Venky's Ltd_Eisec_Research_April'12.pdf

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April 2012 1

Venky’s India Ltd || Initiating Coverage

Source: Company, EISEC research

Venky’s is an integrated player in the poultry business. Venky’s rears chickenwhich is sold as live birds to distributors and which are finally sold as chickenmeat. Broiler meat business is a cyclical industry and for the last 18 months,broiler & Day Old Chick prices have been constrained, due to an oversupply.However, we believe that in the next 6 months, the supply dynamics will begin toimprove. Markets in their wisdom generally price events well in advance. Withdemand for broilers continuing to grow at 15-18%, the stock is trading cheap at 5XFY13 for its many merits. We initiate coverage with a BUY recommendation.

Investment Rationale:

• The demand for chicken continues to grow at a robust 15-18% per annum• Venky’s is one of the largest poultry producers in the country and is well

equipped to cater to this growing demand

• Venky’s is an excellent play on India’s demographic & consumption story

Key Risks:

• Supply overhang takes longer than anticipated to adjust

• The government remains extremely aggressive in pricing maize which is a key

raw material (~70% of RMC ) for Venky’s poultry business

• Industry vulnerable to spread of disease & resultant consumer averseness

Key Financials:

Y/E March (`cr) FY 2010 FY 2011 FY 2012E FY 2013E FY2014E

Net Sales 705 852 998 1194 1435

% Chg 24 21 17 20 20

Net Profit 54 73 32 76 111

% Chg 160 34 -56 137 47

EBIDTA (%) 13 13 6 10 12

EPS (Rs) 58 78 34 80 118

RoE (%) 30 30 11 23 27

RoCE(%) 30 31 14 25 31

P/E (x) 7 5 12 5 3P/BV (x) 1.8 1.4 1.2 1.0 0.8

EV/Sales (x) 0.6 0.6 0.5 0.4 0.3

EV/EBIDTA (x) 5 4 8 4 3

Venky’s India Ltd.

A hen that will lay golden eggs

BUY

CMP ` 395Target Price ` 826

Stock Info VENK.BO / WH IN

Market Cap ( ` cr) 371

Beta 0.8

52 week High / Low 757 / 363

Avg. Daily Volume (6m) 68,720

Face Value ( ` ) 10.00

Sensex/ Nifty 17,486/5,323

Shares outstanding (cr) 0.94

Shareholding Pattern (%)

Indian Promoters 56.12

Foreign Promoters 0.00

FII 0.86

DII 3.69

Public 39.33

ABS(%) 3m 1yr 3yr

Sensex 11 -10 62

Venky’s -4 -38 365

Research:Shalini GuptaTel: +91 22 [email protected]

Sales:Sanjeev MohtaTel: +91 22 61925310

[email protected]



April 2012 2


What Venky’s does • Venky’s rears chicken which are then sold as live birds. These live birds

are sold as chicken meat in retail meat shops. Some of the birds are sold

to fast food chains in the format prescribed by them. Poultry accounts

for 57% of Venky’s revenue.

• Venky’s also makes chicken feed for sale as well as for internal

consumption. Soya Oil and de-oiled cakes are by-products of chicken

feed manufacturing. Venky’s also manufactures medicines for chicken

for its own use and sales. These are ancillary activities for Venky’s and all

these together account for 39% of total revenue.

• Other activities for Venky’s include SPF eggs (used for - making vaccines

and research laboratories) and selling grown commercial layers - chicken

that lay eggs only. This accounts for 4% of Venky’s revenue. Venky’s in

the only company in Asia which produces SPF eggs.

Venky’s Business Model

*Venco Research & Breeding Farm Pvt Ltd is a VH Group JV with Cobb Vantress Inc., USA.

One Day Old Broiler Breeder Parents are boughtfrom Venco Research*

Parent chicks are reared in farms

Female parents are artificially inseminated to geteggs

These eggs are hatched in incubators

Chicks coming out of these eggs are calledcommercial chicks

These are then sold to various commercial poultryfarmers and integrators...

...who then grow the commercial chicks in their

own/ contract farms

Once the commercial chicks are 40-45 days old,they are sold as broiler birds for meat

19%

0%

18%

16%

9%

9%

11%

10%

3%

1%

4%

0% 5% 10%15%20%

Day Old Chicks

Grown Up Parents

Grown Up Broilers

Processed Chicken

Feed

Refined Oil

De-oiled cakes

Animal Health

SPF Eggs

Grown Up Layers

Misc

Turnover Breakup(%)



April 2012 3


Excess supply and high input prices negatively impacting this sector

Due to an oversupply, broiler prices have been stable to declining, albeit

the recent uptrend.

Source: EISEC Research

Driven by aggressive minimum support price increases announced by thegovernment, maize prices remain firm


This has put margins under pressure:

Excess supply has softened

broiler prices

40

50

60

70

80

Broiler Prices (`/kg) at Mahua, a big wholesale market

Price of maize remains firm Spot Maize Prices in `/100 kg

600

800

1000

1200

MSP for Maize over the years

` /100 kg % inc

2011-12 980 17

2010-11 840 0

2009-10 840 35

2008-09 620 0

2007-08 620 15

2006-07 540 0

2005-06 540 -


Pressure on margins

3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12RM/Sales (%) 64% 62% 60% 65% 66% 65% 70% 68% 69%

OPM(%) 13% 18% 19% 11% 11% 11% 7% 8% 3%

Source : MCX Website

Source : www.papaak.com



April 2012 4


What can change?

Supply Dynamics - oversupply will likely get corrected in 2 quarters

• The Day Old Broiler Breeder Parent Chicks (which Venky’s sources

from Venco Research) have a life of 68 weeks.

• Depending upon the supply side dynamics, Venky’s & other players

adjust their orders for the coming year.

• Additionally, in case of an oversupply, farmers have the option to

incubate lesser number of eggs of the parent.

• This brings about a natural adjustment of the oversupply situation.

Venky’s RM to sales & margin data clearly indicate that the oversupply

situation has been hurting Venky’s since 2QFY11.

We believe that the broiler meat industry is near the cusp of the turnaround

and the worst of the oversupply situation is already behind and supply

dynamics should start looking up for Venky’s within two quarters.

However, maize prices will continue to rule firm

We believe that with the government’s endeavour to improve the outlook

for agriculture, MSPs going up is a given.

The robust demand growth of 15-18% will help offset RM price inflation as

pricing power will return once the supply dynamics improve, as discussed

above.

We believe that the supply

dynamics will begin to improve

in next 6 months

Why maize is so critical for the poultry industry

Maize constitutes 70% of feed given to chicken. The rest is protein, mainly, soya bean. So far, companies

have not been able to substitute maize with other carbohydrates such as rice or wheat. Market sources

tell us that ~50% of all maize produced is consumed by the poultry industry and a large part of the rest

by the glucose and starch industry. Also, maize prices have been going up largely driven by robust

demand for poultry.



April 2012 5


Investment Case

An excellent play on India’s demographic & consumption growth story as

rising affluence is leading to more consumption of high value food items.

• Venky’s has all the strengths required to succeed in the business:

o Assured sourcing of parent chicks from group company

o Good understanding of poultry medicines

o Robust veterinary practices in place set over the last 35 yrs

o A good distribution network

o And most importantly a vast land bank in northern and western

states.

• Broilers are commoditised products because no single producer can

influence prices and all are price takers. Yet the industry is interesting as it

is growing at a very high rate and by the looks of it will continue to do so.

• Raw material cost inflation is a concern but we believe that robust

growth in poultry demand will ensure pricing power. • We believe that in just about 6 months, the excess supply will begin to

clear. We therefore recommend investors to buy the stock at current

valuation of 5X FY13 earnings.

Risk to our call

Supply overhang takes longer than anticipated to adjust

• The government remains extremely aggressive in pricing maize which is

a key raw material (~70% of RMC) for Venky’s poultry business

• Industry vulnerable to spread of disease & resultant consumer

averseness

Comparative Valuation

The only listed comparable is Srinivasa Hatcheries though it is a much smaller player as compared to Venky’s.

FY13 ( ` cr) Sales OPM(%) EPS ROCE(%) ROE(%) MCap P/E Mktcap/Sales EV/EBIDTA Price

Srinivasa 154 15% 16 37% 26% 65 4 0.4 3 67

Gr (%) 17 58

Venky’s 1194 10% 80 25% 23% 371 5 0.3 4 395

Gr (%) 20 137

N.B: We do not have coverage of Srinivasa Hatcheries. For the purpose of this comparison, we have:

i) broadly projected the sales, OPM & EPS for FY13 & for FY12ii) debt and cash have been taken at their 9MFY12 levels for Srinivasa

Poultry industry looks

interesting from aninvestment perspective

as Indians are consuming

more of high value food

items



April 2012 6


Key Financials

YE March (`Cr) FY09 FY10 FY11 FY12E FY13E FY14E

Total Revenues 569 705 852 998 1194 1435

Gr % 9 24 21 17 20 20

EBIDTA 42 91 113 60 122 172

Gr % -22 119 24 -47 104 40

Net Profit 21 54 73 32 76 111

Gr % -23 164 34 -56 137 47

Tot Equity/Tot Cap employed 59% 66% 68% 67% 69% 81%

Total Debt/Total Cap Employed 36% 29% 28% 30% 30% 19%

Total Capital Employed 264 311 404 449 535 579

Gr % 0 18 30 11 19 8

Gross Block 197 211 248 301 355 365

Gr % 4 7 17 22 18 3

Investments 52 81 93 103 117 123

Source: Company, EISEC estimates

Key Operating Ratios

YE March FY09 FY10 FY11 FY12E FY13E FY14E

Diluted EPS ( ` ) 22 58 78 34 80 118

Gr % -23 164 34 -56 137 47

CEPS ( ` ) 31 67 88 46 94 134EBIDTA (%) 7 13 13 6 10 12

NPM (%) 4 8 9 3 6 8Tax / PBT (%) 34 34 32 32 32 32

RoE (%) 14% 30% 30% 11% 23% 27%RoCE (%) 15% 30% 31% 14% 25% 31%

Fixed Asset Turnover (x) 3 3 3 3 3 4

Book Value per Share (Rs.) 167 220 292 322 391 496

Debt/ Equity (x) 0.6 0.4 0.4 0.5 0.4 0.2

Dividend Payout Ratio (%) 16% 7% 6% 9% 12% 9%




April 2012 7


Cash Flow Analysis


Sources of Funds

Cash from Operations 27 63 83 38 84 120

Add : Loans (repaid)/ raised -16 -4 25 22 25 -51Add : Equity Raised 0 0 0 0 0 0

Uses of FundsLess : Inc / (Dec)in WC -5 13 35 8 16 32

Less: Capex 10 15 51 29 54 10

Less : (Inc)/Dec in investments -1 29 11 10 14 6Less :Dividend paid 4 4 5 3 11 12

Cash Generated 2 -2 5 10 14 9

Add prev yr Cash Balance 9 11 8 13 23 37

Closing Cash 11 9 13 23 37 46


Common Sized Profit & Loss Account


Total Revenues 100% 100% 100% 100% 100% 100%

Raw Material Consumed 69% 66% 64% 69% 66% 66%

Power & Fuel 4% 4% 3% 4% 4% 4%

Personnel 7% 6% 7% 7% 7% 8%

Other Expenses 13% 12% 13% 14% 13% 11%

EBIDTA 7% 13% 13% 6% 10% 12%Depreciation & amortisation 2% 1% 1% 1% 1% 1%Interest Paid 1% 1% 1% 1% 1% 1%

Non-Operating Income 1% 1% 1% 1% 1% 1%

Extraordinary Expense 0% 0% 0% 0% 0% 0%

Profit Before Tax 6% 12% 13% 5% 9% 11%Tax 2% 4% 4% 2% 3% 4%

Net Profit 4% 8% 9% 3% 6% 8%

Cash Profit 5% 9% 10% 4% 7% 9%Source: Company, EISEC estimates



April 2012 8


Valuation Ratios


P/E (x) 18 7 5 12 5 3

P/CEPS (x) 13 6 5 9 4 3

P/BV (x) 2 2 1 1 1 1EV/EBIDTA (x) 11 5 4 8 4 3

EV/Sales (x) 0.8 0.6 0.6 0.5 0.4 0.3

Market Cap/Sales (x) 0.7 0.5 0.4 0.4 0.3 0.3Net Cash/Market Cap (%) 3% 2% 4% 6% 10% 12%

Dividend Yeild (%) 1% 1% 1% 1% 3% 3%


Enterprise Value


Price (Rs.) 395 395 395 395 395 395

No. of shares (cr) 0.9 0.9 0.9 0.9 0.9 0.9Market Cap 371 371 371 371 371 371

Total Debt 94 90 115 137 163 113

Cash 11 8 13 23 37 46

Enterprise Value 454 452 472 484 496 437


Disclaimer:

This document has been prepared by the investment research department of East India Securities Limited (EISEC),

for the purpose of information only. This document is not to be reproduced, copied, redistributed or published or

made available to others, in whole or in part without prior permission from EISEC. This document should not be

construed as a solicitation, to any person, to buy or sell a security. Recipients of this document should be aware

that past performance is not necessarily a guide for future performance. Although the information contained in

this document has been obtained from reliable sources, its accuracy or completeness has not been fully verified by

EISEC independently and cannot be guaranteed. Neither EISEC nor any of its affiliates, its directors or its

employees accepts any responsibility, of any nature, for the information, statements and opinion given or

expressed herein or for any omission or for any liability arising from the use of this document. Opinions expressedare our current opinions as of the date appearing on this material and are subject to change without notice. EISEC

directors, employees and its clients may have holdings in the stocks mentioned in the report.

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Venky's Ltd_Eisec_Research_April'12.pdf