Venky's India Ltd-High Dose of Protein.

 

Bodybuilders love foods or supplements which have high concentration of quality protein. Some of these protein diets are having 80%-90% protein content per 100 gm…you take these, do intense workouts and witness a quantum leap in the growth of muscles in your body. This Venky is one such opportunity and if taken can really provide immense growth to our investments. Everything is right about the concentration of protein (Value) in this stock…it is right at 90% to 100%. The only question is the quality of protein i.e the quality of the management of the group.

Pictured (right to left): Venkatesh ‘Venky’ Rao, his brother Balaji Rao, their sister Anuradha Desai, and her husband, Jitendra Desai.

Let’s first measure the quantum of protein. Venky’s india is a part of the vast empire of Late BV Rao, who is called the father of Indian poultry. He left the firm with a turnover of around 400 cr , when he died in 1996. After that his elder daughter Anuradha Desai, her husband and her two brothers venktash and Balaji took the group to around 6000 cr and now it is a big poultry giant covering from one day old chicks for laying and breeding, poultry equipments, full grown chickens, processed chickens, SPF eggs, animal health products, human health products, Oilseeds, animal feed, frozen poultry and chicken QSR etc. It is present in the entire value chain of the chicken production to consumer’s plate. This whole content is generated through 28 group companies. 

Venky’s india generated 1700 cr of this. Its parent is Venkateshwara Hatcheries Private Ltd. Vencobb (broiler) and BV300 (layer), the leading breeds of the VH group  have market shares of around 70% and 90% respectively in india. Vencobb is used for producing Broiler chicken and BV300 for layers which lay eggs. These are developed by Venco Research and Breeding Farm Pvt Ltd and Venkateshwara Research and Breeding Farm Pvt Ltd, both group companies. Poultry farms across india use these two breeds.

Venky’s is the one of the six global producers of SPF eggs which requires high technical expertise. SPF Eggs are used for making animal and human vaccines and a number of research activities. Venky’s is having  plans to expand SPF Eggs capacity as its demand will grow big in the future. Currently it is generating around 30 to 40 cr turnover for the company with per unit price of around 50. It is just to highlight that Venky is not like our backyard chicken farmer…it is one big high technology company and entry barriers to some of activities in the entire value chain of poultry product is very high. Big MNC pharma companies like Novartis are its biggest customers for SPF Eggs.

Its poultry products business contributes around 1000 cr out of 1700 cr and it covers one day old chicks, grownup broiler and Layers, Processed chicken. It is selling processed chicken products like sausages, chicken salamis, ready to cook, ready to eat products etc under Venky’s brand and it is first Indian brand to do the same. It also supplies chicken products to McDonalds, KFC, Pizza hut, Domino’s etc. Venky’s chicken products are sold through distributors and retail outlets and are available in all leading super markets and food malls.

Recently it has entered into QSR (Quick Service restaurants) chain Venky’s XPRS. It opened its first such outlet in Pune to compete with the likes of KFC. Its products are prepared with minimum of oil and are mainly Grilled. Prices are very affordable with quality on par with global giants like KFC. It is going slowly in expansion because it is very difficult for a business to business (B2B) firm to come forward and directly face the customer. Tata is the biggest example of this…except for Tata tea and Tata Salt, it is not very successful in building customer centric business. Its handling of Nano brand is the prime example as it established it very poorly as a cheap car. It is having Mount Everest Mineral water in its kitty for long but it is still a paltry 30 cr brand as compared to 600-700 cr of Bisleri. In spite of being india’s largest coffee producer, we can’t find Tata coffee in the retail shops. That’s why it has joined hands with Starbucks to enter into Coffee retail chains. Building a brand to which customer can establish relations and emotions is an art and a very difficult and subtle one. It is currently having around 10-15 outlets and have big plans to take this number to 100. However I don’t have the numbers and profitability, if any, for XPRS chain. But if planned and nurtured properly, it can become a big success as there is huge vacant space for this segment in india for an Indian brand.

The eating-out market in the country is estimated to be around Rs 6 lac crore, but only 2% of it is organised with national and international food retail brands. KFC which is having around 395 stores in the country is showing degrowth in same store sales for around 2-3 years. This is mainly on account of high operational expenses like rentals which are very high as compared to the value added by them. As I have mentioned in earlier posts also, real estate costs in india are illogically too high and these are bound to correct more in the future otherwise the demand will remain very low. Also Indians are yet to find a taste for eating out in high class costly restaurants, they are currently busy in buying expensive smart phones and so their purchasing power for costly stylish food is not that high. One way for firms like KFC is to create the demand for their products by promotional events like big discounts on some days of a month or special occasions like Valentine’s Day, because it will make people aware of their products and they will develop taste.

Big QSR chains are mainly focusing on big tier 1 metro cities like Mumbai, New Delhi, Pune etc as a part of their strategic plan as they seem to follow one simple business premise “more money, more business”. But there is one catch here…in big metro cities, money is more but it is chasing too many consumption points. Also income disparity presents a false picture of all round prosperity. Most of the people in these cities make their ends meet narrowly…after meeting their most important needs they are left with very little; so they don’t spend much on discretionary items, but they are not poor. However their sheer large number and gatherings at lavish Malls give a false appearance of people with money ready to open their wallet.

In strike contrast, there is much more money in our small cities but as there are not much options to spend and show…so this also gives a false view of lesser wealth. Instead people in these cities are ready to spend the money on costly food at a high end restaurant. Most importantly operating costs are lesser here which makes for a viable business model. Lesser competition provides revenue visibility and it is easier to plan a strategy. In Punjab, you can see huge and more lavish bungalows in villages and they are more inclined towards luxury.

So it would be more prudent on the part of big QSR chains to allocate 30-40% of their resources on these small cities, I think they will witness a pleasant surprise. Hope that venky’s will be more vigil in allocating resources for its QSR foray.

Now come to their Oilseed and refined oil business which contributes around 650 cr with low operating margins of around 5%. But I think this unit is a part of the strategic plan where the byproducts of oilseeds like oil cakes are used as a feed in its plants for broilers and layers in order to maintain their high quality and to meet strict standards of MNC customers.

 

Venky’s has also entered into sports nutritional supplements business and sells products like whey protein supplements, Creatine, mass gainers etc. ( But i think this vertical is not under the listed entity). So far this area is dominated by MNC giants but there is huge scope for growth and local producers can create a big market for them if they follow a good marketing plan with good high quality products. Custom duty of around 50% to 100% is charged on import of these. So venky’s is selling the high quality products at around half of prices charged by MNC players in india. Reviews to its products are very good; only need is to follow a proper marketing and brand promotion strategy, good distribution clout…I think e commerce can boost its distributorship resources if and only if it can make people aware of its products and brand.

To keep this plan in mind, Venky’s is associated with IPL in india. It has also bought an English premier league team Blackburn rovers in 2010 which is a big failure so far and hasn’t done any good to the reputation of Venky’s at global level. However this is not the result of mismanagement on venky’s part  but it is mainly because of their little understanding of Football and working of clubs at English premier league. Most of times these clubs are not run to earn profits but to satisfy the passion of owners. Big global business tycoons and Richie riches are the owner of these like Abu Dhabi owners of Manchester City. Blackburn rovers has fared very badly after their acquisition.

This backfiring of Rovers buyout has brought too much negativity about the stock in Indian market also. There are all sorts of views starting from that Venky’s has lost a huge chunk of money around 500 cr on this buyout. But this is not true. Rovers was not bought by Venky’s india but in the personal capacity of the promoter company of venky’s india. Venky’s London which is a direct subsidiary of parent of Venky’s india “Venkatashwera Hatcheries Pvt Ltd” is the owner of Blackburn. Now Rao family is making serious valiant efforts to revive the club and is ready to put in the money.

Global success of the group now hinges on the success of Blackburn Rovers and the revival can establish brand Venky’s at a global scale. If this can happen, then nobody can stop this chicken to fly like an eagle. Although scale of opportunities in india itself are bigger enough to turn it into a eagle.

Its animal health business is 130 cr business with operating margins in the range of 15%-20%. It manufactures all sorts of vaccines, nutritional supplements growth promoters, toxin binders, feed/gut acidifiers, enzymes, anticoccidials, dewormers, & therapeutical products.

Venky’s was once a debt free company but over the years in its quest for expansion and to focus on value added poultry products to change the commodity nature of its business, it has taken debt to the tune of around 600 cr. But it has cash of 175 cr in its balance sheet and around 50 cr invested in various mutual funds. Both these make up 225 cr while the current market value of the company is just 290 crore. Can you imagine this? Largest Indian integrated poultry house with turnover of 1700 cr, 30 plants all over india with great brand name is valued at just 290 cr!!

One more anomaly is huge land bank  all over india. It is having a land bank of around 850 acres. It was valued at just 19 cr in Mar-13. It has added 35 cr worth land in 2014. Around 500 acre is occupied by 30 plants all over india. Around 350 acre is near pune which is vacant and can turn into a cash cow if the company decides to use this for organic or inorganic expansion. Even at most narrow estimates, it will be valued around 100 cr.

Now at the quality part: The VH group is spread into 28 companies with a lot of inter group transactions. The remarkable aspect of this company is that it does not own a single share in any of its group companies, or in companies having any ‘affiliations' with the management. It hasn’t given cheap loans to group companies (unlike Cairn india) from its surplus cash, instead it is parked in income generating mutual funds and fixed deposits (225 cr).

It has given full disclosure about everything important in its annual report from breakup of unit sale to related party transactions which is quite uncommon even to ambanis of our stock market. It has given full breakup of cost of acquisition of One day old birds, Processed chicken, SPF eggs, animal health products, soybean etc along with unit sale prices of all of the above. Lengthy details have been provided for related party transactions and it has occupied around 5-6 pages.

It has made purchases of 130 cr and sales of 600 cr to group companies mainly with its parent Venkateshwara Hatcheries Private Limited. Its sale to the group is around 30%-33% of total sales and this figure is quite constant for last 4-5 years. However its closing debtors last year were around 170 cr which is 10% of its total turnover which is quite good. However 130 cr of these belongs to group companies mainly to VHPL. So in a sense, the chances of turning these bad are very less.

So it looks quite good in this quality test also; if we leave some ifs and buts which are natural for a group as big as it is.

Maize and soybean comprises around 70% of its cost of production. For last few years prices of these two were rising due to lesser production in USA and Brazil. And as india follows a Minimum Support prices (MSP) policy (which is disastrous) so prices of Maize and Soybean were even higher in india which lead to the poor performance of poultry farms across india because these farms have limited power to pass on the higher costs to consumers mainly due to oversupply in the market and perishable nature of the products. After a period of around 45 days, a broiler doesn’t convert the feed intake into weight. So this extra feed will not yield any additional revenue in the form of higher weight. So supply is relatively inelastic, so farms will sell even at lower prices due to lower demand. They can’t store these like potatoes in cold storage in the hope that prices will recover. So if there is low demand, even then they have to sell.

But now production in USA and Brazil is back to normal and so the prices of Maize has fallen to around 10000 per MT all the way from 17000 in 2013. Last dec-14 qtr, the prices were in the same range and venky's earned a NP of 20 cr. so we can at least expect the same in Mar-15 Qtr also. Prices of maize/soy will remain weak due to global oversupply, so india will not be able to export the same…because due to MSP regime our prices are way higher than global prevailing prices. So Indian farmers are looking towards poultry sector to absorb this oversupply.

During this period, stock prices of much smaller Srinivasa hatcheries with turnover of around 150 cr with no profits has risen from 40 to 130 while the same for Venky’s has fallen from 650 to 310 which looks quite ridiculous.

So venky’s india is worth taking a risk and even vegetarian can enjoy it but it is strictly not for Chicken hearted.

Current market price is 310/-

( Update Dec-2015: It has given a 1:2 bonus on 21/12/15, hence bonus adjusted price as on 05/05/15 is 207/-)

Regards

Gurpreet Singh.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)