KSE Ltd Management Discussions

697.65
(4.85%)
Jan 29, 2015|12:00:00 AM

KSE Ltd Share Price Management Discussions

1. INDUSTRY STRUCTURE AND DEVELOPMENT

India being one of the fastest growing animal feed markets in the world, the cattle feed products sector significantly contributes to the Indian livestock industry, driving economic growth with notable vigour. To uphold and further enhance the prosperity of its dairy sector, the countrys livestock industry serves as a crucial employer for cattle feed products. The increasing demand for animal protein and dairy products has resulted in a growing livestock population in India, which in turn has increased the demand for animal feed. Currently the poultry, aqua and dairy industry accounts for the major share of the Indian animal feed industry. Modern animal feed products are manufactured by carefully selecting and blending ingredients to impart highly nutritional diets that both increase the quality of its end products such as meat, milk, eggs and at the same time maintain the health of the animal. The increasing trend in the production of milk, poultry meat, and eggs in India is a significant development in the countrys agricultural and livestock sector, which will contribute to a rise in demand for animal feed in the future. This trend can be attributed to several factors, including rising incomes, urbanization, and changing dietary preferences.

Changing lifestyles and rising per capita income in India have resulted in a shift in the dietary habits in the country leading to increased consumption of milk, egg and meat. The animal population in India is expected to increase continuously in the medium and long terms. India has recorded higher growth of exotic and cross-bred variety of cows, which continue to be preferred by many dairy farmers due to their much higher yield as compared to the indigenous breeds of cows. The Indian government along with private initiatives are increasing the awareness of better feed practices among farmers. Farmers are becoming more aware of the animal health and the importance of a balanced and nutritional food for their animals. All this put together, results in growing demand for compounded animal feed.

2. OPPORTUNITIES AND THREATS

The advantages to your Company in cattle feed and cake processing industries are

(1) its vast experience in these industries of about 50 years

(2) its leadership in the market

(3) adherence to high quality standards and acceptability of the feed in the market

(4) prompt after-sales service and good customer relation

(5) a lot of prestigious awards and recognitions to prove consistent quality and leadership

(6) good network of dealership

(7) talented technical and marketing personnel

(8) judicious purchase of materials and

(9) financial strength of the Company leading to better purchasing power helping to build up stock on favourable situations. The threats to the Company in these two segments are

(1) competition from other manufacturers in organised and unorganised sectors

(2) probable entry of multinational entities

(3) surge in the fuel prices leading to increase in the price of ingredients

(4) the volatile rupee Vs. dollar situation acts as a non-stimulant in import transactions

(5) granting of subsidy by the Government on animal feed selectively avoiding private manufacturers

(6) indirect control by Government over price of milk acts as a blockade, at times, to pass on the cost escalation to the consumers

(7) switching of crop by farmers from oil seeds and grains (from which our ingredients are derived) to other crops

(8) severe shortage in availability of manual local labour leads to increase in the cost of labour as these two segments are highly labour oriented

(9) import of cheaper oils for bulk consumption leading to fall in demand for refined coconut oil

(10) failure of crop and shortage in production of grains and oil seeds due to failure of monsoon/seasonal rain

(11) the raw materials used in the production of animal feed, like soybean meal, sorghum and maize, are being diverted for the consumption of humans, leading to a shortage in the feed industry.

(12) recent increase in sea freights many fold on account of several reasons acts as deterrent to import of copra expeller cake and

(13) the impact of Global Economic Turbulence due to Russias war on Ukraine, Israel and Palestine war and its impact on food and energy prices. Your Company is tackling these issues appropriately, by taking timely actions.

The advantages to your Company in Dairy segment are (1) reputation and brand image of the Company for the quality of its products and (2) financial strength of the Company helping to withstand the unhealthy market competitions. (3) Having celebrity of high regards and popularity as brand ambassador for our Ice Cream which increases the Brand Image in southern part of India.

The threats to the industry are (1) unhealthy competition from small players dealing with inferior quality products (2) entry of big players including multinational corporations in the segment catered by your Company. (3) Control over the Milk price by the state-owned public-sector undertaking.

Despite of drop in Sales volume in Cattle Feed compared with FY 2022-23 and with the Steep increase in raw-material prices for Animal Feed and Solvent Segment, overall revenue for FY 2023-24 has grown by 4.5%.

3. SEGMENTWISE PRODUCTWISE PERFORMANCE

The segment wise revenue and year to year change are given hereunder:

Segments

2023-24

2022-23

Year to Year Change Percentage
Rs. in lakhs Percentage Rs. in lakhs Percentage

Animal Feed

148950.07 88.48 141312.65 87.78 5.49

Oil cake

processing

13925.17 8.27 14829.74 9.21 (6.95)

Dairy

5473.38 3.25 4845.97 3.01 12.94

Total

168348.63 100.00 160988.36 100 4.57

We had to resort to frequent increase in the selling price of feed starting from March, 2023 to combat the steep increase in the ingredient prices and the ingredient prices are still ruling at very high level. After regaining normalcy from Covid Pandemic, many of the new entrants to cattle rearing in Kerala had either returned to their earlier profession or had found new avenues and left cattle rearing. Thus, there was a fall in the animal population in Kerala, and we were the one severely affected by the lower demand, as our feed price was ruling very high compared to other brands available in the market. However, the drop in sales volume has been compensated by capturing additional market share of cattle feed in Tamil Nadu region. When it is felt that the increase in raw material prices is likely to continue for a longer period, the Company had taken a decision to increase the feed prices whenever the raw material price increases to such levels as it deems fit to avoid losses.

The other competing brands in the government sector did not increase the feed prices and as compared to that of competing brands in the Government and Cooperative sector KSE feed price was more than Rs.1800 per ton during FY 2023-24.

In addition to the difference in price, the said competing brands were enjoying subsidy from Government, which was not available to our feed, as we operate in private sector. During the Financial Year 2023-24 the price of Cattle Feed had to be increased whenever there is increase in prices of Raw Material, but the State Government did not allow revision of milk price.

Since the revision of milk price was not made by the Government, many farmers found it difficult to manage and they left cattle rearing itself, as it became highly uneconomical. As a result of all these factors, the sale volume of feed has reduced in 2023-24 by 1.19% from 5.46 lakh tons to 5.39 lakh tons. However, considering the raw material price inflation we were forced to increase the selling price of our Cattle Feed few times during the year totalling around Rs.2000 per MT, which has resulted in increase in overall turnover of cattle feed by 5.4% compared to previous year ended 31st March2023. The company has entered Poultry Feed sector and witnessed growth with a volume of 4521 MT for FY 2023-24 as against 1997 MT for FY 2023-23 registering a growth of 126%.

The quantity of copra cake processed in the Cake Processing Division was 1,06,464 tons in year 2023-24, against 1,15,689 tons in the previous year. The copra cake, after extraction of oil, is being used in cattle feed as an ingredient. Since the volume of cattle feed registered a fall in year 2022-23 and 2023-24, the processing of copra cake also has reduced by 9.72% and 7.97% respectively. The average realisation on sale of coconut oil has reduced considerably. The average realisation for coconut oil is Rs. 1.13 lakhs per ton during the year 2023-24, whereas the same was Rs. 1.19 Lakhs, Rs. 1.47 lakhs and Rs. 1.54 lakhs per ton respectively for years 2022-23, 2021-22 and 2020-21. In March, 2021 the coconut oil price was around Rs. 1.90 lakhs per ton which came down to the level of Rs. 1.15 lakhs per ton in March, 2023 and the company has witnessed lowest selling price of Rs.1,03,000. Due to the steep fall in the price of refined coconut oil during the year 2022-23 & 2023-24, the turnover of cake processing division has reduced by 11.94% and 6.96% respectively.

The volume of sale of milk has increased by 13.55% compared to previous year. However, the Government influenced the market to keep the price of milk unchanged despite the steep increase in the cost of feed. At the same time the procurement price of milk at Tamil Nadu was high. Hence, the milk price in Kerala was not in harmony with our procurement rate. However, the ice cream segment has shown a growth of 5.50% in review and with little growth in sales volume compare to FY 2022-23 even after increasing the selling price of many variant. In that year, we also geared up our focus to premium segment, by cutting short the volume business of cheaper varieties of ice cream, wherein the margin is almost nil. In year 2023-24, we further spent Rs. 3.00 crores for advertisement of Vesta ice cream.

The year to year change in the volume of operation in different segments are discussed under:

Segments Unit of Measurement 2023-24 2022-23 Year to year Change (percentage)
Quantity Quantity
Cattle Feed Tons 539141 545611 (1.19)
Poultry Feed Tons 4516 1997 126.13
De-Oiled Cake Tons 16405 13751 19.30
Refined Coconut Oil Tons 7776 9143 (14.95)
Milk Kilo Litres 5818 5147 13.03
Ice Cream Kilo Litres 1698 1675 1.37

In the above table, the year-to-year volume of sale of animal feed has reduced by 1.19 %. The reason for the fall is mainly on account of farmers leaving cattle rearing due to uneconomical operations and the huge disparity in the price of our feed and that of other leading brands in Kerala. Since the price of our feed was marginally higher in comparison with that of other competing brands throughout the year 2023-24, we had to bear the whole impact of the fall in demand.

The sales volume of milk and ice cream registered marginal growth as a result of measures taken by the management in the form of engaging additional marketing force, exploration of new markets and expenditure on advertisement as discussed in earlier paragraphs in detail.

The segmentwise earnings before interest and tax are furnished below:

2023-24 2022-23 Year to year Change (percentage)
Segments Rs. in lakhs Rs. in lakhs
Animal Feed 4042.89 791.06 411.07
Oil Cake Processing (631.45) (513.73) (22.91)
Dairy (342.19) (641.64) (46.67)
Unallocated income net of expenditure including interest income 47.66 155.12 (69.28)
Total Profit/(Loss) before exceptional items, interest and tax 3116.91 (209.19) (1589.99)

In year 2023-24, the annual average raw material cost of feed has gone up by 4.30% over that of previous year. This is after registering an increase of 9.80% in the annual average raw material cost of feed in the year 2022-23 compared to previous year. In year 2023-24, the average selling price of feed has increased by around 6.16% compared to year 2022-23. The increase for FY 2022-23 was 9.30%. The ingredient prices were stable till February, 2021 and started increasing constantly, gaining the momentum in the last quarter of year 2021-22 and thereafter. Upto February, 2021, the average cost of ingredients was around Rs. 18,000 per ton, which has gone up to Rs. 22,500 per ton by March, 2022, and it further increased to Rs. 23,500 per ton for most part of the year 2022-23 and during 2023-24 I was further increased to Rs.24500 per ton. Thus the increase in the price of feed ingredients over the period of the said 38 months is over 36%. We had increased the selling price of feed in several tranches to make up the loss. The average realisation on sale of feed in March, 2023 was Rs. 25,909 per ton and that in March, 2024 it is Rs. 27,266 per ton, that is, the selling price was hiked by around 25.40% over a period of 38 months. As a result of the abnormal increase in the ingredient prices, which could not be matched with equal increase in the selling rates, the profit of the Animal Feed Division has reduced drastically.

In the cake processing division, local supply of copra cake was in short during the year 2023-24. We had to depend heavily on imported cake as in last year. However, as a result of short supply in Indonesia and Philippines, the imported copra cake has become costlier by more than 6.5%. Due to scarcity of local supply of copra cake, the domestic price for copra cake was also on the higher side. The year-to-year annual average rate of consumption of cake has not varied much. However, compared to the average rate of Rs. 24,000 in the year 2020-21, the increase in the rate of average consumption of copra cake is around 15%. The average consumption rate of copra cake as on March, 2023 was Rs. 29,671, which has gone up to the level of Rs. 32,329 per ton, by the end of the year 2023-24. Contrary to the above, the coconut oil price had a free fall from Rs. 120/kg in April, 2022 to Rs. 110/ kg. by the end of year 2023-24. At present, the coconut oil is cheaper compared to most of the other substitutes. All these put together, the profitability of cake processing division has further eroded considerably during the year under report.

There is low margin on the milk division and the procurement rate of milk in Tamil Nadu is ruling very high. At the same time, the selling price of milk is still low and the government has not increase the milk price during FY 2023-24. As such we had incurred loss of Rs. 51 lakhs in the milk division compared to Rs. 121 lakhs in the previous year. We have improved the markets with premium varieties and are pushing ahead to capture more market share. The main ingredient for ice cream is milk and cream there from. Since the cost of milk has gone up, the cost of production of ice cream also has gone up. To capture the markets, we have kept the price of all varieties of ice cream slightly lower than other competing brands, at the same time keeping the quality as the best, and thus had booked loss during the year 2023-24.

4. OUTLOOK

The cost of ingredients used in the manufacture of animal feed like rice bran, maize, cotton seed deoiled cake, groundnut cake etc. has gone up and still continuing at the same high levels. The situation is expected to continue for a few months. We have increased the selling price of feed to cover-up the cost and the feed division is generating slight margins. We will be making appropriate adjustments in the selling price, according to the ingredient prices keeping in consideration all the related situations. The indirect control of the Government on the procurement price of milk places the farmers into a lot of hardship and while taking pricing decisions, we have to weigh this fact in the best interest of the Company. Since the price of milk is artificially

kept low for the time being, there is no scope for further increase in the price of feed in the short term. The demand for the feed is now showing an increasing trend which will be helpful to us to utilise the production capacity and maintain the revenue.

In the cake processing division, we have to process around 1,25,000 tons of copra cake, to meet our requirements for deoiled copra cake, which is one of the major ingredients in our feed. The availability of local copra cake is still at strain as the price quoted are very high. The availability of copra cake from Philippines and Indonesia is also in short- supply, and the cost there of has increased by 20 to 30 % during first two quarters of FY 2023-24. The volatility in the exchange rate of dollar also makes the task highly tough. The coconut oil price is moving downward. This will add strain to the cake processing division, as the demand for coconut oil is very low.

Since copra cake is a major ingredient for cattle feed, we have to operate the division, even if with low margins, for the time being. The operation of this division is expected to be challenging during the coming months, until the oil price improves or copra cake is available at reasonable cost.

Currently the procurement cost of milk is very high and the selling price of milk is still lower. As such the margin on milk is practically nil. We are expecting a reduction in the procurement price of milk during the monsoon season, when the availability of milk will improve.

There is good demand for Vesta ice cream and we are expecting the same to pick up further. We have made a significant shift from high volume-low price ice cream varieties like frozen dessert to the rich pure ice cream varieties, which are expected to bring in good returns. We are also offering credits to the dealers of ice cream in a controlled manner. We have also boarded a Brand Ambassador who is well known in the Southern Part of India which has resulted Brand reach across Kerala, with which we hope there will be a definite surge in the sales

volume of our Ice Cream. We are confident that we can increase the margin for Vesta ice cream and the consumers will be ready to buy the premium product at a higher price. We are planning to improve the ice cream business at a slow and steady pace, without committing much heavy budgets on advertisement and capital expansion plans.

5. RISKS AND CONCERNS

The cattle feed raw material prices are likely to rule at very high levels and normalcy is not expected in the immediate future. We have tried to match the price of feed so far as possible to avoid losses. Under the current situation, the profitability of feed business will be under strain. We are concentrating on improving the market for our feed in Tamil Nadu, which is now showing good improvement. We expect that tapping of unexplored markets in Tamil Nadu will help us to regain the lost volumes. Since the price of competing brands are more or less matching with our price, we sincerely expect that the volume of feed sales in Kerala markets will improve considerably. As a result of maintaining high quality for the feed, the market acceptability for KS Brand cattle feed is very high in the States of Kerala and Tamil Nadu and we expect to improve the sales volume of feed.

The import cost of copra cake is at present very high, and the exchange rate of the dollar also is highly volatile. We must process around 1,25,000 tons of cake to meet the requirement of cattle feed division, wherein the deoiled cake is used as an ingredient. The coconut oil rates have decreased to the level of Rs. 113/kg. from an attractive level of Rs. 190/kg. about three years back. This will also add to the strain in the margins in cake processing division. We are hopeful that the situation may improve by the second half of the current year.

We are expecting the performance of Dairy division to improve with the backing of reasonable advertisement budget. We have already achieved good improvement in the volume of ice cream which is expected to further improve in the current year. Since we are planning to increase the price for all varieties of ice cream, maintaining the high quality intact, we expect to augment the performance of Dairy division and its profitability.

6. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has adequate policies and procedures in place for its current size as well as the future growing needs. These policies and procedures play a pivotal role in the deployment of the internal controls. They are regularly reviewed to ensure both relevance and comprehensiveness, and compliance is ingrained into the management review process. There are adequate internal control systems in vogue in all spheres of operations of the Company so as to ensure safety of its assets against loss. These internal controls are designed in such a way to ensure adequate accounting and financial controls. The internal control system is being continuously reviewed by the management and adequate steps are taken for improvement, wherever felt. Internal audits are being carried out regularly in all the Units. The internal audit reports and the corrective actions taken for the shortcomings reported in those reports, if any, are being discussed in the meetings of the Audit Committee.

7. FINANCIAL AND OPERATIONAL PERFORMANCE

The Revenue from Operations has registered and increase of 4.57 % to Rs.1683 crores from Rs.1610 crores, compared to previous year. The fall in turnover is mainly due to the reduction in the sales volume of cattle feed. For the reasons already discussed the volume of sale of cattle feed decreased by 1.19 % and realisation on the sale of coconut oil also registered a fall. However, on increasing the selling price of feed, the reduction in the turnover has been partly compensated. Though the Sovent Division and Dairy Segment resulted in Loss the Cattle feed segment resulted in profit whereby the company has reported overall profit before tax of 24.00 Crores and aftertax profit of 17.00 Crores for FY 2023-24 compared to an after tax loss of Rs. 2.33 cores in the previous year.

The sales volume of feed has registered a fall of 1.19 % to 5.39 lakhs tons from 5.45 lakhs tons in the previous year. The ingredient prices had increased by over 30% in a two year span. Though the selling price of feed has been increased as far as possible to avoid loss, there was limitation in increasing the selling price on the fear of losing the market. As a result of this, the profit of Animal feed division further decreased compared to mediocre performance in the earlier years. However, compared to immediate previous year 2022-23, the feed division reported a profit of Rs. 40.42 crores compared to the previous year profit of Rs. 7.91 crores.

We processed 1.06 lakh tons of copra cake in the year 2023-24 as against 1.15 lakh tons of copra cake in the previous year. With the reduction in the volume of feed produced, the volume of cake processed also reduced, since we are using the deoiled cake as an ingredient to feed. The selling price of coconut oil had reduced considerably and at the same time due to scarcity of domestic and imported copra cake, the cost of copra cake has gone up very high. The cake processing division reported a loss of Rs. 6.31 crores as against previous year profit of Rs. 5.14 crores.

The volume of sales of ice cream improved to 1698 kl. in the year 2023-24 as against 1675 kl. in the year 2023-24. As a result of sales promotion efforts supported by good advertisement budget coupled with a soft selling price and high quality, based on a considered decision to establish the market for ice cream. And also due revised price in the increase varieties the loss Dairy division decreased from Rs. 641.64 lakhs in year 2022-23 to Rs. 342.19 lakhs in the year 2023-24.

8. KEY FINANCIAL RATIOS

The Key Financial Ratios are given below with comparative figures for the previous year: Key Financial Ratios Method of calculation 2023-24 & 2022-23

Key Financial Ratios

Method of Calculation 2023-24 2022-23

Debtors Turnover

Revenue / Average Trade Receivables

1413.59 Times 1176.58 times

Inventory Turnover

Revenue /Average Inventory

12.12 Times 11.30 times

Interest Coverage Ratio

EBIT/Finance Cost

9.56 Times (0.44) times

Current Ratio

Current assets/Current liabilities

5.63 Times 5.29 times

Debt Equity Ratio

Total borrowings/Shareholders Equity

0.09 Times 0.09 times

Operating Profit Margin

EBIT/Revenue

1.61 % (0.06) %

Net Profit Margin

PAT/Revenue

1.05 % (0.15) %

Return on Net Worth

PAT/Shareholders Equity

8.02% (1.09) %

9. INDUSTRIAL RELATION

The Company has 767 employees on its rolls as on 31.03.2024. The Company is an exception to the adverse labour conditions existing in Kerala. In that year, all long-term settlements with the Unions have been duly completed. All the Units of the Company functioned without any labour issues during the financial year 2023-24. The management continues to maintain cordial industrial relations with all the employees of the Company, attending to their grievances with an open mind.

10. CAUTION

The views and statements expressed or implied in the Management Discussion and Analysis are based on the current available information, experience and our own judgement. There could be possibilities for alteration of situations. The Companys actual performance may differ as a result of unforeseen events on which the management has no direct control.

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