SKM Egg Products Export Ltd : A Bet on One of the Biggest Cyclical Play.

SKM Egg Products Export (India) Ltd is one of the largest egg processing companies in Asia.. The company alone accounts for 60% of total export of egg products from India, with capacity to process 1.8 million eggs per day to produce 6500 tons of egg powder annually.

SKM egg products started the journey in 1996 with the state of the art production facility comprising best of technology and methods which are in line with international level. SKM EGG PRODUCTS is one of the largest egg processing plant in Asia with a MNCs like Mondeliz, Heinz, Nissin, Tate, and CSM are some of its clients (a client typically has two to three suppliers). Europe, Russia and Japan are its biggest markets.

SKM egg products is certified for ISO22000, BRC, and HALAL to make quality egg products. The state of the art quality assurance laboratory equipped with sophisticated instruments is ISO 17025 accredited. SKM has the capability to formulate and develop various kinds of egg based mixes for bakeries and mayonnaise applications. 

The quality and safety of the raw material is ensured with the backward integration of own layer farm and feed mill. Our poultry farm is ISO 22000 certified. Bio-security is maintained and our poultry farms are registered under establishment as per the norm of European Union.   

Coming to the business...

Despite being in a cyclical and commoditized business, the company has differentiated itself from its peers. It is one of the few players in the world present in all kinds of egg powders - egg yolk powder, egg white (albumen) powder, and whole egg powder. Most players are usually dominant in a single category.

This healthy product mix allows the company to break into and expand in different geographies (Japan is a net consumer of egg white, Europe a net consumer of egg yolk, and the Middle East is a consumer of whole egg powder) and diversify market risks. The company is also planning to expand in domestic markets with its liquid egg product.

The company is currently operating at the bottom of the commodity cycle. A cycle typically ranges from one to three years. And the down cycle began in FY17 (2016). The impact is reflected in the stock price, which has corrected more than 45% from its 52-week highs.

As per the management, from here, the only way is up. The highest and the lowest realizations in the last 15 months are what industry has seen in last 15 years. As per the management, the recovery could take six months to a year.

SKM Egg Products, at these valuations - and with its debt-free balance sheet, strong history of positive cash flows, healthy cash conversion cycle, competent management, and the business qualities we cited above - is one of the best-placed companies to withstand the downcycle and to make the most of the recovery.

it recently entered Russia after three years of efforts. Russia is one of the biggest egg product markets in the world. And so far, the growth has been robust. Going forward, the management aims to capture at least 10% of the import market in Russia. This would mean significant growth, along with the advantage of diversification. India too in the long run remains a potential market, especially post GST.

Potential in Domestic Market

India is a vegetarian dominated country. Egg powder is primarily used in bakery products. However, egg is one of the richest sources of protein. This is creating a new category of 'Eggetarians' in India i.e. people eating eggs but no other non-vegetarian food.

The Indian egg products industry is very small with just four big players i.e. SKM food products, Ovobel foods, Venky's and Eggways. Further, all the players are net exporters as the demand for egg products in India is very low.

The company is developing some innovative products (a liquid egg product) for the Indian market. Such products would be B2C in nature and are expected to create a new egg product market in India.

If the product breaks through, the management may consider setting up a separate plant. We believe, breaking into the Indian market, especially once GST gets implemented, can be a positive surprise.

Why Is the Stock Worthy of Investment

The company is currently facing a downcycle in the commoditized and cyclical business of manufacturing and selling egg powder. A typical cycle, as per the management could last for one to three years. The management expects a recovery in next six months to one year.

We believe that SKM Egg Products, with its world class facilities, strong product mix and geographical diversification is well placed to withstand the crisis because of its strong balance sheet (long term debt at zero) and healthy cash conversion cycle. Historically also, the operating cash flows of the company have been positive even during tough times.

Consolidated Financials

(Rs m)	FY14	FY15	FY16	FY17E	FY18E	FY19E	FY20E
Sales	2,635	2,901	3,029	1,965	2,659	3,092	3,982
Sales growth (%)	22.5%	10.1%	4.4%	-35.1%	35.3%	16.3%	28.8%
Operating profit	211	368	359	-24	293	371	518
Operating profit margin (%)	8.0%	12.7%	11.8%	-1.2%	11.0%	12.0%	13.0%
Net profit	72	254	245	12	137	186	292
Net profit margin (%)	2.7%	8.8%	8.1%	0.6%	5.2%	6.0%	7.3%

Valuations

(Rs m)	FY14	FY15	FY16E	FY17E	FY18E	FY19E	FY20E
Revenue (Rs m)	2,635	2,901	3,029	1,965	2,659	3,092	3,982
PAT (Rs m)	72	254	245	12	137	186	292
EPS (Rs)	2.7	9.7	9.3	0.4	5.2	7.1	11.1
Price to earnings (x)	25.5	7.2	7.5	154.8	13.4	9.9	6.3
Price to sales (x)	0.7	0.6	0.6	0.9	0.7	0.6	0.5
Price to book value	4.0	2.6	2.0	2.0	1.7	1.5	1.2