Hi, has anybody done a comparative study of Ovobel and SKM?
NIA_SKM vs Ovobel short note.pdf (559.6 KB)
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- The stock is trading very close to the bottom in terms of historical PE
- In last 5 years, instances of EPS decreasing but the stock did not fall in proportion due to PE correction
- In my opinion this gives a margin of safety from any EPS fall
- Now the question how much is potential upside
Disc: Studying, close to taking a position
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How come Venkys india leader in poultry is not able to perform but SKM performing very good.
Both work in same industries and both have same material cost
Looks like a competitor for SKM
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I have gone through the video; it was impressive their strategy.
However, do consider their target audience.
They are targeting the people who are ready to pay a premium for hygiene, packaging, and branding.
Their products are more towards the ready-to-eat segment.
I don’t think those are a competitor for SKM since their target audience is only at metros as of now at least.
Maybe if they start looking at Tier II and below cities and exports, then they turn to competitors, and I believe it may take a while.
But the main goal is that they want to target the unorganized more than the organized as per my understanding.
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Whats encouraging it - The market size is 90,000 Cr. (from the heading at least). SKM’s sales is only 701 Cr. for last year. The market size is big. And above that, SKM with lots of efforts have secured the approvals to export to certain countries.
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The only issue I have with this share is lack of clear understanding between private 100% entity owned by promoter down the value chain and its listed counterpart. Have they given clarity regarding what kind of contract is built between the two? I think all the brands for newly launched products are with private entity. Please correct me if I am wrong
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The one point that sticks out like a sore thumb in this article:
“Shivkumar plans to retire from business once the company reaches a turnover of Rs. 1000 crore, a goal he hopes to achieve within the next five to six years.”
Current fiscal year revenue stands at 700Cr. That’s basically 40-50% growth in 5 to 6 years? That’s not a good sign. The vision is just not big enough according to me.
That’s under 7.5% CAGR growth. Not a very ambitious target.
And this info is another concern.
Disc: Entered recently with 1% of pf.
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I am amazed with how much coverage this stock has received on VP - really grateful to be a part of this forum, so much to learn from all you!
I’ve written an article consolidating a lot of information here
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Poor set of number.
Nothing to be enthused about.
Revenues are showing no signs of bottoming out yet.
Though a bit of relief is even after bad numbers stock isn’t expensive based on TTM earnings.
So it’s possible we might not see much damage coz of numbers. Rest will know tomorrow how the market will react to the numbers posted today.
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Base is building in Egg Prices. Price has consolidated between 200-240 for long.
Image is for learning purpose
Invested Biased
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Structural RM advantage
A look at egg prices in India. Namakkal Average for this year is about 506 per 100 eggs or Rs 5 per egg. Lets assume the average egg size in India is 50gms. Approx 90 eggs will be required to make a kg of egg powder. Thus One Kg of Egg Powder raw material will cost approx Rs 450.
SKM Eggs has its owned, leased and contract farms in addition to Environmentally Controlled sheds that have got recently installed which can help with lowering the quantity of feed required for making eggs as well as help with better yield from the layers. It will be safe to assume that the cost of the eggs that they produce will be meaningfully lower than open market prices. Assuming a 50 paisa lower cost (could be more) it would mean that one kg of egg powder RM would cost them Rs 405 per kg.
In the USA, a key large producer of eggs, last 3 year average price of a dozen eggs is around 150 cents or 12.5 cents per egg. Assuming that weight of an egg is 60 gms a kg of egg powder will require around 75 eggs. Thus One Kg of Egg Powder RM will cost $9.37 or Rs 780.
Thus the theoretical spread on RM Per KG for SKM will be ~Rs 380 (based on historical US average price) or Rs 3.8 lakhs per tonne. (Last year production 5000 MT and capacity 7500 MT giving a theoretical gross profit of Rs 190 crore from egg powder alone)
Currently USA egg price has moved upto 250 cents as we run into the winter months aka the annual bird flu season. Thus One Kg of Egg powder RM will cost $15 or Rs 1250.
Thus the theoretical RM spread per KG for SKM will be Rs 800 – 850 per kg. (based on current US prices) or Rs 8 lakhs per tonne.
Off course dried egg prices have different demand and supply dynamics than plain egg but the above points just highlight the structural advantages that the company enjoys on account of the lower cost of production. Also EBIDTA will have an impact of international freight which has now seen a sharp decline.
The company has an installed capacity to break 1.8 million eggs per day to produce 7,500 MT of egg powder annually according to the latest CARE report. According to the last annual report the company the quantity sold during the year 2023-24, of both egg powder and egg liquid stood at 10455 Tons in aggregate out of this around 5000 MT was egg powder. Additionally the company has also seen export sale of eggs move up to Rs 114 crores in FY24 vs Rs 24 crores in FY23 indicative of greater procurement.
Volumes though cyclical will eventually pickup especially if the international egg prices remain at lofty levels. Quarterly numbers will also start improving once contract prices get reset in line with international price increases.
While one can argue that SKM Eggs is a specialized commodity (numerous international buyer approvals required) the key advantage is lower resource cost that is structural.
Key risk like every year will be bird flu outbreak in and near their sources of procurement.
Thoughts welcome. Happy to be corrected.
Disclaimer: I am a holder with PF holding of more than 3%. Views biased.
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thanks for a brilliant writeup, so on an annual basis, what is your estimate of spread per Kg and profit, taking seasonality into account ?
Also, I think Poultry as a business will always be cheaper in India compared to other nations so it gives them runaway for growth and demand should go up in the basis for egg powder as in the name of ESG or Animal Cruelty, other nations can stop producing locally ?
Let’s assume 5000 MT of egg powder and 5000 MT of liquid egg without considering cyclicality of dried egg prices. So broadly 6250 MT of sales ( assumption 4MT of liquid equals 1 MT of powder). Based on the earlier US price average spreads as discussed earlier this should equal to Rs 237 crore of gross profit (3.8 lakhs * 6250). Assuming all other costs are attributed to the processed eggs business (FY24 Rs131 crores) then broadly EBIT of Rs 90 to 100 crores being conservative from processed eggs.
Also assuming that all non processed eggs are sold at Rs 5.5 net of other costs vs cost of Rs 4.5 net of expenses it should yield an EBIT of Rs 20 crores.
Thus Total EBIT OF Rs 100 to Rs 120 crores on a non cyclical basis. Company will be net cash positive by year end so broadly Rs 75 crores to Rs 90 crores of PAT.
Please note these nos are non cyclical annual expectations from the company and not for FY25.
Of course much more upside in numbers if company scales up production further as capacity available is 7500 MT.
Stacks up well against current market cap of Rs 640 crores.
Bring a specialized commodity near term prices will have a greater bearing on performance. Currently spreads are way above assumptions and egg powder prices will likely move up as contracts get reset.
Invested and biased.
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Bird Flu Season had started in Japan a large market for dried egg powder.
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28 cr egg contract per annum supply tender awarded
Going by the 5.5 rs sales price per egg - yearly revenue should be 150+ cr
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