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 improve 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 financial s
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 Farms 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 firms 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 pressure 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. 40-150 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 products, 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 top-line and bottom-line 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 efficiencies 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.
