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BULLSbook Stock Of The Month : Venkys ( India ) Limited

November

2009

Alpha Invesco Research Pvt Ltd www.bullsbook.com

November 2009

Editors Desk

Dear Investor,

Welcome to BULLSbook.

This is an attempt to increase your ‘Investment IQ’ as each day passes by. We are trying to make you knowledgeable in

a step by step process. We want you to learn, we want you to make your own decisions to have a prosperous financial

future.

Here is a brief of what you will come across in this edition of BULLSbook.

First section of this edition comprises of myths & realities behind PE Ratio’s & Stock Price movements.

Second section will inform you about ongoing developments in Healthcare sector in India. We believe this sector will

create huge wealth for investors in days to come. We will invest in this sector when the time is right.

Third section has the stock of the month. We are recommending Venkeys ( India ) Limited for this month.

All the best.


November 2009

Our Approach

Its all about PE & EPS !

What is PE Ratio?

Price to earnings ratio. (PE Ratio)

This is the stock price divided by earning per share.

Stock Price ÷ Earning Per Share (EPS)

For example : If the stock price of a company is trading at 100 Rupees. And the earning per share (EPS) of that

company is 10.

PE = 100 ÷ 10 or 100/10

PE = 10

This means, the PE of the company is 10.

What is EPS ?

Earning per share (EPS)

This is the net profit divided by the number of shares outstanding. The EPS as an absolute figure means nothing and is

significant only when viewed in relation to the price of the stock. It simply means how much one share of the company is

earning.

Net Profits ÷ Number of Shares

For example : If a company ABC has 1 crore shares in the market & Companies Net profit is 10 crores;

EPS = 10 crore ÷ 1 crore or 10 crore/1 crore

EPS = 10

That means each share of the company earns profit of 10 Rupees.

Earning per share is a derived formula. It decides how much PE Ratio will be given to any company.

PE Ratio is a variable factor. It keeps moving up & down, depending on the profit growth & performance of the company.

Let’s see how it works.

General assumption is; lower the PE is, cheaper the stock is ! And high PE means the stock is expensive. FALSE !

Markets pay high PE to companies who are going to show high growth rate & lower PE ratio to stocks that are going to

grow at slow pace.

The greatest amount of wealth is generated in PE expansion phase. And the biggest wealth is destroyed during PE

contraction. But what does it exactly mean ? Lets have a look.


November 2009

PE Expansion Phase :

In the initial phase market does not believe in small company’s growth, therefore markets will give it a low PE. But once

the market participants realize that the company is growing rapidly or at a consistent high growth rate, the markets will

give it a higher PE. This is called as PE re-rating.

Now what is company’s growth ? It is increase in company’s net profit along with its sales.

Example : Stock price of ABC Limited is trading at 50 Rupees & the company is growing at 30% per year since 2008. It

has 1 crore shares in the market & its net profit in 2009 is 10 crores, translating into EPS of 10 Rupees. It shows the

company is trading at a PE ratio of 5.

The company’s net profit grows to 13 crores in 2010. That means a 30% growth in profits. If the company is poised to

grow at the same rate in coming years, the markets will notice the stock. And participants are willing to pay high PE

ratios during such phase. So the PE ratio of this company gets re-rated from 5 to 20. Now the company’s EPS is 13

Rupees (Net Profit ÷ No of shares ). The stock price suddenly shoots to 260 levels from 50 (EPS of 13 X PE of 20) ! A

rise of more than 6 times in a year.

Now in 2011, the company continues to grow at 30%. It posts a net profit of 17 Crores, translating into EPS of 17

Rupees per share. Since the company continues to grow at 30%, markets are willing to pay it a higher PE ratio of 30.

This translates in to a stock price of 510.

The stock of ABC Limited moves from 50 Rupees to 500 Levels. This is how, the stocks which are trading at dirt cheap

rates for many years, suddenly start a multiyear rally and go up by 5 – 10 – 15 – 20 times & even more. Pantaloon,

Titan, TRF are some of the examples in the last bull run. Nobody noticed these stocks till 2003-2004. When these

companies showed a consistent growth & better future prospects, they went up by many times making intelligent

investors multi-millionaires.

PE Contraction Phase :

We will continue with the example of ABC Limited. ABC limited continues to grow at 30% till 2012.With a profit of 22

crores & an EPS of 22 Rupees & PE ratio of 30, the stock price is trading at around 700 levels. The company has reached

its peak in terms of growth & growth rate slows down to 15% in 2013. And the slow growth is likely to continue for few

more years. Now the stock markets will realize this thing and market participants are not willing to pay such a high PE

for a slow growing company. This is called as PE de-rating.

In 2013, the company posts a net profit of 25 crores, translating in to EPS of 25 Rupees. Markets will de-rate the PE

since the growth is slowing down. The market de-rates its PE to 15. So the stock price falls to 375. Even after company

posted an increase in net profits the stock price fell from 700 to 375 !

In 2014, company’s growth rate falls in to negative territory. It posts a net profit of 20 crores & EPS of 20 Rupees. The

market will further de-rate its PE to 10 because of the negative growth. And the stock price will fall further to 200

Rupees.


November 2009

The company is still a profit making organization, but the stock price fell from 700 to 200 just because it is slowing

down. This is what common investors need to understand. Recent examples of PE de-rating are telecom companies like

Idea, Bharti, Reliance Communications. These three company’s are excellent companies with good management. But

their growth rate is slowing down. Though they are showing increase in their net profits from last 6 months, markets are

de-rating their PE. Because of this reason, their stocks have fallen between 40 to 70 % from their all time highs.

And as usual, common investors are buying these slow growing companies just because their stock prices have fallen too

much & they are ‘BLUE CHIP’ companies.

We can summarize the example of ABC limited in following table. This is how multibagger charts are made. Investor who

enter early, benefit the most. And common investors who buy the stock when it becomes a HOT stock, it is discussed all

over media etc. They end up in buying a good company at a bad price and bad time & get stuck.

Year Company

Growth

Rate

Net Profit

(Cr) EPS PE Stock Price

2009 ABC Limited 30% 10 10 5 50

2010 ABC Limited 30% 13 13 20 260

2011 ABC Limited 30% 17 17 30 510

2012 ABC Limited 30% 22 22 30 660

2013 ABC Limited 15% 25 25 15 375

2014 ABC Limited -20% 20 20 10 200

Chart & buying behavior of investors towards this company will look like this.

PE Expansion

Phase (2009 to

2011). Markets

re-rate the stock

& pay a higher PE

after realizing the

growth.


November 2009

Points to be noted :

These are the points that you should keep in mind before putting your money in any stock.

Never buy a stock just because it has fallen too much from its high & the management is good / the company is BLUE

CHIP or it can not fall further etc. No low is a low & no high is a high. This is how unitech, suzlon & many more

prominent names destroyed investors wealth in last couple of years.

A low PE ratio does not mean the stock is cheap. If the company is not growing, it will continue to trade at lower PE

rates for years & decades.

Wealth can be created only by investing in companies which are growing & at the same time trading at low valuations.

So there is a scope for PE expansion. This is how you can be a part of major bull runs in individual stocks.

For growing companies, PE ratio is equal to or more than their growth rate. For companies which are slowing down, their

PE ratio will be lower than the growth rate.

In the next edition, we will take a look at what are the signs of multibagger companies. How to identify them & much

more.


November 2009

BULLSbook Corner

In this section we will keep you updating about latest sector updates, market updates, interviews & thoughts of investing

legends, significant events & much more.

This time we are covering Healthcare sector. The sector is poised for a huge growth in coming days. We are actively

following the latest development on the sector & companies operating in it. We are waiting for the right time &

valuations to enter some of the stocks related to this sector.

Healthcare Update : November 2009

Sector structure/Market size

Healthcare, which is a US$ 35 billion industry in India, is expected to reach over US$ 75 billion by 2012 and US$ 150

billion by 2017, according to Technopak Advisors in their report – ‘India Healthcare Trends’.

The sector offers immense potential to healthcare players as the country witnesses a rise in the incidence of lifestyle-

related and other diseases. A growing elderly population and rise in income levels are also pushing for better facilities in

the country.

To meet this growing demand, the country needs US$ 50 billion annually for the next 20 years, says a Confederation of

Indian Industry (CII) study. India needs to add 3.1 million beds by 2018 to the existing 1.1 million, and requires

immediate investments of US$ 82 billion, as per the Technopak Advisors report.

According to a latest report by McKinsey, driven by strong local demand, Indian healthcare market is expected to

continue growing close to previously projected rates of 10 to 12 per cent. With average household consumption expected

to increase by more than seven per cent per annum, the annual healthcare expenditure is projected to grow at 10 per

cent and also the number of insured is likely to jump from 100 million to 220 million.

Health Insurance

Currently only 10 per cent of the Indian population has health insurance, which means that there is tremendous scope for

growth in this area. The Indian health insurance business is growing at 50 per cent. The sector is projected to grow to

US$ 5.75 billion by 2010, according to a study by the PHD Chamber of Commerce and Industry.

Investments in Healthcare

The sector has been attracting huge investments from domestic players as well as financial investors and private equity

(PE) firms. Funds such as ICICI Ventures, IFC, Ashmore and Apax Partners invested about US$ 450 million in the first six

months of 2008-09 compared with US$ 125 million in the same period a year ago, according to an analysis carried out by

Feedback Ventures. Feedback Ventures expects PE funds to invest at least US$ 1 billion in the healthcare sector in the


November 2009

next five years.

In February 2009, India Venture invested almost US$ 18 million in Tamil Nadu-based Kavery Medical while in June IFC

invested US$ 30 million in Max India.

Philips plans to make India one of its global production hubs for medical equipment by investing substantially on

upgrading of its two acquired manufacturing facilities in the country and increasing their capacity.

Malaysia-based hospital chain, Columbia Asia Hospitals, plans to set up 15 new multi-specialty hospitals in India in three

years. It plans to invest around US$ 100 million for the expansion.

Piramal Life Sciences, the research and development (R&D) arm of Piramal Group is investing US$ 41.17 million in the

next two years’ period to discover and develop new chemical entities and novel drug delivery systems.

As part of its ‘Healthymagination’ initiative, GE will spend US$ 3 billion over the next six years on research and

development, provide US$ 2 billion of financing over the next six years to drive healthcare information technology and

health in rural and underserved areas, and invest US$ 1 billion in partnerships, content and services.

The government, along with participation from the private sector, is planning to invest US$ 1 billion to US$ 2 billion in an

effort to make India one of the top five global pharmaceutical innovation hubs by 2020.

Medical Tourism

In 2007, India treated 450,000 foreign patients ranking it second in medical tourism.

According to a study by McKinsey and the CII, medical tourism in India could become a US$ 2 billion industry by 2012

(from US$ 350 million in 2006). Credit Suisse estimates medical tourism to be growing at between 25-30 per cent

annually.

The key selling points of the medical tourism industry are its cost effectiveness and its combination with the attractions of

tourism. Treatment cost is lowest in India – 20 per cent of the average cost incurred in the US, Singapore, Thailand and

South Africa.

Besides world class medical facilities, India is also trying to promote its traditional medicine such as ayurveda.

Areas of Opportunity

The fast growth in the Indian healthcare sector has created various pockets of opportunities for investors. A recent FICCI-

Ernst and Young (E&Y) report highlights several such areas within the healthcare sector.

• Medical infrastructure forms the largest portion of the healthcare pie. Beds in excess of one million need to be

added to reach a ratio of 1.85 per thousand at an investment of US$ 77.9 billion.


November 2009

• The medical equipment industry is around US$ 2.17 billion and is growing at 15 per cent per year. It is

estimated to reach US$ 4.97 billion by 2012.

• The medical textiles industry is projected to double to reach US$ 753 million by 2012.

• Clinical trials have the potential to become a US$ 1 billion industry by 2010 and the health services outsourcing

sector has the potential to grow to US$ 7.4 billion by 2012, from US$ 3.7 billion in 2006.

Notwithstanding the current economic slowdown, the US$ 2.26 billion Indian wellness services market is expected to

grow at about 30-35 per cent for the next five years on the back of rising consumerism, globalization and changing

lifestyles, according to a FICCI-Ernst and Young study.

The report classified wellness industry into seven core segments of allopathy, alternative therapies, beauty, counseling,

fitness/slimming, nutrition and rejuvenation. While rejuvenation services such as spas, alternative therapies, ayurveda

treatments and beauty services are expected to grow by as much as 30 per cent, fitness comprising gyms and slimming

centers are expected to grow by more than 25 per cent.

Government Initiative

The Government launched the National Rural Health Mission (NRHM) in 2005. It aims to provide quality healthcare for all

and increase the expenditure on healthcare from 0.9 per cent of GDP to 2-3 per cent of GDP by 2012.

During the 2009 interim budget, the government allocated US$ 2.42 billion for NRHM.

The Tamil Nadu government has allocated US$ 698.16 million for health and family care for the year 2009-10, up from

US$ 564.34 million a year ago. The increased budget includes creating a mega blood bank—Asia’s largest—in Chennai

and upgrading several hospitals, besides launching a new insurance scheme.


November 2009

Stock Of The Month

Venkys (India) Limited

BSE 523261 NSE VENKEYS ISIN INE398A01010 Market Cap : 173 Crores Face Value : 10.00 PE Ratio : 5 Dividend : 35% 52 week H : 189.95 52 week L : 56.20 Current Market Price 180 Rs BULLSbook Target 750 to 800 Rs Holding Period 24 Months

BUYING STRATEGY

The company is all set to get re-rated on back of consistent performance & huge market potential, business scalability,

pricing power. We recommend a buy with a price target of 750 to 800 Rs in the next 24 months. Buying is recommended

on all declines to 150 levels. Stock price has nearly tripled from its lows in the last one year. Stock is likely to

consolidate around current levels in the next couple of months.

Buy in small quantities whenever it falls around 150 to 160 range.

To get latest update on this stock, Type BB VENKY on your mobile & send it to 56767. You can get updates at any point

of time till the recommendation is active. We will update the status of this recommendation every month.

ABOUT THE COMPANY

Venkys (India) Ltd, a part of the VH Group is an integrated poultry group in Asia. The company`s principal activities are

to own and operate chicken and broiler breeding farms. Their portfolio include animal health products, pellet feeds,

processed, and further processed chicken products, solvent oil extraction, SPF eggs, nutritional health products for

humans, and pet food & health care products. The company operates through three business segments, namely poultry

and poultry products, animal health products and oilseed. The company`s major business segment is poultry and poultry

products, which consists of production and sale of day-old broiler and layer chicks, specific pathogen free eggs,

processed chicken products and poultry feed. They have manufacturing facilities for manufacturing nutritional health

products for humans, and pet food and healthcare products. They have their animal health products manufacturing

facility at Pune. They are also involved in solvent oil extraction. The company has 30 units spread across India. Venkys

(India) Ltd formerly known as Western Hatcheries Ltd was incorporated in the year 1976 as a private limited, mainly to

produce day-old layer and broiler chicks for the dense poultry markets of North India. The company was promoted by Dr

B V Rao. The company was converted into a public limited company on December 12, 1998. Over the years, the

company embarked upon new ventures in regular succession, adding tremendous value to the company, giving it an

edge in technology and high returns on investment.


November 2009

In May 1985, the company commissioned SPF Eggs Division with an installed capacity of 300,000 SPF Eggs per annum.

They are the only commercial producer of SPF Chicken embryos in India. In June 1992, the company set up a 100%

export oriented unit at Pune for export of hatching eggs with a capacity of 30, 000 broiler breeders.

The name of the company was changed from Western Hatcheries Ltd to Venkys (India) Ltd with effect from June 21,

2000. During the year 2000-01, the company commissioned an Edible oil refinery with a capacity of 50 tonnes per day.

Also, they entered into a business association with the US based Alltech Inc to market their animal nutritional products

in India.

During the year 2002-03, Venkys Foods (India) Ltd, the wholly owned subsidiary company was amalgamated with the

company with effect from October 1, 2001. Also, the company diversified into pet food business and constituted a new

division named Royal Pet. During the year 2003-04, the company disposed of their entire holding in their 100%

subsidiary, namely Venkateshwara Management Services Ltd, in order to focus on the company`s core activity and to

realign their investment portfolio.

During the year 2004-05, they expanded their production capacity of De Oiled cake for poultry feed from 49,200 MT to

98,400 MT.During the year 2005-06, the company disposed off their Animal Health Products Unit to Venkateshwara

Biosentry (India) Ltd. Also, they increased the production capacity of SPF eggs from 3,200,000 No’s to 4,400,000 No’s.

During the year 2006-07, the company increased the production capacity of Chick and SPF Eggs to 92,505,499 Nos and

5,400,000 No’s respectively. Also, they expanded the production capacity of poultry feed by 21,000 MT to 142,800 MT.

During the year 2007-08, the company increased the production capacity of Chicks by 15,881,915 No’s to 108,387,414

Nos.

During the year 2008-09, the company expanded the production capacity of poultry feed by 23,200 MT to 155,400 MT

and nutritional health products by 54 MT to 90 MT.

The company has steadily grown to over 30 unites all over India. Diversifying from mainstream poultry products, the

company has entered into credit, manufacturing facilities for nutritional health products for humans, and pet food &

health care products.

POULTRY INDUSTRY

Indian poultry industry is a booming industry with the second largest market in the world. Today, the poultry industry is

a Rs.45,000 crore industry, providing direct and indirect employment to over 4 million persons. About 2 crore corn

farmers and 50 lakh soya bean farmers are also directly dependant for their livelihood on poultry industry, as more than

80% of the corn and a substantial share of soya meal produced in the country are consumed by the poultry industry.

The overall environment is favorable for continued growth of the industry i.e. 10% in egg production and 18% to 20% in

broiler production. A combination of rising incomes, a young and urbanizing population Phenomenal pace at which


November 2009

integrated operations spread in the entire country. Eminent Transition from live bird market to a chilled/frozen product

market Poultry development in India is a success story par excellence.

PROCESSED FOOD INDUSTRY

15% of the company sales come from processed chicken.

According to the India Food and Drink Report Q3 2008 by research analysis firm Research and Markets, by 2012, India’s

processed food output is likely to grow by 44.2 per cent to touch US$ 90.1 billion, while packaged food sales will

increase by 67.5 per cent to reach US$ 21.7 billion. On a per capita basis, per capita packaged food spending is

expected to grow by 56.5 per cent to US$ 18.06 by 2012.

By 2011, the processed chicken business is likely to contribute more than 30% to the overall sales & this section is likely

to witness margin expansion in the days to come.

CONCERNS

The industry faces severe pressure on input costs. Prices of corn and soya – the most crucial ingredients of poultry feed

which account for 80% of the production cost – shot up by more than 100% in the last two years due to speculation in

these commodities.

After the introduction of forward trading there was large scale speculation in maize and soya which pushed up the prices

putting pressure on margins, especially in the case of small farmers. Added to that was export of these commodities by

private agencies. The poultry industry has pleaded with the Government to ban forward trading in corn and soya and

channelize the export through a designated government agency and to put a ceiling on the volume of export and ban on

export by private parties; and the industry is hopeful of getting a favorable response from the Government. The National

Egg Co-ordination Committee has been constantly taking up this issue with the Government of India.

STRENGTHS

Despite the issue of input cost, the company enjoys a greater degree of pricing power. If the input costs go up from

here, the company can easily increase the prices of its finished good without having any effect on its sales. The industry

is highly unorganized, and being one of the few corporate entities in this industry the company has an added advantage.


November 2009

RAW MATERIALS & FINISHED PRODUCTS

Raw Materials Unit Qty Value in Crores

A.H.P. Ingredients NA N.A. 19.58

Animal Health Powder-Purchased

MT 1239 9.22

Animal Health-Liquid Purchases

KL 257 4.99

Broilers-Commercial-Purchased

Kg 221160 0.95

Broilers-Grown up Kg 656918 1.49

Chicks-Broilers No 636053 0.78

Chicks-Purchased NA N.A. 9.06

Chicks-Purchased No 7188628 8.36

Commercial Layer Chicks

No 482195 0.93

Eggs-SPF Breeder No 7000 1.66

Feed MT 120639 126.47

Grown Up Layer Parents

No 55641 2.37

Oil Seeds/Oil Cake MT 81566 170.43

Other - Raw Materials

NA N.A. 32.9

Other Purchases NA N.A. 0.45

Packing Materials

NA N.A. N.A.

Total 389.64

Board Of Directors

Sr. No Name Designation

1 Anuradha J Desai Chairperson

2 B Venkatesh Rao Vice Chairman

3 B Balaji Rao Managing Director & CEO

4 Jitendra M Desai Director

5 S B Thorat Director

6 B G Deshmukh Director

7 C Jagapati Rao Director

8 Ashok Mahajan Director

9 A G Bauskar CFO & Company Secretary

11 A G Bauskar CFO & Company Secretary

Product Name Unit Value in crores

Qty % Sales Turnover

Animal Health Products-Liquid

KL 18.33 1386 3.21

Animal Health Products-Powder

MT 33.7 2257 5.91

Broilers-Commercial

Kg 93.28 21474199 16.36

Broilers-Grown up No 4.2 124913 0.74

Chicken-Processed Kg 79.88 7046464 14.01

Chicks No 95.55 66786616 16.76

De-oiled Cake MT 70.36 38546 12.34

Eggs-SPF No 23.21 5096057 4.07

Grownup commercial Layers

No 10.06 893029 1.76

Miscellaneous NA 24.28 N.A. 4.26

Nutritional Health Products

MT N.A. N.A. N.A.

Oil MT 66.03 12863 11.58

Poultry Feed MT 51.26 36344 8.99

Service Charges Total

NA 0.12

570.26

N.A. 0.02


November 2009

Shareholding Pattern

Public Shareholding Pattern

Corporate Bodies 6%

Individual shareholders up to 1 lakh Rupees 26%

Individual Shareholders holding shares worth

more than 1 lakh Rupees

12%

NRI/OCB 0.34%

Total 44.34%

Promoters are holding shares worth 55.65% in the company. Promoters have hiked their stake during last few years.

Promoters are not keen on diluting the company stake at high valuations, neither they are interested in issuing fresh

shares & raising capital.

This is another positive sign & establishes credibility of the company.


November 2009

BALANCESHEET

Rs. in Cr. Mar-09 Mar-08 Mar-07 Mar-06 Mar-05

SOURCES OF FUNDS : Share Capital 9.39 9.39 9.39 9.39 9.39 Reserves & Surplus 147.72 131.01 112.32 104.09 90.58 Total Shareholders Funds

157.11 140.4 121.71 113.48 99.97

Secured Loans 51.58 65.71 32.34 30.15 35.26 Unsecured Loans 42.31 44.65 73.25 53.41 16.17 Total Debt 93.89 110.36 105.59 83.56 51.43 Total Liabilities 251 250.76 227.3 197.04 151.4 APPLICATION OF FUNDS :

Gross Block 197.24 189.07 178.17 148.45 138.98 Less: Accum. Depreciation

79.74 72.73 64.75 57.82 52.98

Net Block 117.5 116.34 113.42 90.63 86 Capital Work in Progress 8.67 6.36 2.54 16.37 4.56 Investments 52.11 52.63 44.42 40.4 24.12 Current Assets, Loans & Advances

Inventories 70.98 80.64 63.89 49.78 41.87 Sundry Debtors 52.27 46.65 41.89 37.72 35.3 Cash and Bank Balance 10.84 9.07 10.7 9.18 8.62 Loans and Advances 71.53 57.58 48.52 37.64 54.88 Less: Current Liab. & Prov.

Current Liabilities 66.3 64.22 64.67 57.75 53.63 Provisions 66.6 54.29 33.41 26.93 50.65 Net Current Assets 72.72 75.43 66.92 49.64 36.39 Miscellaneous Expenses not w/o

0 0 0 0 0.33

Total Assets 251 250.76 227.3 197.04 151.4 Contingent Liabilities 4.25 3.32 3.41 3.17 3

Looking at the above balance sheet, we can easily point out that ;

Promoters did not raise capital even during the low interest rate scenario. The company is not having any burden of

excess debt. This is an ideal business which requires less capital to grow. And even if the interest rates rise, interest cost

of the company will not take a hit. Making it even stronger & competent during a slowdown.


November 2009

In the upcoming editions of BULLSbook, we will tell you how to interpret balance sheet & what to look in it to judge the

strength of the company. How you should stay away from companies who constantly raise capital, debt to meet their

business requirement, working capital requirement or over ambitious expansion plans etc.

PROFIT & LOSS ACCOUNT

Rs. in Cr. Mar-09 Mar-08 Mar-07 Mar-06 Mar-05

INCOME :

Sales Turnover 570.26 524.89 411.97 383.74 345.04

Other Income 6 5.22 6.4 2.15 5.84

Stock Adjustments -1.4 6.65 8.89 3.91 -4.4

Total Income 574.86 536.76 427.26 389.8 346.48

EXPENDITURE :

Raw Materials 389.64 349.04 282.02 251.57 217.8

Excise Duty 1 1.73 1.49 2.05 2.11

Power & Fuel Cost 21.69 19.96 18.5 16.68 13.06

Other Manufacturing Expenses

32.42 28.44 25.39 23.9 16.96

Employee Cost 40.62 37.39 32.66 28.82 25.1

Selling and Administration Expenses

25.56 26.96 25.01 24.9 20.8

Miscellaneous Expenses 16.4 14.43 11.88 14.75 14.37

Profit before Interest, Depreciation & Tax

47.53 58.81 30.31 27.13 36.28

Interest & Financial Charges 7.88 8.72 4.83 3.17 3.43

Profit before Depreciation & Tax

39.65 50.09 25.48 23.96 32.85

Depreciation 8.62 8.27 7.34 6.17 6.02

Profit Before Tax 31.03 41.82 18.14 17.79 26.83

Tax 10.47 15.21 6.62 6.02 10.16

Profit After Tax 20.56 26.61 11.52 11.77 16.67

Adjustment below Net Profit 0 0.16 0 3.88 0

P & L Balance brought forward 54.89 34.64 27.57 15.23 3.97

Appropriations 5.9 6.52 4.45 3.31 5.41

P & L Bal. carried down 69.55 54.89 34.64 27.57 15.23

Equity Dividend 3.29 3.29 2.82 1.88 3.29

Corporate Dividend Tax 0.56 0.56 0.48 0.26 0.46

Equity Dividend (%) 35 35 30 20 35

Earning Per Share (Rs.) 21.3 27.74 11.76 12.26 17.26

Book Value 167.32 149.52 129.62 120.85 106.46

Extraordinary Items 1.83 1.18 0.73 -0.07 -0.63


November 2009

The company’s sales are growing gradually. During the year 2008-2009, sales grew at 10%. Raw material cost has gone

up significantly in the last five years, and we can see its impact on input cost & EPS. Despite sales growth of more than

65%, net profits & EPS is up by only 10% in the last 5 years.

Interest cost & selling expenses have not gone up significantly. This is a big positive. Since company can post higher

sales without any additional cost. Employee cost has gone up since the number of employees has risen as well.

Manufacturing expenses are up since the company is in to capacity expansion mode.

However the half yearly sales till September 2009 are suggesting a sales

growth/revenue growth at 20% during 2009-2010. Despite the raw material

cost remaining so high, the company has seen a substantial operating profits

margin growth from 8.33% to 10.89% during March 2009 to September 2009.

You can have a look at company’s half yearly results in the next table.

The operating profit margins of the company are fluctuating between 7% to

11% in the last five years. Due to strong pricing power & strong demand, the

company is likely to see 20 to 40% improvement in its margins. So even if the

input costs go high, the company will maintain its margins above 11%.

If the input costs i.e. raw material cost of soya & corn fall further, the

company will see huge margin growth.

Operating Profit Margin = (EBITDA ÷ Net Sales) X (100)

( EBITDA = earnings/profits before interest, tax, depreciation, amortization )

For example, if the company posts sales of 100 crores & its EBITDA is 11

crores. Company is having OPM of 11%.

Operating Profit Margin gives us the clear picture of company’s business

performance, since it gives us the profit margin of the company on the sales

they are making. Because interest, tax, depreciation & amortization may

change from quarter to quarter, year to year.

The demand supply mismatch & increasing demand in urban area’s for

company’s products will continue to drive the sales growth at 20% + rate for the next 3-4 years.

We expect the revenue of 660 to 700 crores for the year 2009-2010 & 940 to 980 crores for the year 2010-2011.

Company’s net profit margin is moving between 2.8% to 5%. Between March 2009 to Sept 2009, the company has

posted a net profit margin of 5.89%. And we expect the company to maintain the margins above 5% in the coming

years.

Net Profit Margin = (Net Profit ÷ Net Sales) X 100

For example, if the company posts sales of 100 crores. Its EBITDA is 11 crores & OPM is 11%. Its Net Profit is 5 crores,

so the net profit margin or NPM will be 5%.

In Cr. March to Sep-09

Net Sales Turnover 331.76

Other Income 3.46

Total Income 335.22

Total Expenses 299.06

EBITDA 36.16

Depreciation 4.49

EBIT 31.67

Interest 3.04

PBT 28.63

Tax 9.1

Net Profit 19.53

Equity 9.39

Basic EPS 20.79

Face Value 10

Dividend (%) 0


November 2009

The company is not having any excess debt/loans. The company will manage to post a net profit of 35 to 40 crores in

2009-2010 & 50 to 55 crores in 2010-2011. This is considering the raw material prices show moderate growth. If the

raw material prices fall or remain at the same levels, the company will post even higher net profits. And even if the raw

material prices go up too much, the company will be able to maintain OPM & NPM both due to its pricing power.

By above logic, the company will post an EPS of 40 to 45 in 2009-2010 & EPS of above 55 to 60 in 2010-2011. Currently

the PE ratio for the company stands at 5. We believe that, the company will be re-rated due to its continuous growth of

15-20%, margin expansion, market opportunity in its sector, rising demand etc. The company can go for massive

expansion plans if management decides, since they don’t have a leveraged balance sheet.

(Company has 93.97 lakh shares in issue since last 5 years.)

Lets have a look at some more positives on Venkys.

Key Ratios Mar-09 Mar-08 Mar-07 Mar-06 Mar-05

Debt-Equity Ratio (x) 0.69 0.82 0.8 0.63 0.58

Long Term Debt-Equity Ratio (x)

0.16 0.45 0.72 0.48 0.33

Current Ratio (x) 0.98 1.14 1.48 1.24 1.13

Fixed Assets (x) 2.95 2.86 2.52 2.67 2.51

Inventory (x) 7.52 7.26 7.25 8.37 7.2

Debtors (x) 11.53 11.86 10.35 10.51 9.71

Interest Cover Ratio (x) 4.94 5.8 4.76 6.61 8.82

Operating Profit Margin (%) 8.33 11.2 7.36 7.07 10.51

Profit Before Interest And Tax Margin (%)

6.82 9.63 5.58 5.46 8.77

Gross Profit Margin (%) 6.95 9.54 6.18 6.24 9.52

Cash Profit Margin (%) 5.12 6.65 4.58 4.68 6.58

Adjusted Net Profit Margin (%)

3.61 5.07 2.8 3.07 4.83

Return On Capital Employed (%)

15.51 21.14 10.83 12.04 20.53

Return On Net Worth (%) 13.82 20.3 9.8 11.03 17.83

1 > Debt to Equity ratio is low. Lower debt to equity ratio indicates strength of company’s financial position.

2 > Return on capital is set to go above 20 again. Higher the return on capital is, better the efficiency of the company is.

Return on capital is calculated by following equation;

EBITDA ÷ (Total assets – Current liabilities)

Since EBITDA is set to go up, return on capital will go up as well. This is another factor behind the re-rating of the

company.


November 2009

In the upcoming months, we will inform you about how to interpret the ratio’s. And what ratio’s to look for while

selecting a company.

WHY INVEST IN THIS COMPANY

The promoter group of the company is investor friendly. There are no preferential allotments to the promoters to take

advantage of multiyear low prices, neither there were stake sales during boom time. Total number of shares outstanding

remains the same since last five years.

The poultry & food processing sector is poised for a huge growth. The company has a very large & untapped market.

Consistent growth in sales without leveraging balance sheet.

Company’s products & their demand are predictable, profit margins are moving higher.

FII’s, Mutual Funds have no exposure to this company. Sooner or later, they will chase the stock & re-rate it.

The stock is not an actively traded stock, less coverage by media & brokers for this stock. Remember, today’s popular

stocks were unpopular before they started their multiyear bull run.

Stock is available at cheap valuations.

This is the estimated share price movement in the next 12 to 24 months. However if the market re-rates the stock to PE

of 20 or more, the stock price may even go higher. These are the minimum target levels that we are looking for.

Re-rating shall happen in 2010. We recommend buying the stock on every decline towards 150 rupees. Buy the stock

whenever it falls to 150 to 160 levels.

Year Stock EPS PE Stock Price

2009(On 17th Nov 09) Venkys 36 5 180

2010 Venkys 40 10 400

2011 Venkys 55 15 825

The stock price movement may not be exactly as per the above table states. Stock price will fluctuate as per the short

term movements / sentiments of the market. This is how we expect the price to reach 800+ levels in 24 months to

come.

BULLSbook will keep updating you about the stock recommendations through SMS & Email’s on regular intervals.


November 2009

NOTES