Though the Tamilnadu based firm was founded in 1996, and was listed long back, the initial years were challenging. Between 2004 and 2010, SKM performed better, but owing to the global economic crisis, it again went into a tailspin, until the end of FY’14, with its stock price hitting a nadir between Rs. 5 to Rs. 6.
However, all through these years, the company under the able leadership of its Managing Director & CEO, SKM Shree Shivkumar was busy plotting a turnaround from the crisis caused by multiple factors like regulatory issues as well as high debt. The Erode headquartered firm that had run into losses, turned back into a small profit by the third quarter of FY’13. However, the SKM stock continued languishing for a year.
The long years of careful planning and re-strategizing finally started bearing fruit in the first quarter of FY’15, when the profit growth accelerated, and the stock started picking up. And since then there has been no looking back, both for the company and its stock.
From a low of Rs. 7, on April 1st 2014, the SKM Egg Products stock has rallied to an all-time high of Rs. 174.90 recently, marking nearly 25X returns within less than 11 months of this current fiscal.
The rally was driven by sharply improving fundamental performance, over the first three quarters of this fiscal, where SKM Egg Products has achieved almost six times growth in net profit over the corresponding year-on-year period of last fiscal.
SKM Egg Products Export (India) Ltd. has three overseas subsidiaries, SKM Japan at Tokyo, SKM Europe in Netherlands, and SKM Egg Products in Moscow.
To better understand the future prospects of this remarkable turnaround story, StockExplain interviews SKM Shree Shivkumar, MD & CEO, SKM Egg Products Export (India) Ltd:
Processed egg products like egg powder and liquid egg that you specialize in, though not alien to India, is relatively not very common in the country. As yours is a mainly export oriented firm, can you explain to our readers about what is the global market size, its nature, and your geographical reach?
USA has been the pioneer in global egg business. India stands in 3rd place, as far as production is concerned. USA has been dictating egg powder price in the global market, especially the Egg Yolk Powder price. With regard to Egg Albumen Powder, Europe plays the vital role in exports and pricing. At SKM, we export more than 70% of our Egg Yolk Powder to European countries, and 70% of our Egg Albumen Powder to Far East and South East Asian countries. We sell our Whole Egg Powder to mainly Middle East and South East Asian countries.
Are your global customers value-added resellers or do you directly sell to consumers through supermarkets etc? In other words, whether you sell it as a brand or as a bulk food material?
We sell our products to food processing industries and not directly to customers, since this product is a raw material or ingredient for food processing and baking industries.
Is it true that the yearly volume of egg powder / liquid egg exports from India is worth around Rs. 500 crore now, and that you have a market share of nearly 57% of this figure?
Yes, you are right on those numbers and market share.
What is the relative size of the market for egg powder compared to liquid egg? Is liquid the bigger market, and are you planning to scale up your liquid products in the future? Is there any difference in potential margins between the two?
At present, egg powder market is bigger than liquid egg, we can say 70:30. But, liquid egg market is growing and we also plan to scale up our liquid products in the future. With regard to margin, egg powder is higher than liquid egg.
Do you sell any significant volumes in India, like 3-to-5%? As yours is a 100% EOU, do you incur any additional duties while selling in India? Despite being available in India for decades, why are Indian consumers timid about these products? Do you see a breakthrough on this front?
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.
SKM Egg Products has recently pre-closed its term-loan facilities with SBI. What kind of an interest savings will this cause on a quarterly and yearly basis?
Yes. We have pre-closed the term loan from State Bank of India. The interest saving is Rs. 4 crore per annum starting from the next year, and on quarterly basis it comes to Rs. 1 crore.
What would the remaining debt look like? What is the approximate split-up between term loans and working capital in the remaining debt? What portion of it is loaned by the promoter?
I can share with you the outstanding balance as on 12.02.2015. Our Term Loans have become nil. Working Capital Loan is Rs. 49.94 crore. Unsecured Loan from a promoter group entity (SKM Shree Shivkumar) is Rs. 8 crore. Total comes to around Rs. 57.94 crore as per the above date.
Is the pledge on the promoter shares done for any working capital requirements? Will it remain as such?
No. The pledge on the promoter shares were given to State Bank of India during the restructuring stage. We have requested our bankers to release the pledged shares and which will be positively considered by our bankers.
What would be your Working Capital Cycle be like? Is the Working Capital Days improving steadily?
Average working capital (inventory + receivable) cycle is 45 days. And yes, the working capital cycle is improving steadily.
What would be your other margin drivers be, apart from lower interest costs?
Power and Fuel cost is our main margin driver apart from interest cost. The management of the company is looking for reducing these cost substantially, for which necessary actions are to be implemented.
Apparently, from the global numbers, it seems that India is still a relatively small player in this industry. Do you think Indian egg processors can scale up their operations significantly to carve out a much higher market share? Is the global competition very tough, in terms of pricing, and/or in terms of regulatory hurdles?
India is a small player in the global egg powder industry, currently. But Indian egg processors can scale up their operations significantly to catch the market share, since India is the 3rd largest egg producer in the world.
You have been entering new markets steadily, with recent additions like Russia. How has it been faring, and what according to you would be a big breakthrough, maybe an entry into USA? How tough would be the regulations there, like what time it would take for you to enter such a market?
We are entering into Russian market only now. Russia is a very big market for egg products. There is good demand for egg powder, especially, Egg Albumen Powder High Whip, and Egg Yolk Powder Heat Stable. Even though entering and getting registration is tough in Russia, we have succeeded after 3 years of continuous efforts. Since USA is a top producer of egg and self sufficient to meet their requirement, normally they don’t import egg powder from other countries.
Coming to the supply side, SKM Egg Products seems to be working near 85% of its installed capacity now. At the same time, you have a target of Rs. 500 crore revenue within a few years. Are you planning for any capex soon, and what would be its nature? Whether it will be greenfield / brownfield, organic/inorganic, and how will it be funded - debt, equity, internal accruals, or a mix?
Yes. We do have a target of Rs.500 crore, which is for the year 2017-18. The present installed capacity is not sufficient to achieve our goals. We are planning capex soon. The nature and whether it will be a greenfield project etc will be decided in the coming fiscal, that is, 2015-16 only.
While scaling up, what would be the other challenges? Is sourcing high-quality eggs at a reasonable price a challenge? How does occasional bird-flu outbreaks in India or abroad affect you?
Well, it affects to a certain extent. But even if there is bird flu outbreak, we, egg powder processors are allowed to export their egg powder due to inactivation of bird flu virus during high temperature pasteurization and processing. Because of the same reason, most of the importing countries also allow to import egg powder from India even if there is outbreak of bird flu n India.
Since your turnaround into profit, you have been growing the topline and bottomline aggressively. On a more conservative estimate, what yearly percentage numbers would you put on revenue and profit growth, for a 2 to 3 year period?
Ours is a 100% EOU and the percentage numbers purely depends on international egg powder rate, exchange rate, and egg prices. Based on a conservative analysis, the revenue and profit growth will be 8 to 10%.
How would you assess the entry barriers in your industry? Apparently, it seems very tough for any new player to start processing 18 or 20 lakh eggs per day, especially when we consider the stringent requirements like quality monitoring from the feed ingredients stage itself...
Yes. However, it is possible to start the industry in small scale initially and after gaining experience they can go for processing of 18 to 20 lacs eggs per day. We have got rich experience in the poultry farm industry for the past few decades. Based on that experience gained from more than 30 years, we are in a position to face stringent requirements like quality monitoring from the feed ingredients stage to egg powder production.
You have been steadily upping your stake in the company. Do you think that the stock is very undervalued?
Yes, I think that the stock of the company is undervalued. Based on consistent performance of the company, the valuation can be higher.
Is Belovo a pure investor in the company who has invested cash, or is it any kind of arrangement for the processing machinery? Are you in talks with any FMCG major for a stake sale?
Belovo is our foreign collaborator and we had tie-up with them for marketing arrangement for 10 years. Both the agreement and the arrangement had been completed. They had invested in the shares of the company to the extent of 4.148% (10,92,100 shares) only. Presently there are no talks with any FMCG major for a stake sale.
Are you working on re-listing the firm on BSE? When do you expect this to happen?
Yes. We are seriously working on re-listing our company with Bombay Stock Exchange. We hope that it will be done towards the end of March 2015.
You have led this company back from the brink. To what all would you attribute this success?
Broadly speaking, the following two factors contributed the most to the success for our organization. Firstly, continuous steps were undertaken for improvement in three aspects - production, quality, & financial management. Secondly, the management was steadfast in its ethics and principles.
Any other insights that you would like to share with our readers regarding the uniqueness of this industry or regarding SKM in particular?
At SKM we have great clarity regarding our vision and mission. Our vision is to be a leader in the sectors we operate with the responsibility of building a healthy society. Coming to our mission, we have a four-pronged approach of - innovating and excelling in whatever we do, maximising the value for our stakeholders, sustaining integrity and honesty, and contributing towards social needs.