Ideas for Profit: Venkys a long term play in the consumption space

Poultry-producer Venkys reported a tepid performance in Q2 FY19. While topline came in higher, the twin impact of weaker realisations and higher input prices resulted in a sharp decline in profitability. Despite a disappointing performance in a seasonally weak quarter, we remain optimistic about the company’s long term prospects as the company is an excellent play on India’s demographic and consumption growth story. The company enjoys a market leadership position in the sector and controls majority of the supply in key operating markets.

Quarterly snapshot

Revenue for the quarter gone by increased 10 percent year-on-year (YoY) to Rs 646 crore. This was driven by topline growth across its three business lines. Despite lower realisation, poultry and poultry products’ segment sales jumped 10 percent aided by higher volumes. Earnings before interest and tax (EBIT) came under pressure due to weak realisations and higher soya prices.

While animal health products segment had a steady quarter, the oilseed business reported a decline in margin.

Broiler prices recover with start of the festive season

Broiler prices, which were hovering around Rs 85-90 per kg in May-June, witnessed a seasonal correction of around 25-30 percent due to weak consumer demand during the July-September period. Broiler prices have firmed up again (25-30 percent higher YoY) with the onset of the festive season and will support Venky’s realisations as well as margin in Q3.

Soybean, the most important protein source used to feed farm animals, continues to trade 10-15 percent higher than last year, impacting margins of poultry producers.

Growing popularity of fast foods chains bodes well for the business

Indian Poultry Equipment Manufacturers’ Association anticipates 7-8 percent increase in broiler production to 4.9 million tonne during 2018. Demand for processed chicken meat is projected to outpace production with a growth rate in excess of 15 percent.

Influenced by religion and other factors, India has largely been dominated by vegetarians. However, this scenario is fast changing as the young population in India is abandoning their vegetarian diet due to changing lifestyles. Consumption preferences are increasingly tilting towards snacking and convenience. The growing acceptance of eating out and food delivery is further aiding demand for the sector.

Quick-service restaurants such as Burger King India, Kentucky Fried Chicken and McDonalds have been riding this trend through aggressive store expansion. Burger King India, which had started its first store in India in 2014, is nearing its 150th store in the country and aims to nearly triple its store count to over 500 in the next 4-5 years. Similarly, Westlife Development, the franchisee of McDonald's in western and southern regions, seeks to double the number of restaurants to 450-500 by 2022. Order flows for these restaurants have increased with the emergence of food delivery start-ups: Zomato and Swiggy. Venky’s being a primary supplier to majority of these food chains stands to benefit from overall growth in the sector.

Business risks to monitor

Given the commoditised nature of Venky's business, realisations are guided by demand-supply dynamics of the poultry market. Any poultry-related disease outbreak (bird flu) could have a significant impact on volumes as well as prices. Besides, margin are also dependent on key input costs -- soyabeen and maize, the prices of which are dependent on agricultural and climatic conditions as well as international market.

The Food Safety and Standards Authority of India has launched a hygienic and cleanliness drive to improve the health and safety measures of meat processing units. Also, there is an increased focus on using medically important antibiotics (for farm and meat animals) as distributors as well as consumers are laying emphasis on health and hygiene.

In a recent development, the government is also contemplating a ban on the usage of colistin: an antibiotic used to fatten chicken. The company needs to remain compliant with the changing industry requirements and environmental norms to ensure smooth running of the business. Developments regarding a proposed ban on cage farming of poultry and meat animals also need to be monitored closely.

Consumption story available at reasonable valuations

Backed by favourable socio-economic factors, the domestic poultry industry is expected to grow at a steady pace over the medium to long term. Venkys remains well positioned to capture the market demand as it enjoys market leadership in the sector and controls majority of supply in its key operating markets.

Despite a disappointing performance in Q2 FY19, increase in volumes was heartening and indicates a positive trend for non-veg consumption. For FY19, the management expects to clock a volume growth of 10-12 percent and seems on track to achieve a topline of Rs 3,000 crore.

The stock has seen significant volatility in recent months and corrected more than 50 percent from its 52-week high. At the current market price, the company is trading at a reasonable valuation of nearly 13 times FY20 estimated earnings. Long term investors, interested in steady earnings growth, can look to accumulate this stock on dips as there exist significant scope for multiple re-rating in the future.