Our Research Philosophy

This blog is part of Congrolej's focused research on small and mid-sized companies. Our focus shall largely be on companies which we believe have the potential for explosive value creation. One approach we shall continuously follow is that of a marketer: using the intelligence of the masses to predict the future. We constantly interact with people at all levels in all spaces to gauge the current, collecting nuggets, and gleaning out noise.

A common thread we have seen in all the high value creating companies is Environment Management - the capability to manage relationships with various stakeholders including official machinery (bureaucrats and politicians), demanding customers, small businesses in unorganized segment, unpredictable vendors, and so on in a profitable and sustainable manner. The Environment Management philosophy may seem at odds with the Consumer Monopoly or tolls bridge thesis of value investor club, but fundamentally both provide a company a leg-up both in terms of time and costs over competitors. In an Indian context, Environment Management capabilities are very important to grow in leaps.

For a full coverage of our research philosophy and experience, please read A Marketer's Approach to Business Analysis

Friday, April 22, 2011

Venky's India: At the Crossroads

Venky's India is a diversified company operating in (i) poultry, (ii) animal feed and health products, and (iii) oil-seeds. What started as a drive to control the raw material prices (soy) for their chief business (poultry - growing and selling day-old chicks, broiler chicken, and processed chicken) has become a full-blown movement to diversify. In Nov 2010, the Company acquired English football club, Blackburn Rovers at a substantial discount to the asset value, as the Club was a loss-making proposition. Venky's rightly believe that they can increase the commercial revenue generation for the club through their India linkages.

In poultry business, company corners more than a tenth of the Indian processed chicken market. It corners 10% of the worldwide market of SPF Eggs. In animal feed, company controls 75% of the organized market. Its promoters control the influential positions in organizations related to poultry sector. The sales chart below shows company's division wise sales, in Rs cr (BU1: Poultry excluding SPF eggs, BU2: SPF Eggs, BU3: Animal Feed and Health Products, BU4: Oilseeds - Solvent Extraction and Oil Refinery).

The company had inter-segment sales of Rs225cr.

India's poultry industry is valued at $10b (domestic consumption) excluding exports even with very low per capita consumption. To counter the deficient retail network in India, Venky's has started Venky's Express, retail chicken outlets. Nine such outlets are in operation and are commanding better interest than McDonald's in Pune and Mumbai.

The Company's asset base can be valued at Rs1052cr (at current value, after excluding debt, Rs356cr on book). The Company's market cap stands at Rs620cr even after four-fold rise in the share price in the last one and a half years.

Environment Management: As Unitech was a good environment manager, so is Venky's. It has dabbled in a segment with thin margins competing with unorganized segment on a low capital base, got the government to restrict poultry imports, and is now well-positioned to reap the harvests.

The Company's investments in Blackburn Rovers can yield significant upside though with inherent risks. The Company's retail foray and a foray into wines (Venky's Rock) are expected to provide a fillip to the margins. The Company has already launched human feed (Atta and Biscuits) and nutritional supplements, where it can improve its margins.

We expect the stock to rise 6x-8x in 3-5 years giving returns in excess of 40% and a considerable upside.

We have attached the file Venky's India containing a comprehensive analysis of the Company's business, its growth prospects, and why we feel it is a good investment.
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