Inflation eats into Sri Lankan chicken sales

The consumer demand for chicken dampened in the first quarter this year due to a drop in purchasing power hindered by the inflation, which remained elevated towards high single digit levels, according to John Keells Stock Brokers (Pvt) Ltd. (JKSB).

The situation has already impacted the financial performance of the industry and is clearly reflective from the subdued top as well as bottom line of the market leader, Bairaha FarmsPLC.

Even though 4Q sales of the poultry and farming industry has historically been strong due to the festive season (Christmas and the New Year), sales remained subdued this time. The headline inflation during this period hovered around 9.8 percent (in January) and 7.5 percent (in March).

Bairaha Farms PLC’s top line narrowed by 6 percent Year-on-Year (YoY) in Q1 in 2013 (Q4FY13) to Rs. 803 million mainly due to a steep decline in prices in both the broiler and layer day old chick markets stemming from industry oversupply coupled with a decline in sales volumes.

Further, given the positive correlation between the disposable income of people and per capita chicken consumption, this situation could further aggravate the already poor per capital chicken consumption which remains well below the level of developed nations at present.

The present chicken consumption level stand at roughly 6.2 kilograms of chicken per person and 57 eggs per person.

However JKSB expects the per capita consumption of chicken and egg in Sri Lanka to increase in tandem with the projected growth in per capita income level which is expected to reach US $ 4,000 by end 2016.

“This should, in turn, translate to steady volume growth for local poultry producers over the medium term,” they opined.

Meanwhile the gross margin contracted largely due to substantial increase in feed prices, VAT on super markets and the maximum price imposed in November 2012.

Some feed prices during the period even doubled where for instance price of soya bean meal shot up by 99 percent while meat and bone meal increased by 50 percent locally during 2012.

“Poultry producers in Sri Lanka are somewhat constrained in terms of their ability to pass on cost increases to consumers, given a statecontrolled price ceiling of Rs. 380 on processed whole chicken with skin (chicken parts are, however, currently not subject to price controls)”, JKSB said.

They also said that although the price of a kilo of chicken was increased by Rs. 30 in October 2012 (from the previous maximum retail price of Rs.350), it has been insufficient to offset the sharp increase in production costs.

Apart from that, the recently imposed VAT charges on supermarkets generating a quarterly turnover in excess of Rs. 500 million also took effect from 4QFY13, causing a further drag on margins (as producers have had to bear some of the impact).

According to the Central Bank annual report, chicken production grew by 5 percent to 122,490 metric tons while egg production showed a significant increase by 23 percent to 1,457 million eggs in 2012.

For the financial year ended March 31,2013 Bairaha Farms PLC recorded a turnover of Rs. 2,883 million, up 3 percent and posted a net profit of Rs.159 million down 63 percent (from Rs.433 million).