Overview
Venky's is the largest and most diversified company in the poultry sector in India. Its business can be broadly classified into the following three segments. From the company's latest annual report:
1. Poultry and poultry products - top line contribution - 65%
The company's major business is poultry and poultry products which consists of production and sale of day old broiler and layer chicks, specific pathogen free eggs, processed chicken products and poultry feed.
Broilers are chickens raised specifically for meat production whereas layer chicks are raised for the purpose of eggs. Modern commercial broilers are specially bred for large scale, efficient meat production and grow much faster than egg laying hens or traditional dual purpose breeds.
The numbers in brackets show the percentage of the overall revenue for last FY (2011).
Products:
Chicks (18.9%)
SPF eggs (2.8%)
Grown up parents (0.4%)
Grownup commercial broiler (17.7%)
Grownup commercial layers (1.0%)
Poultry feed (8.8%)
Processed chicken (15.9%)
2. Animal health products - 9.5%
The company has its animal health products manufacturing facility in Pune
Products:
Animal health products - powder (6.9%)
Animal health products - liquid (2.8%)
3. Solvent extraction: Oilseed - 25.5%
Products:
Refined oil (9.2%)
De oiled cake for poultry (10.6%)
Misc (4.9%)
DuPont Analysis
Let's first start by understanding the overall economics of the business and then we'll get into the details of specific segments. As always i'll do a DuPont analysis and look at the ROIC numbers for the overall business to get a sense of its profitability and capital intensity over the last five years. The numbers are given below:
2007 2008 2009 2010 2011 2012 (9 months)
Net margin 2.76% 5.04% 3.57% 7.64% 8.48% 3.17%
Net asset turnover 1.72 2.00 2.18 2.28 2.13 1.47
Leverage 1.99 1.89 1.68 1.51 1.47 NA
ROE 9.4% 19.1% 13.1% 26.3% 26.6% NA
First the net margin. The net margin has been fluctuating over the years due to the cost of raw materials. A majority of the cost (~60% of revenues) is constituted by raw materials which is maize or soya. Also the fluctuation in the net margin of the company with the fluctuation in raw material prices tells us that the company cannot pass on the entire cost increase to the consumers. The company in the past has been able to pass on the increased raw material cost but only with a lag. Also the poultry industry in India is highly competitive and this limits the ability of the company to effect price increase. Some source of comfort here should be that the company is the leader in the poultry industry and has built up a good brand name. Hence its bargaining power should be more than that of the other players in the highly fragmented industry.
Net the asset turnover. The company is not overtly capital intensive as can be seen from the asset turnover which has been above 2 for the past 4 years. The assets of the company include Breeder Farms, Hatcheries, Commercial farms in Uttar Pradesh, Haryana, Punjab, Madhya Pradesh, Himachal Pradesh, Gujarat and Uttaranchal. It has its solvent extraction unit in Solapur, Maharashtra and Chicken Processing and Animal health products unit in Pune, Maharashtra. However, the capital intensity of the company might change in the future as can be seen by the decreased asset turnover in 2012. This is because the company has recently ventured into fast food restaurants under the brand name of Venky's Xpress which will require substantial capital expenditure. The company has outlined a capex of Rs. 250 cr. over the next 3 years. (http://investment.contify.com/story/venkys-india-to-invest-rs-25-bln-to-open-100-outlets-across-india-expects-break-even-in-15-months-2011-11-01)
ROCE
2007 2008 2009 2010 2011 2012 (9months)
NOPAT 1,489 3,120 2,557 5,902 7,694 2,912
CE 24,273 26,467 26,441 31,113 40,400 49,299
ROCE 6.1% 11.8% 9.7% 19.0% 19.0% 7.9%#
# Estimated by assuming the fourth quarter NOPAT as the average of previous three.
These nos. are definitely not pretty. Except for 2010 and 2011, the there has been shareholder value destruction in the remaining years. Let look at the segment results to understand the overall performance a little better.
Segment Analysis
First lets look at the net EBIT margin and capital employed in the three segments separately.
Revenues
2011 2012 (9 months) Growth*
Poultry & poultry products 59,425 51,443 16.1%
Animal Health products 8,685 7,103 6.5%
Oilseed 23,485 19,424 17.8%
* Comparison of the first 9 months of 2012 to the same period last year.
EBIT Margin
2011 2012 (9 months)
Poultry & poultry products 15.4% 7.0%
Animal Health products 19.1% 18.1%
Oilseed 6.9% 4.9%
Capital Employed
2011 2012 (9 months) Growth
Poultry & poultry products 21,516 28,729 33.5%
Animal Health products 2,712 3,326 22.6%
Oilseed 6,360 5,337 -16.1%
Below are the EBIT/Capital employed (per annum) to understand the capital intensity of separate segments.
EBIT/Capital Employed
2011 2012 (again projecting EBIT for full year)
Poultry & poultry products 42.5% 16.7%
Animal Health products 61.2% 51.5%
Oilseed 25.5% 23.8%
The results look especially terrible for the poultry and poultry products segment. The company has clarified in its latest quarterly report that - "During the quarter the poultry and poultry products segment registered lower profits due to higher cost of feed ingredients and lower realizations from sale of day old chicks and grown up birds." The products of poultry segment are commoditized expect for processed chicken which contributes 16% to the revenues only. So the fortunes of the company are necessarily tied to the poultry industry. Right now the company appears especially fragile as it is getting beaten on both the ends - prices and costs. Poultry products costs (RM costs) are up and the realizations are down. Over the next year, this is expected to change and hence the profitability is expected to go up. The company has grown revenues at a CAGR of ~20% over the last 5 years. Revenue during the first 9 months of 2012 increased at a rate of 15% and this growth is expected to continue. The cyclicality of the industry will make sure that the bottom line will fluctuate with the industry.
Valuation
On a PE basis, the company is trading at PE of 10.58 on estimated earnings of FY12 and at 5.4 on est. earnings of FY13. This might look on the higher side but keep in mind that this is a cylical company and the best time to buy might be when the PE is at its highest.
P/B ratio for the company is 1.31.
But as suggested by Warren Buffet these numbers might be illusory, the only real way of valuing a company is cash flow valuation. And on that basis, according to my model a fair price of Venky's is in the range of Rs 415-540. Here i have assumed a growth rate of 10% for the next 10 years and a terminal growth rate of 3%. The range of values represents differing scenarios for the capex of the company going forward.
Venky's is the largest and most diversified company in the poultry sector in India. Its business can be broadly classified into the following three segments. From the company's latest annual report:
1. Poultry and poultry products - top line contribution - 65%
The company's major business is poultry and poultry products which consists of production and sale of day old broiler and layer chicks, specific pathogen free eggs, processed chicken products and poultry feed.
Broilers are chickens raised specifically for meat production whereas layer chicks are raised for the purpose of eggs. Modern commercial broilers are specially bred for large scale, efficient meat production and grow much faster than egg laying hens or traditional dual purpose breeds.
The numbers in brackets show the percentage of the overall revenue for last FY (2011).
Products:
Chicks (18.9%)
SPF eggs (2.8%)
Grown up parents (0.4%)
Grownup commercial broiler (17.7%)
Grownup commercial layers (1.0%)
Poultry feed (8.8%)
Processed chicken (15.9%)
2. Animal health products - 9.5%
The company has its animal health products manufacturing facility in Pune
Products:
Animal health products - powder (6.9%)
Animal health products - liquid (2.8%)
3. Solvent extraction: Oilseed - 25.5%
Products:
Refined oil (9.2%)
De oiled cake for poultry (10.6%)
Misc (4.9%)
DuPont Analysis
Let's first start by understanding the overall economics of the business and then we'll get into the details of specific segments. As always i'll do a DuPont analysis and look at the ROIC numbers for the overall business to get a sense of its profitability and capital intensity over the last five years. The numbers are given below:
2007 2008 2009 2010 2011 2012 (9 months)
Net margin 2.76% 5.04% 3.57% 7.64% 8.48% 3.17%
Net asset turnover 1.72 2.00 2.18 2.28 2.13 1.47
Leverage 1.99 1.89 1.68 1.51 1.47 NA
ROE 9.4% 19.1% 13.1% 26.3% 26.6% NA
First the net margin. The net margin has been fluctuating over the years due to the cost of raw materials. A majority of the cost (~60% of revenues) is constituted by raw materials which is maize or soya. Also the fluctuation in the net margin of the company with the fluctuation in raw material prices tells us that the company cannot pass on the entire cost increase to the consumers. The company in the past has been able to pass on the increased raw material cost but only with a lag. Also the poultry industry in India is highly competitive and this limits the ability of the company to effect price increase. Some source of comfort here should be that the company is the leader in the poultry industry and has built up a good brand name. Hence its bargaining power should be more than that of the other players in the highly fragmented industry.
Net the asset turnover. The company is not overtly capital intensive as can be seen from the asset turnover which has been above 2 for the past 4 years. The assets of the company include Breeder Farms, Hatcheries, Commercial farms in Uttar Pradesh, Haryana, Punjab, Madhya Pradesh, Himachal Pradesh, Gujarat and Uttaranchal. It has its solvent extraction unit in Solapur, Maharashtra and Chicken Processing and Animal health products unit in Pune, Maharashtra. However, the capital intensity of the company might change in the future as can be seen by the decreased asset turnover in 2012. This is because the company has recently ventured into fast food restaurants under the brand name of Venky's Xpress which will require substantial capital expenditure. The company has outlined a capex of Rs. 250 cr. over the next 3 years. (http://investment.contify.com/story/venkys-india-to-invest-rs-25-bln-to-open-100-outlets-across-india-expects-break-even-in-15-months-2011-11-01)
ROCE
2007 2008 2009 2010 2011 2012 (9months)
NOPAT 1,489 3,120 2,557 5,902 7,694 2,912
CE 24,273 26,467 26,441 31,113 40,400 49,299
ROCE 6.1% 11.8% 9.7% 19.0% 19.0% 7.9%#
# Estimated by assuming the fourth quarter NOPAT as the average of previous three.
These nos. are definitely not pretty. Except for 2010 and 2011, the there has been shareholder value destruction in the remaining years. Let look at the segment results to understand the overall performance a little better.
Segment Analysis
First lets look at the net EBIT margin and capital employed in the three segments separately.
Revenues
2011 2012 (9 months) Growth*
Poultry & poultry products 59,425 51,443 16.1%
Animal Health products 8,685 7,103 6.5%
Oilseed 23,485 19,424 17.8%
* Comparison of the first 9 months of 2012 to the same period last year.
EBIT Margin
2011 2012 (9 months)
Poultry & poultry products 15.4% 7.0%
Animal Health products 19.1% 18.1%
Oilseed 6.9% 4.9%
Capital Employed
2011 2012 (9 months) Growth
Poultry & poultry products 21,516 28,729 33.5%
Animal Health products 2,712 3,326 22.6%
Oilseed 6,360 5,337 -16.1%
Below are the EBIT/Capital employed (per annum) to understand the capital intensity of separate segments.
EBIT/Capital Employed
2011 2012 (again projecting EBIT for full year)
Poultry & poultry products 42.5% 16.7%
Animal Health products 61.2% 51.5%
Oilseed 25.5% 23.8%
The results look especially terrible for the poultry and poultry products segment. The company has clarified in its latest quarterly report that - "During the quarter the poultry and poultry products segment registered lower profits due to higher cost of feed ingredients and lower realizations from sale of day old chicks and grown up birds." The products of poultry segment are commoditized expect for processed chicken which contributes 16% to the revenues only. So the fortunes of the company are necessarily tied to the poultry industry. Right now the company appears especially fragile as it is getting beaten on both the ends - prices and costs. Poultry products costs (RM costs) are up and the realizations are down. Over the next year, this is expected to change and hence the profitability is expected to go up. The company has grown revenues at a CAGR of ~20% over the last 5 years. Revenue during the first 9 months of 2012 increased at a rate of 15% and this growth is expected to continue. The cyclicality of the industry will make sure that the bottom line will fluctuate with the industry.
Valuation
On a PE basis, the company is trading at PE of 10.58 on estimated earnings of FY12 and at 5.4 on est. earnings of FY13. This might look on the higher side but keep in mind that this is a cylical company and the best time to buy might be when the PE is at its highest.
P/B ratio for the company is 1.31.
But as suggested by Warren Buffet these numbers might be illusory, the only real way of valuing a company is cash flow valuation. And on that basis, according to my model a fair price of Venky's is in the range of Rs 415-540. Here i have assumed a growth rate of 10% for the next 10 years and a terminal growth rate of 3%. The range of values represents differing scenarios for the capex of the company going forward.
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