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CMP Target Price Stock Info Market Cap (`cr) Beta 52 week High / Low Avg. Daily Volume (6m) Face Value (`) Sensex/ Nifty Shares outstanding (cr) Shareholding Pattern (%) ` 395 ` 826 VENK.BO / WH IN 371 0.8 757 / 363 68,720 10.00 17,486/5,323 0.94
Investment Rationale:
The demand for chicken continues to grow at a robust 15-18% per annum Venkys is one of the largest poultry producers in the country and is well equipped to cater to this growing demand Venkys is an excellent play on Indias 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 Venkys poultry business Industry vulnerable to spread of disease & resultant consumer averseness Indian Promoters Foreign Promoters FII DII Public FY 2010 705 24 54 160 13 58 30 30 7 1.8 0.6 5 FY 2011 852 21 73 34 13 78 30 31 5 1.4 0.6 4 FY 2012E 998 17 32 -56 6 34 11 14 12 1.2 0.5 8 FY 2013E 1194 20 76 137 10 80 23 25 5 1.0 0.4 4 FY2014E 1435 20 111 47 12 118 27 31 3 0.8 0.3 3 ABS(%) Sensex Venkys 3m 11 -4 1yr -10 -38 3yr 62 365 56.12 0.00 0.86 3.69 39.33
Key Financials:
Y/E March (`cr) Net Sales % Chg Net Profit % Chg EBIDTA (%) EPS (Rs) RoE (%) RoCE(%) P/E (x) P/BV (x) EV/Sales (x) EV/EBIDTA (x)
Research: Shalini Gupta Tel: +91 22 61925335 shalinig@eisec.com Sales: Sanjeev Mohta Tel: +91 22 61925310 sanjeevm@eisec.com
April 2012
One Day Old Broiler Breeder Parents are bought from Venco Research*
Turnover Breakup(%)
Parent chicks are reared in farms Female parents are artificially inseminated to get eggs These eggs are hatched in incubators
10% 11% 9% 9% 16% 18%
Misc Grown Up Layers SPF Eggs Animal Health De-oiled cakes Refined Oil Feed Processed Chicken Grown Up Broilers Grown Up Parents Day Old Chicks
4% 1% 3%
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
Excess supply and high input prices negatively impacting this sector
Excess supply broiler prices has softened Due to an oversupply, broiler prices have been stable to declining, albeit the recent uptrend.
Driven by aggressive minimum support price increases announced by the government, maize prices remain firm Price of maize remains firm MSP for Maize over the years `/100 kg 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 980 840 840 620 620 540 540 % inc 17 0 35 0 15 0 Source: EISEC Research
Source : MCX Website
April 2012
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 Venkys sources from Venco Research) have a life of 68 weeks. Depending upon the supply side dynamics, Venkys & 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.
Venkys RM to sales & margin data clearly indicate that the oversupply situation has been hurting Venkys 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 Venkys within two quarters.
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
Investment Case
Poultry industry looks interesting from an investment perspective as Indians are consuming more of high value food items An excellent play on Indias demographic & consumption growth story as rising affluence is leading to more consumption of high value food items. Venkys 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.
Comparative Valuation
The only listed comparable is Srinivasa Hatcheries though it is a much smaller player as compared to Venkys. Sales OPM(%) EPS ROCE(%) ROE(%) MCap P/E Mktcap/Sales EV/EBIDTA Price FY13 (` cr)
Srinivasa Gr (%) Venkys Gr (%) 154 17 1194 20 10% 15% 16 58 80 137 25% 23% 371 5 0.3 4 395 37% 26% 65 4 0.4 3 67
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
Key Financials
YE March (`Cr) Total Revenues Gr % EBIDTA Gr % Net Profit Gr % Tot Equity/Tot Cap employed Total Debt/Total Cap Employed Total Capital Employed Gr % Gross Block Gr % Investments Source: Company, EISEC estimates FY09 569 9 42 -22 21 -23 59% 36% 264 0 197 4 52 FY10 705 24 91 119 54 164 66% 29% 311 18 211 7 81 FY11 852 21 113 24 73 34 68% 28% 404 30 248 17 93 FY12E 998 17 60 -47 32 -56 67% 30% 449 11 301 22 103 FY13E 1194 20 122 104 76 137 69% 30% 535 19 355 18 117 FY14E 1435 20 172 40 111 47 81% 19% 579 8 365 3 123
April 2012
-5 10 -1 4 2 9 11
13 15 29 4 -2 11 9
35 51 11 5 5 8 13
8 29 10 3 10 13 23
16 54 14 11 14 23 37
32 10 6 12 9 37 46
April 2012
Valuation Ratios
YE March P/E (x) P/CEPS (x) P/BV (x) EV/EBIDTA (x) EV/Sales (x) Market Cap/Sales (x) Net Cash/Market Cap (%) Dividend Yeild (%) Source: Company, EISEC estimates FY09 18 13 2 11 0.8 0.7 3% 1% FY10 7 6 2 5 0.6 0.5 2% 1% FY11 5 5 1 4 0.6 0.4 4% 1% FY12E 12 9 1 8 0.5 0.4 6% 1% FY13E 5 4 1 4 0.4 0.3 10% 3% FY14E 3 3 1 3 0.3 0.3 12% 3%
Enterprise Value
YE March (`Cr) Price (Rs.) No. of shares (cr) Market Cap Total Debt Cash Enterprise Value Source: Company, EISEC estimates 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. FY09 395 0.9 371 94 11 454 FY10 395 0.9 371 90 8 452 FY11 395 0.9 371 115 13 472 FY12E 395 0.9 371 137 23 484 FY13E 395 0.9 371 163 37 496 FY14E 395 0.9 371 113 46 437
April 2012