The poultry industry will shake off the woes heaped by the Covid-19 pandemic and post a better performance this fiscal because of higher realisations and lower input prices, leading to a 200 basis points (bps) improvement in operating profitability, despite flattish revenues.

Better profitability and modest capital spending, will help improve credit profiles for the industry’s players. This is as per Crisil’s analysis of 87 poultry companies, which constitute ~30% of the industry by revenue.

Wholesale prices of broiler chicken crashed to a low of around Rs 50 per kg in March 2020 from Rs.90 per kg in Jan 2020, due to fears over spread of Covid-19 virus through poultry. The unviable prices led to culling of broiler birds, as costs were not being covered, and creation of a supply shock. Thereafter, with fears of the virus not being spread through poultry abating and with demand outpacing supplies, prices of broiler chicken surged more than 20% to Rs 90-100 per kg on average in the first half of the current fiscal from Rs 75-80 per kg last fiscal (refer to chart 1), Supplies took time to catch up as poultry farms waited for the monsoon to get over, thereby inflating prices. Broiler prices are expected to average at Rs 100-105 per kg this fiscal.

The sharp improvement in broiler realisations will offset the impact of an estimated decline of ~20% in volumes this fiscal. As a result, industry revenues are expected to remain flat this year.

Even so, the poultry industry’s profitability will benefit from softer input prices this fiscal. The feed cost fell as maize production increased amid weaker demand from the poultry sector (which constitutes 65% of demand for maize). Maize prices have been hovering at Rs 15-16 per kg this fiscal compared with Rs 19-20 per kg last fiscal. Lower feed cost and higher sales realisations will increase the profitability of players by at least 200 bps to over 7% this fiscal (refer to chart 2).

Says Dinesh Jain, Director, Crisil Ratings, “We expect realisations to remain firm during the rest of this fiscal with the onset of festival demand in November. Even if average broiler prices decline to Rs 90 per kg in the fourth quarter, the improvement in profitability should hold given prices should still be higher on-year and feed cost remains subdued.”

Better profitability, will help crank up cash accrual by ~50% this fiscal, which will support incremental working capital and capex requirements. Low capex intensity in the sector will ensure that most of the cash accrual will be invested in working capital. Therefore, we expect the capital structure of the industry to strengthen with improvement in total outside liabilities/ tangible networth to less than 0.9 time in fiscal 2021 from 1.16 times in fiscal 2020 (refer to chart 3).

Says Jayashree Nandakumar, Associate Director, Crisil Ratings, “The credit outlook for India’s poultry industry remains positive despite the pandemic aftermath. Debt protection indicators like net cash accrual to term-debt repayments and interest coverage are expected to improve to ~4.5 times and ~7 times this fiscal from 2.9 times and 4 times in fiscal 2020.”

The extent of recovery in demand and sustainability of broiler prices would remain key monitorables.