Venky's India: Hatching a good future - Outside View by Luke Verghese

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Venky's India: Hatching a good future
Dec 27, 2010

20:20 Vision?

(The VH Group as it is called was in the news recently for reasons other than its poultry business. Namely their plans to acquire the first division football club, Blackburn Rovers of the English Premier League.)

Venky's India is the only publicly listed company of the eponymous group. It boasts of 12 other companies in which the directors of Venky's India exercise control, including Venkateshwara Hatcheries Pvt Ltd, which is the holding company of Venky's India. Founded by the late Dr B.V. Rao, the Pune headquartered group is now chaired by his daughter Anuradha Desai. The promoter family has a 56% stake in the voting stock of Venky's India.

The growth drivers

Though medium sized in terms of revenues generated at Rs 7.1 bn for FY10, it boasts a diverse spread of locations of its productive assets, and in terms of its revenue drivers. It is a back to back integrated operation, right down to making animal health care products, to the raw materials for poultry food, and to making the poultry food itself. It has its ‘production' units situated in 10 locations covering 7 states, either owned or leased, ranging from Maharashtra and Gujarat in the West, to Punjab, Haryana, U.P., and Uttaranchal in the North, and Madhya Pradesh in Central India. These units house its bread and butter breeder farms, hatchery and poultry feeds, and commercial farms, solvent extraction, and refinery units, and satellite hatcheries. It buys raw materials and finished products from its group companies, and also sells materials and finished goods to its group companies. It also buys finished goods for resale. It markets a variety of packed chicken products through the retail outlets. Logistics management and quality control management has to be in top gear for this company to persevere and grow.

Investments at arms length

The remarkable aspect of this company is that it does not own a single share in any of its group companies, or in companies having any ‘affiliations' with the management. The promoters have done their tax planning to the hilt it appears. Surplus funds are stacked into mutual fund instruments, which are then turned over. In FY10 it bought debt securities worth Rs 2.1 bn and sold debt securities worth Rs 1.8 bn, yielding a profit of Rs 24 m. At year end, the book value of its investments in debt instruments was of the order of Rs 813 m (Rs 521 m).

FY10 has been a particularly flattering year for the company. In this year it recorded its highest sales and profits, by far, for the decade. Turnover excluding other income grew 24% to Rs 7.1 m, while pretax profits grew at a much faster pace of 165% to Rs 823 m. The chairperson attributes this resurgence to a medley of factors such as the launching of a new design for Venky's logo, to the introduction of state of the art consumer friendly packaging, to improvement in the distribution network, to steps taken to enhance operational efficiency.

Revenue generation

The company earns its gross revenues through the sale of 13 items, including an item labeled miscellaneous (which accounts for 4.5% of all revenues), and, from some piddling service charges. In FY10, the growth in input costs was very tempered, compared to what it was able to eke out from rupee revenue growth. Input cost growth averaged an increase of 18.7%, compared to a rise in revenues of 24%. Its accounting for revenues is rather complex, but from ones understanding of the schedules to the profit and loss account, the revenues are put together on the following lines. From its in-house facilities, it obtains the bulk of its requirements of chicks, and the entire quantum of S.P.F. eggs, along with some poultry feed and animal healthcare products. From its leased facilities it buys still more chicks, grown up commercial broilers, grown up commercial layers, and processed chicken. It also outsources for resale, still more chicks, grown up commercial broilers and animal health products. Of the 91 m chicks that it procured in FY10, almost 23% or 21 m chicks were for captive consumption. Of the balance 70 m, it sold 69.6 m chicks. (During the year it upped in house production of chicks, reduced sourcing from leased facilities, and accelerated outsourcing to 12 m chicks, from 7 m previously). Of the 35 m kgs of commercial broilers that it procured, 16.5 m or 47% are for captive consumption. Of the balance 18.4 m kgs, it sold 18.3 m kgs. It also sold almost the entire quantum of 0.7 m of grown up commercial layers that it procured, and the 8.1 m kgs of processed chicken that it got, from its leased facilities. (In the schedule giving the breakdown of material consumption, there is no clear evidence of how these chicks and commercial broilers bought for captive consumption, have been consumed)

Unit price realisation

On a volume sales basis the company has not really stepped on the gas pedal in any of its product lines. The sales increase has come per se from a mark up in rupee realizations per unit sold. For example, the total volume sales of chicks grew a mere 4%, but the rupee revenue realizations per chick sold grew 20.7%. Processed chicken sales however grew 14% in volume and in unit price realizations. But volume sales of grown up commercial broilers fell 15% though unit price realization grew close to 21%. Other major revenue generators showed a trend of higher unit price realizations.

Individually, 7 of the 13 revenue generators brought in over 72% of rupee sales. Among the revenue drivers, the sales of chicks is the biggest contributor (20%) followed by processed chicken (14.7%), grown up commercial broilers (13.7%), de-oiled cake for poultry feed (13.5%) and poultry feed (10.3%). For segmental purposes, the company groups its revenues under 3 heads - poultry and poultry products, oilseeds, and animal health products. In this classification, the first named brought in 68% of all sales, followed by oilseeds with 23.2%, and the rear end being brought up by animal health products with 8.5%. But it is the last named that brings in the highest margins of 18% on sales, followed by poultry with 14.4%, and oilseeds bringing in a 7.2% margin.

Inter-se transactions

The company has fairly significant inter se transactions with group companies in the purchase of raw materials and finished goods, and in the sale of its final produce. It sourced Rs 757 m worth of goods from a number of affiliates including the holding company, Venkateshwara Hatcheries, and sold Rs 2.2 bn worth of finished items to group companies. Venkateshwara Hatcheries is the top dog in this dual transaction. (Why this company should be a dual beneficiary is not very clear though?) The sales to affiliate companies, account for 31% of all sales during the year. It is also quite obvious that the affiliate companies - especially the parent company of Venky's - is given a longer credit line to pay their dues to Venky's. Debtor dues from group companies account for more than 50% of all trade debtor dues at year end.

An interesting aspect of the outsourcing of chicks is that the company has paid a significantly higher price for these chicks in FY10 at Rs 18.2 per chick, compared to the 11.6 per chick that it paid in the preceding year. Taking the average sale price that it realized in the two years, the margin that it makes on the sale of each chick is a mere Rs 2.5 in the latter year and Rs 2.7 in the pre ceding year. The company would have however made good money on the purchase/resale of powders and of grown up commercial broilers, but lost a tidy sum on the purchase/resale of liquids.

Outlook

Overall, barring a few squeaks here and there, Venky's appears to be a company which is being run on very professional lines. And, given the rise in the income levels on the one hand, and the changing eating habits of today's GenNext, on the other, the company appears to have a plotted a nice future for itself

PLEASE NOTE THAT I AM NOT A SHAREHOLDER OF THIS COMPANY

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:

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