SKM EGG PRODUCTS EXPORTS - A CLOSE LOOK
This company is jointly promoted by well known SKM group and Tamil Nadu Industrial Development Corporation Limited(TIDCO) .Out of the Rs.26 Crore equity , TIDCO holding about 7.58 % and Individuals from promoter group holding another 46 % stake.( This data is based on June quarter share holding and promoters made lot of market purchases in June-September period) .Belgium based Belovo Engineering holding another 5 % stake in SKM .Belovo Engineering is part of BNLfood Group which supplying Egg Science & Technology ,producing and marketing eggs, egg derived nutraceutical ingredients and food ingredients. Plant of SKM itself established with the technical support and collaboration of BOLOVO.Company’s manufacturing facility is located at Cholangapalayam , about 20 Km from Erode in Tamilnadu .This is one of the largest Egg processing facility in Asia and this state-of the art facility is located in a 35 Acre plot. Under stringent quality conditions , company processing around 18 lakhs eggs per day and manufacturing Whole egg powder, Albumen powder ( Powder form of Egg White), Yolk Powder(Yellow) and recently introduced liquid Eggs.These products are supplied mainly to Japanese and European companies for manufacturing products like cakes, biscuits , cookies, Confectionery products, Health foods, Soup mixes, Ice creams , dairy products ..etc. SKM established direct Subsidiary/marketing points in its major markets viz- Netherlands,Japan and Russia.Selling to other markets channelized through third party distributors.Since the number of producers are less and India’s cost effective and competitive advantages ,company is getting repeat orders from its customers. SKM’s products are ultimately used by large food product manufacturing MNC’s like Kraft foods .Heinz..etc. for manufacturing bakery , health care and food items.
SKM is the only listed producer of Egg Powder and other value added products from Eggs .Even from the unlisted space , only very few companies are manufacturing similar products in India which includes an unlisted private company named Venkateswara Food Products Pvt Ltd owned by the same promoters of Venky’s India and another Bangalore based company which listed in BSE but suspended from trading for more than 13 years.Among these few players ,SKM is the market leader in Egg powder exports and contributing more than 50% of India’s total egg powder export.As of now, company processing about 18 lakhs eggs per day and utilising close to 90 % capacity to manufacture its major products Viz- Egg Powder ,Bakery Mix and Liquid Egg.These products are exporting to overseas markets mainly Japan and EU countries.Out of 18 lakhs eggs , about 5 lakhs produced from company owned farms and the remaining is sourcing through contract farming model( Mainly through an associate company named SKM Universal Marketing Ltd) . In order to ensure the quality of Eggs , company itself supplying feeds manufactured by company controlled (leased) feed mill to the farmers and company appointed veterinary doctors and supervisors periodically visiting farms running under contract farming agreements.Earlier, during its tough times company's share holders approved the sale of feed mill and farm , but only the selling of feed mill executed ( now working on lease) .This business model ensuring sourcing of quality eggs without interruption which is otherwise a herculean task to source close to 20 lakhs quality eggs per day.Promoter’s experience in poultry field is one important point to note. This company was originally promoted by Mr. SKM Maeilanandhan who is the doyen of poultry industry in India who also honoured with the Padma Shri award for his outstanding contribution in the field of social work in 2013.
Having said , being a food product , export of these type products to developed countries is not an easy task.Stringent quality standards and periodic quality checking are usual in an industry like this before getting final approval for exports and usually these formalities take many years to complete.In the beginning, company faced many challenges in this front and it affected SKM’s past performance. From past troubled times company emerged as a winner under the able leadership of Mr. SKM Shree Shivkumar who is the MD of the company and son of Mr. SKM Maeilanandhan.
FINANCIALS
During the peak of recessionary period , it reported losses in FY 2011 and 2012 due to various reasons like lower demand, poor realization and most importantly some quality related issues due to its dependency on outside quality testing laboratories. But with early signs of revival , company’s new products introduction and tapping new markets ,SKM made a remarkable turnaround in FY 2013 and further improvement in latest FY 2014.(See the below table for details) .
To avoid any quality related issues in future , company established own quality testing lab and R&D facilities.
As per the thoughts shared during recent AGM , company is now paying top priority to become a debt free company ( excluding working capital debt) in near future. As part of this effort , company already reduced its debt from Rs.51 Cr to Rs.34 Cr in last FY and further reduced it in first six months of ongoing FY .( Half of the loans are taken from promoters itself which they pumped into the company to keep it afloat at the time of extremely difficult periods few years back.) It is targeting a debt free status in next two years . After achieving this target ,SKM is planning to hike its capacity to reach a Rs.500 Cr company by 2017-18.
Major Negatives
Company is an export oriented unit and any recession severe than the previous one may negatively impact the demand scenario of its products.
Company’s earnings is in Dollar and Euro and its movements against Indian Rupee may impact its margins.
Though company sourcing part of its Egg requirements from own farms , any adverse change in the price of feed ingredients may affect its raw material cost.
Un-expected diseases affecting birds may create problems.
Major Positives.
As I mentioned in many of my previous postings ,while investing in small cap stocks , promoter quality is the first point to note.The most important positive point about this company is its promoters and management , not only because of their experience in this field but due to their highly ethical business practices and ‘Nothing to Hide’ mentality even towards its minority retail share holders.I believe ,In these matters , it is difficult to find many companies with this standard from the small caps space .
Potential of company's product is very high and, there is only very few companies in this field. SKM is the market leader handling more than 50% of India’s total egg powder exports.
India is one of the low cost producer of Eggs and this giving added competitive advantages to the company . SKM captured Japanese market by competing even with American companies which indicating its high quality standards.
Entry barrier - As mentioned earlier , procuring 18 lakhs Eggs per day is not easy to replicate by any new entrant in this field. Company established own farms to source part of this requirement and planning to expand the capacity of farm when it add more production capacity in its factory.Contact farming is also designed in a systematic way where company ensuring the quality of feed and arranging periodic visit of veterinary doctors to ensure the health of birds and provide awareness to farmers in order to ensure the quality of Eggs to be processed.Since the end consumers are large MNC food companies they ,always need large quantity at stringent quality standards . To ensure this quality standards ,it should be careful right from the beginning.Any available egg can’t be processed but it can use only the eggs laid by birds fed with specially prepared diets , so special arrangements should be there to ensure this quality and any available eggs in the market or at the gate can’t be accepted.Sourcing close to 20 lakhs such eggs per day continuously is an extremely difficult task.Situation is more tough in the selling side . By competing with foreign firms ,company took years to established the label of a reliable and quality supplier in overseas markets. Being a food ingredient ,import permission to developed countries is not easy and even in the case of Russian market ,SKM succeeded only recently after four years continuous efforts.Because of these reasons , still there is hardly four or five successful egg product processors existing in India. Full traceability of end product is an important factor in export oriented food stuff business. To ensure this ,SKM introduced a system named “TRACKKER” which helping the company to trace from feed ingredients level to final product level.
Scope of company’s products is very vast and so far it not touched the biggest market –USA. Such opportunities may be tapped once the production capacity hiked to double in next few years and company’s financial health improve further .
Using its own R&D , company introducing new products and its recently introduced liquid Eggs receiving overwhelming response from customers. Considering the increasing cholesterol related health issues , liquid white egg may turned as a money spinner for SKM in the years to come. Company also succeeded in increasing the shelf life of products and this will help to penetrate more overseas markets.
During the time of last recession its business badly affected mainly because of its higher concentration in few markets .To avoid such a situation in future SKM is now expanding its geographical presence .Company’s years long efforts to get an entry in Russian market succeeded recently and they got approval from Russia now. Company started trial shipment and it is expected to become a priority market for SKM in future. Company also entered in Nigeria and South African Markets recently.
Promoters efforts to become a debt free company is not a gimmick and they are working sincerely for that ,which is evident from the reduction in debt levels in recent times. Targeted debt free status by next few years will give direct positive impact in its bottom line and make this already attractive company as a compelling buy.
Once, majority of the shares of promoters were pledged with banks to avail loan facility ,but now only 24 % is pledged and balance released on repayment of loan.Remaining is expected to become pledge free in next 2-3 years.
Another most important factor is the multi angle benefit to the company due to global recovery. From last few year’s financial performance , it is evident that even a small positive change in global economy augers well for SKM .It is helping the company in three different ways
· * Increased Demand from foreign markets
· * Being an Export Oriented Unit , appreciation of Dollar and Euro against Indian Rupee is positive for the company
· * Strengthening of Dollar will reduce the competitiveness of US manufactures in foreign markets especially in Japan where SKM’s major competitors are US manufactures.
There is no big local market for processed egg as of now. But history says , In case of India , imitating the trends of food habits from developed markets is an eventuality . This will happen in future for sure. In such a situation , the peer company with years experience will benefit a lot and it will help the company to de-risk its business model by reducing over dependence on export – if necessary – in future.
Cost control efforts taken by management and their attention even in minute factors is another important point if we look through the eyes of a minority share holder. Usage of recycled waste water to irrigate the garden and lawn in front of the factory is an example for this zero wastage strategy. They are even selling egg shells and earning few thousands in each year.
Conclusion
I believe SKM Egg Products Export is a company operating in an Industry with huge potential in future and at the same time with high entry barrier.Most important point is the management’s high ethical standards they exhibited even during their tough times. I strongly believe , god will always with such people and lead them into more success . This is one rare company from the micro cap space I can assure one thing – if there is any failure for this company in future ,it will be only because of a reason beyond the control of promoters and its management.That much is the efforts they are taking to bring back the company into the right direction and further growth.For FY 2013-14 , on a consolidated basis company reported a Sales of Rs.264 Cr , a net profit of 7.20 Cr and an EPS of Rs.2.76. Stock of SKM appreciated post declaration of full year result and currently trading around Rs.60 .Prima-facie on a P/E based valuation method , this is neither cheap nor expensive.But to get a fair picture about last year profit ,we should dig deep. This 7 .20 Crore profit arrived after providing an Exchange fluctuation loss of Rs.7.36 Crore and another one time expense of Rs.4.15 Cr. Considering the chance for stability in Rupee value ( compared with last year) less forex loss is a possibility in current year .In the case of the mentioned one time expense incurred in last year , there is no chance to repeat it again. If we consider these two important hidden factors,valuation picture will change positively. In addition to this , company’s debt reduction will directly impact its bottom line and EPS figures going forward.Along with this quantitative figures, SKM’s market leading position, robust business plans with introduction of new products and penetrating new markets supported by a highly ethical management which is taking every effort to reach a debt free Rs.500 Cr company in next few years makes its an attractive pick for long term investors even at current level.
Listing
During its worse time in 2011-12 ,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( De-listing procedures from BSE yet to completed and theoretically still it is listed in BSE but suspended from trading ) and currently trading around Rs.50
Long-Term investors should latch on to this hidden gem with a target price of Rs 180-220 in next 3 years.
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