SKMEGGPROD MULTIBAGGER – TAMILNADU COMPANY- CMP.70.25 TGT 700 WITH IN 5 YEAR TIME
SKMEGGPROD MULTIBAGGER – TAMILNADU COMPANY-
If we strictly track the history of any stock which turned as a
multi-bagger, there will be at least one niche element in it. Sometimes it may
be the product/service itself, and in some other cases it may be its brand
,technology , market or something like that
.If the number of listed stocks from a particular industry is very
limited and there is a boom period for that business , normally the
listed market leader will turn as a multi-bagger, if it is backed by a
management which is able to utilize the emerging business opportunities. One
very good example for this fact is the recent appreciation in Avanti Feeds Ltd.
,the stock I recommended about three years back @ just Rs.68 and currently trading above Rs.1525 (
Recommendation , Just pointed as an example and not a guarantee for similar
performance in all other cases). This week let us look into another really
interesting unknown niche stock – SKM Egg Products Exports Ltd. CMP.70.25 TGT
700 WITH IN 5 YEAR TIME
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.
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.
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 laks 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. This may happen 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.70
Disc: It is safe to assume that, I have vested interest in it as a share
holder.
SOURCE -FROM- SKM INDIA NAMAKAL
OUR TOWN THURAIYUR- NEAR BY NAMAKAL.
THIS OWNER IS FAMILY FRIEND BY VEDATHRI MAHRSHI- MANDRAM. VALKA VALAMUDAN-
