Venky: A business to bet on and a Stock to accumulate for long term
Venky's (India) Ltd, a part of the VH Group, is an Asia-integrated poultry group. It's a US$1.5 billion Indian conglomerate that comprises companies related to the poultry industry, including processed food, animal vaccines, and human and animal pharmaceutical healthcare products, with significant revenue coming from Poultry and Poultry products.
During the starting phase of the outbreak of COVID-19 in 2020, Venky's had faced a magnitude of challenges, and its volume and realization had taken a big hit because of distribution problems and stigma in the minds of people that the virus was spreading of meat. However, the recent quarterly result shows strong operating and financial stability, thus showing healthy recovery.
In H1 FY22, Venky's top line grew 67% (YOY) on a good base. More robust realisations drove the top line rise, although broiler chicken quantities remained stable year over year. However, profitability remained under pressure due to a sharp increase in input prices (mainly soya).
Price Increasing, Volumes recovering –
Throughout 2020, there was a considerable decline in volumes and realisations because of a nationwide lockdown and rumors that poultry birds may be dangerous viral carriers. Despite the pandemic interruptions, the volume trajectory for H1 FY22 across several verticals suggests that demand has stabilised. The poultry sector is gradually returning to routine, and broiler chicken prices have surpassed pre-pandemic levels on a pan-India basis, dropping to roughly Rs 30-40 per kg.
A variety of variables, including a shift in demand-supply dynamics and an increase in input costs, have contributed to the recent price increase. Supply has been slashed due to some chicken producers going out of business as a result of the epidemic. While meat production has decreased, meat consumption has increased with the reopening of taverns and restaurants.
Government Support –
Higher chicken feed prices put a strain on Venky's profit margins in the first half of the year. In Q1 and Q2, the average soya price was Rs 64 per kg and Rs 84 per kg, respectively. This is a significant increase over the previous year's Rs 35-40 level.
The margins are anticipated to normalise in the future, as soybean prices have begun to fall as a result of recent government initiatives. For the first time, the national government permitted the import of genetically modified soymeal, the main feed for poultry, cattle, and fish, when soybean prices reached a historic high of Rs 100 per kg against the minimum support price Rs 39 per kg. To keep prices under control, the government has implemented stock-holding limitations on soymeal. As a result of the government's actions, supply in the domestic market has improved, and soya prices are presently hovering around Rs 48-50 per kg.
Very Less Capex coming in the near future –
The company has recently completed capacity expansion of its Solvent extraction plant at Srirampur (Maharashtra). It expects to increase the production in 12-18 months with no Capex for the next two years because of sufficient production capacity available for now. Further investment of 40-50 cr will be only to upgrade and improve the existing facility. It has a healthy balance sheet with a debt-to-equity ratio of just 0.2x, which is very good for such a business.
Thus, we can say that the poultry industry is expected to grow by 8-10 percent, so Venky's growth will be. Being a market leader and a key supplier to brands like KFC, Mcdonalds, and Pizzahut and with the growth in this sector, Venky's certainly will be one of the most benefitted companies from this trend. Moreover, it is trading at a reasonable valuation of nearly 11 times FY23 estimated earnings. The business will remain a profit-churning business in the long term. Thus, long investors should accumulate in small dips.
Risks –
Fresh cases of bird flu, as well as lockdowns and restrictions, can have a negative influence on corporate operations and stock prices.