Venky's (India) Ltd. - GEPL Capital

Q3FY12 – Sales in-line but margins disappoint

- Venky's India Ltd. (Venky's) saw its net sales rise by 19.1% Y-o-Y to Rs.2.5 bn in line with our estimates. The raw material cost however were marginally above our estimates and grew by 22.8% Y-o-Y to Rs.1.73 bn resulting in the gross margins reducing by 100bps Q-o-Q and 350bps Y-o-Y.

- Moreover, a higher than expected other expenditure component which grew by 52% Y-o-Y to Rs.509 mn resulted in the EBITDA margin declining to 3.5% in Q3FY12 from 11.4% in Q3FY11 and 7.9% in Q2FY12.

- The EBITDA as a result declined by 63.5% Y-o-Y to Rs.87 mn while the profits fell sharply to 80.7% Y-o-Y to Rs.29 mn, marking fourth consecutive quarterly decline in profits.

Result Highlights

Segmental revenues in-line with our estimates

The poultry and poultry related segment grew by 24.2% Y-o-Y to Rs.1.83 bn and contributed 68% to total revenues as compared to 65% in Q3FY11. Similarly the oilseed division witnessed a 9.2% Y-o-Y growth in revenues to Rs.620 mn and contributed 23% to the revenues in Q3FY12 as compared to 25% in Q3FY11. The animal health product (AHP) division on the other hand witnessed a muted 3.1% Y-o-Y growth to Rs.237 mn and contributed 9% to the total revenues.

Segmental margins below our estimates on raw material pressures

The higher raw material cost pressures were visible across segments with EBIT of the poultry and poultry related segment witnessing a 51% Y-o-Y to Rs.88 mn. The EBIT margin in segment declined to 4.8% in Q3FY12 from 12.1% in Q3FY11 while the EBIT contribution reduced to 53% from 67%. The de-growth in the AHP division EBIT was comparatively low at 14.8% Y-o-Y and stood at Rs.39 mn resulting in EBIT margins in this division to decline to 16.6% in Q3FY12 from 20.1% in Q3FY11. Similarly, the oilseed division EBIT de-grew by 11.3% Y-o-Y and stood at Rs.37 mn with EBIT margins declining to 6% in Q3FY12 from 7.3% in Q3FY11. The lower fall in these segments resulted in the revenues contribution rising to 47% to the total EBIT in Q3FY12 as compared to 33% in Q3FY11.

Valuation & viewpoint

We have reduced our FY13E EPS estimates by 34% as a result of the fourth quarterly loss reported by the company. We believe these numbers reflect a conservative approach with high raw material cost and sharp rise in other expenditures priced in.

Venky's is currently trading at 6.1x FY13E EPS, a 12% discount to its historical one-year forward P/E band. We value the company at 7.3x its FY13E EPS of Rs.70.8 with the assumption that the worst is behind the company as far as raw material prices are concerned, resulting in a target price of Rs.515 per share, a 5% reduction from our earlier target. We maintain a BUY rating on the stock with expectations of a strong growth potential in the poultry industry which we believe Venky's is best poised to capture.

Source : Equity Bulls

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