Rising poultry feed prices continue to compress margins at Keells Food Products

The perverse effects of rising poultry feed prices caused by import controls are fast feeding through its supply chain as processed meat producers such as Keells Food Products PLC have begun to feel the pinch from the rising meat prices, squeezing their margins and thereby their profits. 

According to a post-earnings analysis carried out by First Capital Research on the company after releasing its fiscal first quarter earnings ended in June 2021, the analyst observed an already hurting gross margin at Keells Food Products on the back of a faster increase in the cost of production. 

Sri Lanka’s largest processed meat producer reported sales of Rs. 887.5 million in the April - June quarter (1Q22), up 31 percent from the same period in 2020, reflecting a moderation from the March quarter, but the cost of sale advanced by a higher 35 percent to Rs. 673.9 million.  As a result the gross margin of the company has come down by 226 basis points to 24.1 percent in the 1Q’22 from a year ago level.  “Prices of chicken and pork recorded a gradual increase in recent months and have touched historically high prices driven by escalating costs of animal feed”, First Capital said in a note. 

Sri Lankan businesses are facing higher prices across their supply chains and in the most recent months the producer prices have been rising by near double digit levels from their year earlier levels.

Poultry industry was particularly hit hard from the import restrictions on animal feed which led to an increase in production costs while the depreciating rupee contiunues to make them further costly.  Mirror Business this week showed the retail price of chicken had risen by about 23 percent during the year through April this year, which in fact helped poultry producers such as Bairaha Farms PLC to outweigh the higher feed cost to record higher profits.
Meat prices aren’t the only cost components which saw rising at Keells Food Products as the company observed price escalations in other input materials as well, further impacting the margins.

“We expect price of chicken and pork to continue to rise due to disruption in feed and maize supplies drying up amid import controls, which may invariably influencing a further increase in cost of sales adversely impacting earnings”, First Capital added.  In the April - June quarter, Keells Food Products reported earnings of 80 cents a share or Rs.20.5 million in three months to June 2021 compared to Rs.1.64 a share or Rs.41.7 million in the corresponding period in 2020. First Capital Research however expects the sale of the company’s new range of products in the convenience food category which recorded 5 percent annual organic volume growth, to continue through the financial year ending 2024.