SKM Egg Products Export (India) Ltd

CAUTIONARY STATEMENT

Management Discussion and Analysis forming part of this Report is in compliance withCorporate Governance Standards incorporated in the listing agreement with Stock Exchangesand such statements may be "forward-looking" within the meaning of applicablesecurities laws and regulations. Actual results could differ laws and regulations. Actualresults could differ materially from those expressed or implied. Important factors thatcould make a difference to the Company’s operations include economic conditionsaffecting demand/supply and price conditions in the domestic and overseas markets in whichthe Company operates, changes in the Government regulations, tax laws and other statutesand other incidental factors.

COMPANY PROFILE

India is one of the leading players in egg production and the cost of producing egg inIndia is also cheap. India ranks fifth in the world. India is exporting egg powder, frozenegg yolk and albumen powder to Europe, Japan and other countries. Table eggs are mostlyexported to middle east. The company uses predominantly local inputs and exporting itsfinal products, changes in economies both locally and at international level affect thegrowth and performance of the company. The abnormal increase in the cost of ingredientsused in the manufacture of poultry feeds put a tremendous pressure on the cost ofproducing eggs which will in turn have a direct bearing on the profitability of thecompany.

INDUSTRY PERFORMANCE

As only few companies in India are engaged in processed eggs business, data relating toperformance of this industry are not available. The company operated its plant andproduced 3920 MTs of egg powder as against the installed capacity of the plant 6300 Mts.As rupee strengthened against US dollar unexpectedly, the operating margin during thisyear is not commensurate with the increased volume of sale of 4180.37 MTs. However in thecurrent financial year the situation of INR v US dollar took a reversed trend and it isexpected that the company’s operating margin would be improved to a significantlevel.

BUSINESS OUTLOOK

Pronouncements by several leading economists and Central Bankers across the world wouldsuggest that the worst is over for the global economy, There are early, if feeble, signsof recovery in the US economy, which as a significant bearing on the other major economiesincluding India. Even though headline inflation has been brought under control, theprojected increase in government borrowing is likely to have an adverse impact on marketliquidity and consequently, on interest rate. Your company, as in the past, will continueto pursue its objective of growth with quality; Your Company also continues to focus onnew opportunities to improve profitability.

The year under review faced with the problem of unprecedented increase in egg prices.In this current financial year also the trend of increase in raw material price continuedas there is a spurt in feed ingredients cost.

As the increase in feed ingredients cost experienced through out the world there is acorresponding upward movement in the final product price which neutralized the threadposed due to raw material price movements. The outlook of this industry appears to bebright by considering the present trend in movements in the end product price and rawmaterial cost.

STRENGTH OF THE COMPANY

The entire production process of the company is well documented which helps the companyto track causes for product complaints up to raw material sources level. The company hasstarted poultry farm for captive consumption and the tracker system of the company will beextended up to the feed ingredients level. The company also made significant investment inprocess related and residue labs to be at par with international standards and now thecompany is resourced with facilities to make sample analysis in its lab and therebyobviating the need to get the sample analysis done in outside laboratories. Thecompany’s marketing subsidiary at Netherlands helps the company in servicing itscustomers and also provides required vital inputs for price negotiation and finalizationof new contracts. The company’s supply chain management is so effective which madethe company to register itself as one of the preferred suppliers of renowned customers.

FUTURE PROSPECTS

The steadily increasing oil price remained the overriding concern of the company. Inorder to overcome this, the company is taking initiates to shift to some other cheapfuels.

The future recovery in international prices will happen in tandem with the economicrecovery in the US and the EU. The economic recovery will lead to higher demand for eggspushing the price of eggs in these markets. Consequently the egg product prices will goup. On the other hand the egg producers are losing money which will affect the productioncapability, resulting in lower supply which will also lead to increase in egg prices. Butthe most important factor will be the economic recovery. Based on the past experience theindustry will correct itself in the supply side in 6 months period to have betterrealization. Considering the economic situation, we expect normal price situation in oneyear.

OPPORTUNITIES

Indian economy has been, more or less, able to withstand tremors of global financialmelt down. Even though the rate of GDP growth has slowed down considerably it is expectedto be around 6% The Company has plans to penetrate into new markets which are untapped.Vast market for processed egg products is in existence in Russia and the company is takingefforts to enter in to such markets. The company is in the process of taking strategicaction for tapping Russian markets.

The company’s consistent quality in products and services was very muchappreciated by our customers and we achieved good capacity utilization. We realized thatwe could get a better price from the customers directly. Our own subsidiary company, SKMEurope in the Netherlands to cater to the EU Market. As such, an exclusive distributor SKMJapan to cater to our Japanese customers. The rest of the market was serviced throughseveral distributors and agents.

With the efforts of our partners in Europe and Japan the company was able to realizebetter prices and service the customers more precisely.

THREATS

The company recognizes that threats are inevitable in business and believe inidentifying and reviving risks on an on going basis. Un-intercepted supply of rawmaterials at a competitive price is one of the threats that will pose risk on theprofitability of the company. As the raw material cost is having direct correlation withfeed cost, which predominantly uses agricultural commodities, climatic changes will affectthe availability of feed ingredients. Supply of raw material will be affected during theperiod of monsoon failure and the company by making investment in its own farm resulted inde-risking the threat to a greater extent. It is forcing companies to plant operationseffectively and produce quality products at lower costs.

EXCHANGE RISK

The change in exchange rate plays a major role in determining the realization in Rupee.The cross currency between Dollar and Euro also has an impact on the competitiveness of USoffers in Europe and the exchange rate between Euro and Dollar to the Japanese Yen alsoplays an important role in deciding the competitiveness.

The price realized in Rupee has not increased proportionately to the price increaseEuro and Dollars terms. In spite of all these risks, overall prospects for the Indianpoultry industry in general appears positive, considering government stimulus packages andthe Indian economy recovering faster.

The impact of risks will be reduced through continuous monitoring, timely action andcontrol measures by the company.

RISK MANAGEMENT

Risk is an integral part of the business process.

To enhance the risk management process, the company has mapped the risks. A system hasbeen formulated based on Balanced Score Card with various appropriate measures andaccountabilities to identify, assess, prioritise and mitigate the risks. Reports generatedfrom the system are monitored regularly to ensure that appropriate corrective actions aretaken.

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY:

The company has proper and adequate systems of internal control to ensure protection ofassets, proper financial & operating functions and compliance with the policies,procedures, applicable Acts and Rules. The company’s internal controls aresupplemented by sound internal audit practices. The Audit Committee at their meetingsregularly reviews the financial, operating, internal audit & compliance reports toimprove performance. The heads of various monitoring / operating cells are present for theAudit Committee meetings to answer queries raised by the Audit Committee.

INDUSTRIAL RELATION:

The relationship between the management and employees are continued to be cordial. Thecompany is in the process of developing system for identification of contribution made byindividual employees for rewarding them commensurate with their performance. Restructuringsalaries and wages are also under taken for remunerating employees linked to theperformance of the company.