Simran Farms Ltd. - A Multibagger in the Making
Industry – Poultry
BSE Code – 519566
Current Price – Rs. 40/-
Target Price – Rs. 91 /-
Target Price Period – Short to Medium Term
Equity Capital – 3.79 cr.
Promoter Holding – 36.22 %
Market Cap – Rs. 15.16 cr.
FY10 Sales – Rs. 136.68 cr.
FY10 Operating Profit – Rs. 5.89 cr.
FY10 Net Profit – Rs. 3.48 cr.
FY10 EPS – Rs. 9.19
Current P/E – 4.35
A Brief Overview of the Company :
Simran Farms Limited is a 21 year old company operating in poultry
industry. Under the broad spectrum of poultry industry, Simran Farms
is mainly engaged in Parent Poultry Breeding activities and Commercial
Broilers. The Company has most modernised parent poultry breeding
farms near Indore in Madhya Pradesh and commercial broiler farms in
Madhya Pradesh, Chattishgarh, Gujarat & Maharashtra.
Management & its Competitive Strength :
Simran Farms is managed by Mr. Harender Singh Bhatia who is a veteran
in poultry industry with 32 years of rich experience in all the facets
of poultry industry right from poultry keeping, feed management, farm
management, hatching of eggs, management of hatcheries to marketing of
chicks, eggs & birds. His contribution in the development and growth
of poultry industry in Madhya Pradesh is very well recognised.
Since inception, i.e., since 1989, Simran Farms has seen many ups and
downs of poultry industry and it is worthwhile to note here that the
management of the company has depicted its competitive strength by
sticking to the same line of business despite severe recessionary
trends that poultry industry went through since last many years. The
management of the company not only enabled the company to sail through
the recessionary phase but proactively built pillars for exponential
growth of the company during good phase of poultry industry.
Investment Rationale :
Embeded above is the investment rationale for the company. The pain
that management took of sustaining the company in recessionary phase
of the industry and the proactive steps taken by the management to
ensure exponential growth of the company in good phase of poultry
industry make Simran Farms an excellent pick in current scenario. Let
us first understand the macro perspective then the micro perspective
and then the valuation perspective for investment into Simran Farms
Limited.
Macro Perspective :
Poultry Industry is currently Rs. 40,000 cr. Plus industry in India.
The industry has transformed itself from a mere backyard agricultural
activity to a profitable, dynamic commercial industry. One of the
fastest growing segments of Indian agricultural sector, its growth is
driven by an increasing urban population, a growing middle-class with
increasing per capita and disposable income apart from rising
foodgrain and cereal prices and stable poultry prices.
India, with a poultry population of 489 million and estimated more
than 532 billion eggs production, ranks among the top three countries
in egg production in the world. While the production of agricultural
crops has been rising at 1.5-2 per cent a year, the broiler production
is growing at the rate of nearly 8-10 per cent every year and growth
in production of poultry/chicken meat increased from mere 0.12 million
tonnes in 1981 to 2.2 million tonnes presently. Consumption of chicken
in the country is expected to double in the next five years. The
eating out phenomenon coupled with more quick service restaurant
chains is changing the consumption profile of Indians. The changing
eating habits, cropping fast food outlets and quick service
restaurants speak highly in favour of improvement in levels of poultry
production over the next many years. Domestic poultry industry
currently produces 240 crore birds commercially every year. To cope
with the doubling of demand by 2014-15, the industry will need to grow
at a rate of 12-15% annually.
Micro Perspective :
After looking at the macro perspective, let us look at the micro
perspective i.e. a perspective specific to the company Simran Farms
Ltd.. For this we need to look at four aspects viz.,
(1) Management Initiatives in the past and whether such initiatives
met success or
not
(2) Management Goals for the future
(3) Current Industry Developments which can immensely benefit the
company
(4) Possible and Most probable future scenario for the company
Now, lets explain in detail each aspect one by one:
(1) Management Initiatives in the past and whether such initiatives
met success or not :
We will start with this aspect only, because, for any company which is
into a transformation phase of becoming a mid-cap from a small-cap
company, management initiatives and success of such initiatives in the
initial transformation-phase is extremely important. As stated before,
Simran Farms’ management stuck to the same line of business i.e.
confined their operations to only the industry of their expertise viz.
Poultry industry despite severe recessionary and adverse pressures
that poultry industry went through since last many years because of
rising prices of maize and soyabean which constitute 70% of the cost
for any poultry-based company, spread of diseases like bird flu,
stagnant demand and prices of poultry products, etc. This fact depicts
the credibility of management of the company as otherwise in these
many years any uncredible management would have easily ventured out
into some other line of business.
Now, the second thing which demands an investment in Simran Farms is
the initiatives or pillars that the management started to build to
ensure the exponential growth of the company in the good phase of
poultry industry. Such pillars came in the form of the company
venturing into commercial broiler farming in FY07 apart from parent
poultry breeding farms which was its main activity since last many
years. Immediately after that i.e. in FY08 it ventured into contract
farming for quick ramp-up of scale and based on this plan it started
80 farms in FY08. Immediately after that i.e. in FY09 company ventured
into other states like Gujarat and Maharashtra apart from Indore which
is its main hub. In FY09 company started its operations on 200 farms
and built a vision to consolidate entire simran group operations under
one roof i.e. Simran Farms Ltd. For this, initially it started to
consolidate activities of the listed company itself. In addition,
company also started in-house feed production on large scale in FY09
to imrove the profitability of the company as feed cost constitute 70%
of the total cost of any poultry-based company.
Now, the third thing which we can’t ignore is that whether the
initiatives taken by the management of Simran Farms since FY07 met any
success or not. The best answer for this is to look at the financials
of the company for last six years which are given below :
FY05 FY06 FY07 FY08
FY09 FY10
Sales 11.99 12.33 17.14 30.78
72.30 136.68
OP 0.09 0.59 0.60 0.82
2.50 5.89
NP -0.89 -0.12 -0.17 0.25
2.90 3.48
As can be seen from the above, from FY07 onwards company’s sales more
than doubled every year while on bottomline front it staged a great
turnaround with FY08 seeing the company coming out of red and FY09 and
FY10 seeing the company more than doubling its profit every year. FY09
included exceptional gain of Rs. 1.50 cr. pertaining to one-time
settlement with bank and so its real net profit for FY09 comes to 1.40
cr. All these numbers clearly show that the initiatives which
management of Simran Farms took in the past have met with immense
success.
(2) Management Goals for the future :
Management of Simran Famrs Ltd is working with a vision to consolidate
all the activities of Simran Group under the listed entity viz.,
Simran Farms Ltd. This vision was charted out in FY08 and to start
with, it was planned to first consolidate each and every activity of
Simran Farms to bring-in operational efficiency and then to move on to
bring unlisted group firms under its belt. FY09 and FY10 saw the
consolidation of activities of listed firm and from FY11 onwards we
can see the group firms merging with the listed entity.
The group frims of Simran Group include :
Simran Hatcheries
Singh Hatcheries
Simfa Labs (Vetline)
With consolidation of these group firms into the listed entity, Simran
Farms will be present in all segments of poultry sector including
breeding, hatching, broiler farming, feed production, vet medicine(via
Simfa Labs), etc. Only the segment left out will be retailing of
poultry products which can fetch decent margins for the company,
however, this segment can be ventured into at a later stage.
(3) Current Industry Developments which can immensely benefit the
company :
There are three major developments pertaing to poultry industry which
will lead to a rerating of the listed companies operating in this
industry and more specifically will immensely benefit Simran Farms
Ltd. Those developments are :
(a) Declining-to-Stable Input Prices
(b) Rising Output (Product) Prices
(c) Double Digit Growth a Compulsion for Poultry Industry
(a) Declining-to-Stable Input Prices :
Feed in the form of Maize (Corn) and Soyabean constitute 70% of the
cost of production for any company operating in poultry industry. In
last many years prices of this commodities shot up because of
excessive demand and limited supply. However, now the scenario is
entirely different. Stiff decline in export of soyabean because of
bumper soyabean output in Brazil and USA has put pressure on soyabean
prices in the domestic market. Soyabean meal prices have declined from
January 2010 price of Rs. 19,000 per tonne to Rs. 15,300 per tonne as
of today. Similarly bumper corn crop in Karnataka and Bihar has put
extreme pressuse on corn prices too wherein the prices have declined
from Rs. 11,200 per tonne as of January 2010 to Rs. 8700 per tonne as
of today. This reduction in prices of major input of poultry industry
has enabled the average cost of live bird to come down to Rs. 45 per
live bird.
Also, the prices of soyabean and corn are likely to decline or at the
most remain stable in the near future too because – (i) The southwest
monsoon which covered half of the country last week, has entered the
soybean belt. Good monsoon rains, which irrigate 60 percent of the
country's farms, will boost soybean output. (ii) Inspite of bumper
corn crop in Karnataka and Bihar, corn export is likely to fall due to
lower priced global offerings and quality issues. In early part of
2010 because of quality issues, there were rejection of large
consignments of corn meant for exports. Because of this in contrast to
last year wherein for the entire export year ending September 2009
India exported 2.3 mn. Tonne corn ; whereas this year ending September
2010 India is likely to end with just 0.8 mn. Tonne of corn export.
To conclude, Input prices for poultry industry are likely to remain
soft in the near future too.
(b) Rising Output (Product) Prices :
This is the main factor which will lead to significant rerating of,
specifically Simran Farms, and broadly all the poultry stocks. The
main product in which Simran Farms deals in i.e., Broilers has seen
its price shoot up in last few months. Wholesale live weight Broiler
prices have shot up to Rs. 78-80 per kg. From Rs. 58-62 prevailing
just few months back. This has resulted in increase in retail prices
of dressed broiler to Rs. 140-150 a kg. Up from Rs. 110-120 prevailing
few months back. Similarly, egg prices have also started to move up in
the last few months across the country. Wholesale egg price is
currently quoting at Rs 2.58 per egg, up from Rs 2.40 per egg a month
back. In the retail market, egg is currently selling at Rs. 3.50 per
piece.
Normally, during summer months, poultry products’ prices, especially
that of broilers, normally remain stable because of low demand in
summer months due to hot conditions. However, this time, in summer
months too demand has remained constant because of high prices of
cereals and pulses which are otherwise a rich source of protein.
Hence, people have instead turned to broiler meat which is a very rich
source of protein and other vitamins. India is fifth ranked broiler
producer in the world with an estimated production of 2.3 million
tonne of broiler meat per annum. However there is a huge scope for the
growth of poultry industry as the country's per capita consumption is
only 2.4 kilogram per person per annum and per capita consumption of
broiler meat has grown at 10% in last 15 years.
Hence, prices of poultry produts, especially broilers, is likely to
remain rising-to-stable in the near future.
(c) Double Digit Growth a Compulsion for Poultry Industry :
As discussed before in the section ‘Macro Perspective’, consumption of
chicken in the country is expected to double in the next five years.
The eating out phenomenon coupled with more quick service restaurant
chains is changing the consumption profile of Indians. The changing
eating habits, cropping fast food outlets and quick service
restaurants speak highly in favour of improvement in levels of poultry
production over the next many years. Domestic poultry industry
currently produces 240 crore birds commercially every year. To cope
with the doubling of demand by 2014-15, the industry will need to grow
at a rate of 12-15% annually. Thus, double digit growth is more of a
compulsion than a luxury for poultry industry.
(4) Possible and Most probable future scenario for the company :
In the next few years Simran Farms Limited is likely to emerge as a
strong player to contend with in the poultry industry. Already in the
current year i.e., in FY10 it has surpassed Srinivasa Hatcheries on
the Sales front. The pace at which Simran Farms is growing and the
aggresive management style that the current management of the company
is adopting, will surely make Simran Farms a completely integrated end-
to-end player in the poultry industry with a presence in all segments
of the curve. The consolidation of the company as well as group firms
and the initiatives like in-house feed-production, contract farming,
etc. will dramatically improve profitability of the company in the
coming years. Coupled with these micro factors, macro factors like
fall in input prices, rising demand of end products, spike in end-
product prices is likely to add to the growth momentum of the company
and will lead to dramatic improvement in topline and bottomline of the
company in the coming years.
Valuation Perspective :
This is the third and most important perspective to be looked into
deeply for investment into any company. Here again we need to look at
four aspects, viz.,
(a) Current Financials
(b) Future Financials
(c) Current Valuation
(d) Peer Group Valuation
(a) Current Financials :
Before looking at current financials aspect, let us first look at past
5 years financials of the company to check the quality of current
financials. Financials for last five years is given below :
FY05 FY06 FY07 FY08
FY09 FY10
Sales 11.99 12.33 17.14 30.78
72.30 136.68
OP 0.09 0.59 0.60 0.82
2.50 5.89
NP -0.89 -0.12 -0.17 0.25
2.90 3.48
As can be seen from the above, Simran Farms has maintained its topline
even in recessionary period of poultry industry. On the contrary, in
FY07 and FY08 there was widespread birdflu scare prevalent which
forced many small-scale firms as well as farmers operating in poultry
industry to go bankrupt and shutdown their operations. In such times
Simran Farms actually reported healthy topline growth because of
aggresive strategy adopted by the management to expand in bad times.
This strategy paid of and so when the bad phase of poultry industry
ended Simran Farms started reporting extremely healthy topline growth.
Bottomline growth was muted in FY08 and FY09 because of investment in
expanding the operations [FY09 bottomline number includes Rs. 1.50 cr.
Gain from one-time settlement with bank]. However, the business model
adopted of first achiving the scale and then improving the bottomline
proved to be shrewd one as in the first six months of good phase of
poultry industry, Simran Farms went ahead of Srinivasa Hatcheries, its
immediate listed competitor, in scale and also managed a dramatic
improvement in bottomline. Yes ! the fortunes of poultry industry
turned corner only in October-November 2009 and so FY10 only saw six
months of good phase of poultry industry. The main benefit of fall in
input prices and spike in product prices is likely to be felt from
FY11 onwards which will coincide with operational efficiences which
the company is likely to achieve because of consolidation of
activities of the company as well as group. An indication of such
operational efficiences is already seen in FY10 numbers wherein
company has achieved record operating profits of Rs. 5.62 cr.
(b) Future Financials
As explained above, the main benefit of fall in input prices and spike
in product prices is likely to be felt from FY11 onwards which will
coincide with operational efficiences which the company is likely to
achieve because of consolidation of activities of the company as well
as group. Simran Farms is likely to end current FY11 with a topline of
Rs. 182 cr. And a bottomline of Rs. 6.30 cr. In FY12 the topline is
likely to be around Rs. 210 cr. While the bottomline is likely to
shoot up to Rs. 11.55 cr. In FY12 the real effect of consolidation of
activities of the company, merger of group firms, geographic expansion
as well as full utilization of in-house feed production is likely to
be seen which will result in dramatic improvement in bottomline.
Current FY11 will see a spike in topline while bottomline is likely to
follow the trend of FY10 only wherein OPM & NPM were below industry
average. This is because FY11 will again see expansion of operations
as well as group firms’ amalgamation issues. All these expenses are
likely to keep the margins of FY11 under pressure.
(c) Current Valuation
As discussed in above two sections, Simran Farms reported an EPS of
Rs. 9.19 for FY10 and is likely to post an EPS of Rs. 16.62 for FY11
and Rs. 23.10 for FY12 (In FY12 we have factored in an equity
expansion for likely capex which might even happen in FY11; if in FY11
this equity expansion happens then EPS for FY11 is likely to be Rs.
12.60).
Hence, at the current market price of Rs. 40, Simran Farms is
available at a PE of 4.35 based on FY10 earnings, 2.41 based on FY11
earnings and 1.73 based on FY12 earnings. Also, on market-cap-to-sales
bases it is available at just 0.11 sales based on FY10 numbers, 0.08
sales based on FY11 numbers and a meagre 0.07 sales based on likely
FY12 numbers.
(d) Peer Group Valuation :
Simran Farms has only four listed competitors viz.,
Venky’s India Ltd.
Srinivasa Hatcheries
SKM EGG Products
Hind Industries
Out of above, Venky’s is more of an expanded player with a presence in
other areas too which Simran Farms is not present in or is not
planning to be present in ; SKM Egg primarily deals in egg and egg
products while Hind Industries deals in selling of meat and meat
products. Only Srinivasa Hatcheries can be strictly called peer as far
as Simran Farms is concerned as it is this company which is present in
most of the areas where Simran Farms is present in or is planning to
be present in. Still, we will look at each company’s current valuation
on the bourses to judge the under-, over- or reasonable- valuation of
Simran Farms on the bourses.
Venky’s is currently quoting at a PE of 8.5 and 0.67 sales based on
reported FY10 numbers. Srinivasa Hatcheries is quoting at a PE of 6.5
and 0.65 sales based on reported FY10 numbers, SKM egg is quoting at a
PE of 57.5 and 0.30 sales based on reported FY10 numbers and Hind
Industries is quoting at a PE of 8.4 and 0.19 sales based on reported
FY10 numbers.
Based on above valuations it is apparent that Simran Farms with a PE
of 4.35 and market cap to sales of 0.11 is the cheapest and most
promising company available in the poultry sector.
Conclusion :
To conclude the report as well as investment argument in favour of
Simran Farms Limited, a company :
(1) which is transforming itself into a mid-cap from a small-cap
player
(2) operating in an industry which has just started its boom cycle
(normally boom cycle in poultry industry lasts for four years)
(3) having negligible debt on its books
(4) likely to achieve operational efficiences because of scale,
falling input prices, rising output prices, backward integration
initiatives,
(5) available at a PE of just 4.5 and a market-cap-to-sales of 0.11
based on FY10 and a PE of just 2.41 and a market-cap-to-sales of 0.08
based on FY11 numbers
(6) having peer group - lowest of which is quoting at a PE of 6.5 and
a market-cap-to-sales of 0.19 even when all the players except Venky’s
are smaller in scale than Simran Farms
is the safest bet in current market with a little downside risk and
significant upside potential. This company warrants a significant
rerating sooner rather than later and so a price target of Rs. 91
which entails to a PE of just 5.4 and a market-cap-to-sales of just
0.19 based on expected FY11 numbers is put on the stock.
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