Update and call summary on Venkey's India

Just like the Camlin Dhamaka or the battery party at Exide or the colorful profits in Asahi Songwon Colors and many other such wonderful scripts, I had predicted the sharp rise and near doubling of Venkys India and given a call to buy Venkys at 472 on July 1st and again on July 16th at 524. Apart from the detailed research report (see below), I had written: "This is a re-rating stock. With a rare and unique business model that has a high chance of profit growth and organic and inorganic expansions.". No other analyst had given a call on this script at that time, at least till July 1. Venkys touched 901 today, nearly doubling in 2 months.

 

Below is the original report. You can book 50% profits now and continue to hold the balance stock in your long term portfolio.

 

REPORT ON VENKYS INDIA (NSECODE: VENKEYS)

 

SUMMARY: BUY at CMP 472 for a 12 month CONSERVATIVE target of 725 (+53%)

Venky's India is part of the Rs 13bn Venkateshwara Hatcheries (VH) group, one of the largest and fully integrated poultry groups in India. It is among the best global small companies (by Forbes) with strong brand equity and a pan-India presence. The company was incorporated on 1st July 1976 as a private Ltd. company and was converted into a Public Ltd. company on 12th December 1988. In year 2000, the Registrar of Companies of Andhra Pradesh approved the change of name of Western Hatcheries Ltd to Venky's (India) Ltd.

It has three integrated business divisions: poultry & poultry products, animal health products and solvent extraction. The poultry business is the company's core business and contributes up to 65% of total revenue. The company is engaged in Poultry Breeding & Farming & also in the manufacture of Animal Health products & S.P.F. Eggs (Specific Pathogen Free Eggs) used in the manufacture of Human, Animal & Poultry vaccines. It has a technical collaboration with SOAFAS INC. USA. The SPF Eggs Division have an installed capacity of 3,00,000 SPF eggs per annum which commenced commercial production in May 1985. It is the only commercial producer of SPF Chicken embryos in India. The company has set up a 100% export oriented unit at Pune for export of hatching eggs to the general currency areas.  The capacity of this unit is 30,000 broiler breeders.  This unit was commissioned in June 92.

Mr. B. Venkatesh Rao, Chairman and MD has received the Quality Summit Gold Award. This is the first Poultry Company in the world to receive this prestigious award. The company focuses on R&D and quality, which makes it among the top 100 best global small companies by Forbes.

With growing lifestyle changes and increasing westernization and opening up of more fast food restaurants (KFC, Pizza Hut, Dominos and McDonalds), the consumption of eggs and chicken is set to increase. The domestic poultry industry is expected to double by 2014.

In May, prices of chicken have increased by Rs20 per kg and is at Rs140 per kg and egg prices are at Rs36 per dozen in the retail market. At the same time, raw material prices (soya, maize and grain) are stable, and with good monsoon, raw material prices will cool off.

The company reported robust 4Q financials where sales grew by 31% y©\y to Rs 20 bn and net profit increased by 208% to Rs2.2 bn. The main reason for impressive growth in net profit was due to an increase in margins due to higher demand for products.

The stock is trading at a P/E of around 6x FY11E earnings and 0.5 x market caps to sales. So in spite of a good run-up, it is under-valued.

I believe the company has great potential due to fast-paced growth of quick service restaurants and increasing consumption of poultry products. It should at least be valued at a P/E of 8x FY11E earnings and I recommend a BUY with a 12-month price target of Rs 625, implying potential upside of 33% from current levels.

Ongoing Expansions and Current Outlook

a. Foray into Vietnam: Venkeys India launched the first overseas poultry feed mill in South East Asia. Vietnam is technologically 30 years back, if you compare with India. There is lot to be done and they are also opening up a poultry lab, so that services can be availed there (these facilities are rare in Vietnam). They are also opening up a 4500 metric ton plant which will, it is not even 4% of the entire Vietnam market. Vietnam will contribute to revenue from FY11 end onwards.

b. Venkys saw a fairly descent jump in financials even in FY10: sales rising from about Rs 569 crore to Rs 705 crore. FY11 should be also pretty good because the poultry has high per capita and is in a huge demand. Just go to the market and you will realize.

c. Their oilseed business too has grown to Rs 235 crores. This year there will be about 25% growth again because the bi-product is used in the feed only that's Soybean, so there is a huge demand again.

d. Another international venture going to kick off in Bangladesh this year end (2011).

e. In 2012, yet another international venture is going to start in Philippines. 

f. They are also putting up a vaccine plant in Switzerland near Basel area for the poultry vaccines.

Company seems to sitting rich in cash reserves and will face no cash problems in these future expansions. And the management seems to have a long range vision: yet they seem to be in control and will not go overboard in their expansions. Pick up this gem before it gets too pricey and hold for couple of years. 1 year target is 725.