Avanti Feeds Ltd (AVANTIFEED) Q3 FY23 Earnings Concall Transcript

Avanti Feeds Ltd (NSE:AVANTIFEED) Q3 FY23 Earnings Concall dated Feb. 22, 2023.

Corporate Participants:

C. Ramachandra Rao — Joint Managing Director

A. Indra Kumar — Chairman and Managing Director

Alluri Nikhilesh — Executive Director

Analysts:

Onkar Kulkarni — Shree investments — Analyst

Vishwanath Shettigar — — Analyst

Rahil Shah — Crown Capital — Analyst

Jasdeep Walia — Clockvine Capital — Analyst

Runav Shah — Equitas — Analyst

Saket Kapoor — Kapoor Company — Analyst

Presentation:

Operator

Good evening, ladies and gentlemen. I’m Vidya, moderator for the conference call. Welcome to Avanti Feeds Limited Q3 FY23 Results Conference call hosted by KFin Technologies Limited. We have with us today from the management Mr. A. Indra Kumar, Chairman and Managing Director; Mr. C. Ramachandra Rao, Joint Managing Director; Mr. Alluri Nikhilesh, Executive Director; Mrs. Santhi Latha, GM – Finance & Accounts and Ms. Lakshmi Sharma, Manager, Corporate Affairs. As a reminder, all participants will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] 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.

C. Ramachandra Rao — Joint Managing Director

Thank you, Vidya. Good evening, ladies and gentlemen. I extend a warm welcome for all for this investors conference call to review the unaudited financial results for the quarter 3 of financial year ’23. Along with me here are Mr. A. Indra Kumar, Chairman and Managing Director, Mr. Nikhilesh Chaudhary, Executive Director, joining from France [Phonetic] and other team members. The results of Q3 FY23 are already due 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 for our decision tody. Consolidated financial results of Q3 FY23. The comparative performance of Q3 FY23 with that of Q2 FY23 and Q3 FY22 have been given in the presentation already circulated. Gross income in Q3 FY23 is INR1,132 crores as compared to INR1,349 crores in the previous quarter Q2 FY23, a decrease of INR217 crores by 16%. Compared to Q3 FY22 gross income of INR1,088 crores, there is an increase of INR44 crores just by 4%, The PBT is INR96 crores in Q3 FY23 as compared to INR90 crores in Q2 FY23, an increase of INR6 crores by 7% and compared to Q3 FY22 PBT of INR66 crores and that is an increase of INR30 crores by 45%. The consolidated results indicate net impact of several factors such as decrease in income expenditure, exceptional items, etc. relating to feed and frozen food division which has been discussed in the following divisional performance of the units individually. Let me first take up the standalone financial results of feed division of Q3 FY23 results. The gross income of Q3 FY23 is INR878 crores as compared to INR1,040 crores in the previous quarter of Q2 FY23, a decrease by INR162 crores, representing a decrease by 16% mainly due to decrease in quantity of pre-sales and early harvesting on account of this is rains, decrease in farm gate prices of bigger sessions compared to smaller size. The gross income in Q3 FY23 increased to INR878 [Phonetic] crores from INR2,819 crores in the corresponding quarter of Q3 FY22 which increased by INR59 crores, representing 7% due to increase in sales realization.

The PBT for the Q3 FY23 is INR70 crores as compared to INR52 crores in Q2 FY23, an increase of INR18 crores by 35%, mainly due to stabilization of prices of major raw material. The feed sales is reduced to INR1,06,313 metric tons in Q3 FY23 as compared to INR1,26,034 metric tons in Q2 FY23. The PBT in Q3 FY23 has increased by INR14 crores from INR38 crores in Q3 FY22, represented by 37%. As you know, the cost of raw materials constitutes major share of cost of feed production, particularly fish meal, soyabean meal and wheat flour. The average raw material cost in terms of percentage for feed sales price was INR83.61 in Q3 FY23 as compared to INR87.4 in Q3 FY22 by 88.11% in Q2 FY23, indicating a marginal decrease by about 3.7% as compared to Q3 FY22 and 4.5% in Q2 FY23. The average cost takes into consideration volatility of the major raw materials like fish meal, soyabean meal and wheat flour, sometimes increase and sometimes decreases during the respective quarters. The present rates of fish meal, soybean meal and wheat flour are INR110 that is for fishmeal, 57 kg for soybean meal and INR36 for per kg wheat flour.

Now, I would like to share with you some of the recent developments which has contributed to the cost of raw materials. First, let me take the fish meal. There is a significant increase in the export of fish meal from India. The export of fish meal from India to countries like China, Taiwan, Vietnam, etc. has gone up steeply over the past 8 to 10 months creating shortages in fish meal for domestic consumption. A spurt in demand for exports is due to increase in imports of fish meal from India by China, Taiwan, Vietnam, due to shortage of production in Peru and also higher ocean freight from Peru compared to imports from India. Added to this, the Indian rupee has been depreciating against USD, giving a higher sales realization to the Indian exporters of fish meal. Further the exports are incentivized by the duty drawback of 2.9% on FOB value and 2.30 of RoDTEP. The fish meal production in India is about 3.75 lakh to 4 lakh tons per annum and shrimp feed industry consumes almost 3 lakh metric tons per annum for feed production. 75% to 80% of fish meal is required for feed production in India. The present trend of exports demand almost to 3.5 lakh metric tons per annum are likely to be exported. This is a great disadvantage to the domestic consumers of fish meal creating sharply pushing up the domestic prices. To mitigate the hardship, the Government of India is being approached to initiate measures to safeguard the domestic shrimp feed manufacturers in the interest of shrimp exports earning valuable value-added exports foreign exchange. In this context, it is pertinent to mention that the recent budgetary decrease of customs duty on import to fish meal to 5% from 15% is not significant and advantageous to the domestic consumers.

Let me now dwell up the wheat flour price. Like fish meal, wheat flour prices also is increasing steeply, which appears to be due to inconsistent policy of exports of wheat and wheat products during 2022. In anticipation of allowing exports of wheat and wheat products the trader seem to hold these products resulting in increase of wheat flour price. In order to check the rising domestic wheat and wheat products price, on 25th of January ’23, the Government of India announced the sale of 30 lakh tons of wheat in the open market. Again yesterday that is 21st February ’23, the center announced a sale of an additional 20 lakh tons wheat in the open market to further bring down the retail prices of wheat and wheat flour. It has decided that the state-owned Food Corporation of India will offload an additional quantity of 20 lakh metric tons of wheat in the open market sales scheme. Further, this year that is 2022-2023 crop year the wheat crop also estimated to rise to 112.18 metric tons as compared to 107.74 metric tons in the previous year. It is expected that these factors would increase the wheat flour prices and and soften stabilize here after. To sum up, I would like to share with you that prices of these major raw materials along with the related products like fish oil, soya lecithin, etc., keep changing from time to time depending upon the seasonality, production, global trends, etc. which has direct impact on the raw material cost of the feed which are [Phonetic] under the company’s control.

Let me go with shrimp processing division now. The Q3 FY23 results, the gross income for Q3 FY23 is INR256 crores as compared to INR310 crores in Q2 FY23, a decrease by INR54 crores, representing 17.7% due to decrease in sales volume by 627 representing 18%. The significant reason for the lower sales volume in Q3 FY23 is lower sales volume in Q3 FY23, postponement of shipments on various requests because of the inventory holding at their warehouses. The gross income in Q3 FY23 decreased to INR256 crores from INR270 crores compared to corresponding quarter Q3 FY22, a decrease of INR14 crores, representing 5.2%. Though the sales volume decreased by 18.2%, gross decreased 5.2% only to positive impact of increase in average export realization by $0.29 per kg and foreign exchange gain due to depreciation of INR against USD.

The PBT for Q3 FY23 is INR30 crores as compared to INR40 crores in Q2 FY22, decrease by INR10 crores, which represents 1.1% of gross income, mainly due to decrease in sales volume, average sales realization by $0.32 per kg. Having said that, the PBT has not decreased proportionately with gross income reduction, the company could able to maintain the PBT going to increase in the foreign exchange gain and marginal decrease in ocean freight costs. The PBT in Q3 FY23 is INR30 crores, increase from INR26 crores in the corresponding quarter Q3 FY22.

Provision for a recall expenses in the financial statements. In Q3 FY23 financial statements, an additional provision of INR1.52 crores has been made as an exceptional item towards the value of returned destroyed products and other related expenses with cumulative provision of INR30.62 crores to INR35.62 crores till 31st December ’22, out of which an amount of INR31.56 crores has been paid on the basis of claims, leaving the balance of INR4.06 as a provision in the financial statements. As regards to product liability claims for bodily injury caused by consuming companies contaminated product and under the recall, the company’s insurer, New India Assurance Company has been appointed a surveyor for processing of the claims. So far, the company has received 13 claims towards bodily injury, which has been forwarded to the insurance surveyor for processing. Since the liability has been covered under the commercial general liability insurance policy, no provision has been made in the financial statements. The extent of claims in the financial term is yet to be ascertained. Now let me share with you the industry overview and future outlook. You may notice that in Q3 FY3, the feed division result is in — resulted in an increase of profit though the sales have decreased mainly due to stabilization of the prices of major raw material during the quarter. The shrimp exports have also decreased in Q3 FY23 compared to Q2 FY23. The later part of the year ’22 experienced severe stress on the shrimp culture industry by decrease in production of farm gate prices going down, global recession, etc. The year ’22 ended with a rather disappointing note for these reasons.

Coming to the budgetary support to the industry in 2023 budget. As far as import duties and GST are concerned, the aqua culture industry did not receive much support from the 2023 budget presented on 1st February ’23 by the Honorable Finance Minister, except the following. The import duty on fish meal has been reduced to 5% from 15%. However this decrease has not helped the feed industry, as explained earlier. The import duty on fish feed oil for manufacture of aquatic feed has also been reduced to 15% from 30%. However this decrease is not also helpful to the feed industry on the same lines as in the case of fish meal. The import duty on krill meal for manufacture of aquatic feeds has been reduced to 5% from 15%. This is also at an expensive import item and the decrease of 10% has not really helped the industry much on krill meal. The import duty on vitamins and mineral premix is used for the manufacture of aquatic feed has been reduced to 5% from 15%, which has provided a marginal benefit to the importers of vitamin and mineral premixes used for feed manufacture. The import duty on wheat flour for manufacture of aquatic feed has been reduced to 15% from 30% providing a marginal relief. That quantity of vitamin and mineral premixes [Indecipherable] used in the feed manufacture is not significant and as such the decrease of duties of 10% or 15% does not give much relief expected by the feed manufacturers.

Continuing this outlook, the year 22-23 started on low key, the farmers did not show much interest and are now reluctant to start the feed which otherwise would have started now basically. As per the information available after mid February ’23 the stocking was 5,700 million feed as against 7,800 million feed during the corresponding period of the previous year. According to the stocking going down — stock went down by 26.92% in the first 45 days of the year. However, as the farm gate prices of shrimps is increasing, the farmers are looking for starting from March 23 onwards. It is is anticipated that shrimps culture will pickup from March 23 to make up the shortfall in the first months. However to be cautious with global economy looking bleak and recession looming large throughout the world, the shrimp production in 2023 is likely to be around 8.5 lakh metric tons as agonist 9 lakh metric tons in 2022.

Let me now dwell upon shrimp production and feed consumption for financial year ’22 and companies plans for ’23. Shrimp production consumption though at start of the first season, the shrimp feed consumption in CY ’23, India is expected to grow by 15% compared to the calendar year ’21 with an estimated sales of 12 lakh metric tons. However, due to the various reasons stated earlier, the shrimp feed production in calendar year ’22 is now expected to be 9.75 lakh to 10 lakh metric tons as compared to 11 lakh metric tons in calendar year ’21. The company’s feed sales during the financial year ’22 was about 5.41 lakh metric tons as compared to 4.73 lakh metric tons in FY ’21. It is expected that for financial year ’23, it will be around 5 lakh metric tons unless the shrimp culture in the rest of the year goes down steeply due to uncontrollable reasons. The company has completed setting up of a new shrimp feed manufacturing facility in Bandapuram with annual installed capacity of 1,75,000 metric tons with a capex of INR125 crores.

The new facility has commenced production in December ’22. With the new plant coming up, commencing production, there would not be short supply of companies feed during the peak season this year as it happened in the previous year, which has resulted in the short supply of feed to the extent of about 50,000 metric tons. Shrimp production and export has come down in calendar year ’22 to about 6 to 6.5 lakh metric tons as compared to 7 to 7.5 metric tons in calendar year ’21. The company’s shrimp exports during financial year ’22 was about 12,836 metric tons as compared to 11,518 metric tons in financial year ’21. It is expected for financial ’23, would be around same level of 12500 metric tons. Avanti Frozen is in the process of expanding pre-processing and main processing as detailed below. Pre-processing facility in Gopalapuram adjacent to the existing processing plant, the status is completed and waiting for final approvals to start pre-processing capex of INR11.40 crores. New processing plants in cold storage in Krishnapuram, East Godavari District in Andhra Pradesh with 7,000 metric tons per annum capacity. Land is acquired and civil works commences, the estimated cost of this project is INR64.6 crores. The company has been selected under 2 investment incentive Government of India. One is sales based incentive and production linked incentive scheme. The other is grant in aid under operation screams long term intervention scheme. The production linked incentive scheme, company is eligible for incentive of 6% value-added products 10% on incremental sales over a period of six years from the financial year ’21, ’22 to 2026 to 2027 subject to a maximum of INR79.44 crores with minimum 5% CAGR in sales.

The company has application claim at 6% on the incremental sales of INR57 crores release of incentives under PLA for financial year ’22 and it is under review by the Ministry. This is not accounted for in the books of accounts as per the policy of the company, to account such items only on receipt. Operational — the other operational green scheme approval from the Government of India for grant need for the proposed investment in new shrimp processing plant at Krishnapuram has been received in December ’22. Maximum grant in aid under this scheme is INR10 crores. Grant in aid will be released in interim installments applications for disbursement is requested to be submitted 8 months, 16 months and 24 months after the date of approval of the project.

The outlook for coming quarters for the feed processing division appears to be promising on account of softening of the ocean freight, increase in value-added products, exports and also with the Chinese market promising, it is hoped that the processing division would do better in the coming quarters. I think with this, I close the brief background with setting the ground for discussion. Now we’ll go into the question-and-answer session.

Questions and Answers:

Operator

Thank you sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Onkar Kulkarni from Shree investments. Please go ahead.

Onkar Kulkarni — Shree investments — Analyst

Yeah, my question was regarding, just now you mentioned that with the softening of raw material prices, the future seems to be bright. So what do you think, what could be your margins in the medium-to-long term. I mean we are not able to gather like what kind of margin percentage you can deliver in the mid to long term, because of so much of volatility in all the things.

C. Ramachandra Rao — Joint Managing Director

Yeah. I think the question has to be split into two.One is about the feed, the other about the processing. Let me first take up feed division, as I explained very clearly in my presentation that the raw material prices are likely to come down further but it is very uncertain to what extent we will be able to, it will come down and what extent we’ll be able to take advantage of that. These are all the factors which only can be answered in the due course. The decision of the government to release the 30 plus 20, about 50 lakh tons of wheat has come very recently. We have to see how the market is going to react for this, whether the prices are going to come down or how it is going to happen. Similarly, we are trying to see the exports, the fish meal has really created a great disadvantage for domestic consumers like the shrimp feed producers because the prices are very high, which we — the export prices they are giving it about 150 rupees. So we are — they are selling at 110 rupees per kg now fish meal. So whatever amount of that concession the difference is so huge that to divert then, the government has to come with a very strategic planning, so to domestic to provide the comfort to the domestic industries as far as the availability of fish meal is concerned. We are working on that. So soya bean also like that. Yesterday, the prices have gone up again, soybean meal. The reason is not known, why it has gone up. So these are all as we have been telling almost in every our investors call that these raw materials are very highly volatile and it is very very difficult to give you a precise margins this is going to result in. And are the other side, as you know that the pricing of feed is also not totally free from certain conditions regulations by the government. So we are on the both sides we have a very stringent conditions whereby we are operating. Under these circumstances, it is very difficult for giving you any specific percentage of the profit margin. Coming to the question of processing, here also there is always a mismatch between the raw materials, the farm gate prices and the final export price. So there also we try our best to reduce our cost of processing and maximize the profitability. I think this one, CMD will explain more on this aspect.

A. Indra Kumar — Chairman and Managing Director

See, the international market, everything depends on the international market situation and the openings of the different markets. As of now because the recession and inflation across the world, there is a pressure on the price. And definitely, with another two to three months, that would come to normalcy, and in the US, there all the — they have huge inventories and because of China declared a complete lockdown and lifted it only in the month of December, there has been — the shrimp was not, no item was exported to China because of the lockdown and they declared 100% lockdown. Because of that, there was a turbulence in the market because China consumes around — they are the second largest important of seafood, mainly shrimp. With the lockdown declaring all the exporting countries and exporters have looked into single market of America, US. And as everybody knows about the Russian and Ukraine, the European market is also very volatile. Definitely because of that, the shrimp farmers were little skeptical of stocking in the beginning of this year, January, but slowly they are coming back for stocking. The prices looks stabilizing and as of now since our company is concentrating more on value-added products, we are able to sell and the margins are quite reasonable. And if you look at the supply and demand, the supply of shrimps for the processing plants is very low now because in the end of ’22, because of the cyclones, sir this is and also the Chinese lockdown different, the farmers were slow in stocking. And so the raw material availability has come down right now. So the farmers are going back to stocking and it’ll stabilize.

Onkar Kulkarni — Shree investments — Analyst

Okay, this is about margins. But what about the revenue front. I mean with all the headwinds you have, what kind revenue you are expecting at least for medium-term given the market conditions.

A. Indra Kumar — Chairman and Managing Director

See, the revenues will be the same as last. Maybe there won’t be much increase. The revenue may be around 5% or 10% more or similar as last year because seeing the world situation, entire world situation we cannot expect much jump in the revenues.

Onkar Kulkarni — Shree investments — Analyst

Here, I’m asking you about overall revenue.

A. Indra Kumar — Chairman and Managing Director

Yeah, overall revenue.

Onkar Kulkarni — Shree investments — Analyst

What seems — most of our customers are long-standing customers and they have the tie-ups. They are in the US, long-time. So we are able to cater to them. They are more consistent buyers. So as far as the demand for the product exports the company is concerned, we do not foresee any big headwinds in the export market as far as the company is concerned. Yeah, but my question was regarding a little bit long-term around two to three years, what kind of revenue you are expecting, given all the headwinds you have.

A. Indra Kumar — Chairman and Managing Director

The company is working on increasing the revenues. That’s why we are expanding the production capacities and also going in for the value-added products and we have to see the market situations and the world situation.

Alluri Nikhilesh — Executive Director

Just to add in on the long-term for two to three years, we are adding in additional capacity to produce more value-added products. And once we do — these kind of value-added products require high feed processing activity because a lot of the preparation is being done in-house, so the consumer can consume the product without much preparation on their side. So that’s the reason why we’re expanding the feed processing capacity. So on two to three years horizon, we have already started taking in new product orders. We have already started shipping out some of these orders but the market needs to develop for these orders and we need to develop the recognition in the market for these kind of product. The trial orders have already started going out, so on two to three years horizon when it becomes fully commercialized, there will higher revenues in this category. We are also — that is for one 2 to 3 categories of value-added products which needs to get into full commercialization. Once they do, we will — you can expect a higher-level of realization from the current level and also an increase in revenue but the quantity could not increase as much the volume. So because we are producing high value products, so the quantity might not increase as much, but the value will increase.

Onkar Kulkarni — Shree investments — Analyst

Can, with the additional capacity commencing lately, very recently, what kind of asset turn you’re expecting on that.

Alluri Nikhilesh — Executive Director

What did you — asset turn?

Onkar Kulkarni — Shree investments — Analyst

Yeah, asset turnover ratio. How much your revenue could increase because of those additional facilities coming.

Alluri Nikhilesh — Executive Director

It’s very hard to put a number to it right now because like I was saying it’s a step-by-step process. It is a new product that we’re introducing into the market. So we need to gain recognition for producing such kind of products. So, I wouldn’t put a number to it right now, but I would say, as per strategy to diversify our product portfolio to enable higher margins and revenues. So, right now. I wouldn’t, I can’t put a number because they are in very early stage of giving the traction.

Onkar Kulkarni — Shree investments — Analyst

Okay, that’s the process. But as far as the feed is concerned, your capacities have gone up, right? You have recently increased our capacity. So on that also how much revenue you can produce with those increased capacity.

A. Indra Kumar — Chairman and Managing Director

We can produce, see, we have increased the capacity of 1,75,000 tonnes. Because of the product mix, the product mix now what has happened, we have to upgrade to the technologies and in the technologies what is required by the customer. So we are gearing up to that and definitely last year in 2022, we could not supply to our customers because we didn’t have capacity. So we have increased the capacity and also due to the product mix, what the product mix what we are trying to do in the market to the current requirement of the customer, we are geared up for all the products what is required whether shrimp culture. In fact, let’s say, for example, earlier we used to supply the starter feed in a crumble form. Now we are doing it in a pellet form. So the productivity will come down, but the growth of the shrimp will be much better with good FCRs. And if the shrimp culture, because of the world scenario the shrimp culture, there’s a little bit apprehension by the farmers which they’re coming out. So as the shrimp culture increases we can increase our revenues.

Onkar Kulkarni — Shree investments — Analyst

So at full capacity utilization, how much more you can — how much more revenue you can generate with the additional capacity.

A. Indra Kumar — Chairman and Managing Director

See, full capacity, we can generate around, I think, 25% more.

Onkar Kulkarni — Shree investments — Analyst

Sorry, I missed the number. I missed the number which you talked about. Can you please tell again.

A. Indra Kumar — Chairman and Managing Director

See, with 25% more on this.

Onkar Kulkarni — Shree investments — Analyst

Okay. Another question which keeps coming back to the management for last say, two to three years is the utilization of cash. And there have been plans about entering into new segments, which haven’t fructified, you haven’t been utilizing cash.

A. Indra Kumar — Chairman and Managing Director

Yeah, Mr. Kulkarni, we have expanded our own generation and we require funds for the working capital. Working capital requirement in this industry is very high.

Operator

Sorry for interrupting you, sir, I request the participants to restrict with two questions in the initial round and join back the queue for more questions.

Onkar Kulkarni — Shree investments — Analyst

Yeah, I’ll join back the queue. But let the management answer the current question at least.

A. Indra Kumar — Chairman and Managing Director

I will say the capacity increase and the market is what we are planning to expand into the new segments they require a lot of study which we are because of the COVID reason or different markets position we have to go carefully.

Onkar Kulkarni — Shree investments — Analyst

So, plans are still on?

A. Indra Kumar — Chairman and Managing Director

Yeah, plans are still on.

Onkar Kulkarni — Shree investments — Analyst

And how much progress has been made about that.

A. Indra Kumar — Chairman and Managing Director

See, please understand. We have to go cautiously. We have to see the market and we have to supply the what is required by the market and when we are diversifying into other products, we need to be very careful and we need to work on success.

Onkar Kulkarni — Shree investments — Analyst

Yes, so that is what I am asking. At what level you are in terms of that.

A. Indra Kumar — Chairman and Managing Director

We are almost say, we can — if the markets are right, we can start the production and supply within six months.

Onkar Kulkarni — Shree investments — Analyst

Okay, all right, thank you. I’ll come back in the queue.

Operator

Thank you sir. Your next question comes from Mr. Vishwanath Shettigar, an Individual Investor. Please go ahead.

Vishwanath Shettigar — — Analyst

Hello, am I audible?

A. Indra Kumar — Chairman and Managing Director

Yes.

Vishwanath Shettigar — — Analyst

Yeah, the first question is that, right now you seem—

A. Indra Kumar — Chairman and Managing Director

Your voice is very low, sir.

Vishwanath Shettigar — — Analyst

The shrimp processing segment contributes somewhere around 2%, 2.5% of the total revenue. So in terms of percentage, what do you feel that the processing segment would contribute, say five years down the line.

A. Indra Kumar — Chairman and Managing Director

No, it’s not 2%, 2.5%. Sir, we are almost 20% of the revenue.

Vishwanath Shettigar — — Analyst

It’s 20% of the revenues?

A. Indra Kumar — Chairman and Managing Director

Yeah.

Vishwanath Shettigar — — Analyst

So in terms of — okay, sorry. Yeah, second thing that as far as the pricing pressure is concerned with regard to increasing shrimp feed price, like you, other players are also having similar issues that you cannot raise the price. Do you feel that when the prices of raw material goes down, there will be a pressure again from government that you need to reduce the price.

A. Indra Kumar — Chairman and Managing Director

So, definitely there will be, you see, we have to see the market, then you have to see the customer and your competitor. First, you have to see the customer and the competitor. We have to carefully see the pricing so that the customer is comfortable and we are able to market our products. So we have competition and we are — have to see the one way because the government also tries to interfere because it’s more of, [Indecipherable] and more of political popularist scheme. So we have to carefully handle all those things.

Vishwanath Shettigar — — Analyst

Okay. And last question is with regards to the falling ROE and ROCE. If you looked at at the company’s ROE and ROCE with very low rise below 10, right? So you need to work something around on that thing because it is basically below cost of capital right now.

C. Ramachandra Rao — Joint Managing Director

Yeah, because as we explained to you the activity, what you say ROE depend on the revenue that we get and the expenditure and net profits that we are going. PBT and this one. So unless they automatically once they improve, it also improves. So I think we have to bear with this. Unless you have a high better opportunities, we cannot go for any investment to get a better ROE and ROCE.

Vishwanath Shettigar — — Analyst

So what is the management viewpoint, with regards to long-term ROE. Where they want to be,say 5 years or 10 years down the line.

A. Indra Kumar — Chairman and Managing Director

If you take in the segment of shrimp processing, we are working out on the value addition, higher values addition products and where you’re adding value to the products. And we get higher margins. And in the shrimp feed, we are also trying to bring — working out. See, there are lot of research has to be, it’s being done to reduce the cost of production, how it comes to and improve the FCR.

Vishwanath Shettigar — — Analyst

And sorry, again, the last question with regards to hatchery, I have seen that you started with hatchery. What’s the way forward on that front.

A. Indra Kumar — Chairman and Managing Director

Yeah, the hatchery business has started to provide the shrimp farmer and best quality, good quality seed and see, the hatchery capacity is not compared to the industry standards. We have just started it. And we have started, by the time we got permission and all these things we tried to long tie. And we have — the hatchery business would be around, we can scale it up to one billion capacity, which the revenue would be around approximately around INR30 crores.

Vishwanath Shettigar — — Analyst

Okay. That’s it from my side.

Operator

Thank you sir. I request the participants to restrict with two questions in the initial round and join back the queue for more questions. The next question comes from Rahil Shah from Crown Capital. Please go ahead. Mr Rahil Shah, please go ahead.

Rahil Shah — Crown Capital — Analyst

Hi. My questions has kind of been answered on the guidance for the next year. So, thank you.

Operator

Thank you sir. The next question comes from Jasdeep Walia from Clockvine. Please go ahead.

Jasdeep Walia — Clockvine Capital — Analyst

Hi, thanks for taking my question. Sir, we understand there is a demand issue on account of higher inventory in US. But let’s say if the demand were to come back, are there any issues with constrained production in India. For example, we have been hearing that there is lot of disease issue with the shrimp. On account of which the farmers have not been able to scale up production even if they want. So, I just wanted your comments on that.

A. Indra Kumar — Chairman and Managing Director

No, no. Please come back again. Your voice is not clear and please speak slowly because we could not understand your question.

Jasdeep Walia — Clockvine Capital — Analyst

Sure sir. Sir, I understand that there is a demand issue right now on account of higher inventories in US but let’s say if the demand were to come back, are there any other issues in India, which are constraining production. For example, we have been hearing that there is lot of disease issue in India on account of which farmers may not be able to scale up production, let’s say, if the demand were to come back. I’m just wondering that–

A. Indra Kumar — Chairman and Managing Director

That is not right. If the demand is there and the price is there, India can scale up production.

Jasdeep Walia — Clockvine Capital — Analyst

Got it, but there is no broader issue with regards to disease controlling disease–

A. Indra Kumar — Chairman and Managing Director

Disease is there but the disease management also is there.

Jasdeep Walia — Clockvine Capital — Analyst

Got it. Got it, thanks a lot sir, that’s all.

Operator

Thank you, sir. The next question comes from Runav Shah from Equitas. Please go ahead.

Runav Shah — Equitas — Analyst

Yes, sir, thanks for the opportunity. So my questions are regarding two things. First is what what is the current capacity utilization of our existing feed and processing plant.

A. Indra Kumar — Chairman and Managing Director

Feed plant, we were — we were utilizing around 98%. And now with the expanded capacity, we are almost we are — because just now the season has started, we are at around 80%. Just because the season has started. If you talk about today, the season has just started. Stocking has just started. We are working on an 80% capacity and as days pass by, the stockings happen much more, we may touch around 90%, 95%.

Runav Shah — Equitas — Analyst

Okay sir, and for processing.

A. Indra Kumar — Chairman and Managing Director

And the processing, we are operating at around 60% to 65% because we are concentrating more on value-added products. See, when the value-added products, see, the capacity there, but doing value-addition is the major, it’s human, actually it is not machine-made, it is a human cut and all these things. Because of the capacity, because the customers want human-like man cut. The process is either you can do by machine or by hand. They want hand-made, manual. So, the capacity would not be, we cannot touch 90% or something because it is manual, human factor. Because of value-addition. If it is a bulk, if it is a commodity side, we can touch around 80% to 90%, but it is a value-addition, we are not able to — we have to we are able to do around 60% to 65%.

Runav Shah — Equitas — Analyst

Okay, sir, Got it and sir, in terms of processing dividend what is the benefit in terms of if we are saying that we are focusing on the value-added products, how it benefits in terms of the realization. So what is the incremental realization by which we can get from the value-added products and what is the current proportion of the value-added products in the process of exports.

A. Indra Kumar — Chairman and Managing Director

Nikhilesh, are you answering?

Runav Shah — Equitas — Analyst

Yes, sir. I have two questions in this–

A. Indra Kumar — Chairman and Managing Director

No, I am asking my ED.

Alluri Nikhilesh — Executive Director

Could you repeat?

Runav Shah — Equitas — Analyst

Yes, sir. So, what is the current proportion of value-added products in our exports and processing division. And the second is, what is the incremental realization which we can get from the value-added products from the normal exports.

Alluri Nikhilesh — Executive Director

Muthyam, could you given the breakup of what is the percentage of value-added exports.

A. Indra Kumar — Chairman and Managing Director

It is around 24% to 25% of the value-added.

Alluri Nikhilesh — Executive Director

Okay, out of the total export about 25% is value-add. On a regular day, today we’re facing kind of price pressure but it should develop. I think we’ve reached the bottom of the pricing pressure and it should start increasing from now. We can expect double digit margin on the value-added products and commodities high single-digit margin.

A. Indra Kumar — Chairman and Managing Director

For you to understand a little bit more. See, earlier what we were doing value-added has become a commodity now. PDTO and PD, butterfly and all, earlier they were value-added. Now, they have become commodity and we have gone into higher products like cooked rings and all these things. Now, they are called value-added. So we are taking the, see, the newest products as value addition. The ones which are which were earlier called value-added, we have taken into commodity grade. In shrimp exports, there are different thing headless shell-on is the commodity product. And further value-added the validated the re-wheeling and de-shelling and all these things are supposed to be value added. Now, we are not taking as a value added product for that. We are taking higher product like the cooked products or different that are value added.

Runav Shah — Equitas — Analyst

Got got it, sir, and sir, last question from my end. So, in earlier quarters the US-FDA case at the time, we have created the provision and at that time, there was incremental 80 million of provisions. So are we expecting any reversal of that in upcoming quarters?

C. Ramachandra Rao — Joint Managing Director

Can you please come back. Please repeat the question.

Runav Shah — Equitas — Analyst

Yeah, sir, so in earlier quarters for the US-FDA issue, we have created some provisioning in the books of accounts. And at that time, we have on safer side created 80 millions, around 80 million of incremental provision. So are we expecting any reversal of the same in upcoming quarters.

C. Ramachandra Rao — Joint Managing Director

Exactly reversal means, what we are doing is depending upon the claims received from time-to-time during a particular quarter, we are making the provision. That particular quarter, if you have any additional claims, we make a provision for that. And when the claims are settled, we take that as the expenditure from the provision. So what we do now it has almost come to almost zero level now. It will be not much hereafter. So what we are intending to do is by 31st March, we will close all the claims that have been received so far and how much the settlement is there. Whatever if there is an excess provision, it will be written back or if it is shortfall we will provide further and close it. By 31st March we should be able to get the total liability which we have incurred on account of the recall. That we will be able to do it by end of this year, but we do not foresee any much increase hereafter. Almost all the claims, we hope that has been received already.

Runav Shah — Equitas — Analyst

Okay, got it, got it, thank you so much.

Operator

Thank you sir. The next question comes from Saket Kapoor from Kapoor Company. Please go ahead.

Saket Kapoor — Kapoor Company — Analyst

Yeah, Namashkar, sir. Sir, if you could explain to us firstly the seasonality factor in the business. How do the multi-factor plays.

A. Indra Kumar — Chairman and Managing Director

Sir, shrimp culture if you take a calendar year, shrimp farmers start stocking after Pongal, Pongal or Sankranti or because shrimp culture in the cold climate, the metabolism of shrimp doesn’t work. So actually it is seasonal. After Pongal, after January 15th or 16th, they prepare the ponds and from after the 20th of January some people gradual pick they stock. That goes on up to March, end of March, because the temperature rise, the higher the temperature it is good for the shrimp. The first stock gets over. The people who stocked in January, they harvest in April, people like that, it goes on. The first stock gets over by June. And the second crop starts by again in again, June, because people who harvested in May they stock in June. There are two crops. One is January to April or depending on the stockings. Second crop is from June-July to September-October. This is the pattern of the shrimp culture. Hope your question is answered.

Saket Kapoor — Kapoor Company — Analyst

Yes, sir. Sir. In your opening remarks you did mention about the vagaries of the raw material prices also with wheat prices. And then other than fluctuating prices. So if you could give us some more color of what constitutes the raw materials.

A. Indra Kumar — Chairman and Managing Director

Raw material is fish meal, soya, soya meal, wheat flour and we have different almost 20, 21 varieties of raw material. So minute and major. The major are fish meal, soya meal and wheat flour.

Saket Kapoor — Kapoor Company — Analyst

When we take this fish meal as a major consequent why have we not looked at backward integration in terms of developing our own fish meal and therefore removing the element of — I think that other players in the same segment are coming up with this idea that they are also into the trading aspect into it. So what is our thought in terms of fish meal as an–

A. Indra Kumar — Chairman and Managing Director

Fish meal is done from the marine fish which is available on the west coast of India. See, the fish meal companies are majorly, they specialize in their product. So we cannot do everything. Fish meal business itself is a big activity which deals with the fishermen community and lot of concentration and there is lot of this thing is acquired, so they’re specialized.

Operator

Thank you sir. In terms of time consuming, we are taking two questions per participant. We have a follow-up question from Onkar Kulkarni from Shree investments. Please go ahead.

Onkar Kulkarni — Shree investments — Analyst

So if you recall 8, 10 years back there was Vannamei shrimp, which were introduced and that was a game changer for Avanti as well as for the overall industry. I mean, any such opportunity rising in the future or that was just a one-off.

A. Indra Kumar — Chairman and Managing Director

See, there is lot of research and a lot of innovation is going on. So today, Vannamei earlier our net [Phonetic] use species was Black Tiger. So, the Black Tiger there was wild seed which were used earlier. Now, SPF seed for Black Tiger is being produced. So, the Black Tiger is also coming back into the picture along with Vannamei because Vannamei has been successful because that specific pathogen-free Vannamei was available, the success rate was very high. Now, the specific pathogen free Black Tiger seed is also being available because the technology they’ve developed the seed. And now it is available and some farmers are going for that also. And there a lot of work has been done for low shrimp and different types of shrimp. That has to come into the commercial viability.

Onkar Kulkarni — Shree investments — Analyst

Okay, but there is no immediate or let’s say within a year, there is nothing which is happening or on the cards.

A. Indra Kumar — Chairman and Managing Director

A lot of work is going, sir, which I cannot or anybody cannot tell when it is coming, tomorrow or within one year. But Black Tiger SPF has come in.

Onkar Kulkarni — Shree investments — Analyst

Okay, can you just—

A. Indra Kumar — Chairman and Managing Director

SPF seed is available. It has come in, already people have started stocking SPF for Black Tiger seed. It took almost 10 years for them to develop it.

Onkar Kulkarni — Shree investments — Analyst

Okay. Can you just let me know what was the cash in the company’s balance sheet as of 31st December.

C. Ramachandra Rao — Joint Managing Director

We have about INR1100 crores.

Onkar Kulkarni — Shree investments — Analyst

You said majority of that you require for the working capital. I mean, may I know how much percentage of that is required generally, like every year.

A. Indra Kumar — Chairman and Managing Director

It is seasonal, see, as we answered earlier, this is a seasonal business. In the peak season, we would be requiring around INR700 crores to INR800 crores.

Onkar Kulkarni — Shree investments — Analyst

How much? INR700 crores to INR800 crores.

A. Indra Kumar — Chairman and Managing Director

INR700 crores to INR800 crores or sometimes INR900 crores because the availability of raw material, we have to book the raw materials seeing the prices and all these things. These things we have to look and keep the stock and keep depending on the — because all this — availability of fish meal or availability of soya, they are seasonal. We have to cover those and before the prices go up, we have to buy all the things.

C. Ramachandra Rao — Joint Managing Director

May I add something what CMD said that by using these funds, we are in a much better advantageous position compared to going for bank borrowing because, so one thing is that we are able to pay our raw material suppliers immediately within three to four days of receiving the product and quality control is cleared. So this has given us a lot of advantage in price trend to bargain for good price. That is one advantage we are getting. Similarly, in the season, what happens is, apart from the raw material required for example now January-February-March the year end what we do is we credit this discounts to our dealers. So the cash rotation is less in these two three months when we use these funds for all our raw materials. So we procure the raw materials by paying from these funds. So if you compare really speaking, if you look at the returns today because of the FD rates have gone up and same time, the borrowing cost has also gone up. If you were to use this, it will be disadvantaged if you use borrowed funds. So, we use the same funds for this working capital requirements. This is in fact this is advantage to the company and the shareholders also. We are able to maintain the costs particularly interest costs, which are almost negligible. So this entire amount, it depends upon throughout the year. Maybe a couple of months, we have some surplus but that does not mean that we have got lot of cash surplus for a longer period. It was a short period in almost nine months in the year we require these funds.

A. Indra Kumar — Chairman and Managing Director

It is a rotation, I think it is a very seasonal items. When the crop of soya comes we have to go keep purchasing and all these things. So the money is just mostly for the working capital.

C. Ramachandra Rao — Joint Managing Director

In October, November we get soya bean meal. In March-April, you get wheat flour. See, sometimes there is fishing ban for fish meal. At a time like this, every year they will have their own calendar. We have to managed to keep the stocks.

Operator

Thank you sir. That will be the last question for the day. Ladies and gentlemen, we would like to come to the end of this conference. On behalf of KFin Technologies Limited, we would like to thank the entire team of Avanti Seeds 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. Vivek Jain of FinTech at vivek.jain@kfintech.com. [Operator Closing Remarks]