Long track record of operations and continuous focus on business expansion
The firm is an established player since 1992 and has gradually expanded its breeding capacity to 1.80 lakh birds. Since 1978, the partners of the firm are engaged in the poultry farming business which highlights adequate experience in the business and enabled it to successfully establish strong relationships with its suppliers and customers.  Further, the firm benefits from its integrated operations with its in-house feed processing unit. Also, in FY24, the firm built an in-house laboratory at a cost of Rs. 1.30 Cr. (funded through internal cash accruals) in order to keep track on the bird’s health conditions, nutritional requirements and vaccinate them accordingly. It also acquired shareholding in an adjacent hatchery in FY24 for Rs 9 Cr. (funded through debt and internal accruals) which resulted in an increase in its capacity by 20,000 breeder birds. The firm has also recently entered the retail market with seven poultry shops and has other multiple small production plants at different locations in order to avoid the loss of birds while in transit. Additionally, the firm plans to increase their breeding capacity to 1.95 lakh breeder birds with an estimated cost of ~Rs. 3 Cr. in the fiscal 2026. The firm also plans for setting up of a backward integration plant for the soyabean meal and oil which is used in the manufacturing of mash and pellet feed, at an estimated cost of Rs. 5.5 Cr. and expects the commencement of operations in October’ 2025. Moreover, both the capex plans shall be funded through a mix of debt and internal accruals and the debt tie-up is under process.

Improvement in operating performance owing to increase in the breeding capacity
The operating revenue of the firm improved by ~30% y-o-y in FY24 and stood at Rs. 351.49 Cr. in FY24 as compared to Rs. 269.06 Cr. in FY23 owing to increased capacity and better resource utilisation. The geographical revenue mix includes ~40 percent of sales from Chennai market, ~20 percent from Madurai market and remaining through the local sales. Further, the firm has achieved a revenue of Rs. 360.06 Cr. in FY25. Also, the firm’s operating margin have reflected marginal growth to 2.87 percent in FY24 as against 2.07 percent in FY23, majorly owing to the reduction in the input costs. The firm’s net profitability stood improved at 0.87 percent in FY24 as against 0.34 percent in FY23.

Moderately intensive working capital operations owing to requirement of higher inventory levels
The firm has a moderately intensive working capital operation marked by high gross current assets (GCA) of 119 days in FY24 (116 days in FY23) which is mainly driven by higher inventory period which stood at 100 days in FY24 (95 days in FY23). The firm maintains higher inventory levels in order to mitigate the price fluctuation risk of the raw materials and it takes an average of 6-8 weeks for the chicks to develop into healthy bird. Further, the average debtor period stood comfortable at 13 days in FY24 (12 days in FY23) and the average creditor period stood at 36 days in FY24 (45 days in FY23).

Below average financial risk profile
The firm’s financial risk profile is marked below average owing to low net worth of Rs. 29.13 Cr. as on March 31, 2024 (Rs. 24.47 Cr. as on March 31, 2023). Further, the gearing (including unsecured loans of Rs. 8.65 Cr. classified as quasi equity) of the firm stood high at 3.29 times as on March 31, 2024 as against 2.60 times as on March 31, 2023 owing to increase in long term debt levels and unsecured loans from promoters to fund capex and short-term borrowings to meet working capital requirements. Moreover, the debt protection metrics is marked moderate by interest coverage ratio of 2.06 times in FY24 (1.69 times in FY23) and debt service coverage ratio of 1.25 times in FY24 (1.10 times in FY23). Further, in FY25, the firm has refinanced their debt to the extent of Rs. 4 Cr. and has also repaid its existing term loan of Rs. 8 Cr., which is estimated to have marginally improved the financial risk profile. Going forward, the financial risk profile is expected to improve further on the back of increasing cash accruals.

Exposure to intense competition and risks inherent in the industry
The firm faces intense competition from organised as well as unorganised players catering to regional demands. Furthermore, the poultry industry is driven by regional demand-and-supply factors because of transportation constraints and the perishable nature of the products. Low capital intensity and entry barriers facilitate the entry of players in the unorganised segment. Also, the industry is vulnerable to outbreaks of diseases, which could lead to a decline in sales volume and realisations of poultry players, however, after setting-up the in-house laboratory, the firm is able to track the bird’s health and nutritional requirements on a timely basis.

Risk of capital withdrawal associated with partnership nature
Senthil Hatcheries’constitution as a partnership firm is exposed to discrete risks, including the possibility of withdrawal of capital by the partners. Moreover, the partnership nature partially limits the flexibility to raise the funds vis-a-vis a limited company.
Acuité believes that any substantial withdrawal of capital by the partners is likely to have an adverse impact on the capital structure.