Venkys India Ltd || Initiating Coverage

Venkys India Ltd.

A hen that will lay golden eggs
Venkys is an integrated player in the poultry business. Venkys rears chicken which is sold as live birds to distributors and which are finally sold as chicken meat. Broiler meat business is a cyclical industry and for the last 18 months, broiler & Day Old Chick prices have been constrained, due to an oversupply. However, we believe that in the next 6 months, the supply dynamics will begin to improve. Markets in their wisdom generally price events well in advance. With demand for broilers continuing to grow at 15-18%, the stock is trading cheap at 5X FY13 for its many merits. We initiate coverage with a BUY recommendation.

BUY
CMP Target Price Stock Info Market Cap (`cr) Beta 52 week High / Low Avg. Daily Volume (6m) Face Value (`) Sensex/ Nifty Shares outstanding (cr) Shareholding Pattern (%) ` 395 ` 826 VENK.BO / WH IN 371 0.8 757 / 363 68,720 10.00 17,486/5,323 0.94

Investment Rationale:
The demand for chicken continues to grow at a robust 15-18% per annum Venkys is one of the largest poultry producers in the country and is well equipped to cater to this growing demand Venkys is an excellent play on Indias demographic & consumption story

Key Risks:
Supply overhang takes longer than anticipated to adjust The government remains extremely aggressive in pricing maize which is a key raw material (~70% of RMC ) for Venkys poultry business Industry vulnerable to spread of disease & resultant consumer averseness Indian Promoters Foreign Promoters FII DII Public FY 2010 705 24 54 160 13 58 30 30 7 1.8 0.6 5 FY 2011 852 21 73 34 13 78 30 31 5 1.4 0.6 4 FY 2012E 998 17 32 -56 6 34 11 14 12 1.2 0.5 8 FY 2013E 1194 20 76 137 10 80 23 25 5 1.0 0.4 4 FY2014E 1435 20 111 47 12 118 27 31 3 0.8 0.3 3 ABS(%) Sensex Venkys 3m 11 -4 1yr -10 -38 3yr 62 365 56.12 0.00 0.86 3.69 39.33

Key Financials:
Y/E March (`cr) Net Sales % Chg Net Profit % Chg EBIDTA (%) EPS (Rs) RoE (%) RoCE(%) P/E (x) P/BV (x) EV/Sales (x) EV/EBIDTA (x)

Research: Shalini Gupta Tel: +91 22 61925335 shalinig@eisec.com Sales: Sanjeev Mohta Tel: +91 22 61925310 sanjeevm@eisec.com

Source: Company, EISEC research

April 2012

Venkys India Ltd || Initiating Coverage

What Venkys does

Venkys rears chicken which are then sold as live birds. These live birds are sold as chicken meat in retail meat shops. Some of the birds are sold to fast food chains in the format prescribed by them. Poultry accounts for 57% of Venkys revenue. Venkys also makes chicken feed for sale as well as for internal consumption. Soya Oil and de-oiled cakes are by-products of chicken feed manufacturing. Venkys also manufactures medicines for chicken for its own use and sales. These are ancillary activities for Venkys and all these together account for 39% of total revenue. Other activities for Venkys include SPF eggs (used for - making vaccines and research laboratories) and selling grown commercial layers - chicken that lay eggs only. This accounts for 4% of Venkys revenue. Venkys in the only company in Asia which produces SPF eggs.

Venkys Business Model

One Day Old Broiler Breeder Parents are bought from Venco Research*
Turnover Breakup(%)

Parent chicks are reared in farms Female parents are artificially inseminated to get eggs These eggs are hatched in incubators
10% 11% 9% 9% 16% 18%

Misc Grown Up Layers SPF Eggs Animal Health De-oiled cakes Refined Oil Feed Processed Chicken Grown Up Broilers Grown Up Parents Day Old Chicks

4% 1% 3%

Chicks coming out of these eggs are called commercial chicks These are then sold to various commercial poultry farmers and integrators... ...who then grow the commercial chicks in their own/ contract farms Once the commercial chicks are 40-45 days old, they are sold as broiler birds for meat
*Venco Research & Breeding Farm Pvt Ltd is a VH Group JV with Cobb Vantress Inc., USA.

0% 19% 0% 5% 10% 15% 20%

April 2012

Venkys India Ltd || Initiating Coverage

Excess supply and high input prices negatively impacting this sector
Excess supply broiler prices has softened Due to an oversupply, broiler prices have been stable to declining, albeit the recent uptrend.

Broiler Prices (`/kg) at Mahua, a big wholesale market

80 70 60 50 40 Source: EISEC Research
Source : www.papaak.com

Driven by aggressive minimum support price increases announced by the government, maize prices remain firm Price of maize remains firm MSP for Maize over the years `/100 kg 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 980 840 840 620 620 540 540 % inc 17 0 35 0 15 0 Source: EISEC Research
Source : MCX Website

Spot Maize Prices in `/100 kg

1200 1000 800 600

Source: EISEC Research

This has put margins under pressure:

4QFY10 62% 18% 1QFY11 60% 19% 2QFY11 65% 11% 3QFY11 66% 11% 4QFY11 65% 11% 1QFY12 70% 7% 2QFY12 68% 8% 3QFY12 69% 3%

Pressure on margins 3QFY10 RM/Sales (%) OPM(%) 64% 13%

April 2012

Venkys India Ltd || Initiating Coverage

What can change? Supply Dynamics - oversupply will likely get corrected in 2 quarters
We believe that the supply dynamics will begin to improve in next 6 months The Day Old Broiler Breeder Parent Chicks (which Venkys sources from Venco Research) have a life of 68 weeks. Depending upon the supply side dynamics, Venkys & other players adjust their orders for the coming year. Additionally, in case of an oversupply, farmers have the option to incubate lesser number of eggs of the parent. This brings about a natural adjustment of the oversupply situation.

Venkys RM to sales & margin data clearly indicate that the oversupply situation has been hurting Venkys since 2QFY11. We believe that the broiler meat industry is near the cusp of the turnaround and the worst of the oversupply situation is already behind and supply dynamics should start looking up for Venkys within two quarters.

However, maize prices will continue to rule firm

We believe that with the governments endeavour to improve the outlook for agriculture, MSPs going up is a given. The robust demand growth of 15-18% will help offset RM price inflation as pricing power will return once the supply dynamics improve, as discussed above.

Why maize is so critical for the poultry industry Maize constitutes 70% of feed given to chicken. The rest is protein, mainly, soya bean. So far, companies have not been able to substitute maize with other carbohydrates such as rice or wheat. Market sources tell us that ~50% of all maize produced is consumed by the poultry industry and a large part of the rest by the glucose and starch industry. Also, maize prices have been going up largely driven by robust demand for poultry.

April 2012

Venkys India Ltd || Initiating Coverage

Investment Case
Poultry industry looks interesting from an investment perspective as Indians are consuming more of high value food items An excellent play on Indias demographic & consumption growth story as rising affluence is leading to more consumption of high value food items. Venkys has all the strengths required to succeed in the business: o Assured sourcing of parent chicks from group company o Good understanding of poultry medicines o Robust veterinary practices in place set over the last 35 yrs o A good distribution network o And most importantly a vast land bank in northern and western states. Broilers are commoditised products because no single producer can influence prices and all are price takers. Yet the industry is interesting as it is growing at a very high rate and by the looks of it will continue to do so. Raw material cost inflation is a concern but we believe that robust growth in poultry demand will ensure pricing power. We believe that in just about 6 months, the excess supply will begin to clear. We therefore recommend investors to buy the stock at current valuation of 5X FY13 earnings.

Risk to our call

Supply overhang takes longer than anticipated to adjust The government remains extremely aggressive in pricing maize which is a key raw material (~70% of RMC) for Venkys poultry business Industry vulnerable to spread of disease & resultant consumer averseness

Comparative Valuation
The only listed comparable is Srinivasa Hatcheries though it is a much smaller player as compared to Venkys. Sales OPM(%) EPS ROCE(%) ROE(%) MCap P/E Mktcap/Sales EV/EBIDTA Price FY13 (` cr)
Srinivasa Gr (%) Venkys Gr (%) 154 17 1194 20 10% 15% 16 58 80 137 25% 23% 371 5 0.3 4 395 37% 26% 65 4 0.4 3 67

N.B: We do not have coverage of Srinivasa Hatcheries. For the purpose of this comparison, we have: i) broadly projected the sales, OPM & EPS for FY13 & for FY12 ii) debt and cash have been taken at their 9MFY12 levels for Srinivasa

April 2012

Venkys India Ltd || Initiating Coverage

Key Financials
YE March (`Cr) Total Revenues Gr % EBIDTA Gr % Net Profit Gr % Tot Equity/Tot Cap employed Total Debt/Total Cap Employed Total Capital Employed Gr % Gross Block Gr % Investments Source: Company, EISEC estimates FY09 569 9 42 -22 21 -23 59% 36% 264 0 197 4 52 FY10 705 24 91 119 54 164 66% 29% 311 18 211 7 81 FY11 852 21 113 24 73 34 68% 28% 404 30 248 17 93 FY12E 998 17 60 -47 32 -56 67% 30% 449 11 301 22 103 FY13E 1194 20 122 104 76 137 69% 30% 535 19 355 18 117 FY14E 1435 20 172 40 111 47 81% 19% 579 8 365 3 123

Key Operating Ratios

YE March Diluted EPS (`) Gr % CEPS (`) EBIDTA (%) NPM (%) Tax / PBT (%) RoE (%) RoCE (%) Fixed Asset Turnover (x) Book Value per Share (Rs.) Debt/ Equity (x) Dividend Payout Ratio (%) Source: Company, EISEC estimates FY09 22 -23 31 7 4 34 14% 15% 3 167 0.6 16% FY10 58 164 67 13 8 34 30% 30% 3 220 0.4 7% FY11 78 34 88 13 9 32 30% 31% 3 292 0.4 6% FY12E 34 -56 46 6 3 32 11% 14% 3 322 0.5 9% FY13E 80 137 94 10 6 32 23% 25% 3 391 0.4 12% FY14E 118 47 134 12 8 32 27% 31% 4 496 0.2 9%

April 2012

Venkys India Ltd || Initiating Coverage

Cash Flow Analysis

YE March (`Cr) Sources of Funds Cash from Operations Add : Loans (repaid)/ raised Add : Equity Raised Uses of Funds Less : Inc / (Dec)in WC Less: Capex Less : (Inc)/Dec in investments Less :Dividend paid Cash Generated Add prev yr Cash Balance Closing Cash Source: Company, EISEC estimates FY09 27 -16 0 FY10 63 -4 0 FY11 83 25 0 FY12E 38 22 0 FY13E 84 25 0 FY14E 120 -51 0

-5 10 -1 4 2 9 11

13 15 29 4 -2 11 9

35 51 11 5 5 8 13

8 29 10 3 10 13 23

16 54 14 11 14 23 37

32 10 6 12 9 37 46

Common Sized Profit & Loss Account

YE March Total Revenues Raw Material Consumed Power & Fuel Personnel Other Expenses EBIDTA Depreciation & amortisation Interest Paid Non-Operating Income Extraordinary Expense Profit Before Tax Tax Net Profit Cash Profit Source: Company, EISEC estimates FY09 100% 69% 4% 7% 13% 7% 2% 1% 1% 0% 6% 2% 4% 5% FY10 100% 66% 4% 6% 12% 13% 1% 1% 1% 0% 12% 4% 8% 9% FY11 100% 64% 3% 7% 13% 13% 1% 1% 1% 0% 13% 4% 9% 10% FY12E 100% 69% 4% 7% 14% 6% 1% 1% 1% 0% 5% 2% 3% 4% FY13E 100% 66% 4% 7% 13% 10% 1% 1% 1% 0% 9% 3% 6% 7% FY14E 100% 66% 4% 8% 11% 12% 1% 1% 1% 0% 11% 4% 8% 9%

April 2012

Venkys India Ltd || Initiating Coverage

Valuation Ratios
YE March P/E (x) P/CEPS (x) P/BV (x) EV/EBIDTA (x) EV/Sales (x) Market Cap/Sales (x) Net Cash/Market Cap (%) Dividend Yeild (%) Source: Company, EISEC estimates FY09 18 13 2 11 0.8 0.7 3% 1% FY10 7 6 2 5 0.6 0.5 2% 1% FY11 5 5 1 4 0.6 0.4 4% 1% FY12E 12 9 1 8 0.5 0.4 6% 1% FY13E 5 4 1 4 0.4 0.3 10% 3% FY14E 3 3 1 3 0.3 0.3 12% 3%

Enterprise Value
YE March (`Cr) Price (Rs.) No. of shares (cr) Market Cap Total Debt Cash Enterprise Value Source: Company, EISEC estimates Disclaimer: This document has been prepared by the investment research department of East India Securities Limited (EISEC), for the purpose of information only. This document is not to be reproduced, copied, redistributed or published or made available to others, in whole or in part without prior permission from EISEC. This document should not be construed as a solicitation, to any person, to buy or sell a security. Recipients of this document should be aware that past performance is not necessarily a guide for future performance. Although the information contained in this document has been obtained from reliable sources, its accuracy or completeness has not been fully verified by EISEC independently and cannot be guaranteed. Neither EISEC nor any of its affiliates, its directors or its employees accepts any responsibility, of any nature, for the information, statements and opinion given or expressed herein or for any omission or for any liability arising from the use of this document. Opinions expressed are our current opinions as of the date appearing on this material and are subject to change without notice. EISEC directors, employees and its clients may have holdings in the stocks mentioned in the report. FY09 395 0.9 371 94 11 454 FY10 395 0.9 371 90 8 452 FY11 395 0.9 371 115 13 472 FY12E 395 0.9 371 137 23 484 FY13E 395 0.9 371 163 37 496 FY14E 395 0.9 371 113 46 437

April 2012