Good evening, ladies and gentlemen. I'm Krithika, moderator for the conference call. Welcome to Avanti Feeds Limited Q2 FY23 Results Conference Call, hosted by KFin Technologies Limited . We have with us today from the management, Mr. C. Ramachandra Rao, Joint Managing Director, Mr. A. Venkata Sanjeev, Executive Director, Mr. Alluri Nikhilesh, Executive Director, Mrs. Shanti Latha, GM, Finance and Accounts, and Miss Lakshmi Sharma, Manager, Corporate Affairs. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone telephone. Please note, this conference is recorded. I would now like to hand over the floor to the management. Thank you, and over to you, sir.
Thank you, Krithika. Good evening, ladies and gentlemen. We extend a warm welcome for this investors conference call to review the unaudited financial results for Q2 FY23. Along with me here are Mr. Nikhilesh Chowdary, Executive Director, Avanti Frozen Foods Private Limited, and Mr. Venkata Sanjeev, Executive Director, Avanti Feeds Limited, and other, team members. The results of Q2 FY23 are already with you for some time now, and we are sure that you would have gone through them. However, I would like to share with you some of the key indicators relevant to our discussions today. Consolidated... First, let me take up the consolidated financial results for Q2 FY22. The comparative performance of Q2 FY23 with that of Q1 FY23 and Q2 FY22 has been given in the presentation already circulated.
Gross income in Q2 FY 2023 is INR 1,349 crores, as compared to INR 1,582 crores in the previous quarter, Q1 FY 2023, a decrease of INR 433 crores, which represents 15%. Compared to Q2 FY 2022, gross income of INR 1,252 crores, there is an increase of INR 97 crores, which represents 8%. The PBT is INR 90 crores in Q2 FY 2023, as compared to INR 100 crores in Q1 FY 2023, a decrease of INR 10 crores, representing 10% and compared to Q2 FY 2022, PBT of INR 38 crores, there is an increase of INR 52 crores, which represents 137%.
The consolidated results indicate net impact of several factors, such as increase, decrease in income, expenditure and exceptional items, etc., relating to feed and frozen food divisions, which have been discussed in the division-wide performance later. Let us take first the standalone financial results of feeds and processing divisions. Feed division, the gross income for this quarter, second quarter FY 2023 is INR 1,040 crores as compared to INR 1,311 crores in the previous quarter of Q1 FY 2023, decreased by INR 271 crores, representing a 21% decrease, mainly due to decrease in the quantity of feed sales and early harvesting on account of disease, rains, decrease in farm gate prices of bigger size shrimps compared to smaller size.
The gross income in Q2 FY2023 increased to INR 1,040 crores from INR 982 crores in the corresponding quarter of Q2 FY2022, increased by INR 58 crores, representing 6%, which is due to increase in sale price and marginal decrease in the average raw material cost. The PBT of Q2 FY2023 is INR 52 crores as compared to INR 77 crores in Q1 FY2023, a decrease of INR 25 crores, representing 32%, mainly due to decrease in feed sales volume. The feed sales reduced to 126,034 metric tons in Q2 FY2023, as compared to 161,343 metric tons in Q1 FY2023.
The PBT in Q2 FY 2023 has increased by INR 30 crore from rupees 22 crore in Q2 FY 2022, representing by, representing, 136 crore, 136%. As you know, the cost of raw materials constitutes major share of cost of feed production, particularly fish meal, soybean meal, and wheat bran. The average raw material cost in terms of percentage over feed sale, over feed sales were, is 88.11% in Q2 FY 2023, as compared to 93.58% in Q2 FY 2022, indicating a marginal decrease by about 5.48% in the average raw material cost. However, compared to Q1 FY 2023, it is more or less at the same level at 87.74% in Q1 FY 2023.
The average cost takes into consideration volatility of major raw materials like fish meal, soybean meal, and wheat bran, sometimes increasing and sometimes decreasing during the respective quarters. The present rates of fish meal, soybean meal, and wheat bran are INR 105, that is fish meal, INR 57 per kg is soybean meal, and INR 34 per kg is it wheat bran. I would like to share with you that the prices of these, major raw materials, along with related products like fish oil, soya lecithin, et cetera, keep changing from time to time, depending upon the seasonality, production, global trends, et cetera, which has direct impact on the raw material cost of the feed.
Another important factor to be taken into consideration is that most of the products, particularly fish meal, soybean meal, and wheat flour, have been brought under the levy of GST, except less than 25, less than 25 kg pack branded wheat flour, resulting in increase of raw material cost without adjustment to output and input tax mechanism, since the final product, shrimp feed, is exempt from GST. Now, the only relieving factor is that wheat and wheat products have been banned for export to check the increase in prices after the government experimenting with the export of wheat and wheat products, which resulted in steep highs in wheat and wheat products in India. Now, let me take up the shrimp processing division.
The gross income for Q2 FY 2023 is INR 310 crore, as compared to INR 273 crore in Q1 FY 2023, an increase by INR 37 crore, representing 14% due to increase in sales volume by 232 metric tons, representing 7%, and foreign exchange gain due to depreciation of Indian rupee against US dollar, and average sales realization due to marginal increase of export price. The gross income in Q2 FY 2023 increased to INR 310 crore from INR 273 crore compared to corresponding quarter Q2 FY, sorry, 2022, and increased by INR 37 crore, representing 14%, along with increase in average export realization by $0.50 per kg, and foreign exchange gain due to depreciation of INR against USD.
The profit before tax, before the exceptional item for Q2 FY 2023, is INR 40 crore as compared to INR 30 crore in Q1 FY 2023. An increase by INR 10 crore represents, representing 30%, mainly due to increase in average sales realization. The PBT in Q2 FY 2023 is INR 40 crore, decreased from INR 41 crore in corresponding quarter Q2 FY 2022. Present status of termination recall and reinstating green list status. I'm happy to share with you that U.S. FDA has removed cooked shrimp products from FDA import alert list from twenty-first October, this year. This will enable the company to accelerate, to accelerate the growth, accelerate the exports of value-added products, particularly cooked shrimps to USA.
I would like to assure the stakeholders that your company gives utmost importance to food safety and compliance with global regulatory requirements, and leaves no stone unturned to achieve this objective. Coming to the financial provision in the financial statements for this recall. In Q2 FY 2023, an additional provision of INR 1.30 crore has been made as an exceptional item towards value of returned, destroyed products and other related expenses, with cumulative provision of INR 34.10 crore till 30 September 2022, out of which an amount of INR 26 crore has been paid on the basis of claims, leaving the balance INR 8.10 crore as a provisional in the financial statement.
We have assessed that almost all the claims so far have been received, and as far as the returned and destroyed products are concerned, and we would like to continue the final closing this provision till 31st March. The excess provision as of now, it is INR 8.10 crore, and we will wait till 31st March 2023, and then we write back this excess provision in the financial statements. As regards the product liability claims for bodily injury caused by consuming company's contaminated product under the recall, the company's insurer, New India Assurance Company, has appointed a surveyor for processing of the claims. So far, the company has received 13 claims towards bodily injury, which have been forwarded to the insurance surveyor for processing.
Since the liability has been covered under commercial general liability insurance policy of the company, no provision has been made in the financial statement. The extent of claims in financial terms is yet to be ascertained, and the information required by the surveyors have been asked from the claimants, and that is provided in due course. Industry overview and future outlook is like this: At the start of this year, 2022, the environment for shrimp culture in the country started favorably, and the shrimp culture commenced promisingly. However, due to plague decrease in APM gas prices, and sluggish export market during end of first and main crop, shrimp culture did not register expected growth. On the other hand, it has shown a deep growth compared to the corresponding period of the previous year.
This sluggish shrimp culture activity is likely to continue even in the second crop due to decrease in demand for shrimp exports on account of recession in USA, Europe, and lockdown in China due to zero COVID policy. Added to this, Ecuador has become the largest producer of the shrimp, and is a major competitor to for export of shrimps to US, as Ecuador is able to export at lower prices due to proximity of US market to them. All these factors are expected to contribute for decrease in production. Moreover, in view of the current situation, some of the farmers are planning to go for a crop holiday in 2023. The shrimp production and feed consumption in FY 2022 and the company's plans for FY 2023.
Though at start of this season, the shrimp feed consumption in calendar year 2022 in India is expected to grow by about 15% compared to calendar year 2021, with an estimated sale of 12 lakh metric tons . However, due to various reasons stated earlier, the shrimp feed consumption in calendar year is now expected to be at 9.75-10 lakh metric tons, as compared to 11 lakh metric tons in FY 2021. The company's feed sales during FY 2022 was about 5.41 lakh metric tons, as compared to 4.73 lakh metric tons in FY 2021. It is expected that for financial year 2023, it would remain more or less the same as in financial year 2022, unless large number of farmers decide to go for a crop, crop holiday.
At this stage, I would like to share with you that company has limited choice in to increase the feed price as and when the raw material cost increases. Before resorting to any increase in feed price, the company has to consider the farmers' feasibility to take on the increase, sustaining the margins on the farm gate prices that he receives from the processors, exporters. In addition, of late, the government of Andhra Pradesh state has also been holding consultative meetings with the farmers and the feed manufacturers to arrive at a price workable to the farmers, and advising the feed manufacturers to moderate the prices, taking into considerations the hardship faced by the farmers.
The feed manufacturers are cooperating with the government and also working for the sustenance of this industry in the interest of the farmers. Let me come to shrimp processing and export. The country's shrimp production and export is likely to come down in calendar year 2022 to about 6.5-7 lakh metric tons, as compared to 8.5 lakh metric tons in calendar year 2021. The company's shrimp exports during the financial year was about 12,836 metric tons as compared to 11,518 metric tons in FY 2021. It is expected for FY 2023 would be around the same level of 13,000 metric tons. Avanti Frozen Foods is in the process of expanding pre-processing, main processing and cold storage, as detailed below.
Pre-processing facility in Gopalapuram, adjacent to the existing plant, completed and awaiting final approvals to start the pre-processing, incurring a CapEx of INR 11.43 crore. New cold storage at Yerravaram processing plant with 2,000 metric tons capacity, work is in progress and estimated cost is about INR 17.60 crore. The new processing plant and cold storage plant in Visakhapatnam, East Godavari district, with 7,000 metric tons per annum capacity. Land has been acquired, civil works are to be commenced. Estimated cost of this project is INR 49 crore. Before concluding, I would like to share with you that Indian shrimp culture industry is facing unprecedented crisis due to steep fall in exports, due to recession in US, Europe, and lockdown in China, coupled with serious competition in export price from Ecuador.
To face this crisis, which is expected to be temporary, to ensure sustainability of the industry, the shrimp exporters, led by Sri Indra Kumar, as President of the Seafood Exporters Association of India, and the initiative of Andhra Pradesh government, represented by Sri B. Masthan Rao , Honorable Member of Parliament, Rajya Sabha, are holding discussions with the farmers of AP region to find solution to this crisis. The Seafood Exporters Association and the government are advising the farmers not to go for crop holiday, which is not in the interest of the industry. Instead, advising crop rotation and lower stocking density and culturing the big size shrimps.
The shrimp exporters have assured the farmers that the raw shrimps would be purchased at the government fixed prices, which is INR 210 per kg per 100 count, and which is INR 380 per kg per 30 count. The government, as well as the seafood exporters, are extending their support to the farmers at this crisis time and to see that the industry sustains. It is hoped that all the stakeholders like farmers, exporters, feed manufacturers, hatcheries, work harmoniously to get over the present crisis and ensure sustainability, sustainable growth. Thank you. We will now take up the question and answer.
...Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star and one on your telephone keypad and wait for your turn to ask a question. If you would like to withdraw your request, you may do so by pressing star and one again. First question comes from Depesh Kashyap from Equirus Capital. Please go ahead.
Yeah, hi, Rao, sir. Thank you for taking my questions. Sir, you have given the current raw material prices. Can you just give the average price for the last quarter, please? Fish meal, soya meal, and the wheat.
You want, last quarter, average raw material cost?
Yes, sir.
Percentage I have given. So the compared to the last quarter, it is more or less the same. It is about INR 87, no? 80...
INR 111 is the fish meal.
Do you want raw material price or raw material cost?
Sir, the individual raw material prices, Fish meal, Soybean meal.
Okay. Yeah.
The Fish meal is around INR 111. It was the same in the earlier quarter also.
Okay.
Soya is around INR 62, and wheat flour has gone up to INR 29. But the present raw material cost is different from what I am telling you.
So the present procurement.
Sir, Rao, sir, has already told you in the-
INR 33.
INR 34.
INR 33-INR 34 rupees is the present wheat flour cost.
Fish meal remains the same.
Yeah, fish meal price is also, the fish meal price now, see, around INR 100 it is, hovering. This, actually, the prices are likely to go up because there's a lot of demand for exports. So because the depreciation of rupee, the exporters are getting a very good realization from their exports. So, the, in, in future also, unless some sort of a discipline is brought in for export of fish meal, it is likely to go up because of the competition from the export market.
Okay. So, sir, if I got the number correctly, you said soya meal last quarter was INR 52, now it is INR 57, and wheat last quarter was INR 29, now it is INR 34.
Yes.
I also understand that you have rolled back the INR 2 price hike, right? Do you think the margin will further go down in the next quarter?
You see, there are two things, Mr. Kashyap. One is that, the soya price, we have to keep watching. One is this, if the soya prices come down, there should not be much, variance in the margins, because the October, September, October, new crop has come. Some of the expectation of some exports and things like that, the sort of, holding is taking place. And definitely in months to come, in November, I mean, December and January, we are going to receive more quantities of, soya bean meal, and that could, in fact, stabilize the price. And, whatever the price it is, there now, is likely to, remain at that level. As far as fish meal is concerned, again, the...
We are, you know, looking at the export market, but the market information that the price, the exports to countries have come down, particularly the Taiwan and other countries, it has come down, because their crop is over now, so they are not ordering exports of fish meal any longer. So with that, I think that also should get stabilized in due course. As far as the wheat flour is concerned, we don't see any change because the next crop is expected only in March.
Got it, sir. Sir, secondly, sir, if I look at the consolidated employee cost number, I think that has increased by INR 15- INR 16 crore YOY. So I just want to understand, this is because of the change in formula that you did for the, your management remuneration, or it is because of the new employees of the wheat plant that you are coming?
Yeah, both. Both, both.
Okay, largely because of the change in formula, that's right?
That's right.
Okay, got it. And, sir, I just want to ask the guidance number for processing. You have given around 13,500 tons for FY 2023. Now, given your first half number, it seems that you're factoring in a 4%-5% decline in the second half, in the processing division. So, now that you also got the U.S. FDA clearance, still you think there will be decline in second half in this processing volumes?
Hi, so this is Nikhilesh. To answer that question, there are two factors. One is that we've got the green ticket, but actually, we've never actually stopped selling the cooked products, value-added products to the U.S. market. We were selling at a lower pace because it had added testing in the U.S. when it reached, the containers reached the U.S. geography. Now, the market is also very weak. The customers in the U.S., the large retailers, food service companies, are sitting on lots of inventory. So, we need to see how fast they clear their inventory, and if they're able to, we'll be able to send out more product. As for the cooked products, we've already started booking a lot of orders, so it's compensating on the weaker market.
We need to see how it pans out in the next two to three months, because this is the holiday season and the primary place where most of the sales occur. So we need to wait and watch. No definitive answer at the moment.
Got it. Lastly, Rao sir, what is the reason for the delay in the starting the feed plant? Because I think it's the entire capacity is already sitting in the balance sheet, right? So what is the reason for the delay?
See the, some governmental clearances are awaited. It's, ready for production. In fact, we have taken the trial productions also successfully, but, it's only, you know, couple of, government approvals have to come, nothing else. Just we are waiting for, the approval. Once we get, we start, I mean, for, I mean, dispatch it from that new plant.
Got it, sir. Thank you. Thank you very much.
Yes.
Thank you, sir. Next question comes from Nitin Awasthi from InCred Capital. Please go ahead.
Hello, sir. I wanted to ask you about a component in the feed, component of the feed. Other aqua companies have started to use DDGS as their component, you know, substituting some amount of soya and wheat. Are you also looking at to do something similar because of the price differential?
See, the, you know, we don't want to compromise on the quality, I mean, sir, quality of the feed. We are now sticking to the formula which we are following, and we are only making some combinations of the variance in soybean meal. For example, we have a percentage, protein percentage. We're varying and seeing that ultimately, it meets the requirement, the standards that we have been supplying to the company, to the farmers earlier. We don't want to compromise on the, the quality of feed by just, for sake of cost, buying at a cheaper raw materials. We do not want to go do that.
Okay, sir. So secondly, all the other aquaculture major feed companies who are into aquaculture are getting into shrimp. If they are not into shrimp, they're expanding their fish feed business also, and we don't seem to be expanding into any other category of the fish feed segment. So when will we start doing something similar? Because unless and until we do that, we won't grow further and the competition will keep eating up our share or at least putting cost pressures.
Yeah, we are well aware of this. In fact, we have all the, you know, necessary formula and all for fish feed also. We can start the fish feed at any time. It will not take... But only thing is we are just waiting for the stabilization of the fish feed market. It is because the fish feed market is not consistent. Sometimes it is high, sometimes it is low, and the farmers, they see, they go for cheaper raw materials and cheaper feed. So they unless we are sure, because when you bring the technology, the new technology, giving higher yields and all, they should be able to definitely it will be more expensive than what they are getting now. Once we are confident of the market, then definitely we'll bring the fish feed also.
We are ready with everything, to start the fish feed. We are also waiting for the appropriate time.
Okay, so what changes in the market were you looking at to bring forward this product into your company portfolio? Because company is much smaller than you are putting up massive capacities. That's why I asked this question.
See, what we have. You are right. See, we have a larger capacity to do it, but we cannot just start like that, no. So when we do it, we do it with a very definitive formula, and also to service to the farmers to get the yields, we have to do very systematically. It is easy to start a small fish feed plant. It is very simple to start. It will not take much, you know, CapEx or much the formula. It depends on how much protein and how much that you are giving to the fish feed. If you give more nutritious feed, it will be expensive. If you give a less nutritious feed, it will be cheap.
We are trying to see that when the market is right to take the nutritious food with the quality that we produce, we do not want to into the cheap feed and suddenly go up, suddenly the market comes down. If fish market comes down, they'll stop using the quality fish, I mean, quality feed. That's the reason why we are just keeping it on hold. Otherwise, we are, as I told you, we are ready to start anytime.
Okay, sir. So last question from my side. The farming holiday, has it, are the farmers convinced of not going for it, or are you looking for a certainty, percentage of definitive farmers stopping and going for late farming next year or next calendar year?
See, a lot of debate is going on that, that particular subject, because, you know, today we are facing a lot of crisis. In the crisis, naturally, the farmers think that going for a crop holiday is a good option, not to just go till, not to do anything till April 2023. But it is not correct also. So as, you know, the exporters and also the government, they are advising the farmers to go for rotation, crop rotation, and also to do it in such a way that all suddenly you don't increase the production. And, and also they are saying, "Go for a bigger size, less stocking density." So there are certain measures that are being advised by the seafood exporters as well as the government, so that the farmer survives this crisis.
Just, declaring it top quality does not really help the industry. That's what, yesterday's meeting, the government as well as the seafood exporters have advised the farmers. So a lot of debate-
Okay.
- is taking place. I think it will take another, maybe another, fifteen days, one month time to take a decision on this.
Okay, so continuation of that, are the company and the government... Sorry, are the feed manufacturers, the processors, and the government on the same page, or is there difference of opinion between the state government and the corporates?
No, no, they are all on the same page. Only, you know, it is a panic reaction, like, you know, it's a knee-jerk reaction by the farmers to suddenly stop because they are not getting good price. But the government has assured, and the exporters have also assured the farmers that they will buy the price at which the government has advised, like, 100 count at INR 210. They said they will buy, so they are asking them not to stop, but only don't produce in a big way at a time. Do it in a phased manner.
Listen, I just want to rephrase the same thing. We are pretty much very well researched into the shrimp market. I think you've also seen reports across the world, including the largest producer, Ecuador, that the prices of shrimp are plummeting. So the government and the corporates, everybody is very much on the same page, which is to ensure that the farmers don't lose their livelihood on the lower prices. So there's some sort of minimum support given to the farmers, so that they kind of almost break even or kind of make, depending on their efficiencies, a little bit margin.
There's also a lot of firm answers given by the government, saying that this is only to support at the bottom stage, but once the market rebounds, then there will be no involvement after. And this is the same in pretty much every other market, and this is being governed mostly by the end market dynamics, especially weak U.S. market, very weak China market. So this is what is governing it. So once things rebound, I'm pretty sure the farmers will come back into going into like full-scale farming. Right now, since there's excess supply globally and peak demand, so there's a slowdown in production to kind of balance the scales. But I think it's a phenomenon that we're seeing in every kind of industry.
I think a week ago, Target, a large retailer in the US, also reported their results, which were very, very low margins and also high inventory. That's the same with every other retail chain in the U.S., not pertaining only to seafood, but all other categories. So we're also seeing a weak macroeconomic dynamic, where there's recession fears. There's also layoffs in many of these big tech firms, and also people worrying about getting into impulsive buying and only going to necessary products. So this is just running by the macroeconomic situation, and things will get better. That's what we can foresee.
Yeah, we... This is a temporary phase. That's what the industry is of view, that it is only the temporary phase, and it will pick up shortly. That is what the government as well as the exporters are giving confidence to the farmers, so that let them not take any, you know, get depressed about the prices and all. They will keep the culture going in a different, rather, in a good manner, not in a big way, but slowly start to pick up, and it will automatically, as Nicholas said, it will pick up with time.
Okay, sir. Understood. Thank you.
Thank you. Ladies and gentlemen, if you have a question, please press star and one on your telephone keypad. I repeat, if you have a question, please press star and one on your telephone keypad. We will wait for a moment while the question queue assembles. Next question comes from Ash Aditya, an individual investor. Please go ahead.
Hi, am I audible?
Yes, yes.
Hi. I've seen that Avanti has done very well in terms of execution in processed shrimps to non-US markets. I think non-US sales is now accounting for about 40% of processed shrimp shrimp exports. So can you talk more about your marketing strategy in the non-US markets?
So, I think this is always a strategy to kind of diversify from the US market. We are focusing on requirements globally, apart from the US market, that can be clearly seen in the last 3-4 quarters, especially when we had the FDA issues from last year. So that's working out well. So we are also working on launching products which are focused on other Asian markets, so that we can kind of reduce, further reduce our reliance on the US market. So not only are we diversifying our product categories for other global markets, but we're also focusing on developing customers and increasing sales to the same customers in European and Asian markets, but also finding new customers in those markets. So we will continue to focus on that.
But also, I would like to say the US has been Avanti's key market for the last 25 years, so we will continue to work in that market with the same aggression, but also at the same time, develop new markets also.
Thanks for the clarification. And for these non-US markets, how are our realizations? And what kind of shrimps are we selling? Like, is it raw shrimp or is it value-added shrimps?
We are selling all kinds of, like, all product types to all markets, depending on the requirement. To China, it's mostly commodity shrimp, very basic commodity shrimp, but the remaining markets we are selling pretty much all our product categories.
Okay. My next question is about the longer-term trajectory. So if you look for the last four, five years, Avanti has maintained its market leadership in the feed segment, and it has turned out to be one of the biggest companies in the shrimp processing segment, despite the industry going through certain headwinds in the last thre, four years. So I would like to applaud the management for this. But if you also look at the share price in the last five years, I think we are still down 60% from our peaks, and we have a lot of cash on our books. Is the management thinking of a strategic buyback at lower share prices, which can be value accretive to the shareholders who remain invested, or something on those lines?
Now, as you were said, the management has been consistently giving the dividends, and as far as the cash reserves are concerned, we have told earlier also that, one, that we are using that money for working capital requirements of seasonal requirements, like when we have more inventory of raw materials and the finished goods also in the case of feed. Because the raw materials are subject to high volatility, when the prices, when the new crop comes and the prices come down, we make, take more inventory and taking this. We find that this is definitely cheaper in cost compared to the bank borrowing, with all the conditions attached and to very high cost.
So whereas this is the, the best way of funding the working capital, requirements. Coming to the, the expansions, we, we are, we have been thinking of, expansion and planning, discussing in the board meeting several times, but we are yet to, come to some, you know, confidence level, confidence level to go for a new projects. There are several projects which we are discussing. We will come back to the investors at the right time when, when the board takes a decision to go for the expansions.
Yeah, thanks for that clarification. Is there a point beyond which, like, cash on the books, starts becoming return, diluted, in terms of ROEs? Like, is there a strategic target we have in mind, like INR 1,000 crore, INR 1,200 crore? Because there has to be an upper limit to how much cash the company keeps.
Yeah, you see, that's what I've been telling you. When you are looking at the 31st March balance sheet, definitely it will have more cash. So when you see the seasonal requirement of the... Then the cash reserves are very less when compared to the seasonal purchase of our inventories, maintaining higher inventories of raw materials and finished goods for the following season. So at a point, we cannot take it at a particular point of time, that it is showing a huge cash flow. We are, I mean, we don't have a plan how to do that reserves.
I don't think it's, I mean, the right way to think, and it is, because of the demand for the, our raw materials, which is cash and carry, we have been able to, get very good prices, competitive prices compared to the market, which is ultimately is the benefit of the investor, which is it increases the profit. So it is not just go for investment without ensuring the, the, the growth and the value for the investment. So that is the reason why we are just keeping, that, expansion of, or going for diversification projects on hold. And it, and, you can take it, you can get. I mean, confidence level is that we are using this money only for rotation in the working capital.
Absolutely, the safety is there, and we are not taking any risk on it.
Yeah, that makes sense. Like, as long as it's used to fund the working capital, and if it provides us strategic benefits, I, I understand the use. My last question was about our margin levels. So if you see that the shrimp feed margins have been hit in the past few quarters, which makes sense because the raw material prices are, have increased. But structurally, do we see the 12% margins, which we used to do at some point of time, coming back? And if yes, what is the time frame which the management can think of?
... See, the raw material price constitutes more than 80% of the cost of production of feed. So that being the case, the lot depends on the margin, lot depends on the raw material price. If it goes up, naturally, margins come down. To add it to that, so earlier, when you are referring to, we were not having the GST on the raw materials. For example, fish meal was duty free. I mean, there was no sales tax. There was no sales tax on soya meal. There's no sales tax on wheat flour. Almost all raw materials we use as many as 15-16 raw materials. All raw materials, spare parts are now subject to 18% tax.
So all these things will add up to the cost, because there is no mechanism for us to adjust input, output tax, because the final product feed is exempt from GST. So whatever is coming is going into the cost and it reduces the profit. Is it clear?
Yes. I agree. So, yeah, it, it's kind of beyond our control.
So you see, we have two constraints here. One is that on the price front, the cost of raw material, cost of production front, we have no control on the, you know, raw material prices. We have no control on the GST. On the other side, the feed. Feed prices also, we cannot increase at our choice to match the margins, because and as I explained in my, first, you know, when I discussed about this subject, I think government comes in way, and also the farmer sustainability is the most important thing for the industry. We always see that the farmer gets, he gets the benefit, then only he will continue the, shrimp culture. If he doesn't make profit margins between the farm gate price and the cost of production, then there is no purpose.
The industry will not have a sustainable growth. So these are the factors-
Yes, uh.
-which are contributing to... You know, there are some sort of limitations, constraints, and we should... In spite of all these things, the measures that we are taking, we are able to maintain a margin of, depending upon the raw material cost, from 9% to 10%, 11%. Between 9% and 11%, we are trying to match the margins.
Yeah. Yeah, thanks for that clarification, and that's it from my side. Good luck to the company.
Thank you. Thank you.
Thank you, sir. We are having a follow-up question from Depesh Kashyap from Equirus Capital. Please go ahead.
Yeah, thanks for the follow-up, sir. Sir, just want to understand, that, we are seeing a lot of, interference, if I can use the word, by the, by the state government of Andhra Pradesh, but how are you in other states? Are you having a different, feed pricing formula in other states like Gujarat or Odisha, or you are selling at the same price?
See, more than nearly 60% of the total production of shrimp is in Andhra Pradesh. So Andhra Pradesh is the nerve center for the aquaculture. So naturally, the government, most of the culture is done by the small and medium farmers. So naturally, the government is interested in the interest of the farmers, and we, feed manufacturers, are also interested in the farmers because they should continue the activity. So, we don't call it as a, you know, some sort of this thing, but it is a some sort of, you know, trying to balance between all these things, like, stakeholders should survive, the market should be there. This is what we can take into consideration while fixing the price of the feed.
That is the one thing, but see, government has its own agenda. You know, they, they'll have to take care of the welfare of the state, you know, farmers and like other dependent population, they have to take it. So naturally, we cannot say that they are interfering, but we can say that they are also playing the role of a moderator. They come and they call both feed manufacturers as well as the farmers and consult and try to strike a balance. This is what is happening.
Yeah, got it, sir, but in other states, are you able to price the feed?
No, other states, there is no. See, if you take each state, like Gujarat is very uncertain. You know, Gujarat has got only one, the one crop, and then West Bengal, then Odisha. These are the three, four major states where you get this thing, and they don't. And feed manufacturers are all mostly Andhra Pradesh and one or two in Tamil Nadu. It's mostly concentrated in Andhra Pradesh itself.
You are actually saying that whatever you are selling in Andhra Pradesh, same price you get in Gujarat also. Is that understanding correct?
Yeah, we are selling, you know, well, naturally, it's not correct. No, we have to extend the same price to the other farmers also.
Otherwise, the farmers, it's unfair for them, right? Different product, cost, same product.
Got it. Got it. And, sir, I got the raw material part and the employee expense part. Just want to understand the other expenses part also, that in this quarter, if I look at the standalone in the feed segment, your other expenses increased to INR 52 odd crores versus INR 36 crores. That's a big jump of 43%. So is there any one-off or anything you can highlight in this number?
Yeah, yeah. See, what we are trying to do is, we are to encourage the farmers to convert to our feed, to increase our market share, we are giving the, we are giving some farmer schemes. So the farmer schemes, those who come to our feed will be given an extra benefit for conversion from the other feed to our feed. We are. That is the expense which we have booked now.
It is expected to continue, sir?
No, no, no, it is not, it depends upon the, season, how the market is, you know, reacting to such things. If the price is a criteria, we give that price. Instead of reducing the price, what we do, we give a scheme, farmer scheme, to encourage them. So if you buy, if you achieve so much target, we give them a percentage of the value of the, the, say, purchase that they make, that we percentage, we give them the, the scheme give. There are so many varieties. Sometimes we give some the items, or sometimes we said you can redeem mobile coupons. They can buy their feed by redeeming the coupons. So there are two, three varieties of really incentivizing the farmers to come for our feed.
That's how the expenditure is coming there as a, you know, what you call, expenses for the market. Yes.
Got it, sir. So lastly, Nikhilesh, you know, just wanted your opinion about US and Europe market. We kind of understand what is happening, but just wanted to cover the Chinese market. We understand that the consumption in China is lower right now because of the lockdowns, but how is the production level there? Do you think when it opens up, there will be a massive demand which can give a positive surprise next year?
Yes, on that point about the Chinese lockdowns, continued lockdowns and the lower demand, yes, that's a definite problem that we're finding. The second thing is that we... I feel that they're sitting on a lot of inventory even now. We can only know that once, probably December, early January, when they start buying for the Chinese New Year. The third point is that the Chinese market, to be very frank, has been very, very dicey for the past six to eight months. A lot of renegotiation, a lot of backouts by the buyer when selling the product. It's been very difficult with the market, but the reasoning that the buyers are giving is that the lockdowns and even weak economic conditions in China itself.
So, will it recover? Yeah, definitely, we see it recovering. I see China continuing to grow once the past lockdowns, which I think, we're all very certain, like the rest of the world, they'll also remove these lockdowns at some point. And once they start doing that and the consumption starts increasing, then I'm pretty sure it will become a dominant market, like the U.S. And with its proximity towards, in distance to India, it will be a good gain for India in the long term.
Got it. Thank you for answering your question. Thank you very much.
Thank you, sir. Next question comes from Chockalingam Narayanan from ICICI Prudential AMC. Please go ahead.
Yeah, hi. Thanks a lot for taking my question. How much is the proportion of cooked shrimps that you sell today?
Just give me a second. So, sir, actually, when we do value-added products, we actually club couple of, products into the value-added products. So right now, the cooked shrimp is about, about 16%. I think we used to do about 35%, 30% before. And like I, I think Deepesh asked that question before. We have still been supplying cooked shrimp, but just at a lower pace, so that will accelerate now.
Okay, understood. With regards to the, you know, different expenses that were, you know, that have seen an increase, if you could kind of quantify an employee cost, how much is related to managing, you know, the management-related remuneration increase, and how much is related to the new plant, if you could quantify it?
We will, I think,
INR 175,000.
The expenditure, he says, how much is relating to the...? Can you just come back on the question, please?
No, no. I asked, you know, versus last year, when you look at the increase in employee cost, what quantum, you know, in absolute INR crores, is relating on a quarter to, you know, Q2 this year versus Q2 last year, what proportion is, what quantum in INR crores is relating to the change in managerial remuneration, and what is relating to the new plant?
Make up, Santhi.
See, around INR 9 crore is towards the managerial remuneration and INR 3 crore towards the employee benefit, the new plant. But the new plant is not there throughout the six months. It is there only for the three months, the new employees, because they are just recruiting. We are in the process of recruiting for the new plant.
The INR 9 crore number is for first half or for 1 quarter?
... It's for the first half.
First half. Okay, understood. Second is with regards to the other expenses, you mentioned something with regards to, you know, the schemes for farmers.
Yeah.
What is the quantum in the first half and second quarter, if you could quantify?
It is there only in the second quarter. It is not there in the first half, and the same expenditure was not there in the previous year. So it is around INR 5.5 crores.
Understood. Lastly, on the container rates having come down, have you started to see the benefit of that on the, you know, freight cost? What was the freight cost on, you know, the processing business, and if the rates were to currently prevail, what sort of savings could you see?
I just don't have it with me right now, but I can. Because on a comparative note, I don't know. Like, I don't have it on hand, but I can tell you that at the peak, we were paying about $14,500 to L.A., and now it's reduced. The lowest quote that we're getting is about $6,000, so that's a substantial decrease. But however, our contracts are a combination of long-term contracts and also spot market contracts. And due to uncertainty this year and last year, most of the contracts by the customers were short-term because there it was a lot of unpredictability and high volatility of raw material price.
And also, most importantly, they were not able to gauge the market demand, since they're sitting on high inventory. So I would say, yes, we will get a benefit of the freight reduction, but it won't show a substantial impact because most of the contracts that we have are also spot market contracts. On the outlook, I think I feel the freight rates would continue to go down, I think at least by another $1,000-$1,500 to $4,500 to L.A. That's what I'm predicting. Hopefully, that does come through so that the consumer at the end can start really seeing these price reductions and the cost of protein go down.
Sir, if you could help in terms of, you know, even if you're not, you don't have the absolute crore number, it's a percentage of revenue, if you could kind of say a broad ballpark, that will kind of help.
Okay. So I actually, I do have it. So, I think maybe I spoke ahead of time, but, on this quarter, we paid an average of $12,000 for freight, compared to $7,000 last year, but, since the prices have started coming down. So next quarter, we can see, start seeing lower freight costs.
Understood. And, what is the progress with regards to your, you know, PLI, you know, policy, the facilities?
So we have completed the land acquisition, and we've also started kind of filling up the land to get it to a level before we start construction and the civil activities in December. So we have, you know, as per the Hindu tradition, we have the muhurat and all that things scheduled for December. For that, before that, we're filling in the land and, yeah, ordering all the necessary materials, finalizing the plans. So we are going ahead with that plan because we have—we do feel that our product continues to have strong demand in the market. So... And we also take it as an opportunity given by the Government of India to help us kind of consolidate our position.
To add what Mr. Nikhilesh said, we have already applied for the... We're applying for the first years of PLI, because we have achieved it. We are applying it. It will be scrutinized and maybe by first week of January, we will know the result out of that. But we are not making any provision in the accounts for that PLI. Just we are after only the government's approval only, we will take it to accounts. And one more thing, we have got approval for another scheme. What they call it as long-term operations schemes, long-term interventions of the Ministry of Food Processing Industries, Government of India.
They have another scheme that the government has announced for subsidizing the investments on post-harvest processing facilities. We have made an application in principle. In principle, we have received application only yesterday. Today, we have received, in fact, the approval, but we are working on that. We have been selected for the scheme that allows by the government under the particular Operation Greens , Operation Greens, they are calling it.
Sorry-
They give a subsidy on the investment.
... Okay. This is for new plants, is it?
Yes, yes, yes.
Okay. This will be on top of PLI or,
On top of PLI. On top of PLI, yes. PLI is for achieving the incremental sales, whereas this is for the investment itself.
Okay, understood. Understood. And, on the PLI, you've already applied for it, so what could be the quantum that you might be eligible, if you could give a ballpark?
No, no, no. It will take some more time to give the number. We are just working on it, and we'll submit in by 2-3 days, we'll submit that. I think maybe next, we'll be able to give you the exact figures for it.
Understood, sir. That would be helpful. Thank you.
Thank you.
Thank you, sir. Due to the time constraints, that would be the last question for the day. Now, I hand over the floor to the management for the closing comments.
Hmm, good.
Thank you, everybody, for taking time to attend the investors call. We value your time, and we will continue to work to give solid performance in the coming quarters. Have a good day and a pleasant weekend.
Thank you, sir. Ladies and gentlemen, we would like to come to the end of this conference. On behalf of Christensen , we would like to thank the entire team of Avanti Feeds for giving us the opportunity to host this call, and we appreciate the interest from the investors and analysts for the participation. Thank you, and if you need any further information, you may connect with Mr. Sahil Shah of Christensen at sahil.shah@christensenir.com. Thank you for using Chorus Call Conference Call service. You may disconnect your lines now. Thank you, and a good evening, everyone.