 10.34%. The shrimp culture also showed huge promise with operations and conditions progressing smoothly in both the seasons. After a difficult time on the export front during 2022, the seafood exports are still facing challenges in 2023 and the industry forecast is that the year 2024 would be favourable for the industry.

The Union Budget for 2023-24 too has given a boost to the aquaculture sector. The Pradhan Mantri Matsya Sampada Yojana (PMMSY), a new flagship programme with a significant investment of Rs20,050 Crores (US $ 2.46 billion) for the growth and expansion of the fisheries sector in the nation, was recently unveiled by the Indian government.

Several states which have the advantage of coastline and an enterprising farm community have identified Shrimp farming and culture as lucrative and are holding out incentives for the private sector also to participate.

The future outlook for Indias aquaculture sector appears positive with expectations of sustained growth and expansion.

Power

The Company has investment in the following power projects:

(a) The 3.2 MW Wind Mill Project in Chitradurg, Karnataka State installed in the year 2005 is operational and has generated 47.95 Lakhs units during the year.

(b) Srivathsa Power Projects Private Limited

Srivathsa Power Projects Private Limited, is a 17.2 MW gas based independent power project situated in Andhra Pradesh.

During the Financial year 2022-23, Plant was operated and generated power only 33 days and the gas supplied by GAIL was only 20,036 SCMD as against the firm allocation of 65,000 SCMD stated to be due to non-availability of APM-Gas. As a result, the power generation was limited to 236.72 Lakhs units as against generation capacity of 1,100.00 Lakhs units. During the year 2021-22 Plant operated for 8 months, the Company reported a turnover of Rs1,181.28 Lakhs and a loss of Rs2,181.97 Lakhs after charging interest and depreciation, as per audited financials.

(c) Patikari Power Private Limited

The Company holds 25.88% equity shares in PPPL which has a 16 MW Hydel Power Project in Himachal Pradesh. During the Financial year 2022-23 as per audited financials the Company generated 50.50 Million saleable energy units, yielding a gross sales income of Rs1,141.33 Lakhs which resulted in a net profit of Rs458.93 Lakhs after charging interest, depreciation and tax. For the Financial year 2022-23, the Company has declared dividend of Rs1.1 per equity shares including Final dividend of Rs0.35 per equity shares with the approval of the shareholders and Interim dividend of Rs0.75 per equity shares with the approval of Board of Directors of the Company.

Internal Control Systems and their Adequacy

The company has a proper and adequate system of internal controls to ensure that all assets are safeguarded and protected against loss from unauthorized use or disposition and that all transactions are properly authorized recorded and reported correctly. Further, the internal control system is designed to ensure that all the financial and other records are reliable for preparing financial statements and for maintaining accountability of the assets.

The Company has engaged an Independent Chartered Accountant firm as Internal Auditor responsible to ensure compliance of all the statutory requirements by the Company. The finance department in co-ordination with Internal Auditor is also responsible for periodical risk appraisal, internal as well as external, of all the functional departments in the organization is being taken up. On the basis of the appraisal, potential risks are identified and preventive measures are initiated depending on the perceived gravity of the risk.

Discussion on Financial performance with respect to operational performance

(i) Operational Performance

The financial statements have been prepared in compliance with the requirement of the Companies Act, 2013 and Indian Accounting Standards in India. During the year under review, your company reported profit of Rs30,680.90 Lakhs before tax adjustments as compared to profit of Rs26,427.74 Lakhs in the previous year.

(ii) Segment-wise Performance

The segment-wise performance of the Company during the Financial year 2022-23 is disclosed in the Notes to Accounts at Schedule No. 34.

Key Financial Ratios

Pursuant to Schedule V(B) to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015:

Particulars 2023 2022
Operating Profit Margin (%) 6.06% 5.06%
Net Profit Margin (%) 5.76% 4.92%
Debtors Turnover - (No of times) 15.13 25.44
Inventory Turnover 6.33 7.86
Current Ratio 5.88 5.07
Return on Net worth (%) 13.78% 12.78%

Notes:

1. Debtors Turnover ratio has been computed for both years on the basis of Gross Sales Value (net of rebates and discounts) instead of Gross Revenue.

2. Net Profit Margin and Return on Net worth ratios have been computed based on Profit After Tax (before exceptional items).

3. Interest Coverage Ratio and Debt Equity ratio are not relevant for the Company as it has negligible debt.

Human Resources / Industrial Relations

The process of Shrimp Feed production involves specialization in procurement of suitable raw materials, feed formulation, production to suit the needs of Shrimp Culture, which needs qualified and trained staff for these operations. The marketing staff has to be well trained in techniques of shrimp culture to assist to the farmers. In this direction, the Company imparts expert training in the respective field and develops Human Resource capabilities. The periodical trainings, incentives, increments and other welfare measures ensure healthy industrial relations. The total number of employees as on 31st March, 2023 are 1,357 employees.

For and on behalf of the Board
AVANTI FEEDS LIMITED
A. Indra Kumar
Place: Hyderabad Chairman & Managing Director
Date: 24th May, 2023 DIN:00190168

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