kesoram rayons
TRANSCRIPT
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Please refer to important disclosures at the end of this report
Kesoram IndustriesTyre imprints on cement
Kesoram Industries (Kesoram) is a diversified player with presence in cement and
tyre manufacturing. The company’s cement and tyre businesses are currently trading
at attractive valuations coupled with being at a substantial discount to their peers
and replacement costs. We have valued the cement business at a EV/tonne of US
$65, which is at a considerable discount to the replacement costs of US$80/tonne.
This gives an implied enterprise valuation of Rs1.4cr/tpd to the tyre business ,
which is at 35-63% discount to the peers such as Apollo Tyres (Rs3.8cr/tpd) and
JK Tyre (Rs2.2cr/tpd). WWWWWe Initiate Coverage on the stock, with a Buy recommendation.e Initiate Coverage on the stock, with a Buy recommendation.e Initiate Coverage on the stock, with a Buy recommendation.e Initiate Coverage on the stock, with a Buy recommendation.e Initiate Coverage on the stock, with a Buy recommendation.
FFFFFavourable regional exposure:avourable regional exposure:avourable regional exposure:avourable regional exposure:avourable regional exposure: The company’s relative proximity to the western
markets (40% of cement revenue derived from Maharashtra) is expected to cushion
its cement operations from the short-term demand-supply mismatch likely to
prevail in the south. Even in the south, we expect demand to start improving from
2HFY2011E with the political situation in Andhra Pradesh improving, which would
result in increased government spending on infrastructure and housing projects.
PPPPPoised to capitalise on presence in high-margin, high-growth T&B radial segment:oised to capitalise on presence in high-margin, high-growth T&B radial segment:oised to capitalise on presence in high-margin, high-growth T&B radial segment:oised to capitalise on presence in high-margin, high-growth T&B radial segment:oised to capitalise on presence in high-margin, high-growth T&B radial segment:
The company is on expansion phase in the emerging T&B radial segment in its bid
to capitalise on the prevailing scarce supply situation. The company expects to
ramp up capacity from 140tpd (FY2010) to 225tpd by end FY2011E, taking its
T&B radial capacity to 23% of its overall FY2011E tyre capacity, one of the highest
in industry.
SOSOSOSOSOTPTPTPTPTP-based target price of Rs437: -based target price of Rs437: -based target price of Rs437: -based target price of Rs437: -based target price of Rs437: At current levels, the stock is available at attractive
valuations of P/BV of 0.7x and EV/EBITDA of 5x on FY2012 estimates. We have
valued the company’s cement business at EV/tonne of US $65 and the tyre business
at Rs2cr/tpd, which implies EV/Sales of 0.5x at capacity utilisation of 62%. At our
SOTP target price of Rs437, the stock would trade at P/BV of 1.0x and EV/EBITDA
of 5.7x on FY2012 estimates.
July 16, 2010
BUYCMP Rs300Target Price Rs437
Stock Info
Sector Diversified
Market Cap (Rs cr) 1,371
Beta 0.8
52 Week High / Low 419/298
Avg Daily Volume 45531
Face Value (Rs) 10
BSE Sensex 17,956
Nifty 5,394
Reuters Code KSRM.BO
Bloomberg Code KSI@IN
Abs. (%) 3m 1yr 3yr
Sensex 2.1 16.5 17.3
Kesoram (23.7) (11.8) (43.6)
Investment Period 12 months
Shareholding Pattern (%)
Promoters 26.1
MF / Banks / Indian FIs 35.0
FII / NRIs / OCBs 22.3
Indian Public / Others 16.6
Source: Company, Angel Research
Key Financials
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net SalesNet SalesNet SalesNet SalesNet Sales 3,882 3,882 3,882 3,882 3,882 4,721 4,721 4,721 4,721 4,721 5,237 5,237 5,237 5,237 5,237 6,226 6,226 6,226 6,226 6,226
% chg 29.8 21.6 10.9 18.9
Net PNet PNet PNet PNet Profitsrofitsrofitsrofitsrofits 379 379 379 379 379 237 237 237 237 237 219 219 219 219 219 303 303 303 303 303
% chg (1.1) (37.4) (7.7) 38.5
OPM (%) 14.6 13.4 12.6 13.5
EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) 82.9 82.9 82.9 82.9 82.9 51.9 51.9 51.9 51.9 51.9 47.9 47.9 47.9 47.9 47.9 66.4 66.4 66.4 66.4 66.4
P/E (x) 3.6 5.8 6.3 4.5
P/BV (x) 1.0 0.9 0.8 0.7
RoE (%) 32.8 16.5 13.4 16.3
RoCE (%) 16.0 11.0 8.8 11.8
EV/Sales (x) 0.9 1.0 0.9 0.7
EV/EBITDA (x) 6.0 7.3 6.8 5.0
VVVVV. Srinivasan. Srinivasan. Srinivasan. Srinivasan. Srinivasan
+91 22 4040 3800 Ext: 330
Email: [email protected]
Rupesh SankheRupesh SankheRupesh SankheRupesh SankheRupesh Sankhe
+91 22 4040 3800 Ext: 319
Email: [email protected]
July 16, 2010 2
Kesoram Industries | Initiating Coverage
Peer Comparison - Trading attractively
Cement
Kesoram, which derives close to 40% of its cement revenues from Maharashtra, is
better placed than its southern peers who have major presence in Andhra Pradesh.
The company derives only 14% of its revenue from Andhra Pradesh and is expected to
face lower pricing pressure. In terms of relative operating performance, we expect the
company to report lower operating profit per tonne as compared to larger players like
ACC (pan-India presence), Ambuja (present in the high-growth northern region).
However, we expect Kesoram to clock slightly better operating profit per tonne as
compared to its south-based peers with pre-dominant presence in Andhra Pradesh
like India Cements due to the geographical advantage it derives due to its presence in
western region.
On the valuation front, currently the large pure cement players in the country such as
ACC, Ambuja, Ultratech are trading at US $88-106 on FY2012E capacity. In case of
Kesoram, despite its well-spread geographic presence and superior realisations wehave valued its cement business at EV/tonne of US $65, which is at a
considerable discount to its replacement cost of US $80/tonne, and almost at par
with the current valuations of its southern peers, India Cements and Madras Cements.
Despite Kesoram having a well-spread
geographic presence and superior
realisations we have valued its cement
business at EV/tonne of US $65, whichis at a considerable discount to itsreplacement cost of US $80/tonne, and
almost at par with its southern peers,
India Cements and Madras Cements
Source: Company, Angel Research
Exhibit 2: Installed capacity of cement players
26
23 23
14
11
75
30
2725
16
12
75
30
27 27
1614
75
0
5
10
15
20
25
30
35
ACC Ambuja Ultratech Ind Cem. Mad Cem. Kesoram JK Lakshmi
FY10 FY11E FY12E
(mtp
a)
Exhibit 1: Kesoram v/s other cement players
Source: Company, Angel Research; Note: *Target EV/Tonne of cement business
Realisation/tonneRealisation/tonneRealisation/tonneRealisation/tonneRealisation/tonne EBITDEBITDEBITDEBITDEBITDA/tonneA/tonneA/tonneA/tonneA/tonne EV/T EV/T EV/T EV/T EV/Tonne (US $)onne (US $)onne (US $)onne (US $)onne (US $)
(Rs)(Rs)(Rs)(Rs)(Rs) FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E
ACC 3,447 3,619 856 961 95 88
Ambuja 3,500 3,500 858 846 112 106
Grasim 3,932 4,295 952 1,113 97 86
India Cements 2,833 3,042 435 552 70 65
JK Lakshmi Cem 3,075 3,073 782 809 42 39
Madras Cements 3,149 3,236 620 672 71 64
Ultratech 3,045 3,198 822 928 98 88
Kesoram 2,963 3,075 476 636 65*
July 16, 2010 3
Kesoram Industries | Initiating Coverage
SOTP-based Target Price of Rs437
We have arrived at a SOTP target price of Rs437 for the company by valuing its
cement business at EV/tonne of US $65. The tyre business has been valued at
Rs2cr/tpd, which implies EV/Sales of 0.5x at a capacity utilisation of 62%. The captive
power plants (CPP) have been assigned a value of Rs4cr/MW. The rayon and other
businesses have been valued at market cap-to-sales of 1x.
Kesoram recently increased its capacity by 552tpd at its new Uttarakhand tyre facility
including a 140tpd Truck and Bus (T&B) radial capcacity. On the operating front, we
expect the company to register OPMs in line with its peers on aided by the high
proportion of T&B radial tyres (23%) in its overall capacity.
On the valuation front, Kesoram’s tyre business is currently trading at an implied
EV/tpd of Rs1.4cr, which is at 35-63% discount to peers, Apollo Tyres (Rs3.8cr/tpd)
and JK Tyre (Rs2.2cr/tpd). For our target price, we have assigned a target EV/tpd of
Rs2cr (also at a discount to peers) for the company's tyre business.
Kesoram’s tyre business is currently
trading at an implied EV/tpd of Rs1.4cr,
which is at 35-63% discount to peers,
Apollo Tyres (Rs3.8cr/tpd) and JK Tyre
(Rs2.2cr/tpd)
Tyre
Source: Company, Angel Research
Exhibit 4: Installed capacity of tyre players
850 823787
400
950988
787
500
1,200
988
884
500
0
200
400
600
800
1,000
1,200
1,400
Apollo Kesoram JK Tyres Ceat
FY10 FY11E FY12E
(tpd)
Exhibit 3: Kesoram v/s other tyre players
Source: Company, Angel Research; Note: Implied EV/tpd; Annual sales/tpd, EBITDA/tpd computedbased on capacity utilisation
(Rs cr)(Rs cr)(Rs cr)(Rs cr)(Rs cr) Annual Sales/tpdAnnual Sales/tpdAnnual Sales/tpdAnnual Sales/tpdAnnual Sales/tpd EBITDEBITDEBITDEBITDEBITDA/tpdA/tpdA/tpdA/tpdA/tpd EV/tpd EV/tpd EV/tpd EV/tpd EV/tpd
FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E
Apollo 6.7 5.5 0.9 0.7 5.3 3.8
CEAT 6.9 7.3 0.5 0.6 2.3 2.3
JKT 8.3 7.8 0.8 0.8 2.5 2.2
Kesoram 5.7 6.4 0.6 0.6 - 1.4*
July 16, 2010 4
Kesoram Industries | Initiating Coverage
Tyre business available at implied EV/tonne of 1.4cr/tpd
Kesoram's current tyre capacity stands at 823tpd and is set to go up to 988tpd in
FY2011 of which the high-margin T&B radial tyres segment would account for around
23% (225tpd). The tyre business is currently available at an implied EV/tpd of Rs1.4cr
based on our FY2012E estimates, which is at a substantial discount to peer valuations.
The implied value is excluding the EV of cement business, captive power plants (CPP),
rayon and others and investments. The CPPs have been assigned a value of
Rs4cr/MW.
We have assigned a target EV/tpd of
Rs2cr to the company's tyre business,
which is still at a discount to peer
valuations
We have assigned a target EV/tpd of Rs2cr to the company's tyre business, which is still
at a 10-47% discount to the current valuation of peers such as Apollo Tyres and
JK Tyre.
Exhibit 6: Implied value of tyre business (FY2012E) (Rs cr)
Market cap - (a) 1,371
Net Debt - (b) 2,858
EV of firm - c =(a+b) 4,229
EV of cement business - (d) 2,121
CPP - (e) 300
Rayon and other businesses (f) 256
Investments (g) 203
EV of tyre business h=(c - d - e - f - g) 1,349
Installed capacity (tpd) 988
EV/tpd 1.4
Source: Angel Research
Exhibit 5: SOTP Valuation (FY2012E)
SegmentsSegmentsSegmentsSegmentsSegments VVVVValuation Paluation Paluation Paluation Paluation Parameterarameterarameterarameterarameter (Rs cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr)
Cement 7.3mtpa x US $65/tonne 2,121
CPP 75MW x Rs4cr 300
Tyre 988 (tpd) xRs2cr 1,976
Rayon & Others 1x Mcap/sales 256
Enterprise VEnterprise VEnterprise VEnterprise VEnterprise Valuealuealuealuealue 4,6524,6524,6524,6524,652
Investments 30% discount to market value 203
Net Debt 2,858
Fair value 1,998
No. of shares (cr) 4.6
VVVVValue Palue Palue Palue Palue Per Share (Rs)er Share (Rs)er Share (Rs)er Share (Rs)er Share (Rs) 437437437437437
CMP (Rs) 300
Upside PUpside PUpside PUpside PUpside Potential (%)otential (%)otential (%)otential (%)otential (%) 4646464646
Source: Angel Research
July 16, 2010 5
Kesoram Industries | Initiating Coverage
Investment Arguments
Favourable regional exposure
Kesoram’s diversified operations is expected to cushion its cement operations from
the expected short-term demand-supply mismatch likely to prevail n the South. The
company’s cement plants are located at two locations - Sedam (5.6mtpa) in Karnataka
and Karimnagar (1.7mtpa) in Andhra Pradesh and derives a major portion of its
revenue from Maharashtra (40%), Karnataka (37%) and a significantly lesser portion
from Andhra Pradesh (14%). Further, we believe that the huge investment planned in
major segments such as housing, infra and real estate would aid a revivial in the
cement demand growth in the southern region over the next few quarters resulting in
higher despatches and stability in prices. Overall, we expect the southern region to
register 9.7% CAGR in demand over FY2010-12E.
Exhibit 8: State-wise cement consumption
Source: CMA, Angel Research
We believe that the huge investment
planned in major segments such as
housing, infra and real estate would aid
a revivial in the cement demand growth
in the southern region over the next few
quarters resulting in higher despatches
and stability in prices
39.7%
36.8%
14.2%
9.3%
Maharashtra Karnataka Andhra Pradesh Others
Source: Company, Angel Research
Exhibit 7: Kesoram cement revenues - Geographical break-up (FY2010)
State (mn tonnes)State (mn tonnes)State (mn tonnes)State (mn tonnes)State (mn tonnes) FY05FY05FY05FY05FY05 FY06FY06FY06FY06FY06 FY07FY07FY07FY07FY07 FY08FY08FY08FY08FY08 FY09FY09FY09FY09FY09 CACACACACAGR GR GR GR GR (%)(%)(%)(%)(%)
FY05-09FY05-09FY05-09FY05-09FY05-09
Andhra Pradesh 8.6 11.5 12.6 14.7 18.0 20.4
Tamil Nadu 9.6 11.1 12.8 14.5 15.9 13.5
Karnataka 8.1 9.4 11.1 11.8 11.5 9.2
Maharashtra 15.9 16.8 18.2 20.6 21.9 8.3
Kerala 6.1 6.5 7.0 7.1 7.9 6.5
July 16, 2010 6
Kesoram Industries | Initiating Coverage
Since 2HFY2010, southern region has faced weakness in cement demand due to
political concerns in Andhra Pradesh (AP), which is the leading cement consuming
state in the south.With the political situation in AP now improving, we expect demand
in the region to revive with the government spending on infrastructure and housing
projects increasing. The cement consumption in the region is expected to grow from
59mn tonnes (mt) to 71mt over FY2010-12E, registering a CAGR of 9.7%. However,
capacity utilisation is expected to reduce from 73% to 70% during the period due to
the 25% increase in overall capacity to 110mn tonnes.
Exhibit 10: Demand-supply dynamics in the southern region
PPPPParameter (mn tonnes)arameter (mn tonnes)arameter (mn tonnes)arameter (mn tonnes)arameter (mn tonnes) FY07FY07FY07FY07FY07 FY08FY08FY08FY08FY08 FY09FY09FY09FY09FY09 FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E
Installed Cap (mtpa) 54 57 67 88 100 110
Growth (%) 5.5 5.6 17.5 31.3 13.6 10.0
Production 50 54 60 64 70 77
Growth (%) 10.9 8.6 10.4 7.2 9.0 10.0
Comsumption 44 49 54 59 64 71
Growth (%) 12.9 10.7 10.4 8.7 8.8 10.2
Utilisation (%) 92 95 89 73 70 70
Source: CMA, Angel Research
Cement consumption in the southern
region is expected to grow from 59mn
tonnes (mt) to 71mt over FY2010-12E,
registering a CAGR of 9.7%
Exhibit 9: Growth in cement consumption in the southern region
4449
5459
64
71
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
FY07 FY08 FY09 FY10 FY11E FY12E
CAGR of 10.3%over FY07-10
CAGR of 9.7%over FY10 -12E(m
nto
nnes)
Source: CMA, Angel Research
The cement consumption in the western region is expected to grow from 37mn tonnes
to 45mn tonnes during FY2010-12E, buoyed by strong demand from the infrastructure
and industrial segments. The major states in the region (Maharashtra, Gujarat and
Rajasthan) have been the favoured destination for infrastructure and industrial
investments owing the favourable policies of the respective state governments. This is
expected to be maintained going ahead as well, resulting in strong demand for cement.
These states are also expected to be major beneficiaries of investments in other
infrastructure segments such as ports, power, roads and railways. Thus, overall capacity
of the western region is expected to increase from 36mtpa to 44mtpa over
FY2010-12E. However, with consumption in the region expected to grow at a slower
pace during the period, capacity utilisation is expected to decline from 86% in FY2010
to 84% in FY2012E.
July 16, 2010 7
Kesoram Industries | Initiating Coverage
Major investments in housing, infra projects to drive cement demand
India's housing sector is expected to account for more than 63% of the total cement
demand during the Eleventh Plan. Various central government schemes such as Bharat
Nirman Yojna and Jawaharlal Nehru Urban Renewal Mission (JNNURM), which are
aimed at increasing rural housing and slum rehabilitation, are expected to be the
major drivers for cement demand in the housing sector. The government is also carrying
out other schemes such as the Indira Awaas Yojna, Rajiv Gandhi Awaas Yojna and the
Two Million Housing programme to reduce the rural housing shortage. In addition to
the measures undertaken by the central government, the state governments are also
implementing a number of housing schemes. The country's overall housing shortage
estimated at 78.7mn at the end of CY2008 is expected to decline to 75.5mn by the
end of CY2014.
Central government schemes such as
Bharat Nirman Yojna and Jawaharlal
Nehru Urban Renewal Mission (JNNURM)
are expected to be the major drivers for
cement demand from the housing sector
Source: Company, Angel Research
Exhibit 12: Cement demand drivers in the Eleventh Plan
Housing Infrastructure Commercial Industrial Investment
63%
22%
12%
3%
Exhibit 11: Demand-supply dynamics in the western region
FY07FY07FY07FY07FY07 FY08FY08FY08FY08FY08 FY09FY09FY09FY09FY09 FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E
Installed Cap (mtpa) 29 29 32 36 42 44
Growth - - 10.3 12.5 16.7 4.8
Production (mn tonnes) 28 29 28.9 31 34 37
Growth (%) 9.5 1.8 (1.0) 8.8 10.0 10.0
Comsumption (mn tonnes) 28 32 34 37 41 45
Growth (%) 9.1 14.0 5.4 9.0 10.0 10.5
Utilisation (%) 98 100 89 86 81 84
Source: CMA, Angel Research
July 16, 2010 8
Kesoram Industries | Initiating Coverage
Source: Crisil Research, Angel Research
Exhibit 14: Investments in irrigation projects in India
212
281 290 285 293 306370
459
612
728
0
100
200
300
400
500
600
700
800
FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY13E
CAGR of 24.2%
over FY
09-13E
(Rs
bn)
Source: Crisil Research, Angel Research
Exhibit 13: Housing Shortage in India
(mn
units
)
64.362
59.4 59.253.8
15.118.4 19.3 20.6 21.7
0
10
20
30
40
50
60
70
CY01 CY06 CY08 CY10E CY14E
Rural Urban
States like Andhra Pradesh, Maharashtra,
Gujarat and Karnataka (where Kesoram
has a significant presence) top the list of
major investment destinations in the
irrigation space
Source: Crisil Research
Exhibit 15: Irrigation Cost Structure
Cement Steel Machinery Administrative & Others Labour
30%
20%20%
20%
10%
India's investment in the irrigation space is expected to be a substantial Rs2,169bn
over FY2009-13E, with the government carrying out schemes such as NREGAto promote
the agrarian economy. With cement accounting for 30% of the total irrigation costs,
there is a huge opportunity for the cement players. Notably, states like Andhra Pradesh,
Maharashtra, Gujarat and Karnataka (where Kesoram has a significant presence) top
the list of major investment destinations in the irrigation space. Hence, the company is
expected to benefit from the large scale investments in this sector.
July 16, 2010 9
Kesoram Industries | Initiating Coverage
Set to capitalise on presence in high-margin, high-growth T&Bradial segment
The Rs22,500cr Indian tyre industry (FY2009) registered volume CAGR of 8.5% over
the FY2005-09 with production of 1.2mt in FY2009. The replacement market
contributed 60% to overall industry revenues followed by the OEMs at 25% and exports
around 15%. Going forward, we expect strong demand for vehicles across segments,
aided by an overall recovery in the macro-economic factors and underlying structural
demand drivers, which will propel robust growth in tyre demand. Hence, we expect
the tyre industry to register a higher 9-10% volume CAGR over FY2010-12E, driven
by around 9% CAGR in replacement demand, 10% CAGR in OEM demand and
around12% CAGR in exports in the mentioned period. This is also supported by the
fact that, the Indian tyre industry is operating at around 90% capacity utilisation levels.
Consequently, on FY2010E installed capacity of 4,540tpd, capacity addition of around
1,165tpd would be needed over FY2010-12E.
Radialised tyres enjoy a premium of 20% in pricing over cross-ply due to their longevity
and higher fuel efficiency. In India, although radialisation has currently crossed the
98% mark in the passenger car segment, its penetration has been at a low 9.1% in the
T&B segment as against a global average of 50%. Going ahead, we expect radialisation
in the segment to gather momentum on account of improvement in the road
infrastructure and increasing proportion of vehicles allowing fitment of radial tyres
and have a 15% share in the T&B segment. Currently, despite the low penetration
levels of T&B radial tyres, the entire demand could not be met through domestic
supply and hence requiring import of the same. Thus, with the penetration levels of
the radial tyres in the T&B segment set to increase going ahead, players who have
T&B tyre capacity are set to enjoy superior profitability.
Going forward, we expect a strong
demand for vehicles across segments,
aided by an overall recovery in
the macro-economic factors and
underlying structural demand drivers,
which will propel robust growth in tyre
demand
The highest number of PPP projects are
being executed in the states of Andhra
Pradesh, Karnataka and Rajasthan, which
would again benefit Kesoram
The infra projects carried out under PPP model are expected to lend a boost to the
cement demand in the southern and western region. Road projects account for 60%
of the total number of projects and 45% of the total value of PPP projects (that are
currently operational or under implementation) are worth Rs1,020bn. The component
of cement in the total construction cost of road projects is substantial and augurs well
for cement manufacturers. The highest number of PPP projects are being executed in
the states of AP, Karnataka and Rajasthan, which would again benefit Kesoram.
Source: Industry, Angel Research
Exhibit 16: Penetration of radialisation in T&B segment (FY2009)
100 96 95
71
5748
20
9.1
65
0
20
40
60
80
100
120
Wes
tern
Euro
pe
Nort
hA
mer
ica
Cen
tral
Euro
pe
Afr
ica/
Mid
dle
East So
uth
Am
eric
a
Asi
a
East
ern
Euro
pe
India
Worl
d
(%)
July 16, 2010 10
Kesoram Industries | Initiating Coverage
Profit of about Rs5,155cr would be
required over FY2010-12E to meet
reinvestment needs, implying about
Rs1,963cr of profit in FY2012E compared
to Rs360cr in FY2009
Tyre Sector: Earnings far below reinvestment needs, resulting supply short-age to improve RoEs
The tyre industry demand is growing at about 9% CAGR. Consequently, on FY2010E
installed capacity of 4,540tpd, capacity addition of about 1,339tpd would be needed
over FY2010-12E. Radial tyres require more than twice the capex per tpd as compared
to cross-ply (Rs5cr v/s Rs2.5cr). Therefore, investment requirement over FY2010-12E
is estimated at Rs8,302cr, of which equity would be Rs4,151cr. Inclusive of dividend
payout, profit of about Rs5,155cr would be required over FY2010-12E to meet
reinvestment needs, implying about Rs1,963cr of profit in FY2012E compared to
Rs360cr in FY2009. Paucity of supply is likely to increase tyre realisations significantly,
as no cross-ply capacity is expected to be added over next three years. Thus, based on
our FY2012E profit estimates, the tyre companies are trading at highly attractive
valuations of 4.9x P/E and 1.0x P/BV on FY2012E estimates.
Exhibit 17:Exhibit 17:Exhibit 17:Exhibit 17:Exhibit 17: Earnings far below reinvestment needs
PPPPParticulars (Rs cr)*articulars (Rs cr)*articulars (Rs cr)*articulars (Rs cr)*articulars (Rs cr)* FY2010EFY2010EFY2010EFY2010EFY2010E
Industry capacity (tpd) 4,540
Total sales 21,111
Revenue per tonne 4.65
Next three years requirements (tpd; 9% CAGR) 1,339
Investment per tonne 5
Total capex 6,695
Working capital 1,607
Total investment needed (FY2010-12E) 8,302
Debt 4,151
Equity 4,151
Total profit opportunity incl. dividend (FY2010-12E) 5,155
Net profit in FY2009 360
Net profit in FY2012E (15% CAGR over FY2010-12E) 1,963
Current market cap 9,646
P/E (x; FY2012E net profit) 4.9
P/BV (x; FY2012E net worth) 1.0
Source: Industry, Angel Research; Note: *Top 6 listed players
July 16, 2010 11
Kesoram Industries | Initiating Coverage
Exhibit 18: Dupont Analysis - Cross -ply v/s radial (FY2010)
PPPPParticulars (Rs cr/tpd)articulars (Rs cr/tpd)articulars (Rs cr/tpd)articulars (Rs cr/tpd)articulars (Rs cr/tpd) CrossCrossCrossCrossCross-ply-ply-ply-ply-ply RadialRadialRadialRadialRadial
Investment per tonne 2.5 5.0
(less) Accumulated depreciation 1 -
Net investment per tonne 1.5 5.0
Working capital per tonne 0.9 1.1
Total investments 2.4 6.1
Sales 4.7 5.7
Expenses 4.2 4.4
Operating profit 0.5 1.2
Depreciation 0.1 0.3
Interest cost 0.1 0.3
PBT 0.2 0.6
Tax 0.1 0.2
PAT 0.2 0.4
OPM (%) 10 21.5
RoE(%) 13.5 13.5
RoCE (%) 15.7 15.7
Margins to increase on account of high investment in radial tyres
Manufacturing of radial tyres is a far more capital-intensive than cross-ply. Investment
per tpd is 2x of cross-ply at Rs5cr/tpd. However, the selling prices of radial tyres are
about 20% higher than cross-ply tyres. Taking into account the difference in capital
requirements and consequent impact on asset turnover, interest costs and depreciation
to generate similar RoCE and RoE, the tyre companies would need to earn EBITDA
margins of about 21.5% as compared to about 10% being earned on cross-ply tyres.
This assumption also implies 5% higher operating expenses per tpd , in absolute
terms, for radial tyres. Thus, higher capital requirements will help protect margins
from upward-bound input costs, as the business model evolves bearing in mind final
RoEs rather than margins. With the sector set for a structural shift (higher investment
needs in radialisation) and apparent pricing flexibility will result in an improvement in
RoCE and RoE of tyre manufacturers going forward.
With a total tyre capacity of 823tpd as of FY2010, Kesoram is well equipped to ride
the buoyant auto industry. In FY2010, the company commissioned a 552tpd
green-field tyre capacity (including 140tpd T&B radial capacity) at Uttrakhand at a
capital outlay of Rs1,792cr. The company expects to increase T&B radial tyre capacity
by an additonal 85tpd in FY2011. Currently, the high-margin passenger car radial
(PCR) and T&B radial tyres constitute close to 17% of Kesoram's overall installed tyre
capacity, which is set to rise and touch 31% levels in FY2011.
Source: Angel Research
Currently, the high-margin passenger car
radial (PCR) and T&B radial tyres
constitute close to 17% of Kesoram's
overall installed tyre capacity, which is set
to rise and touch 31% levels in FY2011
Kesoram expects to increase its T&B radial
tyre capacity by an additonal 85tpd in
FY2011
With the tyre sector set for a structural
shift (higher investment needs in
radialisation) and apparent pricing
flexibility will result in an improvement in
RoCE and RoE of tyre manufacturers
going forward
July 16, 2010 12
Kesoram Industries | Initiating Coverage
PPPPParticulars (tpd)articulars (tpd)articulars (tpd)articulars (tpd)articulars (tpd) FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E
BalasoreBalasoreBalasoreBalasoreBalasore 351351351351351 351351351351351
T&B cross-ply 271 271
Car radial 80 80
UttaranchalUttaranchalUttaranchalUttaranchalUttaranchal 552552552552552 637637637637637
T&B radial 140 225
Truck & farm tyre 317 317
LCV's & motor cycles 95 95
TTTTTotal capacityotal capacityotal capacityotal capacityotal capacity 823823823823823 988988988988988
Incremental capacityIncremental capacityIncremental capacityIncremental capacityIncremental capacity 552552552552552 165165165165165
Capex (Rs cr) 1,792 800
Investment per tpdInvestment per tpdInvestment per tpdInvestment per tpdInvestment per tpd 3.23.23.23.23.2 4.84.84.84.84.8
Exhibit 21: Tyre capacity addition
Source: Angel Research
Company Company Company Company Company FY10 FY10 FY10 FY10 FY10 FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E TBR % of TBR % of TBR % of TBR % of TBR % of
TBR TBR TBR TBR TBR OthersOthersOthersOthersOthers TBRTBRTBRTBRTBR OthersOthersOthersOthersOthers TBRTBRTBRTBRTBR OthersOthersOthersOthersOthers total FY12E total FY12E total FY12E total FY12E total FY12E
Apollo 18 832 78 872 270 930 22.5
CEAT - 400 100 400 100 400 20.0
JK 111 676 111 676 167 717 18.9
Kesoram 140 683 225 763 225 763 22.8
Exhibit 20: Break-up of tyre capacity
Source: Company, Angel Research; Note: TBR refers to T&B radial tyres
Exhibit 19: Increasing share of radial tyres in overall tyre capacity
Cross Ply Radial Radial as a (%) of total capacity
271
683 683 683
140
305 305
0.0
17.0
30.9 30.9
0
5
10
15
20
25
30
35
0
100
200
300
400
500
600
700
800
FY09 FY10 FY11E FY12E
(tpd)
(%)
Source: Company, Angel Research;Note: Radial tyres includes T&B radials and PCRs
July 16, 2010 13
Kesoram Industries | Initiating Coverage
Financial Overview
Top-line to register 14.8% CAGR on strong volume in tyre segment
TTTTTyreyreyreyreyre
We expect the tyre business to be the primary contributor to the company's top-line
and account for 64% of overall revenues in FY2012E. Volumes of the segment are
estimated to increase on higher capacity utilisation. We expect capacity utilisation to
increase from 37% in FY2010 to 62% in FY2012E. Overall, the tyre business is
expected to register a CAGR of 22.0% over FY2010-12E, primarily on substantial
increase in sales volume.
Top-line of tyre business is expected to
increase on higher capacity utilisation
Source: Company, Angel Research
Exhibit 23: Tyre segment Revenue
1,755
2,850
3,438
4,242
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY09 FY10 FY11E FY12E
(Rs
cr)
CAGR of 22.0% over FY10-12E
Cement
The segment is expected to register muted growth in top-line due to marginal growth
in volume and decline in realisation. We estimate cement prices to remain under
pressure in FY2011E and expect it to improve slightly in FY2012E. As a result, we
expect the company's net realisation to decline at a CAGR of 0.8% over FY2010-12E.
However, we expect the company to clock moderate utilisation levels of 82% and 89%
in FY21011E and FY2012E, respectively. Thus, the division is estimated to post a
CAGR of 4.7% in net sales over FY2010-12E.
The segment is expected to register muted
growth in top-line due to marginal growth
in volume and decline in realisation
Source: Company; Angel Research
Exhibit 22: Revenue Mix
FY2010 FY2012E
Cement Tyre Others
43%
52%
5%
32%
64%
4%
Cement Tyre Others
July 16, 2010 14
Kesoram Industries | Initiating Coverage
Bottom-line to log 13.1% CAGR
We expect the company to post 13.1% CAGR in bottom-line over FY2010-12E to
Rs303cr. The muted growth in Bottom-line as compared to operating profit is expected
on the back of higher depreciation, interest and tax expenses. Depreciation and
interest cost are set to register CAGR 22.8% and 58.7% over FY2010-12E respectively,
on high capex.
Operating profit to record CAGR of 15.3%
On the operating front, in FY2010, the tyre segment contributed 20.1% to overall
operating profits, which is expected to increase to a substantial 44.7% by FY2012E
with the division set to register a significant 54.8% CAGR in operating profit over
FY2010-12E. Thus, the company’s operating profit would register 15.3% CAGR over
FY2010-12E. Overall OPM would be impacted by the fall in cement realisations and
increase by a marginal 10bp during the period.
Source: Company, Angel Research
Exhibit 25: Segment-wise contribution to EBITDA
13.5%20.1%
48.0% 44.7%
79.5% 73.0%
43.7% 48.5%
7.0% 6.9% 8.3% 6.8%
0
20
40
60
80
100
FY09 FY10 FY11E FY12E
Tyre Cement Rayon & Others
(%)
Source: Company, Angel Research
Exhibit 24: Operating profit growth
566
632 659
840
0
100
200
300
400
500
600
700
800
900
FY09 FY10 FY11E FY12E
(Rs
cr)
July 16, 2010 15
Kesoram Industries | Initiating Coverage
PPPPParticularsarticularsarticularsarticularsarticulars FY2005FY2005FY2005FY2005FY2005 FY2006FY2006FY2006FY2006FY2006 FY2007FY2007FY2007FY2007FY2007 FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010FY2010FY2010FY2010FY2010 FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E
Cement businessCement businessCement businessCement businessCement business
Installed capacity (mtpa) 2.9 2.9 4.6 5.3 5.3 7.3 7.3 7.3
Production (mtpa) 3.1 3.1 3.5 4.5 5.4 5.5 5.9 6.5
Capacity utilisation (%) 107.3 107.6 76.7 84.5 102.6 75.9 82.0 89.0
Sales quantity (mtpa) 3.1 3.1 3.5 4.5 5.4 5.4 5.9 6.5
Realisation per tonne (Rs) 2,046 2,321 3,280 3,720 3,723 3,323 3,010 3,055
TTTTTyre businessyre businessyre businessyre businessyre business
Installed capacity (mn tyres) 1.6 1.7 2.0 2.1 3.7 12.1 14.2 14.2
Production (mn tyres) 1.5 1.5 1.7 2.0 2.4 4.5 8.1 8.8
Capacity utilisation (%) 95.3 91.1 88.1 95.1 65.2 37.1 57.0 62.0
Sales quantity (mn tyres) 1.5 1.6 1.7 2.0 2.4 4.0 8.1 8.85
Exhibit 28: Key Assumptions
Source: Company, Angel Research
Return Ratios to remain moderate
We expect Kesoram's RoCE and RoE to remain stable going ahead, as most of the
capital expenditure in the tyre business would get converted into operating assets and
start contributing to earnings. We expect the company to clock moderate RoEs of
13.4% and 16.3% in FY2011E and FY2012E, respectively.
Source: Company, Angel Research
Exhibit 27: Margin trend
14.613.4
12.613.5
9.8
5.04.2
4.9
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY09 FY10 FY11E FY12E
Net Sales (LHS) OPM (RHS) NPM (RHS)
(Rs
cr)
(%)
Source: Company, Angel Research
Exhibit 26: Net Profit Performance
(Rs
cr)
379
237219
303
0
50
100
150
200
250
300
350
400
FY09 FY10 FY11E FY12E
July 16, 2010 16
Kesoram Industries | Initiating Coverage
Slowdown in demand
Any slowdown in cement demand from the end user industries like housing, construction
and infrastructure would impact the company’s performance and our estimates.
Increase in input costs
The prices of commodities like rubber and other crude-related products, which bottomed
out towards end FY2009, have bounced back considerably since then. For instance,
the NYMEX crude prices have more than doubled from US $34/ barrel in February
2009 to around US $80 currently. The natural rubber prices have also increased to
Rs175/kg after bottoming out at Rs50/kg towards end FY2009. We believe that the
tyre manufacturers might not be able to fully pass on the full increase in the raw
materials costs. Hence, any substantial increase in the raw material costs would always
lead to margin erosion. The rising prices of coal, fuel, fly ash and other raw materials
used in the manufacture of cement will exert additional pressure on the margins of the
cement business.
Concerns
High debt/equity ratio
Kesoram had a debt-equity ratio of 2.2x in FY2010, which is a concern. However, by
FY2012E we expect the company to improve the debt/equity ratio to1.5x.
Source: Company, Angel Research
Exhibit 29: Proportion of debt, equity in total capital
38.3%31.6% 35.2% 40.6%
61.7%68.4% 64.8% 59.4%
0
10
20
30
40
50
60
70
80
90
100
FY09 FY10 FY11E FY12E
Equity Debt
(%)
Source: C-line, Angel Research
Exhibit 30: Natural rubber price trend
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Jan-
08
Mar-
08
May-
08
Jul-
08
Sep-0
8
Nov-
08
Jan-
09
Mar-
09
May-
09
Jul-
09
Sep-0
9
Nov-
09
Jan-
10
Mar-
10
May-
10
Collapseof price
Prices haverisen sharply again
(Rs/
10
0kg
)
July 16, 2010 17
Kesoram Industries | Initiating Coverage
Outlook
Cement
We expect the industry to add around 42mn tonnes of capacity through FY2010-12E.
Such huge capacity additions would eventually result in an oversupply situation in the
market, while demand is not expected to keep pace with the supply. The southern
region, especially Andhra Pradesh, which has witnessed the highest capacity addition
is expected to continue to face low prices over the next few quarters. However, going
ahead, demand is expected to pick up in the region post the monsoons due to increased
government spending on irrigation and housing as the political situation in the state
has been improving. We expect this to augur well for Kesoram, which would register
better cement realisations from the latter part of 2HFY2011E onwards.
Tyre
India's growing auto sector is expected to drive a healthy 9% CAGR for tyres despite
the changing business economy (rising input costs) for the industry. Raw material
prices (rubber) are increasing, but we do not expect any significant impact on the
operating front, going forward. This is also supported by the fact that the tyre industry
has been operating at 90% capacity utilisation over the last 3-4 years, implying either
strong demand or constraints on the supply side, both of which would push up the
tyre prices. Taking cue from these signals the tyre makers are positive about sustained
improvement in demand on the back of which have been planning higher investments
for the next 2-3 years. We expect the excess demand situation to continue in turn
enabling the prices to remain at healthy levels.
Valuation
At current levels, the stock is available at attractive valuations of P/BV of 0.7x and EV/
EBITDA of 5x on FY2012 estimates. We have valued the company’s cement business
at EV/tonne of US $65 and the tyre business at Rs2cr/tpd, which implies EV/Sales of
0.5x at capacity utilisation of 62%. At our SOTP target price of Rs437, the stock would
trade at P/BV of 1.0x and EV/EBITDA of 5.7x on FY2012 estimates.
July 16, 2010 18
Kesoram Industries | Initiating Coverage
Source: Company, Angel Research
Exhibit 32: One-year forward EV/EBITDA band
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10
(Rs
cr)
3x 5x 7x 9x
Exhibit 31: SOTP Valuation (FY2012E)
SegmentsSegmentsSegmentsSegmentsSegments VVVVValuation Paluation Paluation Paluation Paluation Parameterarameterarameterarameterarameter (Rs cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr)
Cement 7.3mtpa x US $65/tonne 2,121
CPP 75MW x Rs4cr 300
Tyre 988 (tpd) xRs2cr 1,976
Rayon & Others 1x Mcap/sales 256
Enterprise VEnterprise VEnterprise VEnterprise VEnterprise Valuealuealuealuealue 4,6524,6524,6524,6524,652
Investments 30% discount to market value 203
Net Debt 2,858
Fair value 1,998
No. of shares (cr) 4.6
VVVVValue Palue Palue Palue Palue Per Share (Rs)er Share (Rs)er Share (Rs)er Share (Rs)er Share (Rs) 437437437437437
CMP (Rs) 300
Upside PUpside PUpside PUpside PUpside Potential (%)otential (%)otential (%)otential (%)otential (%) 4646464646
Source: Angel Research
Source: Company, Angel Research
Exhibit 33: One-year forward EV/Sales band
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10
(Rs
cr)
0.5x 0.75x 1x 1.25x
July 16, 2010 19
Kesoram Industries | Initiating Coverage
Company Background
Kesoram Industries, established in 1919, operates under the two business segments
of cement and tyres. It is also involved in the manufacture and sale of other products
like rayon yarn, spun pipes, etc. The company's Vasavadatta cement plant at Sedam
in Karnataka has a capacity of 5.6mtpa, while the Karimnagar plant in Andhra Pradesh
has capacity of 1.7mtpa. Kesoram installed its first tyre plant at Balasore in Orissa in
1992, with a capacity of 10 lakh tyres per annum. In all, Kesoram's total tyre capacity
is expected to touch 998tpd in FY2012E.
Source: Company
Exhibit 34: Kesoram's business structure
Kesoram
CementRayon TP &Chemicals
Tyres
FY2010Sales - Rs260crEBIT - Rs14cr
FY2010Sales - Rs1,913cr
EBIT - Rs482cr
FY2010Sales - Rs2,850cr
EBIT - Rs46cr
Source: Industry, Angel Research
Exhibit 35: South India market share (FY2010)
India Cements Madras Cements Ultratech Cement ACC
Grasim Kesoram Others
18.9%
15.9%
10.4%
11.1%
2.2%
11.6%
30.0%
Source: Company, Angel Research
Exhibit 36: Timeline
1919 Company incorporated to manufacture textiles rayon yarn, cement spun
pipes and fire bricks. The first plant was set up in Hooghly, West Bengal
1969 Set up first cement plant (Kesoram Cement) at Karimnagar with 0.8mtpa
capacity
1986 New cement plant commissioned at Vasavadatta, Karnataka, with
0.5mtpa capacity
1992 In March, commissioned tyre plant in Balaosore, Orissa for the
manufacture of 10 lakh tyres per annum
1992-2010 Cement capacity was increased at both Kesoram Cement and Vasavadatta
2009 Greenfield tyre project of 552tpd capacity set up in Uttarakhand
July 16, 2010 20
Kesoram Industries | Initiating Coverage
Source: Ministry of Finance
Sector-wise investment in PPP projects
SectorSectorSectorSectorSector TTTTTotal numberotal numberotal numberotal numberotal number V V V V Value ofalue ofalue ofalue ofalue of
of projectsof projectsof projectsof projectsof projects contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)
Airports 5 19,111
Education 1 93.3
Energy 24 17,111
Ports 43 66,499
Railways 4 1,602
Roads 271 102,005
Tourism 29 2,467
Urban Development 73 15,288
TTTTTotalotalotalotalotal 450450450450450 224,175224,175224,175224,175224,175
Source: Ministry of Finance
State-wise investment in PPP projects
State/Union TState/Union TState/Union TState/Union TState/Union Territoryerritoryerritoryerritoryerritory TTTTTotal numberotal numberotal numberotal numberotal number V V V V Value ofalue ofalue ofalue ofalue of
of projectsof projectsof projectsof projectsof projects contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)contracts (Rs cr)
Andhra Pradesh 63 39,279
Bihar 2 422
Chandigarh 14 15
Chhattisgarh 4 838
Delhi 9 10,877
Goa 2 250
Gujarat 27 18,712
Haryana 2 756
Jharkhand 6 681
Karnataka 95 39,492
Kerala 11 11,973
Madhya Pradesh 37 7,789
Maharashtra 285 34,026
Orissa 16 7,623
Pudducherry 2 2,286
Punjab 19 1,544
Rajasthan 49 5,253
Sikkim 24 17,111
Tamil Nadu 30 12,452
Uttar Pradesh 5 2,108
West Bengal 5 2,055
Inter-State 13 8,634
TTTTTotalotalotalotalotal 450450450450450 224,175224,175224,175224,175224,175
Annexure - I
July 16, 2010 21
Kesoram Industries | Initiating Coverage
Profit & Loss Statement Rs crore
Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007 FY2007 FY2007 FY2007 FY2007 FY2008 FY2008 FY2008 FY2008 FY2008 FY2009 FY2009 FY2009 FY2009 FY2009 FY2010 FY2010 FY2010 FY2010 FY2010 FY2011E FY2011E FY2011E FY2011E FY2011E FY2012E FY2012E FY2012E FY2012E FY2012E
Gross salesGross salesGross salesGross salesGross sales 2,516 2,516 2,516 2,516 2,516 3,440 3,440 3,440 3,440 3,440 4,292 4,292 4,292 4,292 4,292 5,021 5,021 5,021 5,021 5,021 5,585 5,585 5,585 5,585 5,585 6,595 6,595 6,595 6,595 6,595
Tyre 1,112 1,389 1,947 2,850 3,438 4,242
Cement 1,156 1,719 2,051 1,913 1,902 2,097
Others 248 332 294 260 244 256
Less: Excise duty 312 451 411 300 348 369
Net SalesNet SalesNet SalesNet SalesNet Sales 2,204 2,204 2,204 2,204 2,204 2,990 2,990 2,990 2,990 2,990 3,882 3,882 3,882 3,882 3,882 4,721 4,721 4,721 4,721 4,721 5,237 5,237 5,237 5,237 5,237 6,226 6,226 6,226 6,226 6,226
Total operating income 2,204 2,990 3,882 4,721 5,237 6,226
% chg 36.6 35.6 29.8 21.6 10.9 18.9
Total Expenditure 1,820 2,334 3,315 4,088 4,578 5,386
Net Raw Materials 921 1,106 1,653 2,232 2,557 3,025
Other Mfg costs 473 584 784 1,049 1,012 1,179
Personnel 129 158 186 225 252 290
Other 297 486 692 582 757 892
EBITDEBITDEBITDEBITDEBITDAAAAA 385 385 385 385 385 656 656 656 656 656 566 566 566 566 566 632 632 632 632 632 659 659 659 659 659 840 840 840 840 840
Tyre 68 124 104 157 316 375
Cement 376 579 613 569 288 408
Others (4) 8 54 54 55 57
% chg 233.2 70.5 (13.6) 11.6 4.2 27.5
(% of Net Sales) 17.4 21.9 14.6 13.4 12.6 13.5
Depreciation& Amortisation 58 89 112 173 226 261
EBITEBITEBITEBITEBIT 326 326 326 326 326 566 566 566 566 566 455 455 455 455 455 459 459 459 459 459 433 433 433 433 433 579 579 579 579 579
% chg 444.3 73.6 (19.7) 1.1 (5.8) 33.8
(% of Net Sales) 14.8 18.9 11.7 9.7 8.3 9.3
Interest & other Charges 34 54 121 109 261 275
Other Income 49 40 76 125 120 100
(% of PBT) 14.3 7.3 18.5 26.3 41.1 24.7
Recurring PBTRecurring PBTRecurring PBTRecurring PBTRecurring PBT 342 342 342 342 342 553 553 553 553 553 410 410 410 410 410 476 476 476 476 476 292 292 292 292 292 405 405 405 405 405
% chg 322.3 61.7 (25.9) 16.1 (38.6) 38.5
PBT (reported)PBT (reported)PBT (reported)PBT (reported)PBT (reported) 342 342 342 342 342 553 553 553 553 553 410 410 410 410 410 476 476 476 476 476 292 292 292 292 292 405 405 405 405 405
Tax 76 169 30 238 73 101
(% of PBT) 22.3 30.6 7.4 50.1 25.0 25.0
PPPPPAAAAAT (reported)T (reported)T (reported)T (reported)T (reported) 266 266 266 266 266 383 383 383 383 383 379 379 379 379 379 237 237 237 237 237 219 219 219 219 219 303 303 303 303 303
ADJADJADJADJADJ. P. P. P. P. PAAAAATTTTT 266 266 266 266 266 383 383 383 383 383 379 379 379 379 379 237 237 237 237 237 219 219 219 219 219 303 303 303 303 303
% chg 452.9 44.3 (1.1) (37.4) (7.7) 38.5
(% of Net Sales) 12.1 12.8 9.8 5.0 4.2 4.9
Basic EPS (Rs)Basic EPS (Rs)Basic EPS (Rs)Basic EPS (Rs)Basic EPS (Rs) 58 58 58 58 58 84 84 84 84 84 83 83 83 83 83 51.9 51.9 51.9 51.9 51.9 47.9 47.9 47.9 47.9 47.9 66.4 66.4 66.4 66.4 66.4
FFFFFully Diluted EPS (Rs)ully Diluted EPS (Rs)ully Diluted EPS (Rs)ully Diluted EPS (Rs)ully Diluted EPS (Rs) 58 58 58 58 58 84 84 84 84 84 83 83 83 83 83 52 52 52 52 52 48 48 48 48 48 66 66 66 66 66
% chg 452.9 44.3 (1.1) (37.4) (7.7) 38.5
July 16, 2010 22
Kesoram Industries | Initiating Coverage
Balance Sheet Rs crore
Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007 FY2007 FY2007 FY2007 FY2007 FY2008 FY2008 FY2008 FY2008 FY2008 FY2009 FY2009 FY2009 FY2009 FY2009 FY2010 FY2010 FY2010 FY2010 FY2010 FY2011E FY2011E FY2011E FY2011E FY2011E FY2012E FY2012E FY2012E FY2012E FY2012E
SOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDS
Equity Share Capital 46 46 46 46 46 46
Preference Capital - - - - - -
Reserves& Surplus 609 936 1,284 1,495 1,682 1,953
Shareholders FShareholders FShareholders FShareholders FShareholders Fundsundsundsundsunds 654 654 654 654 654 982 982 982 982 982 1,330 1,330 1,330 1,330 1,330 1,540 1,540 1,540 1,540 1,540 1,727 1,727 1,727 1,727 1,727 1,999 1,999 1,999 1,999 1,999
Minority Interest - - - - - -
Total Loans 873 1,215 2,142 3,341 3,175 2,925
Deferred Tax Liability 112 143 126 328 328 328
TTTTTotal Liabilitiesotal Liabilitiesotal Liabilitiesotal Liabilitiesotal Liabilities 1,640 1,640 1,640 1,640 1,640 2,340 2,340 2,340 2,340 2,340 3,598 3,598 3,598 3,598 3,598 5,210 5,210 5,210 5,210 5,210 5,230 5,230 5,230 5,230 5,230 5,252 5,252 5,252 5,252 5,252
APPLICAAPPLICAAPPLICAAPPLICAAPPLICATION OF FUNDSTION OF FUNDSTION OF FUNDSTION OF FUNDSTION OF FUNDS
Gross Block 1,676 1,895 2,718 4,514 4,514 5,214
Less: Acc. Depreciation 722 811 913 1,082 1,308 1,569
Net BlockNet BlockNet BlockNet BlockNet Block 954 954 954 954 954 1,084 1,084 1,084 1,084 1,084 1,804 1,804 1,804 1,804 1,804 3,432 3,432 3,432 3,432 3,432 3,206 3,206 3,206 3,206 3,206 3,645 3,645 3,645 3,645 3,645
Capital Work-in-Progress 151 635 865 413 800 100
Goodwill - - - - - -
InvestmentsInvestmentsInvestmentsInvestmentsInvestments 29 29 29 29 29 48 48 48 48 48 62 62 62 62 62 51 51 51 51 51 62 62 62 62 62 62 62 62 62 62
Current Assets 870 1,206 1,576 1,857 1,870 2,152
Cash 27 41 57 80 29 67
Loans & Advances 220 450 550 318 550 550
Other 623 715 969 1,459 1,291 1,535
Current liabilities 365 633 708 544 708 708
Net Current AssetsNet Current AssetsNet Current AssetsNet Current AssetsNet Current Assets 506 506 506 506 506 573 573 573 573 573 867 867 867 867 867 1,314 1,314 1,314 1,314 1,314 1,162 1,162 1,162 1,162 1,162 1,444 1,444 1,444 1,444 1,444
Mis. Exp. not written off - - - - - -
TTTTTotal Assetsotal Assetsotal Assetsotal Assetsotal Assets 1,640 1,640 1,640 1,640 1,640 2,340 2,340 2,340 2,340 2,340 3,598 3,598 3,598 3,598 3,598 5,210 5,210 5,210 5,210 5,210 5,230 5,230 5,230 5,230 5,230 5,252 5,252 5,252 5,252 5,252
July 16, 2010 23
Kesoram Industries | Initiating Coverage
Cash Flow Statement Rs crore
Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007 FY2007 FY2007 FY2007 FY2007 FY2008 FY2008 FY2008 FY2008 FY2008 FY2009 FY2009 FY2009 FY2009 FY2009 FY2010 FY2010 FY2010 FY2010 FY2010 FY2011E FY2011E FY2011E FY2011E FY2011E FY2012E FY2012E FY2012E FY2012E FY2012E
Profit before tax 342 553 410 475 292 405
Depreciation 58 51 112 173 226 261
Change in Working Capital (155) (54) (263) (423) 101 (244)
Less: Other income 49 40 76 125 120 100
Direct taxes paid 71 136 64 36 73 101
Cash Flow from OperationsCash Flow from OperationsCash Flow from OperationsCash Flow from OperationsCash Flow from Operations 125 125 125 125 125 374 374 374 374 374 119 119 119 119 119 65 65 65 65 65 425 425 425 425 425 220 220 220 220 220
(Inc)/ Decin Fixed Assets (404) (703) (1,052) (1,345) (387) -
(Inc)/ Dec in Investments 0 (19) (14) 10 (10) -
(Inc)/ Dec in loans and advances - - - - - -
Other income 49 40 76 125 120 100
Cash Flow from InvestingCash Flow from InvestingCash Flow from InvestingCash Flow from InvestingCash Flow from Investing (354) (354) (354) (354) (354) (682) (682) (682) (682) (682) (990) (990) (990) (990) (990) (1,209) (1,209) (1,209) (1,209) (1,209) (278) (278) (278) (278) (278) 100 100 100 100 100
Issue of Equity - - - - - -
Inc./(Dec.) in loans 251 342 927 1,199 (166) (250)
Dividend Paid (Incl. Tax) 21 27 32 32 32 32
Others - - - - - -
Cash Flow from FCash Flow from FCash Flow from FCash Flow from FCash Flow from Financinginancinginancinginancinginancing 231 231 231 231 231 315 315 315 315 315 895 895 895 895 895 1,167 1,167 1,167 1,167 1,167 (198) (198) (198) (198) (198) (282) (282) (282) (282) (282)
Inc./(Dec.) in Cash 2 7 23 22 (50) 38
Opening Cash balancesOpening Cash balancesOpening Cash balancesOpening Cash balancesOpening Cash balances 25 25 25 25 25 27 27 27 27 27 34 34 34 34 34 57 57 57 57 57 80 80 80 80 80 29 29 29 29 29
Closing Cash balancesClosing Cash balancesClosing Cash balancesClosing Cash balancesClosing Cash balances 27 27 27 27 27 34 34 34 34 34 57 57 57 57 57 80 80 80 80 80 29 29 29 29 29 67 67 67 67 67
July 16, 2010 24
Kesoram Industries | Initiating Coverage
Key Ratios
Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007 FY2007 FY2007 FY2007 FY2007 FY2008 FY2008 FY2008 FY2008 FY2008 FY2009 FY2009 FY2009 FY2009 FY2009 FY2010 FY2010 FY2010 FY2010 FY2010 FY2011E FY2011E FY2011E FY2011E FY2011E FY2012E FY2012E FY2012E FY2012E FY2012E
VVVVValuation Ratio (x)aluation Ratio (x)aluation Ratio (x)aluation Ratio (x)aluation Ratio (x)
P/E (on FDEPS) 5.2 3.6 3.6 5.8 6.3 4.5
P/E (on basic, reported EPS) 5.2 3.6 3.6 5.8 6.3 4.5
P/CEPS 4.2 2.9 2.8 3.3 3.1 2.4
P/BV 2.1 1.4 1.0 0.9 0.8 0.7
Dividend yield (%) 1.5 2.0 2.3 2.3 2.3 2.3
EV/Sales 1.0 0.8 0.9 1.0 0.9 0.7
EV/EBITDA 5.7 3.8 6.0 7.3 6.8 5.0
EV / Total Assets 1.3 1.1 0.9 0.9 0.9 0.8
PPPPPer Share Data (Rs)er Share Data (Rs)er Share Data (Rs)er Share Data (Rs)er Share Data (Rs)
EPS (Basic) 58.1 83.8 82.9 51.9 47.9 66.4
EPS (fully diluted) 58.1 83.8 82.9 51.9 47.9 66.4
Cash EPS 70.8 103.3 107.4 89.7 97.3 123.3
DPS 4.6 5.9 7.0 7.0 7.0 7.0
Book Value 143.1 214.7 290.8 336.7 377.6 437.0
Dupont Analysis Dupont Analysis Dupont Analysis Dupont Analysis Dupont Analysis (%)
EBIT margin 17.4 21.9 14.6 13.4 12.6 13.5
Tax retention ratio 77.7 69.4 92.6 49.9 75.0 75.0
Asset turnover (x) 1.6 1.6 1.4 1.1 1.0 1.2
ROIC (Post-tax) 22.3 23.7 18.2 7.4 9.6 12.2
Cost of Debt (Post Tax) 3.5 3.6 6.7 2.0 6.0 6.8
Leverage (x) 1.1 0.9 1.2 1.7 1.8 1.4
Operating ROE 42.3 42.8 31.6 16.4 16.1 20.0
Returns (%)Returns (%)Returns (%)Returns (%)Returns (%)
ROCE (Pre-tax) 25.4 30.4 16.0 11.0 8.8 11.8
Angel ROIC 24.4 29.5 15.8 10.7 8.5 11.3
ROE 49.6 46.9 32.8 16.5 13.4 16.3
TTTTTurnover ratios (x)urnover ratios (x)urnover ratios (x)urnover ratios (x)urnover ratios (x)
Asset Turnover (Gross Block) 1.5 1.7 1.7 1.3 1.2 1.3
Inventory / Sales (days) 52 50 48 58 59 51
Receivables (days) 36 32 31 36 36 32
Payables (days) 61 78 74 56 50 48
Working capital cycle (ex-cash) (days) 80 79 74 91 94 85
Solvency ratios (x)Solvency ratios (x)Solvency ratios (x)Solvency ratios (x)Solvency ratios (x)
Net debt to equity 1.2 1.2 1.5 2.1 1.8 1.4
Net debt to EBITDA 2.1 1.7 3.6 5.1 4.7 3.3
Interest Coverage (EBIT / Interest) 9.7 10.5 3.8 4.2 1.7 2.1
Kesoram Industries
Disclosure of Interest StatementDisclosure of Interest StatementDisclosure of Interest StatementDisclosure of Interest StatementDisclosure of Interest Statement KKKKKesoramesoramesoramesoramesoram
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
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Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)
Ratings (Returns) :
Kesoram Industries
Research Team
Fundamental:
Sarabjit Kour Nangra VP-Research, Pharmaceutical [email protected]
Vaibhav Agrawal VP-Research, Banking [email protected]
Vaishali Jajoo Automobile [email protected]
Shailesh Kanani Infrastructure, Real Estate [email protected]
Anand Shah FMCG , Media [email protected]
Deepak Pareek Oil & Gas [email protected]
Sushant Dalmia Pharmaceutical [email protected]
Rupesh Sankhe Cement, Power [email protected]
Param Desai Real Estate, Logistics, Shipping [email protected]
Sageraj Bariya Fertiliser, Mid-cap [email protected]
Viraj Nadkarni Retail, Hotels, Mid-cap [email protected]
Paresh Jain Metals & Mining [email protected]
Amit Rane Banking [email protected]
Jai Sharda Mid-cap [email protected]
Sharan Lillaney Mid-cap [email protected]
Amit Vora Research Associate (Oil & Gas) [email protected]
V Srinivasan Research Associate (Cement, Power) [email protected]
Aniruddha Mate Research Associate (Infra, Real Estate) [email protected]
Mihir Salot Research Associate (Logistics, Shipping) [email protected]
Chitrangda Kapur Research Associate (FMCG, Media) [email protected]
Vibha Salvi Research Associate (IT, Telecom) [email protected]
Pooja Jain Research Associate (Metals & Mining) [email protected]
Technicals:
Shardul Kulkarni Sr. Technical Analyst [email protected]
Mileen Vasudeo Technical Analyst [email protected]
Derivatives:
Siddarth Bhamre Head - Derivatives [email protected]
Jaya Agarwal Derivative Analyst [email protected]
Institutional Sales Team:
Mayuresh Joshi VP - Institutional Sales [email protected]
Abhimanyu Sofat AVP - Institutional Sales [email protected]
Nitesh Jalan Sr. Manager [email protected]
Pranav Modi Sr. Manager [email protected]
Sandeep Jangir Sr. Manager [email protected]
Ganesh Iyer Sr. Manager [email protected]
Jay Harsora Sr. Dealer [email protected]
Meenakshi Chavan Dealer [email protected]
Gaurang Tisani Dealer [email protected]
Production Team:
Bharathi Shetty Research Editor [email protected]
Simran Kaur Research Editor [email protected]
Bharat Patil Production [email protected]
Dilip Patel Production [email protected]
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