Venky's India - WALFORT

Favourable Demand Prospect for Poultry Industry: In India, poultry is the fastest growing live stock subsector. The annual per capita poultry meat consumption in India though increasing from 0.7 kg in 2001 to 1.69 kg in 2010 (NSSO Data), while of egg is 24 eggs in 2010, still remains one of the lowest globally with vast gap even between NIN (National Institute of Nutrition) recommended levels of 11 kg of poultry meat and 180 eggs per person. Venky's India Ltd. (VIL) is the largest listed poultry company in India with fully integrated operations and strong presence in Northern and Western region of India. Owing to its presence in full value chain, from grandparents, parent breeders, hatcheries and commercial broiler farms, feed mills, chicken processing and retail chain outlets, it is well poised to benefit from the growth in Industry.

Nearly Debt Free Company with Robust financial performance: VIL has achieved remarkable Revenue and PAT growth of CAGR 20.3% and 20.3% respectively in last 4 yrs. The EBITDA has quadrupled from Rs. 285.74 mn in FY 2007 to Rs. 1218.07 mn in FY 2011 and PAT has gone up 6 times from Rs. 115.14 mn in FY 2007 to Rs. 728.77 mn in FY 2011. VIL had one of its best years in FY 2011 with EBITDA margin of 14.30% and PAT margin of 8.55%. However, this exceptionally well year cannot be taken as base to calculate forward earnings. We expect margins to be under pressure in next year with EBITDA and PAT margin at 9.25% and 5.36% respectively for FY2012E which will further improve in FY 2013E. Other strength of the company is its, nearly, debt free nature of the Balance Sheet. Net Debt to equity was zero in FY 2010 and 0.03 in FY 2011 and is likely to remain at low levels going further. The company also recorded good RoE @ 26.64% for FY 2011 and RoA @ 18.79%.

Growth Momentum in Processed chicken continues with strategic entry in QSR: There is a growing market for processed chicken with increasing proportion of working women, changing lifestyle and food habits of people. Venky's is most preferred brand in processed chicken with maximum product range in this segment. VIL processed chicken division has witnessed a growth of 30% Y-o-Y. Management maintains positive outlook on account of increasing penetration of modern retail, Quick Service Restaurants (QSRs), Brand awareness and first mover advantage. VIL has also entered the hospitality industry with the launch of "VENKYS XPRS" to serve their customers with a range of healthy, hygienically cooked, and yet reasonably priced chicken.

Attractive valuation: Considering the industry's huge potential, company's niche strengths and the leadership in its business, the company's share price is trading at very attractive levels. The stock is trading at P/E(x) of 5.89 and P/BV of 0.98x times for FY 2013E. We have valued the company taking a weighted average of DCF Valuation (Rs. 529) and values derived from P/E band (Rs. 476.). Our weighted average value per share works out to be Rs. 502. Hence, we initiate coverage on the stock with a 'BUY' recommendation and a target price of Rs. 502 with a twelve month perspective and an upside of 25%.

Source : Equity Bulls

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