A room with pristine white coats, white shoes, surgical caps and masks greet you before you can enter the processing area. You are asked to sterlise your hands not once but twice. For a minute you might think you are in a hospital, but no, you are at SKM Egg Products’ manufacturing facility. For the company, which swears by quality, the elaborate process is a norm. Situated about 20 kms from Erode, in Cholangapalayam village, SKM’s 35-acre facility, also in pristine white, looks as much state-of-the-art from the outside as inside. But it is these best-in-class quality standards inside that have put them on the world map and ahead of global competitors.
Inside the facility, eggs are broken and shells removed. Then, with the help of machines, workers separate the egg yolk and whites. These along with whole eggs undergo treatment from a high-pressure spray before coming out as egg powder. It is this ingredient, used in baking, pasta, noodles and sauces, that has propelled SKM’ success.
Breaking the egg
The eggs weren’t broken at first though. CEO Shree Shivkumar’s father, SKM Mailenandhan, used to run an animal feed business. He would sell the feed to farmers and in return purchase 1.5 million eggs every day at pre-determined prices before selling them in the market. The problem though was that while they were making money in the feeds business, they were losing money selling the eggs.
This was when Mailenandhan asked his son, who joined the business in 1995, to see if there was a way to stem the losses. “We were losing Rs.3 crore annually. By improving the logistics and reporting system, we brought down the losses to Rs.2 crore,” recalls Shivkumar.
Around the same time, the Tamil Nadu Industrial Development Corporation (TIDCO) was looking for a co-promoter for an egg processing unit, which would cater to exports. Since SKM was already trading in eggs, this proved to be the turning point for the company. TIDCO picked up a 11% stake in the company, which it has since pared to 7.58%. And to help with technology, SKM partnered Belgium-based Belovo. “Since egg processing was a relatively new industry unlike diary, we felt it was better to go in for a partner, who understood the business,” says Shivkumar. So SKM and Belovo entered into a 10-year partnership, with the latter even picking up a stake in the company. The foreign collaboration also helped SKM’s IPO in December 1995. “It was quite fashionable to have a foreign collaborator those days. The issue was oversubscribed 1.7x times,” says Shivkumar.
After commencing production in July 1997, SKM was set to handle 10 lakh eggs a day and produce 3,500 tonne of powder annually. But around this time, agri-exports from India took a beating over the pesticide residue controversy, dealing a body blow to SKM as well. “Our labs said the eggs were okay, but when we took it European labs, there were some problems. Exports took a hit and we ended up operating at 20-30% capacity,” recalls the CEO.
It was after this episode that the company decided to put in strict controls. “Since we were procuring eggs from a number of farms, traceability was an issue. So, we started to put in quality controls and paid farmers a premium if they adhered to our conditions,” says Shivkumar. Farms were asked to have feed mills besides staying away from pesticides and antibiotics to get a premium of 3-5 paise per egg.
But despite these incentives, the next two years were a struggle, with the company battling low capacity utilisation and mounting interest costs. So, in 1999, Shivkumar decided to host a conference for potential distributors and customers. “I felt things would change if they saw our facility and quality controls at work,” he says. So about 32 potential customers from 27 countries were invited and many of them went back impressed.
Shivkumar also reached a one-term settlement for the company’s term loan with IFCI, which meant interest costs wouldn’t nibble away the profit. Thanks to these efforts, in 2000-01, the overall capacity utilisation improved to 45% and the company broke even, making a profit of Rs.45 lakh on a revenue of Rs.27 crore.
SKM’s first set of customers came from Japan, followed by Europe. For the company, these two countries are still its biggest markets, with Japan contributing 45% to overall revenues, driven by customers such as Ajinomoto and Nissin. Japan is a big consumer of egg white powder, which is used in ham and sausages as well as fish products. Europe, on the other hand, is a big consumer of egg yolk, which is used in mayonnaise, dressing and sauces, which explains its 40% contribution to SKM’s overall revenues. Whole egg powder is used in biscuits, cakes, pasta, noodles and quiches.
But while SKM was gaining ground overseas, in 2005, it’s partnership with Belovo came to an end. So, it decided to put in place its own distribution network across key markets – Japan and Europe. Branko Klawer of BK Foods Ingredients, the company’s distributor in Europe, remembers the first time he heard about SKM. “In 2004-05, I was in India to show Heinz the facilities of SKM’s competitor. After the plant visit, Heinz officials told me I should visit SKM’s facility instead. I was upset at that time thinking SKM was going to get the business. But when I did visit their plant later, I instantly knew where Heinz was coming from.” It was also during this visit that Shivkumar and Klawer decided to put together a distribution network in Europe.
In Europe, some of SKM’s biggest customers include Tate & Lyle and SternMaid. Besides SKM’s client list spans food majors such as Mondelez and Heinz. “They are quick to adapt to customer needs and are flexible in their approach, constantly working with customers to innovate. Besides, the prices are very competitive,” says Fredy Tanuwidjaja, business unit manager, Connell Bersaudara Chemindo, one of SKM’s distributors in Indonesia.
SKM’s expanding client list can largely be attributed to its quality checks. While it has had a lab facility ever since the plant was commissioned in 1995, it set up a testing facility for residue analysis too in December 2005 so it didn’t have to depend on Indian labs. “The company has always been proactive when it comes to improving quality standards. They set up their own analysis system for pesticide residue and antibiotics. Even companies in the US don’t have labs like this one,” says Mac Ohi, CEO of OVO Japan, SKM’s distributor in Japan. Apart from testing, SKM has also put in place a system where if a problem occurs, it can be traced back to the root, right from the farm from where the egg came to the feed that was given to the chicken. “SKM is able to assure quality right from farm procurement to the final product, with documentation. There are very few companies in the world that can do that,” says Wiroj Lerdprapongh, managing director, Jim’s Group, a leading manufacturer and distributor of instant foods in Thailand.
Thanks to its stringent quality control, SKM’s revenue and profit rose steadily, with the company crossing the Rs.100-crore revenue mark in FY08. The very next year, capacity had grown to 12 lakh eggs a day through process improvements, and revenues were highest at Rs.122 crore.
Not satiated, SKM was ready for its next round of expansion. The plan was to invest in its own farm and feed mill at a cost of Rs.80 crore in FY09. The initial call was to set up a farm that could produce 12 lakh eggs daily, but as market costs barely covered the cost of production, this was trimmed to 6 lakh eggs daily. And the company decided to instead expand its capacity. Of the Rs.80 crore, about Rs.50 crore went to capacity expansion and Rs.30 crore for the farm and feed mill. This saw capacity rise to 18 lakh eggs per day and annual powder capacity to 7,250 tonne.
To fund this expansion, SKM had borrowed Rs.60 crore from SBI and rest from internal accruals. But with the markets facing a slowdown, the next two years proved challenging for the company as profits turned to losses during 2010-12. Inadvertently, SKM had to sell off its feed mill to Hatsun Agro for Rs.8 crore at a loss of Rs.2.8 crore. The company also restructured its loan with SBI.
Sticking it through these rough times though brought good news. Prices started to move up because of supply issues in Mexico and the US, which made 2012-15 period the best for the company since inception. From a loss of Rs.11.7 crore in FY12, it went on to make a profit of Rs.25.2 crore in FY15. Moreover, in June 2015, SKM paid off all of its secured and unsecured loans, becoming a long-term debt free company.
With debts out of the way and capacity utilisation over 90%, in 2015-16, SKM again began exploring expansion. But luckily for the company, this time the market turned soft before the plans could fructify. “While consumption of eggs was growing in India, in developed markets such as Japan and Europe it was stable, so it was supply that was dictating prices. Twice in the past, the market collapsed right after we expanded capacity, so we decided to wait this time around,” explains Shivkumar.
But expansion is definitely on the cards. “We want to reach the capacity to break 25 lakh eggs a day and produce 10,000 tonne of egg powder annually using both the organic and inorganic route in the next couple of years and reach revenues of Rs.500 crore by 2020,” he adds. For this, SKM is in talks to acquire Bengaluru-based egg processor Ovobel, the second-largest player in the space. While the companies can’t agree on the price yet, Shivkumar clarifies that the acquisition is more for Ovobel’s clients than its manufacturing capacity. Shanti Aggarwal, managing director of Ovobel, which has been in the business alongside SKM for over 10 years now, says, “There is healthy competition between us where we don’t compete on prices but on quality.”
Besides, SKM is also looking to improve its presence in markets such as Russia. Shivkumar says, “Russia is one of the biggest users of egg yolk. We have just entered the market and hope to cement our position in the next three to four years.” The company is also exploring the option of entering US, which is a huge market for egg white powder but the approval process is a long-drawn-out affair. So for now, SKM is eyeing the domestic B2C segment by introducing tetra paks in various sizes. “We are hoping of the Rs.500 crore in 2020, Rs.100 crore would come from domestic market,” he adds.
SKM’s journey, though successful, has been challenging. “It is not easy to establish yourself globally in this industry, especially when you are an Indian company. There are many apprehensions about quality. And it being rather a new segment, bankers didn’t always understand the business cycles. But Shivkumar’s persistence has put SKM in a league of its own,” says C Devarajan, MD, URC Construction and SKM board member, who has seen the company evolve over the years.
With SKM, Shivkumar has shown the world that you can end up a winner even by putting all your eggs in one basket.