KEY RATING DRIVERS
Strong Credit Profile: The upgrade reflects AFL’s ability to sustain its credit profile amid volatility in the shrimp industry. The company’s net leverage has remained below 1.0x and its interest cover in double digits since FY13. In FY16, net leverage was negative 0.3x (FY15: negative 0.1x; FY14: 0.3x) and interest cover was 68x (67.5x; 25.3x).
Substantial Increase in Scale While Improving EBITDA Margins:AFL’s revenue grew at a CAGR of 46% to INR20.2bn in FY16 from INR6.5bn in FY13. The growth in revenue was driven mainly by the increase in the volumes of both the feed and processing divisions. The feed division’s volumes grew 7.9% yoy while the processing division’s volumes grew by about 20% during FY16. Realisation of the feed division’s increased 6.4% yoy in FY16, but the processing division saw a dip in realisation of about 12% yoy. Additionally, margins in the processing division dipped in FY16; however, they were more than compensated by the margin expansion in the feed division. This lead to an increase in EBITDA margins to 11.4% in FY16 (FY15: 10.3%). However, margins were a tad lower in 1QFY17 at 10.1% (1QFY16: 9.7%).
Capacity Expansion Largely Funded by Internal Accruals: Over FY13-FY16, AFL increased its feed manufacturing capacity to 420,000 tonnes form 110,000 tonnes and processed shrimp capacity to 8,000 tonnes from 2,720 tonnes, using internal accruals. The company is further expanding its shrimp processing capacity by 12,000 tonnes to 20,000 tonnes and is likely to be complete it by November 2016. The company would rely on a term debt of INR300m for the expansion of its processing plant capacity while the balance of INR850m would be funded through internal accruals.
Established Brand and Strategic Location: Of the 420,000 tonnes manufacturing capacity, about 86% or 360,000 tonnes is in Andhra Pradesh and the balance 14% or 60,000 tonnes is in Gujarat. Around 60% of AFL’s feed sales happen in Andhra Pradesh. The company has a strong brand name and a market leader, and the strategic location of its plants has aided the increase in its scale of operations over the past three to four years.
Strong Liquidity: AFL had cash and cash equivalent of INR750m at FYE16. Furthermore, the term debt repayment requirement over the next 12 months is a meager INR21.3m. The company uses its INR750m fund-based facility sparingly due to its ability to manage the working capital. Average utilisation of its fund-based facility over the 12 months ended July 2016 was less than 10%. Also, cash flow from operations increased to INR1.3m in FY16 from INR532m in FY13.
Changing Business Mix: AFL’s business mix will change as the proportion of revenue from the lower-margin processing division is set to increase with the new 12,000mtpa facility becoming operational during 2HFY17. Furthermore, the company’s working capital requirement would increase since the processing division requires higher inventory levels. However, Ind-Ra expects the company to be able to maintain a comfortable credit profile due to its low term debt levels, its ability to manage its working capital and the cash flow generation ability of the business.
Raw Material Price Risk: Avanti’s business is exposed to raw material price risk for both its feed and processing businesses due to the commoditised nature of the businesses.
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