Venky s India Ltd. A hen that will lay golden eggs Venky s is an integrated player in the poultry business. Venky s rears chicken which is sold as live birds to distributors and which are finally sold as chicken meat. 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 to improve. Markets in their wisdom generally price events well in advance. With demand for broilers continuing to grow at 15-18%, the stock is trading cheap at 5X FY13 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 3 P/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 Source: Company, EISEC research BUY CMP ` 395 Target 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 Gupta Tel: +91 22 61925335 shalinig@eisec.com Sales: Sanjeev Mohta Tel: +91 22 61925310 sanjeevm@eisec.com April 2012 1
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 One Day Old Broiler Breeder Parents are bought from Venco Research* Turnover Breakup(%) Misc 4% Grown Up Layers 1% SPF Eggs 3% Animal Health 10% De-oiled cakes 11% Refined Oil 9% Feed 9% Processed Chicken 16% Grown Up Broilers 18% Grown Up Parents 0% Day Old Chicks 19% 0% 5% 10% 15% 20% Parent chicks are reared in farms Female parents are artificially inseminated to get eggs These eggs are hatched in incubators Chicks coming out of these eggs are called commercial chicks These are then sold to various commercial poultry farmers 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 *Venco Research & Breeding Farm Pvt Ltd is a VH Group JV with Cobb Vantress Inc., USA. April 2012 2
Excess supply broiler prices has softened 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. Broiler Prices (`/kg) at Mahua, a big wholesale market 80 70 60 50 40 Source: EISEC Research Source : www.papaak.com Price of maize remains firm 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 - Driven by aggressive minimum support price increases announced by the government, maize prices remain firm Spot Maize Prices in `/100 kg 1200 1000 800 600 Source: EISEC Research Source : MCX Website Source: EISEC Research This has put margins under pressure: Pressure on margins 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 RM/Sales (%) 64% 62% 60% 65% 66% 65% 70% 68% 69% OPM(%) 13% 18% 19% 11% 11% 11% 7% 8% 3% April 2012 3
What can change? Supply Dynamics - oversupply will likely get corrected in 2 quarters We believe that the supply dynamics will begin to improve in next 6 months 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. 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 4
Poultry industry looks interesting from an investment perspective as Indians are consuming more of high value food items 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 FY12 ii) debt and cash have been taken at their 9MFY12 levels for Srinivasa April 2012 5
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 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 94 134 EBIDTA (%) 7 13 13 6 10 12 NPM (%) 4 8 9 3 6 8 Tax / 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 6
Cash Flow Analysis YE March (`Cr) FY09 FY10 FY11 FY12E FY13E FY14E Sources of Funds Cash from Operations 27 63 83 38 84 120 Add : Loans (repaid)/ raised -16-4 25 22 25-51 Add : Equity Raised 0 0 0 0 0 0 Uses of Funds Less : 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 6 Less :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 YE March FY09 FY10 FY11 FY12E FY13E FY14E 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% April 2012 7
Valuation Ratios YE March FY09 FY10 FY11 FY12E FY13E FY14E 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 1 EV/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 0.3 Net Cash/Market Cap (%) 3% 2% 4% 6% 10% 12% Dividend Yeild (%) 1% 1% 1% 1% 3% 3% Enterprise Value YE March (`Cr) FY09 FY10 FY11 FY12E FY13E FY14E Price (Rs.) 395 395 395 395 395 395 No. of shares (cr) 0.9 0.9 0.9 0.9 0.9 0.9 Market 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 expressed are 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. April 2012 8