When pandemic strikes, rumours are what go viral the most. One such casualty of Covid-19 is the domestic poultry industry. The over Rs.1 trillion industry, expected to grow at a CAGR of 16% over 2019-2024, has suddenly found itself in a vortex of falling sales. For one of the most successful sub-categories of our agri-driven economy with 25 million dependent on it for their income, the pandemic has come as a bolt from the blue.
Union minister for animal husbandry, dairying and fisheries, Giriraj Singh, mentioned that the poultry industry is losing around Rs.15-20 billion every day since. From February, the sales of broiler chickens and eggs have fallen by 80%. At the farm level, the price for eggs has dipped from Rs.3.60 a piece to Rs.1.5 a piece, while that for chicken has dropped from Rs.75-80 to Rs.10-20 per bird.
Incidentally, the situation is in stark contrast globally wherein citizens in the US and Europe are stocking upon eggs and chicken before the supply dries up, according to KG Anand, industry veteran and general manager of Venkateshwara Hatcheries (VH), an unlisted entity of Venky’s India. Brazil has been sending multiple consignments to China, since its domestic production has reduced over the past few months, he adds.
In India, the virus has not just impacted production at small poultry farms, but also big players such as Venky’s, the country's largest organised poultry player with 91% market share. With all aflutter, we analyse the prospects of two prominent brands in the industry. The stock of Venky’s has more than halved since January 2020, while that of SKM Egg has fallen 18%.
The Pune-based company makes everything from feed and eggs (even pathogen-free ones for vaccines) to broiler chicken and chicken products. The company has incurred losses of Rs.1.5-2 billion between February and March, as broiler chicken and egg sales halved, according to Anirudh Mohta, director at Kalpvriksh Capital. The stock has crashed 60% from to Rs.1,580 on February 1 to Rs.830 on March 26. Currently, Venky’s is cleaning up the excess inventory piled up since February 15. “We are liquidating (processing or culling) the parent chickens within 58 weeks, which on a normal occasion would happen in 68 weeks. Assuming things won’t get as bad as Italy and Iran, we are looking for a turnaround soon,” says Anand.
However, there are a few things that the industry can be thankful for. For one, slowing production and demand has brought down the prices of maize and soya bean, which is used as feed that accounts for nearly 75% of operating cost. After FY17, when the government declared minimum support price (MSP) for maize farmers, poultry companies’ margins suffered — Venky’s profit dropped from Rs.1.99 billion in FY18 to Rs.1.74 billion in FY19 (See: Temporary setback). Today, maize is down from Rs.26 per kg last year to Rs.15-14 per kg, while soya has fallen from Rs.40 per kg to Rs.31 per kg. Anand expects a significant margin benefit in the coming quarters, coming on the back of Rs.58.6 million loss in Q3FY20. Meanwhile, since the chickens are being culled prematurely, Anand is anticipating a shortage in the coming months once the situation normalises. This shortage will be triggered by low supply owing to dearth of capital for buying fresh breeding stock, thus, Venky’s expects the price of chicken to shoot up. “In May and June, we hit around Rs.110 per kg for chicken. This year it won’t be surprising if it touches Rs.140-150 per kg,” he says.
Independent investment advisor Ritwik Rai, who tracked the company for Kotak Securities, had maintained ‘Sell’ in his last report (April, 2018) around the time the stock was positioned to cross Rs 4,000 trading, at a P/E of 27.6x for FY19. He explains, “Profitability for poultry firms is a relative calculation of the prices of feed and chicken, followed by the latter’s supply in the industry.” That is, when the feed prices are high and the supply of broiler is high, the margins take a hit. When the feed prices are low and the supply of broiler has fallen, there is a killing to be made, as long as demand stays intact. “In April 2018, that supply and demand factor fell into the right position,” says Rai. Earnings shot up and the share price followed. Now that the stock has crashed, Rai says, "Like all commodity companies, you have to be very particular that things have to be in your favour before you make an investment call. Otherwise it might take years for things to turnaround." But he adds that Venky’s has created a strong market for itself in the poultry industry and hence, it will survive. “Given that favourable conditions will return eventually, it's a good stock to buy.”
Mohta of Kalpvriksh Capital, who had entered the stock at Rs.400 levels, part-exited in 2018 when it was trading around Rs.4,000. But there was another reason. “Venkateshwara Hatcheries owned a football team, Blackburn Rovers, in the English Premier League and they had spent a lot on that. Then Venky’s funded VH with Rs.2 billion. Many investors questioned that move,” he says. Following a clarification from the management, the stock had rebounded. For now, Mohta expects the company to bounce back in the second half of FY21. The stock does seem attractive at current levels given that it is trading at trailing P/E of 8.79x compared with its 10-year average of 15.5x.
SKM Egg Products
Falling egg prices has come as good news for SKM Egg Products, which makes value-added goods such as egg powder, pasteurised egg liquids and bakery mixes. It procures 700,000 eggs every day in addition to its in-house production of one million daily. But the stock price of Asia’s largest producer of processed egg products is down by 14.6% from Rs.31 on February 20 to Rs.27 on March 24. Besides the pandemic scare, the stock has been under pressure over the past three years owing to inconsistent earnings growth. It fell from levels of Rs.180 in January 2016. SKM promoter and MD Shree Shivkumar explains, “Our average price realisation and margins have come down due to the heavy duties we have to pay in Japan as an Indian-origin company. There is a stark difference in the duties paid on eggs produced in EU and India. This has affected our bottomline.” Since Japan and Russia are the company’s largest markets, its net profit fell from Rs.226 million in FY16 to Rs.17.9 million in FY17, further falling to Rs.9.6 million in FY18 (See: Sunny side up).
Now that the bottom line is once again on an uptrend — at Rs.60 million FY19 and Rs.40 million for 9MFY20, Shivkumar is optimistic that the current crisis will not dent its financials. He maintains that there hasn’t been any decrease in demand, since most of the business happens through prior contracts for three and six months and one year, on rare cases. The company accounts for over 50% of the processed egg product exports from the country. “Around 70-80% of our export business happens on a prior contract basis. Only 20% of it is on spot. At present, in Russia we are covered up till December, and till June next year for Japan,” he says. In fact, exports makes up for 95% of its total revenue. SKM Egg has a market share of around 10% in Japan where the dominant suppliers are from Italy, so he is expecting an additional demand from this quarter since the Mediterranean country has been severely affected by the pandemic.
In India, the largest share of its sales comes from whole-egg liquids, which are supplied to big bakeries and hotels chains such as Taj and ITC. After GST, margin from these sales has improved with the tax coming down to 5% against the earlier 20-23%.
SKM Eggs will be investing more into expanding its in-house egg producing capacity to at least 70%, over the next seven years, with a capacity of housing two million birds. To protect the business from fluctuating feed prices, the company recentlyreceived the necessary clearances to import feed.
Manish Srivastava, equity research analyst at Pace Stock Broking, which is one of the top ten shareholders in SKM Eggs, says, “The company can eventually be a good alternative to Venky’s at a cheaper price.” Currently, SKM is trading at a PE of 14.74x against the 10-year highest of 309.24x in April 2018 (priced at Rs.112) and the lowest of 13.12x in July 2019 (priced at Rs.30).