India Ratings and Research (Ind-Ra) has upgraded Avanti Feeds’ (AFL) long-term issuer rating to 'IND A' from 'IND A-'. The outlook is stable.

The upgrade reflects the substantial increase in AFL's scale of operations during FY14 and FY15 driven both by volume and price growth. Over FY13-FY15 the volumes of the feed division increased at a CAGR of 50% and the processing division grew 17%. Realisation of feed and processed shrimp grew at a CAGR of 15% and 13% respectively during this period. Over the same period, Avanti's revenue grew at a CAGR of 65.5% to Rs 17.7 billion in FY15 (FY14:11.3 billion; FY13: 6.5 billion) and EBITDA margins improved to 10.3% (FY14: 9.8%; FY13: 8%) due to better absorption of fixed costs and the company’s ability to pass on the increased raw material prices to customers due to favourable demand.

The upgrade also reflects the improvement in AFL's credit profile with net leverage turning negative at -0.1x in FY15 (FY14: 0.3x; FY13: 1.0x) due to negligible term debt and lower utilization of working capital debt. This was due to better working capital management as a result of which the net cash conversion cycle improved to 37days in FY15 (FY14: 42 days; FY13: 69days) despite the increase in the scale of operations.

The improvement in the working capital cycle was mainly due to better collection days in the feed division which constituted 85% of the total sales in FY15. 75% of AFL’s sales in the feed division are on cash basis while 25% are on a credit basis (10-30 days). Avanti however, extends a credit of 30-90 days to the customers of processed shrimp but this constituted only 15% of the total revenue in FY15. Avanti’s liquidity position is also comfortable with cash and cash equivalents of Rs  826 million at FYE15 (FY14: Rs 179 million).

AFL's ratings are constrained by the volatility in raw material prices and AFL's limited ability to pass on increased raw material prices to customers. The ratings also remain constrained due to both divisions being vulnerable to a disease out- break in the aqua culture (both shrimp and fish) and unfavourable industry attributes such as food safety regulations in export markets.

Ind-Ra observes that shrimp prices have increased during the past two years due to the global demand-supply mismatch created by lower supplies from major shrimp producing nations such as Thailand and China as a result of a viral attack on shrimps. The restoration of supplies from these regions would impact the demand-supply dynamics and lead to volatility in the EBITDA margins of shrimp processing and shrimp feed businesses. Demonstration of sustainability of EBITDA margins through the volatility would be a positive for the company.