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.
How does one track global egg supply and prices?
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.
Apologies: didnât make the standard disclosure: I have no holding in this one
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 - #93 by Mridul
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
SKMLâs top 5 customerâs account for 61% of its total sales during FY17 and majority of sales is contributed by
Japan followed by Germany and Netherlands. SKMLâs 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 companyâs own farm are strategically located within a radius of about 30-40 km from the companyâs manufacturing unit thereby providing easy access to the RM and ensuring lesser breakage of eggs during transit.
- The plantâs 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 SKMâŚWhere can these be tracked? Some relevant news -
Cheap eggs flood US grocery stores | Fox Business
Egg prices are the lowest in a decade | The Gazette
_(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 -
âYes, 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.â - 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 arenât commodity). Are there anyâŚlike liquid egg? Though heard, liquid egg market size isnât 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?
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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:
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EggPro(Flavoured Drink) - A drink made out of egg white powder in different flavours.
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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.
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EggPro Sprinklers - An easy way to sprinkle protein into everything you eat.
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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
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Hi Ramesh,
Very Informative post⌠I really like their business modelâŚas it is unique and canât 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 ethicalâŚ
Can you explore this area and share your thoughts which is really appreciatedâŚ
Dis: Not invested and curiously tracking
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.
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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.
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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
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http://economictimes.indiatimes.com/slideshow/60021148.cms
Hope this helps SKM
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SKM Annual Report (2016-17)
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Biggest clients in key markets-Tate & Lyle, Mondelez and Heinz.
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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. -
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
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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.
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Repeat orders from the major markets of Russia, Japan, Indonesia, Thailand, Vietnam, Nigeria, Taiwan etc. keep coming. Quality recognized.
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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.
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Re-entered Korea market and expect good volume of business in this market in next 3 monthsâ time.
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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.
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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 :
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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.
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Its proposed acquisition of Ovobel Foods has not materialised, now has the company given any roadmap of growth.
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No information is shared on how the domestic business funding, manufacturing, distribution is planned.
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US market foray is a long drawn affair. Russian approvals took almost 3 years.
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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.
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The capacity utilization for FY16 was ~ 95% and FY17 was around 77% due to decline in production
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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 âunofficialâ 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.
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Anyone attending the AGM?
USA egg prices are at 28 month peakâŚUSA egg producers determine global egg powder prices.
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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
weekâs 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
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Their website is not working. Anyone here has email idâs of the management and the investor relations?
Thanks
you can send it to shares@skmegg.com
SKM AGM MEET 2017
Positives
- Started Supplying to contract company of Britannia industries in last financial year to the tune of 5000 liters/Per day of Liquid egg. Due to clarity on Input Tax Credit.
Since GST has given the clarity we can expect more orders from other domestic FMCG players. - Global Egg powder prices have risen to 6 Dollars Per kg. ( Avg 8 Dollars to 10 Dollars)
- New Feed mill is considered near Plant at the cost of 3.5 Crores to enhance operating margins.
- Revenue contribution to top 3 customers ~ 25% CAGR growth in 5 years.
- Targeting 25 % Turnover from Domestic front by the year 2022. ( Around 125 Crores)\
- They donât growth at the cost of leveraged balanced sheet.
Neutral
- Capacity Expansion ruled out as company is operating at 72 %. Management maintained same Sales in MTâs unless Global egg powder prices improves.
- No fund raising, for the new B2C business. All expenses are done via internal accruals.
Triggers
- SKM has introduced EGG WHITE CUBE and it is under test run in Erode town since
June 8,2017. They are improving the product based on customer feedback.
Price Points 500 gms - 230/-
Price Points 200 gms - 100/- - Marketing to done by SKM universal (Sister concern). This is considered as positive as long as they donât eat up margins. Because SKM universal Pvt limited and as 1000 dealers/Shop owners across 4 Southern states.
- EGG WHITE CUBE is made up of EGG ALBUMEN LIQUID, earlier they launches it as egg panner so it created confusion. It taste similar to " BOILED EGG WHITE".
- EGG WHITE CUBE is " 100 % NATURAL,PROTEIN RICH, ZERO FAT, ZERO CHOLESTEROL,and FREE FROM PESTICIDE RESIDUE". It will be successful Among health conscious consumers.
- Expecting launch by November or December in cities like Chennai, Bangalore and planning to cover all 4 States in one year time.
- They have 24 Products in Pipe line and Under R&D. ( Flavored Drinks, Pro Sprinklers).
Negatives
- No plan for Invest Heavily on Branding ( No high profile ambassador )
- Marketing Margins for SKM universal not revealed. Since business is nascent stage it wonât affect much. After 2 to 3 years it is surely a concern. Now management is leveraging the dealer network established by sister concern.
- SKM is planning for major up-gradation ( Amount not revealed ) along with additional equipment for new business. For this they are planning to apply under central govt
scheme of capital subsidy to get 30 % interest subvention. They will go ahead with expansion only if govt approves the scheme, other wise they will go ahead with
required maintenance and replacement only. - Management has not revealed margins on domestic B2C business.
- Management is not aggressive very cautious. ( Not hungry for growth )
Calculation of Margins for EGG WHITE CUBE ( Sample )
Egg weight : 60gms
Yolk Weight : 20 gms
So we can consider 40gms for white egg.
To make 500 gms of the product we need 12.5 Egg approximately.
Cost of One egg is taken @ retail rate of BEST EGGS so 12.5*8=100
Production Cost + Marketing + Packing Cost should work around 50 Rupees. ( Just a guess )
Their final product price is 230 with Taxes (If any)
I tried my best to represent the facts and figures with my little knowledge. Comments are welcome, this is not recommendation for buy or sell. I am invested in this with a long term view.
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