Beef ban made this stock cash cow; can it still be a good bet?

NEW DELHI: Venky’s India is among a few stocks whose returns this year have overwhelmed investors.

While the government beef ban has been a major driver of the 360 per cent rally in the stock, other forces too are at play now.

Between May and June, factory gate prices of chicken went up 25-35 per cent, thanks to the hot weather that affects bird weight and mortality. The prices declined a bit towards the second half of June, they said.

Poultry company Venky’s India carried on with its capex programme when it was not needed and when growth in revenue was lacklustre for almost past five years.

But analysts see good demand ahead.

“Near-term (FY18) earnings visibility is high, especially following a sharp rise in poultry prices in the first quarter of FY18. On a two-year investment horizon, assuming trailing multiples are sustained, Venky’s stock can potentially double with a high likelihood of strong gross margins running through till FY19,” Kotak Securities said in a note.

The brokerage though has a March 2018 price target of Rs 2,150 on the stock.

The brokerage noted beef accounted for 20-25 per cent of poultry consumption and a ban on it may keep chicken prices at elevated levels in the near term.

On Tuesday, India's Supreme Court suspended the government order banning trade of cattle for slaughter, giving relief to the multi-billion dollar beef and leather industries that employ millions of poor workers

But Venky’s also stands to gain from external factors, such as restriction on cow slaughter and a drop in soya (down 30 per cent YoY) and corn prices (down 10 per cent).

“We project 42 per cent CAGR earnings through FY17-FY19 and expect significantly improvement in return ratios and paring of debt, going forward, which builds a case for greater investor attention/re-rating,” Kotak Securities said.

Neeraj Deewan of Quantum Securities said he had identified the stock in FY16, when its market capitalisation was at Rs 730 crore and total sales Rs 2,100 crore.

“There was a Rs 30 crore profit at that time, but the company indicated that it had made a mistake in FY10-FY11 by increasing capacity thinking that consumption will improve, but then everyone knows that FY11-FY15 was a bad phase for consumption. But then besides poultry, it expanded capacity in other high margin businesses such as SPF eggs, for which it is the only manufacturer. We have factored in a profit of about Rs 200 crore in FY19. Even though the stock is trading at about 14 times FY19 and with an ROC in excess of 25 per cent, I would not say it is very expensive right now. It is fairly valued,” Deewan said.

At present, the m-cap of the stock stands at Rs 3,200 crore. The stock has jumped 120 per cent in last one quarter, 364 per cent in one year and 674 per cent in last five years.

“Amazing move! It’s is a big brand,” said Porinju Veliyath of Equity Intelligence India, who was bullish on the stock 10 to 15 years ago.

“There are such companies that are just sleeping as far as stock price is concerned. That sleeping of stock happens because of any major corporate event or the promoters’ attitude. At present, we are not holding the stock. ”

Sanjiv Bhasin of IIFL, meanwhile, said: “The impact cost of entry and exit is high on the counter that one can always see surprising moves. In the underlying business, this firm has monopoly. It has more to do with food habits and that can continue. It is similar to what in the rice segment we have seen and that is played out in most of the other soft commodities, but chicken being the other part. The stock has almost doubled in the last six to nine months. I would be little wary here because of the overall market conditions, but definitely a buy on declines.