1700% jump in 3 years! This multibagger just received a rating upgrade

Country's only listed poultry firm Venky's India has had a dream run on Dalal Street with the share price surging over 1700 per cent in the last three years as investors played the defensive consumption theme. The company just came out with its March quarter results, and impressed a brokerage house to revise its outlook on the stock. 

Brokerage Kotak Securities, which just last month downgraded the stock to Sell from Buy, upgraded the rating by a notch to Reduce from Sell. The brokerage revised its May 2019 target price marginally to Rs 3750 from Rs 3700 earlier. 

"Venky’s Q4FY18 EBITDA came in modestly ahead of estimates on positive topline surprise, while PAT missed estimates on higher effective tax for the quarter. The quarter confirms our fears of contraction in Venky’s margins going into FY19. However, the nearly 20 per cent decline in the stock since our last update on April 11, 2018 reduces the risks involved at current market price, due to which we upgrade the stock one notch to REDUCE from SELL earlier," explained Kotak Securities in a results review report. 

Venky's India was trading at Rs 3646.40, up over 1 per cent on the BSE in today's trade. The stock has rallied over 31 per cent so far this year, but shed 10 per cent in the last one month. 

The company reported 22.75 per cent jump in net profit at Rs 51.20 crore in the quarter ended March 2018 as against Rs 41.71 crore in the same quarter a year agao. Sales rose 20.25 per cent to Rs 741.58 crore during the said quarter as against Rs 616.69 crore reported in the same quarter of last year.

For the full year, net profit rose 60.09 per cent to Rs 199.71 crore in the year ended March 2018 as against Rs 124.75 crore during the previous year ended March 2017, while sales rose 8.61 per cent to Rs 2688.81 crore in the year ended March 2018 as against Rs 2475.58 crore during the previous year ended March 2017.

"Since Venky’s EPS growth is forecast to slow to 11 per cent CAGR through FY18E-FY20E.

Kotak Securities believes the fact that Venky’s EPS growth is forecast to slow to 11 per cent CAGR through FY18E-FY20E, an investment case on Venky’s must be built on either positive earnings surprise, or a meaningful change in the perception of Venky’s. The latter could happen as a result of actual shift towards branded, packaged chicken (this will be a long process), or a greater articulation of the process or timeline for this transition, if any, said Kotak Securities. 

The brokerage sees the valuation of Venky’s to be contained to 20-22 times of FY20E price to earnings ratios (PER).

Before you take a call to invest in Venky's (India), take a look at following risks:

"Downside risks to estimates could emerge from lower poultry prices/ higher raw material prices than our assumptions. There could be downside risks to the industry’s earnings from imports of chicken legs from USA. Upside risks could emerge from better input-output dynamics," added Kotak Securities.