Tata Communications Ltd, NIIT Ltd and Biocon Ltd

Entered in these stocks some times back. in fact i am holding Biocon for a long time at avg of 250/- I'll post detailed study after some time. Now just posting some introduction for these to have basic idea.

Tata Communications: Entered around 400/- . It is the company which provides the data services to internet service providers, voice services to our telecom giants. Contrary to the belief our telecom and internet services are not at all wireless. In fact they are wired…our internet data travels across the globe via huge optical cable network in the seas. Same is true for telecom voice services. Wireless is only from mobile device to mobile tower.

Our telecom giants are not having installed these optical fiber cables across the globe under seas and under land in india, they buy these slots from companies like Tata communications which is having around 210000 KM optical fibre submarine network under sea and operating in around 240 countries across the world. Global submarine cable network is around 12 lac KM. Around half of this network was laid in the dotcom period of 1999-2002, thinking that world would need these for providing services like movie on demand which never materialized at that time. And because of that wholesale prices for data and voice is falling for years. Oversupply has meant prices of bandwidth saw a steep fall - in 2010 they were 20% of what they were in 2003.

But now the emergence of smartphone and huge need of data services for internet and live streaming of videos and movies, most importantly cloud computing which requires huge data capacities are now creating the need and demand for optical fiber network and driving the wholesale data prices.

But this game of fiber network is much more complex. There is excess capacity of fiber network across the globe. But the traffic moves only within the lines, it just can't break this line. For an email to go from Australia to India, it is often first routed to California, and then back across the Pacific to India. There are many cities in Asia which are only linked to each other through the US because of a lack of direct cable links. The US still acts as a major clearing house for internet communications - though that importance will decline as investments in new cable routes are made. But there's also an incentive to build more cable on routes already well served by existing systems.

a couple of years ago , a ship's anchor dragged on a cable and severed it, leaving many in West Asia with weak or no internet connectivity. Indeed, such accidental cable breaks happen quite often. A new cable, between two regions but along a different route, isn't just a luxury, but a necessity. Bandwidth wholesalers like Airtel see the ability to offer customers capacity on multiple routes between key destinations as a competitive advantage. If one route gets taken out, traffic can be switched to an alternative route.

Tata communications’ optical network carries around 10% of the global internet traffic and 19% of the voice traffic. It carries 25% share of indian data traffic.

With voice business loosing stream it is betting big on data business which is going to see huge demand in the future. It is to reap the benefits of broadband storm in india and setting up of 100 smart cities

Tata communications is now focusing on new age business which uses the synergy from its data network like streaming of media content, payment solutions through management of white and brown ATM's across the country, data center services, cloud computing with partnership with global behemoth like Google.

I feel the worst is behind the company and it is having unmatched technical capabilities in this field.

It is in the final stages for selling its stake in its African business Neotel to Vodafone for around 4000 cr, which will reduce its high debt. Need to study the full news.

NIIT Ltd: Entered in NIIT at 39. It is at 650 cr market cap. It is holding 25% of NIIT Technologies which works out at 575 cr and at 30% discount it is at 400 cr. there is around 100 cr cash in the books apart from valuable land...it makes up about 500 cr,which leaves just 150 cr for a business having a turnover of 1200 cr, strong brand name NIIT.

I think brand of NIIT will be around 1000 cr itself. NIIT is one of the best education stock in the market apart from Zee Learn...it is changing its business model to offer more productive courses like E commerce and Finance. 

NIIT is an old horse...they know the running. NIIT is moving into corporate training and more value added contemporary courses on e commerce and finance. Many times it is good to buy a stock guessing the next move of promoters like recently i did for Future retail (that they will either list their logistics arm or do some change in their business model; they did the merger with bharti). in the same way i am taking my call on the promoters of NIIT..they have the brand power, 30 years of history and experience, no debt....so they can change their course of action into something more comprehensive in education sector in the future.

Like the main reason behind the IT coaching falling down was the starting of the same in the schools and colleges, so sensing the opportunity NIIT has entered into school training, teacher training etc. I think earlier we were getting anything in the name of IT coaching, our standards were very poor...our software engineers were just doing coding (writing millions of lines of a program designed and conceptualized in some USA, we are still doing the same). This is the reason; we have not created anything like Oracle, Java, Windows. our infosys and TCS are just low cost contractors. i think it is all about education.

So i am betting my money on this quality education part.

Biocon: Biocon is one of the best research based pharma company. I am a huge fan of  its owner Kiran mazumdar shaw, who started the business with 10000/- in 1978 after banks declined to give her loan because she was a girl. i adore some indian promoters like PRS Oberoi of EIH, Vikas oberoi of Oberoi realty and kiran M shaw of biocon for their business acumen, fairness and passion. She doesn't like the idea of taking debt for acquisition. Biocon was a debt free company, only recently it took a loan, perhaps for its Malaysia plant for making insulin for catering to global market as its present capacity in india is fully utilized.

Biocon is investing around 7-8% of its biotech turnover on R&D which is equal to global MNC as compared to indian standard of just 1%. Biocon has been betting big on oral insulin and it is into 3rd phase trial...if it is a success you can sense the scale it can generate. It is also into final stages of developing the drug for cancer.

It has launched many innovative drugs with its own research. Now it is focusing big on Biosimilars which is a huge business opportunity because patents of many biologics are going to expire upto 2020. Biosimilars are generic version of biologic medicine. Generic drugs are generic version of chemical drugs.

Making of curd and making of liquor is the best examples of workings of biotechnology, when enzymes convert one material into a complete new material. Biotechnology is changing our medicine world with its innovative and side effects free biologics.

Biocon is one research arm Synegene which provides research outsourcing facilities to global clients. Biocon is going to list it in the market around jul-15, it comprises 25% of profit but its valuation last year was 4000 cr (biocon market cap is 9000), so if syngene gets a valuation of 5000 cr then we are getting Biocon at just 4000 cr. CMP around 440.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Balmer Lawrie Ltd: Board this Lorry

Balmer lawrie Ltd is a mini Ratna PSU. It is dealing in the business of Logistics, tour and travels, Ind packaging like steel drums, Lubricants with Balmerol brands. Balmer Lawrie & Company was started by 2 Scotsmen, Stephan Balmer and Alexander Lawrie in 1867. Today it is 148 years old company.

It is maintaining good performance since long and even in difficult times, its diversified revenue streams provided adequate safety and consistency.

Its logistics business will be the biggest growth factor. It is already having 3 CFS             (container Freight Stations) at Mumbai, Kolkata, Chennai and warehouses at Kolkata and Coimbatore. Logistic is the biggest contributor in the profit at net level. It is around 60% at operating level.

Turnover and other data (in crore)
Segment	9m 2014-15	Opr profit for 9 mths	Opr margin %	2013-14, full year	Opr profit 2013-14	Cap employed
Ind packaging	409	26	6	496	34	211
Logistic	386	79	20	472	130	115
Tour	988	15	2	1177	23	183
Grease	296	20	7	430	27	151
others	67	0.72	1	82	0	249
Total	2146	141		2657	214	909
	2010	2014
gross block	674	878
Market value Current	1600 cr
cash in the books	400 cr

Dividend Payout ratio: 3.30%, CMP 550/-

Logistic Business: In India, there are immense opportunities for growth in the area of cold chain logistics, 3PL, Project Logistics and Freight Forwarding. It is foraying into the areas of Cold Chain Logistics and Multi Modal Logistics Hub (MMLH). They are in the process of setting up multi product Temperature Controlled Warehouses (TCW), which will primarily cater to Quick Service Retail (QSR), Multi Retail (MR), Pharma and F&V segments of the market. They are also setting up a first of its kind MMLH at Visakhapatnam in association with Visakhapatnam Port Trust (VPT). Investment in this will be around 220 cr on 50 acres of land. Balmer lawrie will be having 60% and VPT will be having 40%, the land will be provided by VPT. The Hub will comprise rail road linkage, CFS, ICD's and Cold chain warehouses. These warehouses and ports will be available this year and will contribute greatly to the top and bottom line.

I picked Gati and Transport corp of india very early around 30 and 54. However indian logistics is not only about E-commerce. India spends around 14% of GDP on logistics as compared to 7% of developed world. We are inefficient. E commerce is only the user of only one segment and that is door to door delivery. The entry barriers to this type of logistics is very low but as e-commerce companies want to enter tier 2/3/4 cities, these courier companies will face the heat of inadequate infrastructure. their model is only of road transport and warehouse to store the goods, although they don’t need advanced warehouses...as they are dealing in general items only at present. But i feel their scale of operation will not grow much because of intense competition.

However companies like Balmer and redington are much more comprehensive and technically expert. Balmer Is focusing big on cold chain warehouses since wastage of food is the big problem in india and a major factor of food inflation. Also for better movement of goods in the country, we need more local ports. India is having around 4500 sq miles of coastal area but our coastal shipping is only 3% which is very low. Coastal shipping is very cheap as compared to road and rail transport. Modi govt is investing heavily on developing coastal shipping. For this we need many new developed ports. Balmer is investing big amount for port development. So logistics business is not just about e-commerce but much more than that.

Balmer is spending around 165 crore in building seven temperature-controlled multi-product warehouses in two phases. It will invest Rs 65 crore in the first phase of setting up three temperature-controlled warehouses — one in Hyderabad (Andhra Pradesh), another in Rewari (Haryana), and the third in Patalganga (near Mumbai). Each warehouse will have a capacity of 3,000 pallets. In the second phase, it will set up four warehouses in Chennai, Bengaluru and Pune.

Lubricants: For its lubricant business, Balmer is focusing big to establish its brand Balmerol at national level with aggressive marketing and distribution channel. It wants to double its market share. It is having R&D centre for lubricants in india which is one of its kind in india. As per the expansion plan, the company will invest Rs 100 crore in revamping the lubricant business and this will be mainly done at its Kolkata plant.

Tour and Travel Business: Balmer Lawrie has historically been a ticketing company and it has catered mainly to government departments and corporates both in the PSU and non-PSU sector. However its low commission has made it necessary for Balmer to expand in the area of Vacations, Holidays and MICE. Since building skills and capabilities would have taken time, they have recently acquired Vacations Exotica, a leading vacations brand and this has been integrated with their ticketing business. Exotica is mainly into package tours and among top five in india with nine offices accross india and 4 associate offices including one in US.

Balmer is already having a large client base due to its ticketing business, almost 5 lac, so it can leverage this clientele for selling Exotica’s high margin packages. Vacations Exotica brings with it a multi-talented work force and a wide range of holiday packages with a turnover of around 150 crore. Ticketing margins are falling all over due to emergence of online travel sites and competition, so a lot of consolidation will happen in travel sector and stronger player will be able to hold their forte. Balmer is having a long legacy and sufficient resources to charter a new journey into travel business. We can see another high technology acquisition in this space by Balmer.

Final Take: With around 3-4% dividend yield and a PE ratio of 10 which is very low. we should give a normal pe ratio of 20 to its logistic business keeping in view its heavy investments in high margin cold chain and port infra although its current revenue streams are custom and air cargo services, CFS , general ICD and warehousing which are of relatively lower margin. Its after tax logistic profit is around 100 cr, giving it a pe ratio of 20 means, 2000 cr while its current value is just 1600 cr for whole business along with 400 cr cash in books. Also it is having huge land bank in prime locations in india.

But they need to focus on their lubricant, Packaging and travel to justify their high investments in these businesses; however their decision to invest more in logistic business is a right step. Also their investment in Exotica is a great step to move away from commodity business of ticketing.

They are also investing big in brand building for Balmerol brand.                                                                                                                                        Its packaging business is one of its kind in india, it has formed a JV with Van leer of USA for plastic drums and steel drum closures. Balmer has put up a proposal for merging its steel drum business with JV with Van Leer in order to derive the synergy of steel and plastic drums.                                                                                                  

It is giving good results and dividends year after year and now the management wants to squeeze the maximum.

Update 26/12/2016: Balmer has declared  a bonus in the ratio of 3:1, so Bonus adjusted recommended price of 550 is now 137.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Future Retail ltd-Updates on Deal with Bharti

Future retail was recommended earlier (Click here)at 85/-, it is now at 115. I have bought more at 115 today.

I was expecting something from Future group like stake sale in its supply chain arm Future supply chain solutions Ltd, which is one of the biggest in india. But instead it has chosen to merge its business with Bharti retail. As part of the new arrangement, Future Retail's retail undertaking will be merged into Bharti Retail, while the retail infrastructure undertaking of Bharti will be merged into Future Retail. 

So they will merge their retail business into one and their backend retail infra business like supply chain etc into other. We'll be getting shares of both. Future Retail will be renamed as Future Enterprises and Bharti Retail will called Future Retail and will be listed separately as a front-end retail company. Retail entity will have a debt of Rs 1,200 crore and the infra entity will have a debt of Rs 3,500 cr.

Together they will be having 570 retail stores across india which is huge and they can give a run for their money to online retailers like Flipkart. Retail business will generate turnover of around 15000 cr which is second only to reliance retail at 20000 cr which is having around 2500 stores. Future retail is having grand plans of 4000 stores.

Online retail is building its strong base by acquiring customers at a huge cost…but it Is able to afford that because of equity money invested into these at skyrocketed valuations. These valuations are based on Gross Merchandise billing rather than profit figures as online retail is still in its infancy. But online retail will not be able to kill offline because Walmart is still existing that too at a very large scale.

I see this online and organized offline retail as a value addition exercise. Organized retail has and still has the ability to add huge value to our traditional retail model which was inefficient and not beneficial to small producers like our farmers. Middlemen were eating the profits of farmers. But organized retail with huge investments in backend operations like cold chain and high tech warehouses, made possible the bulk buying from farmers at competitive rates that too from their gates.

They can pass this value addition to consumers also…because back in last year, during our onion criss they were selling onions at half the price of local vendor, who was getting his vegetables from local mandis.

But I don’t see any major value addition by online retail unless they built similar facilities or capabilities. They may be saving my time, but they pay to others for their time to process and deliver our order. Whether they will benefit because of the scale of operations but big question is at which point they will add some value into this whole retail process or whether they will capture the other’s business without adding any value?

Because a business can survive only if it adds some value to some process or activity whether it is a battery or a warehouse.

Organized retailers like Future has integrated business…they also manufacture the products from basic staple foods to fashion apparels…so they are better placed to squeeze the margins from this whole process of retail as they can offer their products at their retail points at slightly lower prices.

I am always in search of companies, the business of which has some material entry barriers. Online retail doesn't have any such entry barrier, anybody can start a website and with marketing they can attract consumers and investors....but they can't move into offline that easily because it requires setting up of retail chains and warehouses at multiple locations which is very strategic and requires huge capital.

High real estate prices are the main reason behind the likes of Walmart not entering Indian market in spite of approval of FDI in retail

So i think, Future group will surely enter into online channel with huge renowned focus because with their large number of stores they can offer same day delivery from their online sites. So we know now that Offline can enter into online anytime not the online into offline.

We are yet to know the details of operations of both the entities. But I feel they will sell some non core assets in the back end entity to reduce the debt. Also the synergies of the both the groups will play big part in further strategic future decisions like the retail arm can use the services of Airtel’s telecommunication network and Bharti to use its resources for retail business as it seems Bharti is not interested in running the show but in investment. Also possible synergies in payment gateways and mobile wallets will be a big factor.

I’ll come up with more details with time. I am having huge faith in Kishore Biyani, as he is having retail in his DNA and understands retail like nobody else do. He invested small amounts in fashion startups like Biba, Lee cooper and clarks shoes and later he sold Biba and AND fashions at 450 crore after having invested around 80-90 cr,  he also sold the stake in capital foods for 180 cr after investing just 13 cr.

There is blood bath going into Indian retail and only the ones with thick skin will survive. It is now becoming a game of who can bear the maximum blows and Kishore Biyani may just have got the strength now to withstand the blows.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Venky's India Ltd-High Dose of Protein.

 

Bodybuilders love foods or supplements which have high concentration of quality protein. Some of these protein diets are having 80%-90% protein content per 100 gm…you take these, do intense workouts and witness a quantum leap in the growth of muscles in your body. This Venky is one such opportunity and if taken can really provide immense growth to our investments. Everything is right about the concentration of protein (Value) in this stock…it is right at 90% to 100%. The only question is the quality of protein i.e the quality of the management of the group.

Pictured (right to left): Venkatesh ‘Venky’ Rao, his brother Balaji Rao, their sister Anuradha Desai, and her husband, Jitendra Desai.

Let’s first measure the quantum of protein. Venky’s india is a part of the vast empire of Late BV Rao, who is called the father of Indian poultry. He left the firm with a turnover of around 400 cr , when he died in 1996. After that his elder daughter Anuradha Desai, her husband and her two brothers venktash and Balaji took the group to around 6000 cr and now it is a big poultry giant covering from one day old chicks for laying and breeding, poultry equipments, full grown chickens, processed chickens, SPF eggs, animal health products, human health products, Oilseeds, animal feed, frozen poultry and chicken QSR etc. It is present in the entire value chain of the chicken production to consumer’s plate. This whole content is generated through 28 group companies. 

Venky’s india generated 1700 cr of this. Its parent is Venkateshwara Hatcheries Private Ltd. Vencobb (broiler) and BV300 (layer), the leading breeds of the VH group  have market shares of around 70% and 90% respectively in india. Vencobb is used for producing Broiler chicken and BV300 for layers which lay eggs. These are developed by Venco Research and Breeding Farm Pvt Ltd and Venkateshwara Research and Breeding Farm Pvt Ltd, both group companies. Poultry farms across india use these two breeds.

Venky’s is the one of the six global producers of SPF eggs which requires high technical expertise. SPF Eggs are used for making animal and human vaccines and a number of research activities. Venky’s is having  plans to expand SPF Eggs capacity as its demand will grow big in the future. Currently it is generating around 30 to 40 cr turnover for the company with per unit price of around 50. It is just to highlight that Venky is not like our backyard chicken farmer…it is one big high technology company and entry barriers to some of activities in the entire value chain of poultry product is very high. Big MNC pharma companies like Novartis are its biggest customers for SPF Eggs.

Its poultry products business contributes around 1000 cr out of 1700 cr and it covers one day old chicks, grownup broiler and Layers, Processed chicken. It is selling processed chicken products like sausages, chicken salamis, ready to cook, ready to eat products etc under Venky’s brand and it is first Indian brand to do the same. It also supplies chicken products to McDonalds, KFC, Pizza hut, Domino’s etc. Venky’s chicken products are sold through distributors and retail outlets and are available in all leading super markets and food malls.

Recently it has entered into QSR (Quick Service restaurants) chain Venky’s XPRS. It opened its first such outlet in Pune to compete with the likes of KFC. Its products are prepared with minimum of oil and are mainly Grilled. Prices are very affordable with quality on par with global giants like KFC. It is going slowly in expansion because it is very difficult for a business to business (B2B) firm to come forward and directly face the customer. Tata is the biggest example of this…except for Tata tea and Tata Salt, it is not very successful in building customer centric business. Its handling of Nano brand is the prime example as it established it very poorly as a cheap car. It is having Mount Everest Mineral water in its kitty for long but it is still a paltry 30 cr brand as compared to 600-700 cr of Bisleri. In spite of being india’s largest coffee producer, we can’t find Tata coffee in the retail shops. That’s why it has joined hands with Starbucks to enter into Coffee retail chains. Building a brand to which customer can establish relations and emotions is an art and a very difficult and subtle one. It is currently having around 10-15 outlets and have big plans to take this number to 100. However I don’t have the numbers and profitability, if any, for XPRS chain. But if planned and nurtured properly, it can become a big success as there is huge vacant space for this segment in india for an Indian brand.

The eating-out market in the country is estimated to be around Rs 6 lac crore, but only 2% of it is organised with national and international food retail brands. KFC which is having around 395 stores in the country is showing degrowth in same store sales for around 2-3 years. This is mainly on account of high operational expenses like rentals which are very high as compared to the value added by them. As I have mentioned in earlier posts also, real estate costs in india are illogically too high and these are bound to correct more in the future otherwise the demand will remain very low. Also Indians are yet to find a taste for eating out in high class costly restaurants, they are currently busy in buying expensive smart phones and so their purchasing power for costly stylish food is not that high. One way for firms like KFC is to create the demand for their products by promotional events like big discounts on some days of a month or special occasions like Valentine’s Day, because it will make people aware of their products and they will develop taste.

Big QSR chains are mainly focusing on big tier 1 metro cities like Mumbai, New Delhi, Pune etc as a part of their strategic plan as they seem to follow one simple business premise “more money, more business”. But there is one catch here…in big metro cities, money is more but it is chasing too many consumption points. Also income disparity presents a false picture of all round prosperity. Most of the people in these cities make their ends meet narrowly…after meeting their most important needs they are left with very little; so they don’t spend much on discretionary items, but they are not poor. However their sheer large number and gatherings at lavish Malls give a false appearance of people with money ready to open their wallet.

In strike contrast, there is much more money in our small cities but as there are not much options to spend and show…so this also gives a false view of lesser wealth. Instead people in these cities are ready to spend the money on costly food at a high end restaurant. Most importantly operating costs are lesser here which makes for a viable business model. Lesser competition provides revenue visibility and it is easier to plan a strategy. In Punjab, you can see huge and more lavish bungalows in villages and they are more inclined towards luxury.

So it would be more prudent on the part of big QSR chains to allocate 30-40% of their resources on these small cities, I think they will witness a pleasant surprise. Hope that venky’s will be more vigil in allocating resources for its QSR foray.

Now come to their Oilseed and refined oil business which contributes around 650 cr with low operating margins of around 5%. But I think this unit is a part of the strategic plan where the byproducts of oilseeds like oil cakes are used as a feed in its plants for broilers and layers in order to maintain their high quality and to meet strict standards of MNC customers.

 

Venky’s has also entered into sports nutritional supplements business and sells products like whey protein supplements, Creatine, mass gainers etc. ( But i think this vertical is not under the listed entity). So far this area is dominated by MNC giants but there is huge scope for growth and local producers can create a big market for them if they follow a good marketing plan with good high quality products. Custom duty of around 50% to 100% is charged on import of these. So venky’s is selling the high quality products at around half of prices charged by MNC players in india. Reviews to its products are very good; only need is to follow a proper marketing and brand promotion strategy, good distribution clout…I think e commerce can boost its distributorship resources if and only if it can make people aware of its products and brand.

To keep this plan in mind, Venky’s is associated with IPL in india. It has also bought an English premier league team Blackburn rovers in 2010 which is a big failure so far and hasn’t done any good to the reputation of Venky’s at global level. However this is not the result of mismanagement on venky’s part  but it is mainly because of their little understanding of Football and working of clubs at English premier league. Most of times these clubs are not run to earn profits but to satisfy the passion of owners. Big global business tycoons and Richie riches are the owner of these like Abu Dhabi owners of Manchester City. Blackburn rovers has fared very badly after their acquisition.

This backfiring of Rovers buyout has brought too much negativity about the stock in Indian market also. There are all sorts of views starting from that Venky’s has lost a huge chunk of money around 500 cr on this buyout. But this is not true. Rovers was not bought by Venky’s india but in the personal capacity of the promoter company of venky’s india. Venky’s London which is a direct subsidiary of parent of Venky’s india “Venkatashwera Hatcheries Pvt Ltd” is the owner of Blackburn. Now Rao family is making serious valiant efforts to revive the club and is ready to put in the money.

Global success of the group now hinges on the success of Blackburn Rovers and the revival can establish brand Venky’s at a global scale. If this can happen, then nobody can stop this chicken to fly like an eagle. Although scale of opportunities in india itself are bigger enough to turn it into a eagle.

Its animal health business is 130 cr business with operating margins in the range of 15%-20%. It manufactures all sorts of vaccines, nutritional supplements growth promoters, toxin binders, feed/gut acidifiers, enzymes, anticoccidials, dewormers, & therapeutical products.

Venky’s was once a debt free company but over the years in its quest for expansion and to focus on value added poultry products to change the commodity nature of its business, it has taken debt to the tune of around 600 cr. But it has cash of 175 cr in its balance sheet and around 50 cr invested in various mutual funds. Both these make up 225 cr while the current market value of the company is just 290 crore. Can you imagine this? Largest Indian integrated poultry house with turnover of 1700 cr, 30 plants all over india with great brand name is valued at just 290 cr!!

One more anomaly is huge land bank  all over india. It is having a land bank of around 850 acres. It was valued at just 19 cr in Mar-13. It has added 35 cr worth land in 2014. Around 500 acre is occupied by 30 plants all over india. Around 350 acre is near pune which is vacant and can turn into a cash cow if the company decides to use this for organic or inorganic expansion. Even at most narrow estimates, it will be valued around 100 cr.

Now at the quality part: The VH group is spread into 28 companies with a lot of inter group transactions. 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. It hasn’t given cheap loans to group companies (unlike Cairn india) from its surplus cash, instead it is parked in income generating mutual funds and fixed deposits (225 cr).

It has given full disclosure about everything important in its annual report from breakup of unit sale to related party transactions which is quite uncommon even to ambanis of our stock market. It has given full breakup of cost of acquisition of One day old birds, Processed chicken, SPF eggs, animal health products, soybean etc along with unit sale prices of all of the above. Lengthy details have been provided for related party transactions and it has occupied around 5-6 pages.

It has made purchases of 130 cr and sales of 600 cr to group companies mainly with its parent Venkateshwara Hatcheries Private Limited. Its sale to the group is around 30%-33% of total sales and this figure is quite constant for last 4-5 years. However its closing debtors last year were around 170 cr which is 10% of its total turnover which is quite good. However 130 cr of these belongs to group companies mainly to VHPL. So in a sense, the chances of turning these bad are very less.

So it looks quite good in this quality test also; if we leave some ifs and buts which are natural for a group as big as it is.

Maize and soybean comprises around 70% of its cost of production. For last few years prices of these two were rising due to lesser production in USA and Brazil. And as india follows a Minimum Support prices (MSP) policy (which is disastrous) so prices of Maize and Soybean were even higher in india which lead to the poor performance of poultry farms across india because these farms have limited power to pass on the higher costs to consumers mainly due to oversupply in the market and perishable nature of the products. After a period of around 45 days, a broiler doesn’t convert the feed intake into weight. So this extra feed will not yield any additional revenue in the form of higher weight. So supply is relatively inelastic, so farms will sell even at lower prices due to lower demand. They can’t store these like potatoes in cold storage in the hope that prices will recover. So if there is low demand, even then they have to sell.

But now production in USA and Brazil is back to normal and so the prices of Maize has fallen to around 10000 per MT all the way from 17000 in 2013. Last dec-14 qtr, the prices were in the same range and venky's earned a NP of 20 cr. so we can at least expect the same in Mar-15 Qtr also. Prices of maize/soy will remain weak due to global oversupply, so india will not be able to export the same…because due to MSP regime our prices are way higher than global prevailing prices. So Indian farmers are looking towards poultry sector to absorb this oversupply.

During this period, stock prices of much smaller Srinivasa hatcheries with turnover of around 150 cr with no profits has risen from 40 to 130 while the same for Venky’s has fallen from 650 to 310 which looks quite ridiculous.

So venky’s india is worth taking a risk and even vegetarian can enjoy it but it is strictly not for Chicken hearted.

Current market price is 310/-

( Update Dec-2015: It has given a 1:2 bonus on 21/12/15, hence bonus adjusted price as on 05/05/15 is 207/-)

Regards

Gurpreet Singh.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)