SKM Egg Products - thinking out of the shell


(NaMo) #1

SKM Egg Products is a successful turnaround story with competent management. Started in 1995 in collaboration with Belovo- Belgium, SKM produces Whole Egg powder, Egg Yolk (Egg Yellow) powder, Egg Albumen (Egg White) powder and liquid egg. Its customers are bakeries and FCMG companies. SKM combined the technical know-how obtained from Belovo with its own three decade long experience in the poultry industry to build the SKM brand. SKM products are exported to Europe, Japan, Middle East, Russia, Africa and Southeast Asia. SKM has sales offices in Netherlands, Japan and Russia. Promoters hold 54.27% stake with Tamil Nadu Govt holding 7.5% stake in company.

India ranks 3rd in egg production. Cost of egg production is cheap in India. But, processing of egg is at bare minimum in India. Good margins are available if processed egg is exported to developed markets provided quality of the product is ensured. Egg powder is immune to bird flu virus because virus becomes inactive due to high temperature pasteurization and processing.

SKM processes around 20 lakh eggs/day out of which around 5 lakh are from own farms and the rest are sourced through contract farming. Company controls the entire life cycle of egg processing. It supplies its own feed. All the chicken are regularly inspected. Automated system tracks every activity of egg processing. The above activities ensure export level quality. Currently SKM is operating at 90% capacity and they have plans to expand it to achieve 500CR revenue by FY18. Only 3 players exist in India in this business with high entry barrier ie; SKM, Venky’s and Ovobel. Though SKM contributes 57% of India’s export of egg powder, globally it has to compete with many competitors

Setting up new markets is a time consuming process due to regulatory hurdles. SKM built excess capacity in 2012 funding the expansion with debt ignoring these issues. Its turnover has touched 300 cr from 120 cr in 2012, net profit at 30 cr vs loss of 12 cr. Its debt stands around 30 cr vs 90 cr which is a great achievement. SKM Egg has wisely scaled down its expansion plans due to current global glut but India always has low price advantage. Rumours are that SKM Egg is surely going to acquire competitor Ovobel Bangalore to expand its capacity and to have ready customers.

Golden time for SKM will start when they expand capacity and get more share of Indian market also which is way underpenetrated in processed egg products and scope is huge. Eggs are the cheapest source of best quality protein. Egg powder and Liquid Eggs are more economical to transport and store than whole eggs with shelf life from 5 to 10 years. Egg powder is something which can help in eradicating the nutrition problems. SKM has created world class facilities in India. India is following the developed countries in the use of fast foods and Egg products so it is just about time that the demand for Egg powder will rise in India.

SKM’s inputs are raw material for feed and egg (in case of contract farming) where costs are highly variable. SKM had a fantastic journey from around 7 to 230 and now back to 62 with stock PE of 10.86. SKM is listed only in NSE. Market cap of 163 cr is less than annual sales. Good return on equity track record: 3 yr ROE 32.73%. Total share capital is only 26.33 cr which makes the share prices very volatile.

Disclosure: Invested. This is for study purposes and to invite comments from fellow boarders and to gain knowledge accordingly. I am not SEBI registered and this is not a Buy/Sell recommendation.


Avanti Feeds
(Amitdarji) #2

Hello Namo,

Thank for the good information,

  1. Last two quarter of skm is poor

Reagrds,
Amit
Disc: Tracking


(NaMo) #3

Dear Amit,
After hitting 30 Year High last July, the Egg prices this year in the US has hit 10 Year Low. These are unprecedented events that affected the company. Corn Feed shortage also has taken Egg prices in India to record high. After this down cycle, SKM will come out a lot stronger compared to other companies and also compared to how it fared in the last downturn 4-5 years back. It is just a matter of seeing this period through SKM managed a raw material to sales ratio of 0.73. This is commendable considering the tough business environment right now. In next 2 quarters, we may see some positive improvement in sales and profit.

The feed prices would start tapering down once we have new season Corn crop coming into the market but that would not happen till October. We have a tough year ahead of us. We hope to see improvements in bottom line from Q4. Till then, management need to ensure, there is no cash loss.

Also, re-listing on BSE is delayed. The company is in dispute with State Bank of India regarding the claim made as “Right of Recompense (ROR)”. This is holding back clearance certificate from the bank that the BSE is demanding. We hope to have some clarification on the same in the AGM scheduled for 2nd Sept. Another key response awaited is regarding take over news of Ovobel. Management is on a clean up drive.


(NaMo) #4

Dear Amit, during the last two quarters SKM’s competitor Ovobel posted very bad numbers compared to SKM. SKM management is trying their best to ensure no cash loss during this bad period.


(goutam) #5

What is your views on Japan market? It is the biggest market for SKM Egg and the financial situation there is not that good…

Disc : Tracking , invested earlier but sold all holdings


(Krishna Agrawal) #6

Depleted sales to Russia and Japan are now again picking up…however, this will be of lower ,margins. Their main product egg Albumin Powder rates are down from peak of 920-950 to around 600 now. And that’s creating the drag. Also, last year due to flood in Tamil Nadu Egg prices gone sky rocketed which effected their Q3, Q4 and over all Fy 16 nos.

Seeing imports improving again and decreasing trend in Egg prices in India (Namakkal Rate is 330 as on today)…hope SKM will soon make a strong come back.

Please note this is not a bad business only the time and situation around the company goes bad which will only improve going forward.

Disc: Invested from higher level and averaged till 60. Holding tight and hoping high :slight_smile:


(goutam) #7

Article on SKM Egg in Outlook Business …


(fabregas) #8

Was comparing SKM with Venky’s.

  • I noted that Venky’s processing is carried out in a fully automated and controlled microbe free environment. whereas SKM’s process involves manual separation of white & yolk (I noticed this in the outlook business article). Checkout Venky’s website.
  • Venky’s capacity is 15 lakh eggs per day v/s SKM’s 18 lakhs.
  • Both have in house testing laboratory to check for things like contamination, pesticide residue
  • Both companies export to Europe, Japan, SE Asia

I think Venky’s has a slight advantage due to its fully automated facility.

Another key concern is, also mentioned in the outlook article, consumption of eggs is stable in Europe and Japan. Hence pricing is dictated by supply. SKM’s best run came during 2012-15 when there were supply issues in USA and Mexico. Seems like supply from Mexico & USA has come back on track, since the operating profit margins for SKM dropped in FY16.


(Rama Kumara Nagaraja) #9

SKM’s primary export is to Russia, who currency Rouble is very very unstable.
The stock is trading at moderate PE, but there are factors beyond its control (Bird flu etc, envt conditions etc) which can prevent company from going forward

Ramu


(paresh.sarjani1) #10

This company has been suspended from trading in BSE for penal reasons.

Any comments on this?


(NaMo) #11

@fabregas Venky’s is large player in overall Poultry industry but not in Egg powder business. SKM’s product range is more attractive than Venky’ s. SKM’s quality control is far superior to others.SKM is targeting to become a model company in Japanese 5S implementation in the next two years. SKM is the largest Exporter with long-established associations with major international food companies like Kraft foods Heinz etc. If SKM takes over Ovobel as expected widely (for their customers rather than for the facilities), it will emerge as one of the very few players in India in this business going forward.

@paresh.sarjani1 At the time of crisis in 2012 ,company sought share holders approval to de-list its stock from BSE and remain listed only in one exchange. In the 17th AGM of the company, share holders approved a special resolution for this purpose and hence at present SKM Egg Product Exports is trading only in NSE. Let us hope , the management will deliver in plans including revocation of suspension from BSE , achieving Rs.500 Cr turnover in another 2-3 years etc. According to last AGM, SKM completed almost all formalities for BSE re-listing and one certificate from its banker( SBI) is pending .


(bullrun1988) #12

@NaMo i agree with you completely…in my opinion what a investor need in a company

  1. Management honesty 2. Adequate promoter holding 3. debt free 4. expansions if company need it without taking debt or in a control way
    SKM egg fulfilling all this quality and still we have domestic market to penetrate as we know globally slow down impacting the SKM but i strongly believe SKM will emerge as soon as possible. In AR SKM trying to enter in domestic business too with value added products. SKM is good with long term investment prospect.

(aravindms1us) #13

SKM Universal Marketing sells eggs in South India. You can find these in supermarkets. The eggs are sold at a premium of 30-40% compared to unbranded eggs. This looks like a good business. But suffers during times of Bird flu news etc.One good thing is that there is a seal on each egg with packed date. However, there are enough players like Suguna, etc which sell these. SKM Universal Marketing is a related company and not subsidiary of SKM Egg Products.

Here is an old interview of Mr.Shivakumar
http://www.stockexplain.com/2015/02/SKM-Egg-Products-MD-CEO-Interview-StockExplain.html


(NaMo) #14

@goutam thanks for the outlook article. A good read. All export related activities are known to public before the result announcement thanks to zauba. https://www.zauba.com/export-egg-powder-hs-code.html

SKM’s recent new product of Egg Liquid is highly acceptable in Europe & Middle East Countries, and successfully Penetrating in these markets. We can find this product on Zauba with HS Code 04081900 & 04089900. SKM Egg is the only exporter of this product out of India

@aravindms1us From the annual report, SKM Universal Marketing Company India Pvt. Ltd. Note No. 7© on Page No. 73 shows that SKM has an investment of Rs. 1.18 Cr. in SKM Universal at average share price of Rs. 15. Google search shows that the Paid-up capital for SKM universal is Approx. 4.23 Crores. If we consider a Face Value of Rs. 10 per share, this investment amounts to holding of approx. 18% of SKM Universal’s ownership. So success in market penetration by BEST branded Eggs in Indian Market in the long run will benefit our company as well.


(sivakkri) #15

Looks like there has been a return of shipments from Japan (Quality issues ??) worth approximately 4.1 crores in July. These were exported in Dec 2015/Jan 2016 and are returned back.

This is not a good sign, given that Japan is one of their major export geo. This is a major concern. Anyone attending AGM might query the management regarding the same.

Also the export numbers for July & August have been pretty bad (compared to last few qtrs) and not sure what the reasons are. Also I’ve not seen any exports to Russia in a long time now.


(NaMo) #16

@sivakkri Since port of discharge is Hyderabad I assume that this shipment is related to Venkys. SKM ships out from Tuticorin Sea and Ovobel from Bangalore. Needs to confirm this however.


(sivakkri) #17

@NaMo, I’m going by HS code 04089100 which is for SKM (as this is the code I see for exports) and so this must be SKM’s unless proven otherwise. Infact, you can match the exports which happened in Dec 2015 & Jan 2016 for these returns. So better to get this confirmed.


(NaMo) #18

@sivakkri HS code 04089100 is not specific for a company, but a generic code for dried whole egg powder. We should verify if this returned shipment was for Venkys (most likely because of hyderabad port) or for SKM.


(sivakkri) #19

@Namo, Sorry, My bad. Thanks for correcting me. In anycase one needs to get this verified.

BTW, Is there a way to figure out which shipments are for SKM as against other companies ?. Does one go only by the shipment port ?

Also, Under what other HS codes (eventually specific products) SKM exports its produce ?

Any information on mapping specific company exports in Zauba would be helpful.


(NaMo) #20

@sivakkri please refer to https://www.zauba.com/export-egg-powder-hs-code.html which shows all egg powder related HS codes. Only way I know to find who exported it is to look at the port of discharge. Also, you may search for liquid egg which SKM started exporting.