Monday, 1 August 2016

Revisit SKM Egg Products: Egg Powder has very long Shelf Life

I am again into Eggs. So many of our friends are raising queries about the future of SKM Egg as they are invested at higher levels of around 200. SKM Egg is a perfect example of over reaction of the market. When I bought it few years back around 10 my main growth catalyst was growth in Indian market which had near zero usage of its products. However it came back to life thanks to price rise in global markets but making the most of the fertile times it did a good job in wiping out the costly debt from its books and now it is ready to expand further particularly in Indian markets. When it was at 200, I was expecting it to fall as its growth was constrained by full capacity utilization levels. It is a commodity business and should not be getting high PE ratio which was when it was at 200.

Actually as I have explained earlier also that commodity businesses like Advanced Enzyme can deserve high PE ratio as entry barriers are strong and scope of scale is big. But in case of SKM, its strong entry barriers are only for Indian markets where demand is low and it doesn’t enjoy any such premium in global market where it is just another player. But it can survive in the global markets if it can keep its cost low. Scope of scale was also low due to full capacity utilization and low focus on Indian markets.

As its capacity utilization levels were full, so it was ready for a fall with stable results which it did and so fell. But its recent golden period from 2012 to 2015 was never going to last as price rise was stimulated by fall in supply from USA and Mexico due to flu attack and most of the countries banning import of USA poultry. USA egg prices rose to never seen prices due to shortages as millions of birds were killed. So countries earlier using USA imports were then looking for other avenues for supply and price of eggs skyrocketed in the global markets and so as the price of SKM Egg. But as I have shared a number of times earlier that I never invest in commodity stocks as most of the things are never in the control of these commodity producers. The more common the thing is; more price takers they are. Hence unless a commodity player has some compelling advantages like strong entry barrier, huge scale, low cost as compared to others etc. I never invest in them. The recent spike in the performance of SKM Egg wasn’t due to any of the above strong factors but due to global spike in prices on which it had no control. So this superlative performance wasn’t going to sustain anyways.

SKM Egg was a commodity player in the global market but a special player in Indian market where demand is low. But it has one thing in its favor and that is low cost which is negated by the recent fall in the egg prices. Actually Eggs are not suitable for transporting to long distances as they require more space, temperature control etc. which inflate their costs and dent the unit economy. So India is mainly exporting bulk table eggs to Middle East countries due to lesser distance and lesser quality control rules. But when we process the raw shell eggs to powder its weight reduces greatly and its shelf life increases considerably. Egg powder can easily last for over 18 months and if properly sealed it can have a shelf life of 5 to 10 years. All these things make Egg powder fitting for global trade at fraction of cost.

This Egg Powder can be used to make Omelet etc. just like shell eggs and they taste almost same. But Egg powder finds their major use in food industry for variety of purposes. Protein supplements are another area where their demand is big and growing continuously. Egg powder process also kills Bird flu and other virus due to high temperatures. Liquid Eggs also do the same work but with lesser efficiency as they require refrigeration and cold storage but still far better than table eggs. So I think Egg powder is something which can help in eradicating the nutrition problems in poor countries. Transporting table eggs to these countries is a waste of money and resources. These countries have enough demand to absorb all the excess supply; their only problem is price.

So things were going fine for SKM Egg unless USA found its feet again on the ground earlier this year. After the Bird Flu wean away, USA producers increased their production very fast and within months they were producing Eggs at the pre Flu scale. But demand wasn’t there as most of the Egg/Egg powder using food industry had either gone for plant based substitutes for Eggs or started using eggs at low scale in their products. This replaced demand hasn’t come back yet. Also the countries, which banned USA import haven’t still started it fully. This created a glut in USA market and this time prices fell to lowest levels. As USA was importing eggs last year, which it stopped later also resulted in the fall in global Egg prices. So currently there is over supply in the global markets and it will take some more time to fully absorb this. So we can see more pressure on SKM Egg for some more time.

But I am invested in it mainly for demand for its products in India. That will be the real golden time for it. As I have explained in earlier posts it has created world class facilities in India which is indeed a great feat. India is following the developed countries in the use of Cheese and Egg products so it is just about time that the demand for Egg powder will rise in India. We are still importing Egg based protein supplements; and still importing Whey protein based supplements. Whey protein is produced during cheese making process and a great value added products for dairy producers like our Parag milk which has big plans for entering into this segment in B2C market.

SKM Egg has wisely scaled down its expansion plans due to current global glut but India always has low price advantage and this will be back in near time. Average Egg prices in USA hovers around $ 2 for a dozen which are more than double the prices in India; even if we add costs related to superior quality India still is at half. So SKM Egg is surely going to acquire Ovobel (One of the biggest Egg Powder Producer in India) to expand its capacity and to have ready customers.

So those who have bought SKM Egg at the higher price should just wait for the tough time to pass. But SKM Egg is not a bad investment decision. Actually things can go tough in the stock markets as so many favorable and unfavorable variables always exist together and you can never know when unfavorable ones would take the command. Just like Life, we need to pass the tough time absorbing all the pain. This is the way in our Life when through hardships and pains we enrich and mature. But some of our decisions can turn out to be failures.

 We take our decisions from the narrow range of our consciousness but outcomes are decided by vast forces of life which we can’t measure at the time of taking decision. And we find Lord Krishna again relevant in stock market when he says to Arjuna that he can only do “Karma” (Act) not thinking about the “Phal” (Results). Actually Lord says taking decision is in my hands but results are an outcome of so many vast and various forces on which i have least control. But life and growth is always personal and individual; we grow when we venture into the unknown; this is the way to live life, meaning of life. We can’t follow the predefined and traveled path and hope to grow….this is just Re-acting not ACT. Our consciousness expands and solidify when we put ourselves into unknown. So if we want to accumulate great wealth in stock markets (not Normal Re-acting wealth) then we need to venture into stocks where maximum growth is into the future (current prices are just the beginning)...we can at the most care about the "Sarathi" ( Promoters just like Lord Krishna was the Sarathi of Arjuna who ventured into unknown on the persuasion of Lord and get the real essence of Life). Everything else after this is in the hands of Grand forces of life/Business. We shouldn't feel bad if somethings don't turn the way we like...we did our job perfectly...this is it.

So for my friends, who have entered into it at high prices of 200/150 , it is not a bad investment decision but a wrongly timed one. I remember my time, I entered in it at 20 and it was at 5-6 after 1-2 years…so I kept on adding in small. But I waited until Egg powder prices rebound in the markets and capacity utilization improved…then I made my major purchase at 7. So I made my bulk purchases around 1/3rd of my initial purchase price. At CMP of 70, it is just around 1/3rd of 200. so no need to worry just wait for the next phase of growth. If it delivers that then it is worthy of further investment even at 70-80...but not before that.

Its results will be out today; however I am not seeing any major setbacks this time in its results. Earlier around 2010 it was incurring heavy losses due to stressed global prices but quantum of loss was mainly attributed to the factors like low capacity utilization levels and high cost debt in the books. At present it is running at full capacity with almost nil debt….so only muscles and no fat this time. I think it is now better suited to withstand the tough market situations. Also Egg powder producers generally have long term relationships with their customers as customers want to ensure uninterrupted supply of raw material. So I am not seeing it drifting down to 50 where I’ll be happy to put more money into it.

We need to just remember that Egg Powder has long shelf life…it doesn’t get rotten that early.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post)

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