Too Much Chicken Earns This Poultry Producer A ‘Sell’

Poultry producer Venky's India Ltd. has a chicken problem. There's way too much of it.

That's prompted brokerage Kotak Securities to downgrade Venky's India Ltd., which calls itself Asia's largest integrated poultry group, to ‘Sell'. This comes at a time when the stock has returned more than 300 percent in the last one year, the third highest among medium- to large-sized Indian companies with a market capitalisation of at least Rs 5,000 crore.

A fall in poultry prices, driven by oversupply, will not just impact the company's medium-term earnings but also its stock performance, Kotak Securities, among the few brokerages that cover the stock, said in a report. Chicken prices, it said, on an average are 20 percent lower than a year ago.

Poultry industry in India, the fourth largest producer of chicken after the the U.S., Brazil and China, faced volatility for about four years because of raw material costs and expansion, before prices started rising last year. Farms increased production to make most of the situation. But it rose faster than anticipated demand, leading to oversupply.

Also Read: Chicken Prices Are Set To Rise, Says Venky's India MD

As a result, Venky's earnings for the quarters ended March and June are likely to be less exciting than what investors have seen over the past few quarters, Kotak Securities said.

Venky's India Vice Chairman B Venkatesh Rao sees the glut as temporary. “In the past, we have seen that whenever prices rise, people try to overproduce,” he told BloombergQuint. “In the livestock industry, we normally see these issues because of production, but I expect prices to be normal over the next one month.”

Agrees Dharmesh Kant, an independent market expert. A temporary blip in prices will not impact Venky's India as the long-term consumption of chicken remains intact, he told BloombergQuint. “I expect volume growth of 25 percent annually for the company given the chicken demand and expect prices to normalise in some time.”

Venky's net profit rose 79 percent on a yearly basis to Rs 149 crore on the back of a significant drop in raw material prices and a 38 percent fall in interest costs in nine months ended December, according to its filings. Revenue rose 5 percent to Rs 1,947 crore during the period.

Costs of the two key raw materials—soya and corn— for the poultry industry have shown a divergent trend. Poultry feed soya prices in India increased by 32 percent in the last one year to Rs 3,510 a quintal, while corn prices declined 5 percent to Rs 1,505 a quintal, according to Bloomberg data.

Kotak Securities said that won't lead to a rise in raw material costs in the near-term as Venky's has sufficient inventory. A normal monsoon forecast, it said, bodes well as it reduces uncertainty related to raw material prices.