SKM Egg Products - thinking out of the shell


(ARTR) #42

Dear Bramhaputra, Agree next couple of quarters SKM profitability will be under stress, other way of looking at it is an opportunity to buy a good company with able/ transparent management in difficult time at a good price.
Sorry forgot to mention, I hold SKM and planning to add more on further correction (if any)


(bramha) #43

Dear ARTR,

Am not disagreeing with you and like I mentioned it’s on my watchlist too. However my current thinking is to wait and watch in the next few quarters.

Apart from the egg prices, the other issue that bothers me is 161.30 crores has been paid to SKM Universal for Egg procurement. This accounts for close to 60% of the revenue, it does not find any mention apart from Related party transactions.

  1. SKM Egg Products is public while SKM Universal is private (except for some minor shareholding by SKM Egg). Can it be misused to channelize funds? May be or may not be. But do not see evidence to allay those fears from Management Response.
  2. Why is the Management not transparent and give out more details, given the huge % of revenue SKM Universal is accounting for.
  3. If they are so closely integrated, why are the companies kept separately? Won’t it make sense to merge and / or make it a subsidiary.
  4. Is SKM Universal profitable? Do they do anything outside SKM Eggs’ business? How are they operated? How are they funded (apart from the loans from SKM Eggs)? Are they financially stable and viable? Interested to know answers, since any problem with SKM Univ will cripple SKM Eggs
  5. What’s SKM Universal’s margin? I do not know at this time but if it’s more than SKM Eggs, then it will be a red flag to me.
  6. Did SKM Eggs receive any dividend from SKM eggs? Tried to find to get some insights on SKM Univ’s operation but didn’t find any. Another area where there is no transparency.

Playing devil’s advocate, a promoted owned / run private company that takes up 60 paise out of every rupee of revenue, can be used as a channel to squander. An independent and separate company that controls the jugular vein for SKM Eggs’ raw material and thus its operations can cripple the operations any time.

Concerned, as there is not much transparency on SKM Universal’s Operations. So can’t fully agree that the management is transparent.

MF and FIs shareholding is abysmal at 0.06%. May be they are small cap, but still no Fund Manager has looked at it, despite their consistent publicity blitzkrieg for the past few years is another point for contemplation.

PS:
No holdings. Under watchlist.


(bramha) #44

A few more points …

Am trying to understand a bit more on their pricing strategy. Are they dollar denominated? It’s a commodity market, but do they have any hold? Like long term contracts, RM price pass over etc. Do they sell directly to the large clients or necessarily go through the distributors? There are n’t much information either.

If they are getting forex revenue, how do they manage the forex? Do they hold in $? (guess not since they have to pay up, including high cost RM). Do they hedge? Again not much information available.

Seems the past few years results have been protected due to external reasons - US bird flu, forex fluctuations. Wondering how much have they really grown in $ denominated terms (and how much of their numbers saved by INR depreciation).

They are in global business. And thus their competition will always be global. Why is China not active in this segment? Can they? Chinese have proven that they can do well in commodity business with flimsy margins. Not withstanding the Chinese food fiascos in the past, if they come up big, can SKM withstand the onslaught? How? (BTW Chinese egg production is roughly 8-10 times that of India)

Japan seems to a big exporter of liquid egg and processed eggs. Then why are they importing? Is it because of Cost Advantage? (if so,why is SKM not targetting where Japanese export to?) or because the products of SKM Eggs’ is at the lower end of the value chain?

What’s SKM Eggs thrust to move up the value chain? AR talks about namesake R&D, with some statements on liquid egg repeated every year.

Often come across this statement, they managed well during downturn. So able management. Cant agree at face value - as forex fluctuations and US Bird flu were the saving grace.

Transparent Management - At best the details given are sketchy and to meet statutory requirements. No effort has been taken to give out addiitional infromation and cultivate investor awarenesss around the business.

A commodity business, with global competition, flimsy margin, high client countries concentration, very high raw material costs (over 75% of revenue), sensitive to forex fluctuations (so far been beneificiary - but need not be all the time), volatile industry (one bird flu equivalent & countries may ban), close to capacity operations, limited opportunity to scale with out capex, not much in-house technology development.

May be the market mispriced the windfall due to US bird flu and other events & when the euphoria died, the price came crashing.


(bhavya) #45

Good to see someone showing the devil’s eye role to balance the story.
Before sharing the points, i am invested and having vested interest in skm eggs stock and i hold this stock with an average price of 72 rs.

W.r.to SKM Universal role:
The company is getting raw material from SKM Universal at lesser prices than Market rate.
Similarly SKM egg holds 20% of SKM Universal, really it will be good if the the promoter disclose the annual report for SKM Universal.

In the past company is used to serve the products to Indian army, In one of the call promoter as well informed it. Advantage is, if the products are served to domestic retailers company has to pay higher taxes since its plant is fully export oriented one, in case of selling it to Army this will be bear by government.

You point is valid w.r.to stock price correcting from 240 to 60 levels, @240 when the plant is running with 100% utilization, all the positive factors are digested into stock price.
Similarly when it is at 60rs, the following factors are ignored in the short term.

  1. Getting the FMCG majors as clients is a major challenge, where the company is succeeded.
  2. Previously Company used to sell its products under Ovobel marketing chain in Japan, later it successfully established it’s own marketing chain and capturing 10% of Japan market share is good achievement.
  3. The pork-farm tracking mechanism is well above the global competitors.
  4. Management is surely investor friendly, because i asked for sharing the investor presentation and company video tour to be uploaded to youtube, which they did accordingly.
  5. Similarly when the company is in debt crisis around 4 years back, actions such as injecting promoters money into the company, delisting the shares from BSE exchange, selling the feed mill to Hatsun agro products etc…shows commitment towards the work.

One can see export data from below site:
https://www.seair.co.in/egg-powder-export-data.aspx


(Marathondreams) #46

What I don’t like about SKM is their growth market is place like Russia. People with experience with dealing with Russia will tell you how difficult and unpredictable that market it. (exchange rate, government interference etc). As global growth slows down, it makes lot of sense to focus on India. But when you are EOU plant, that possibility is diminished.

Hence as @bramhaputra has mentioned above, I struggle to find positive trigger for this stock in short to medium term.

Disc - Not invested


(Krishna Agrawal) #47

Soybean and Corn…main two raw materials for chicks feed are at one year low. May increase margins a bit. Definitely a much required relief in tough time. Hope to see Namakkal Egg prices falling below 320 soon. Lets hope for the best.

Disc: Old holding with an avg price @ 85. Tracking closely. Will add more if situation improves a bit.


(NaMo) #48

Suspension on listing of SKM’s competitor and possible takeover target Ovobel is revoked and it will be back on BSE on 14-September. Understand that this could possibly be the reason for recent 20% surge in a few days from 62 to 74 levels. Understand that in last year Ovobel had 100 cr sales and 9 cr profit with equity of around 10 cr.

In span of last 15 months, the Egg prices in the US touched 30 year high & 10 year low. People in industry have not experienced for 10 years and 30 years what just happened in a span of 15 months. These events do not happen every few quarters. These are testing times and an unprecedented circumstances. There will not be pricing power in downturn

Commodities are at the bottom of the value chain. Uncertainty is the basic characteristics of all commodities mainly due to government policies that try to protect interest of a specific group in their country. Qualification by a central agency to enter the Russian Market, 4S & 6 Sigma Quality qualifications for the Japanese Customers are some examples of how these barriers are created and value is added to the product by SKM management. When SKM went through a downturn cycle 6 years back, they did not have any of these tools with them and they were neck deep in debt. Failure teaches you things that no business school or books can ever teach


(NaMo) #49

Good news is that export volumes to Russia market is on the constant rise. Jun - 30 Tons, Jul - 84 Tons, Aug - 96 Tons, Sep (first half) - 120 Tons. Overall, total Tonnage 911 Tons in Q2 till 9th Sep as against 891 Tons in Q1. Sales likely will exceed 20%+ compared to Q1.


(sriG) #50

yup…noticed this…but the export price is discounted big time (in comparision to competitors ovobel,venky etc.)…But keeeping fingers crossed for long term…russian currency instability also a problem


(NaMo) #51

Exports exceed 400 Tons in a month for the first time since December 2015. At least the volume is revived. The price revival will hopefully happen in next FY. Egg powder prices may start to move upwards by about end 2016/early 2017 onwards as the demand shall start increasing due to festivals/holiday season in the West


(NaMo) #52

Exports cross 538 Tons in September of which 192 tons to Russia (as per Zauba). SKM need to sustain this volume for next two months to say for sure that the business volume revival is complete.


(Mehnazfatima) #53

SKM has formed a very strong bottom and is now ready for take off…its incredibly bullish on all time frames…virtually no downside risk and huge upside potential…

But I am not invested in SKM because I don’t know much about it fundamentally…and its now a low volume stock…if things don’t go well, it will trap investors…not giving them chance to get out…


(NaMo) #54

@Mehnazfatima I noticed your recent perfect analysis on Aarti Drugs. Hope for the best with SKM.


(sivakkri) #55

Based on Zauba data, I notice that the 2016 exports to Germany has come down drastically (< 5% of 2015 volumes). Who is their customer in Germany and why is this drastic reduction of exports to Germany ?


(Kiran K) #56

FY17 Q2 Results: http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/66ABBA88_731D_4057_AB6B_95BD937C444F_151239.pdf


(pankaj) #57


(NaMo) #58

Topline has surprised, unpleasantly. Some observations: 1. Sales of First 4 days of July (4.72 Cr) was considered in Q1 sales, that’s the reason for higher topline in Q1 and lower in Q2. 2. Export Incentive is brought to book aggressively in this quarter to maintain positive Bottom line. 3. Material consumption Cost is almost 95% of topline. Egg prices are hurting. 4. Inventory is almost for 98 Days that’s for 3-1/4 Months. 5. Receivables is Zero. Is the company selling everything against Advance? 6. Accounts Payable is increased by further 4 days. 7. Cash & Equivalent is constantly increasing when the Short Term Loan (Working Capital) is increasing. Why would anybody maintain huge amount in cash equivalent & pay interest on Working capital loan? The only logic can be some deposit that the company must have put with the bankers of OVOBEL as proof of funds for negotiating a settlement to take over the company. Not sure, if the deal is still under negotiation or the bankers are refusing to release the deposit. 8. TTM EPS falls from 5.72 to 3.55. Not sure at what multiple would market discount this EPS. If the bears decide to short, holding price level of 60 looks difficult in short term.


(bramha) #59

(Sanyam) #60

The news say there is no outbreak of flu in Tamil Nadu. But as a security measure they are taking steps.

Regarding news related to bird flu, I had a talk with a retailer of eggs n hens. He said that bird flu news are spread by media purposely so that they receive cash from them to stop spreading the news. It might be true to an extend. The link which you sent @bramhaputra says something in the headlines n opposite in the paragraphs that follow.

Dis: Invested at avg price of 140 and my view may be biased


(bramha) #61

@Sanyam: You are right. There are no outbreaks in TN so far. The news article and similar articles in other media talk about Kerala and precautions taken by TN.

Since SKM operates with wafer thin margins, impact of such event, if it spreads from neighboring Kerala is very high. Am sure the industry & government will do all it takes to prevent such incidence. Yet the investors, need to be cognizant, as it has the potential to wipe off the profits of a few quarters.

@NaMo: Topline numbers are definitely more than expected. Zauba export data is not adding up to these numbers and am wondering what I am missing.

With out export subsidies, it’s 4 crore loss. Preferred to see accounting of subsidy in footnotes (like accrued or realized). Disproportionate numbers (vs revenue) with out explanations, leads me to doubt window dressing. I may be completely wrong here. But not certain with out information to conclude either way.

Having said that, the cost of raw materials has increased from 74% (last year) to 95% this quarter. Seems unable to pass on the increase in costs to customers. Recurring pattern indicates lack of pricing power & positions SKM more on commodity end of the spectrum.

Top line for Sep 16 has reduced by 49% from corresponding quarter last year. May be Sep 15 was exceptional, due to global events & not repeatable quarter after quarter. But that puts on a different question, with less pricing power and wafer thin margins, is the company left to the vagaries of the global market?

Ovobel acquisition is much talked about and am unable to fathom if there would be any big boosts - since raw material costs accounts for 80-95% of revenue and leave little to maneuver elsewhere (read operational synergies, cost of acquisition)

PE multiples seem to be exorbitant with out corresponding moat - 95% raw material cost, along with a promoter controlled company acting as sole gatekeeper for eggs procurement, doubts of window dressing, absence of pricing power, linear costs vs revenue (no scalability), wafer thin margins, bse listing delays etc, leave me skeptical on this counter.

PS: No holdings but on watch list.