Venky’s profits under pressure

Venky’s operating margins have gradually
declined, and for different reasons, from a high of 13.4% for quarter ended June
2005 to a negative 2.76% for Q2; excluding other income and one-time
income.

For instance, while it was the bird flu outbreak in February
2006, the current decline in margins is led by higher input costs of maize and
lower realisations for live poultry. Here, live poultry accounts for nearly 70%
of revenues from poultry and poultry products (PPP) segment, which in turn
accounts for 50% of total revenues.

Maize doubled in
price
The company said that maize prices have almost doubled. And
this rise is led by shortage of maize, which in turn is on account of increased
exports. As a result raw material costs have jumped 33.8%.

On the income
side price declined. Day old broiler chicks are down are down 40%, layer chicks
down 18-20% and broilers down 8-10%. Given that broiler chicks account for a
major chunk of live poultry segment, profits were impacted.

For the
remaining 50% of the revenues, oilseed (solvent extraction; 25% of revenues) did
extremely well with revenues rising 40% while segment profits rose 126.8%. This
is a backward integration business initiative, where the de-oiled cake is used
to produce poultry feed, while the refined oil is sold in the wholesale
market.

The poultry feed business saw profits increase by 7.9%, while
sales (10.9% of revenues) declined 25.2%.

It is expected that
prices at the end of the year will improve with the beginning of winter
season, although it is not foreseen that prices of maize will come down in the
short term.