SKM Egg Products - thinking out of the shell


(NaMo) #105

Q1 result will be on 9 Aug. It could most likely be another lacklustre quarter. Important thing is during such times of egg powder glut in the international market, SKM is keeping its head out of water by posting some meagre profits. This will likely continue till 2018 first quarter till international egg prices improve. Bears are likely to hammer the stock, but it could present a good buying opportunity for long term when it touches 50-55 levels. It may not go below that level unless results are very bad


(abhi2525) #106

The recovery has started in terms of Egg powder price recovery in Europe. It is currently trading keeping into account bad results and any positives should lead to good upmove.


(Rohit Balakrishnan) #107

How does one track global egg supply and prices?


(arsh13) #108

Have joined this thread late. I was a bit puzzled to see the big ticket related party transactions in the FY15-16 AR (Page 84) - Rs 137 cr of purchases of egg from SKM Universal Marketing Company (India) Limited, with common directors. The corresponding figure was Rs 153cr in FY14-15 AR. Why would the ListCo not be able to procure the eggs directly rather than allow a leakage of margin to a unlisted promoter entity? Several other smaller ticket related party transactions too - including sale of scrap (egg shells), procurement of poultry feed supplement, etc. WIll be interesting to see what this number looks like in the FY17 AR.

Have any of the seniors on the thread discussed this with management / auditors? Looks a potential governance yellow flag to me. And if anybody has downloaded the lastest ROC filings on Universal Marketing Company (India) Limited, would be interesting to see how much profits they make and how much managerial compensation they pay.


(arsh13) #109

Apologies: didn’t make the standard disclosure: I have no holding in this one


(Mridul) #110

Key takeaways from the Care Ratings from July 6 -
http://www.careratings.com/upload/CompanyFiles/PR/SKM%20Egg%20Products%20Export%20(India)%20Limited-07-06-2017.pdf

Capacity

As on March 31, 2017, installed capacity to break 1.8 million eggs/day to produce 6,900 MT of egg powder annually at its unit in Erode. What was the utilization level in FY16/FY17?

Product Mix

SKML has a diversified range of products which are broadly classified under egg powder, bakery mix and liquid egg. Export sales mix consists of egg yolk powder around 45%, egg albumen powder around 25%, whole egg powder around 20% and the rest by liquid egg, while domestic sales is majorly from sale of bakery mix and eggs. Direct customer sale forms only 25-30% of the total sales as the rest are through distribution agents in each of the countries it operates.

Recent operational performance

During FY17, the company reported PAT of Rs.2.5 crore on total operating income of Rs.217.9 crore as against Rs.22.7 crore and Rs.283.3 crore respectively during FY16.

Reasons for decline in performance in FY17

The operating income declined by 23.2% from Rs.283 crore in FY16 to Rs.218 crore in FY17 mainly on account of unfavorable prices for egg powder in export market particularly Japan and also due to the increase in domestic egg prices. The PBILDT margin and PAT margin declined from 17.20% and 7.99% respectively in FY16 to 8.45% and 1.15% respectively in FY17.

The average price of egg as per NECC during FY16 was Rs.3.39/egg and Rs.3.69/egg during FY17. With RM cost accounting for nearly 80% of overall cost of production, ability of the company to pass on the increase in price to its customers plays a significant role in the overall profitability. See this in correlation to one of my posts - SKM Egg Products - thinking out of the shell

More than 90% of revenue of SKML is generated in foreign currency while the RM is procured locally barring certain consumables. Any steep movement in the currency exchange rates can have a bearing on the profitability of the company.

The operations of SKML are working capital intensive in nature due to its nature of business and its requirement to maintain high inventory for export orders and diversified product profile. SKML has sanctioned pre-shipment & post-shipment working capital facilities of Rs.70 crore and the average working capital utilization for the past 12 months ended March 2017, remained high at 93.67%.

Revenue concentration risk

SKML’s top 5 customer’s account for 61% of its total sales during FY17 and majority of sales is contributed by
Japan followed by Germany and Netherlands. SKML’s dependence on these agents & higher concentration on Japanese and European markets exposes the company to any change in consumption pattern in these markets and entry of alternate products.

Key advantages

  • Experienced promoters
  • Strategically located manufacturing facility with adherence to high quality standards. All the poultry farms including the company’s own farm are strategically located within a radius of about 30-40 km from the company’s manufacturing unit thereby providing easy access to the RM and ensuring lesser breakage of eggs during transit.
  • The plant’s construction and machinery installation confirms to EU/USFDA regulations and the entire unit is HACCP Certified.

Key Monitorables

  • Local egg prices (in Namakkal). Low egg prices would be beneficial for SKM. These can be tracked at http://www.e2necc.com/eggdailyandmontlyprices.aspx
  • Egg/Powder prices in the target countries (Japan, Germany, Netherlands). High egg prices in these countries would be beneficial for SKM…Where can these be tracked? Some relevant news -
    http://www.foxbusiness.com/features/2017/07/28/cheap-eggs-flood-u-s-grocery-stores.html
    http://www.thegazette.com/subject/news/business/egg-prices-are-the-lowest-in-a-decade-20170630
    _(the interplay between the above two factors influence the margins for SKM i.e. if RM prices are high but egg prices in target countries is high as well, SKM would not be impacted much. On the other hand, if RM prices are high and egg prices in target countries is low, SKM would be severely impacted (this is what is happening currently).)_Indian poultry industry was benefited big time due to the outbreak of avian flu in the US back in 2015.
  • Foray into newer geographies. How are Russia sales coming along? They earlier said egg yoke market is huge in Russia.
  • Stable/Depreciating INR
  • Foray into domestic market would reduce currency risks. They probably cannot use the same plant for domestic production due to indirect taxation issues? Excerpt from an interview from 2015 -
    Yes, we do sell in India, but not even 3%. Since we are 100% EOU we have the problem of 9% + 2 % + 1% duty issue (even though basically egg is a non-excisable product) , which makes the product expensive for the domestic consumers. If government supports us on this duty front, there will be very big demand for the liquid egg products in domestic market.
  • Foray into B2C (Egg paneer and other products) would give pricing power and thus better margins. Anybody got an idea on the response for this new segment?
  • Foray into higher margins products (which aren’t commodity). Are there any…like liquid egg? Though heard, liquid egg market size isn’t big.
  • 5S implementation to improve egg processing and reduce wastage.

Quick weekly tech chart clearly showing the divergence during 2015-16-17 in yellow, resistance trend line in blue, and support trendline in green.This looks to me at the very bottom of the cycle from where things can only improve. Thoughts?


(Ramesh kumar) #111

In the recent launch of egg paneer, SKM has unveiled its plan to come out with many high margin B to C type products. It has also named some of them:

  1. EggPro(Flavoured Drink) - A drink made out of egg white powder in different flavours.

  2. Protein Pops - Protein balls made of egg white and to be made available in various tastes. Ready to eat poopers can be healthier alternative to fast foods.

  3. EggPro Sprinklers - An easy way to sprinkle protein into everything you eat.

  4. Liquid Egg - A tetrapack would be available in three variations - egg white, yolk and whole egg.

Above products will make the company similar to FMCG. Also the decision to move from a commodity product to value added and consumer facing is a welcome step. It will not only balance the export fluctuations and international market vagaries but open a BIG unexplored market in India. Also introducing new products to the generation used to proceessed foods will have its own first mover advantage.

However, market response of the first product launched on 8th June 17 is yet to be known. We may have to wait for a couple of quarters to see the same reflected in results. Some scuttlebutt may help till that time to get a feel of the kind of response the people are getting.
Any thoughts?

Disc: Invested
Source : www.skmegg.com/admin/upload/New_Product_Launch_08-06-2017.pdf


(Gorthi) #112

Hi Ramesh,

Very Informative post… I really like their business model…as it is unique and can’t see any established player . But the only concern here I have is ( its already mentioned by other board members as well) their un-listed subsidiaries… which leads to questions about Management ethical…

Can you explore this area and share your thoughts which is really appreciated…

Dis: Not invested and curiously tracking


(NaMo) #113

What we need to understand from the management is that are these new products under SKM egg products or are they under SKM universal. SKM Best is a Brand Owned by SKM EGG Products Export (India) Limited. Under Class 29. They have not kept it on their personal name. But this would not imply that the listed company will get profits made by these products. Will SKM egg products only make these products and not market them? such a scenario will leave us with a few profit percentage only. Hope things will be clear with commentary from Q1 results on 9th Aug.

june qtr share holding pattern is out. promoter shares locked in till june 2017 due to listing in bse as part of regulatory compliance. It will be released this quarter.


(Ramesh kumar) #114

Management has many a times re-iterated that they trade at arms length with associate companies. SKM Universal figures mainly among related party transactions from which it purchases eggs at less than NECC rates. My understanding is the same is done to exploit economies of scale and maintain quality.
Till date no red flag has been convincingly demonstrated. Being a small company it has to interact more with investors and customers to ward off suspicions.Once the concerns are addressed, the scrip will be available at a premium commensurate with certainty it will bring.
One willing to take a bet has to keep reading the sector, the company and monitor the performance regularly.


(NaMo) #115

These numbers that came out today are really unexpected. The profit for this quarter is equal to the profit of whole of last year!! However, this being Q1 result, we dont get to see extracts of Balance Sheet, so have to wait till Q2 results to see, if theres any change in Working Capital Cycle or any other significant change in Current Assets & Liabilities


(dhiresh17) #116

http://economictimes.indiatimes.com/slideshow/60021148.cms
Hope this helps SKM


(Ramesh kumar) #117

SKM Annual Report (2016-17)

  1. Biggest clients in key markets-Tate & Lyle, Mondelez and Heinz.

  2. Inroads into Russia and planning entry into USA targetting revenue of Rs.500 crore over the
    next four years. US is a huge market for egg white powder but approval process is a long-drawn affairs. So the target set for 2020 is moved further by 2 years.

  3. Russia market is doing very well.Further being first Asian company in egg products sector to enter Russian market, selling considerable volume in this market

  4. The company is eyeing the domestic B2C segment by introducing tetra packs in various sizes, Egg white paneer, Egg Protein Health drinks and etc. Though the decision is badly delayed with other players jumping into the fray, the company will definitely have first mover advantage.

  5. Repeat orders from the major markets of Russia, Japan, Indonesia, Thailand, Vietnam, Nigeria, Taiwan etc. keep coming. Quality recognized.

  6. New product (Egg Liquid) is highly acceptable in Europe and Middle East countries, and successfully penetrating in these markets. Now our liquid samples are accepted by Oman market also and we expect to start our exports in this market within next 3 months time.

  7. Re-entered Korea market and expect good volume of business in this market in next 3 months’ time.

  8. In order to increase our market share and understand customer requirements, we are participating in big international food shows and visiting customers at their place at regular intervals. Foreign travel expenditure increased by 50%. The company seems to have made efforts to retain customers, meet new ones and explored markets.

  9. Working to identify new customers in Iran, Egypt, Srilanka, etc., We hope, to start our exports to these destinations within next 6 months time.

Transaction with related parties details :

i. Transactions with SKM Animal Feeds and Foods (India) Private Limited:
a. Sale of Egg Shells (Net of Returns):
Quantity 767.255 tonnes
Value Rs.15.37 Lacs
Balance as on 31.03.2017 (Dr) -

ii. Transactions with SKM Siddha and Ayurvedha Company India (Private) Limited:
a. Purchase of Medicines - Poultry feed supplement (Net of Returns):
Quantity 3,505 Litres
Value Rs.4.94 Lacs
Balance as on 31.03.2017 (Cr) Rs.1.23 Lacs

iii. Transactions with SKM Universal Marketing Company (India) Private Ltd:

a. Sale of Eggs (Net of Returns):
Quantity 1,74,23,670 Nos.
Value Rs.624.09 Lacs
Balance as on 31.03.2017 (Dr) Rs.24.91 Lacs

b. Sale of Poultry Feeds (Net of Returns):
Quantity 6,65,750 kgs
Value Rs.140.09 Lacs

c. Rent Receipts :
Rent received for letting out portion of the building at
Chennai for 5 months 0.50 Lacs

d. Purchase of Eggs (Net of Returns):
Quantity 32,07,07,440 Nos
Value Rs.10,646.03 Lacs
Balance as on 31.03.2017 (Cr) Rs.727.22 Lacs

e. Purchase of Wind Power:
Quantity 44,22,455 units
Value Rs.280.83 Lacs

f. Purchase of Medicines - Poultry feed supplement (Net of Returns):
Quantity 1,42,696.5 Kgs & 5,780 Ltrs
Value Rs.217.31 Lacs
Balance as on 31.03.2017 (Cr) Rs.7.74 Lacs

iv. Transactions with SKM Shree Shivkumar:

a. Payment of Rent:
Rent paid for hiring Administrative Office for 7.5 months 1.87 lacs

b. Payment of Salary & Commission:
Salary, Allowances & Other perquisites 40.58 lacs

v. Transactions with Sri.SKM Maeilanandhan:

a. Payment of Salary & Commission:
Salary, Allowances & Other perquisites 30.75 lacs

vi. Transactions with K.S.Venkatachalapathy:
a. Payment of Salary & Commission:
Salary, Allowances & Other perquisites 22.27 Lacs

vii. Transactions with P.Sekar:
a. Payment of Salary & Commission:
Salary, Allowances & Other perquisites 4.79 Lacs

Area of Concern :

  1. Company buys raw materials in Rs and sells egg powders in dollars. Egg prices do not seem to be dropping in India and the same is still cheap in US, putting pressure on margins. Persisting situation will not allow the company to grow.

  2. Its proposed acquisition of Ovobel Foods has not materialised, now has the company given any roadmap of growth.

  3. No information is shared on how the domestic business funding, manufacturing, distribution is planned.

  4. US market foray is a long drawn affair. Russian approvals took almost 3 years.

  5. There are too many unlisted subsidiaries/associate companies where the MD/CEO is involved. Some of them are in related businesses. One wonders the order of preference for the management.


(Rohit Balakrishnan) #118

The capacity utilization for FY16 was ~ 95% and FY17 was around 77% due to decline in production


(Rohit Balakrishnan) #119

I think this is a very critical thing to monitor. Thinking aloud here - given US is major supplier of egg powder in the European markets - a supply glut is keeping the prices low for processed egg products such as egg powder/egg yolk.

If the above is true then we need to understand how long are these cycles in the US in the past? And also consider what can shorten the cycle or lengthen it?

For eg- Recently, there was a bird flu scare in Europe - with eggs containing Fipronil in some EU countries. Has that had any impact on the US egg prices - maybe the excess supply can be diverted to European markets, thus not having much pressure on the egg prices? This will indirectly impact the egg powder prices.

This link provides weekly update on Egg prices in the US -while prices continue to be low - the following paragraphs, though contrary, caught my attention

Prices for shell eggs on the wholesale market firmed and advanced through the week on increased demand.Offerings are light and held with confidence. Supplies are light to moderate. The pace of trading is moderate to active. Prices for national trading of trucklot quantities of graded, loose, White Large shell eggs rose 10 percent (from $0.541 to $0.596 per dozen). The Midwest wholesale price for Large, white, shell eggs delivered to retailers declined 9 percent (from $0.82 to $0.75 per dozen) while the California benchmark for Large shell eggs declined 6 percent (from $1.24 to $1.17 per dozen), both reflecting the weakness in the market during the past week. The wholesale price on the bellwether New York market for Large shell eggs delivered to retailers increased 4 percent (from $0.92 to $0.96 per dozen). Demand for shell eggs rose into the last “unofficial” week of summer, following a normal seasonal pattern and enters its eighth straight week above average, driven by active retail business, but at lower pricing.

The wholesale price for breaking stock in the Central State posted its largest single week increase since the avian influence outbreaks in May 2015, increasing 19 percent (from $0.42 to $0.50 per dozen) to a price level last seen in March 2016. The undertone is firm. Demand is fairly good for light offerings and light to moderate supplies. Schedules are full-time and trading is moderate.

https://www.ams.usda.gov/sites/default/files/media/Egg%20Markets%20Overview.pdf

And this pretty much sums it up - http://calmainefoods.com/investors/volatility-of-egg-prices/

This is a listed company so this can be a good way to track the cycle.


(Rohit Balakrishnan) #120

Anyone attending the AGM?


(spiderman) #121

USA egg prices are at 28 month peak…USA egg producers determine global egg powder prices.


(spiderman) #122

Demand for shell eggs rises to its highest level this year and is well above average with the onset of the autumn demand season. Wholesale
prices are higher on light offerings and moderate supplies. Trading is moderate. Breaking stock prices are steady to higher on light to
moderate supplies and offerings. Schedules are full-time to extended; trading is moderate. The preliminary sample of featuring by retail
outlets indicates increased activity as retailers move past Labor Day and into the start of the school season. The average ad price loses last
week’s gains as it drops sharply. Shell eggs continue to enjoy good consumer interest but increased competition is noted from egg products
manufacturers on demand speculation stemming from the European Fipronil contamination issue


(abhi2525) #123

Their website is not working. Anyone here has email id’s of the management and the investor relations?

Thanks


(Chaitu) #124

you can send it to [email protected]