Add Meat To Your Portfolio With Venky's India

Venky's (India) is one of the outperforming stocks from the FMCG food sector.

The share price of company soared more than 284 per cent on a year-to-date basis. The stock had traded at RS.442.2 on January 2, 2017, and it closed at RS.1698.65 on June 30, 2017, generating multiple returns for its shareholders in last six months. Here, we at DSIJ present an exclusive analysis on Venky's India which has multiplied investors' wealth four-fold within a short period. 

INDUSTRY 

The poultry industry is expected to maintain its growth rate in the coming years. Presently, the poultry industry is a Equity Analysis RS.95,000-crore industry that provides direct and indirect employment to about 50 lakh people. It also supports the economy of over two crore agricultural farmers, especially the maize and soya growers are dependent on this industry. About 75 per cent to 80 per cent of the cost of production in the poultry industry consists of feed ingredients such as maize and soya. With an annual production of 67 billion eggs, India ranks second in egg production in the world. The broiler production is estimated at 4 million tonnes of chicken meat and India ranks third in the world. 

The vast gap between our present per capita consumption (64 eggs and 3.5 kg of meat) and National Institute of Nutrition (NIN) recommended level (180 eggs and 11 kg of meat) offers an excellent opportunity for the growth of poultry industry, at least for the next two decades.

Factors like increasing disposable incomes and revival of sentiment and pick-up in industrial activity are expected to contribute to the growth in demand for poultry products.

ABOUT THE COMPANY 

Venky's (India) is engaged in the production of day-old layer and broiler chicks for the poultry markets of North India. The company offers a range of products, such as day-old commercial chicks, grown up commercial broiler, refined oil and de-oiled cake for poultry feed. Its segments include poultry and poultry products, animal health products and oilseeds. Its animal health products manufacturing facility is located in Pune. 

The poultry and poultry products segment consists of production and sale of day-old broiler and layer chicks, specific pathogen-free eggs, processed chicken products and poultry feed. The animal health products segment produces and sells medicines and other health products for birds. The oilseed segment produces and sells edible refined soya oil and soya de-oiled cake. Its portfolio of products includes animal health products, pellet feeds, processed and further processed chicken products and solvent oil extraction.

INCREASED SHAREHOLDING 

Large institutions are increasing their positions in Venky's (India).The number of institutions holding stakes in Venky's were 22 in Q3FY17 which has increased to 27 in Q4FY17. This is also because the demand of chicken continues to grow at a pace of 15 per cent to 18 per cent per annum and Venky's (India) is well equipped to cater to this growing demand. Its institutional holdings expanded 32 basis points to 0.90 per cent in Q4FY17. 

GST IMPACT ON COMPANY'S BUSINESS

In India, the FMCG sector comprises 50 per cent of the food and beverage industry and another 30 per cent from personal and household care. The impact of GST rates on the FMCG sector will be largely positive. The rates decided for the major FMCG products are lower than their current tax rates. 

As per the Poultry Farmers and Traders Samithi (PFTS), implementation of the GST will boost poultry business. It will reduce the cost of chicken by about RS.15 per kg. 

The GST Council has revised revenue neutral rate for packaged food from 18 per cent to 12 per cent, which will further increase positive sentiment in the industry players. Eggs are exempted from GST. Major raw material of Venky's India is oil seeds, which attract 5 per cent GST. 

Another second largest raw material for company such as poultry feed has attracted nil GST rate. 

We at DSIJ infer that the double benefits of lower raw materials costs as well as end-products' lower tax rate will boost company's profitability margins. The company may pass on the benefits to end-customers. Hence, lower prices will lure more consumers which may lead to rise in company's top line. 

ULTIMATE FINANCIALS

On the financial front, Venky's (India) has reported revenue of RS.2476 core with a growth of 16.39 per cent in FY17 as compared to the previous fiscal. The company's EBITDA soared more than double to RS.277 crore in FY17 on a yearly basis. Its EBITDA margin expanded by 477 basis points to 11.2 per cent in FY17 on a year-on-year basis. Its net profit increased more than three-fold to RS.125 crore in FY17 as compared to the previous financial year. 

On the segmental revenue front, Venky's (India) has earned 49.21 per cent from poultry and poultry products, 43.69 per cent from oil seeds and 7.1 per cent from animal health products in FY17. 

Considering last five years data, Venky's (India) has witnessed heightened growth. The company's topline increased at a pace of 11.66 per cent during FY13FY17. Its EBITDA also rose 35.65 per cent in the last five financial years ended with FY17. The bottomline of Venky's (India) increased 38.16 per cent during FY13-FY17.

Venky's (India) debt-to-equity ratio has reduced from 1.91x in FY16 to 0.89x in FY17. The company's reduction in total debt has helped build stronger balance sheet. 

EXPANSION IN PROFITABILITY MARGINS 

There are pressures on consumption of beef in the country, which is a positive for other meats. This will further aid poultry industry. In May-June 2017, due to hot weather, the chicken factory gate prices have increased about 25 per cent to 35 per cent. Meanwhile, weatherrelated spike is temporary an depend upon the tuning of supply at lower growth, coupled with upward pressure on the demand side. Chicken acts as a substitute for beef, which is about 20-25 per cent of poultry consumption. There has been a rise in demand for chicken after restrictions on cattle slaughtering were enforced in the country. We expect that chicken prices are likely to remain at higher levels in the near term. 

AID OF RAW MATERIALS

Chicken feed majorly comprises of around 70 per cent of corn and 30 per cent of soya, which are primary raw materials for the company. The decline in soya and corn prices have aided gross margins in H2FY17. India's poultry producers are posting record profits as feed costs have dropped to a five-year low. Going forward, we expect lower raw material costs will aid further expansion in the gross margins of Venky's India in FY18.

VALUATION 

On the valuation front, Venky's (India) is trading at trailing 12-month (TTM) PE of 19.11x as compared to industry PE of 44.27x, which is quite at a discounted level. The company's ROE and ROCE stood at 23.49 per cent and 40.41 per cent in FY17, respectively. Venky's (India) has given 0.41 per cent dividend yield to its shareholders in FY17.

The company has book value of RS.376.96. It is trading at PB of 4.49x, as against industry peers such as Simran Farms (1.18x). The share price of Venky's India is trading PE of 19.11x, which is at a discount as compared to Simran Farms which is trading at PE of 21.4x. 

On the back of GST boost, lower raw material prices, positive environment in the industry, we recommend HOLD on the stock for our reader-investors.