Kesoram Industries Ltd. (KIL) Q3FY07 - Result Update
Kesoram Industries Ltd.'s (KIL) cement despatch for Q3FY07 increased by 10.6% to 0.84mn ton and tyre volumes increased by 19.9% to 20331 ton. Cement capacity utilization for Q3FY07 increased to 116% compared to 105% in Q3FY06 and Q2FY07. We estimate FY07 despatches to be at 3.35mn ton with new capacity expected to commence commercial production in March 2007. We expect cement volumes to be at 4.2mn ton for FY08 with staggered production for the new capacity.
KIL’s gross cement realization went up by 45.7% to Rs3285 yoy for Q3FY07 but was down sequentially by 2.7%. Cement prices are looking up in the recent months. We expect realisations for KIL to improve 3.6% in FY08 over FY07. The recent customs duty removal for cement is expected to have marginal impact on pricing front and prices are expected to rule firm till major capacities are coming in FY09.
Tyre margin for Q3FY07 has come down to 4.1% from 4.6% on yoy basis and on sequential basis the same has come down from 6.1%. Prices of key inputs like Carbon Black, NTCF and Synthetic Rubber has firmed up in the quarter and reduction in average natural rubber price to the tune of 6% has not had a major impact. Tyre producers reduced the prices of tyres also by nearly 4% in September 2006 which has reduced the EBIT margins for tyre segment. We expect natural rubber prices to continue at the present levels and possibility of increase in tyre prices by the producers if the prices exceed Rs10000 per quintal. Recent reduction in Carbon Black is a positive for the sector.
Rayon and Transparent Paper (TP) division has turned around and posted profits at EBIT level in Q3FY07. Definitive anti-dumping duty was imposed for VFY in Q2FY07 and provisional duty was imposed on TP in Q4FY06. This has improved the prospects of these segments and prices have started moving up. From negative EBIT margin in Q3FY06 and Q2FY07 the segment has recorded 4.3% EBIT margin in Q3FY07.
We expect cement and tyre business margins to improve going forward with price increases. With increased cement capacity and ongoing expansion on tyre capacity, we expect KIL to be well positioned to exploit the up-cycle in these sectors. KIL is expanding its cement capacity by 1.5mn ton which is expected to come online in Q4FY09 and planning to increase its tyre capacity by putting Greenfield tyre capacity at Jharkhand. It has purchased land for new tyre capacity at Rs600mn recently. With major capacity expansions, KIL is expected to become a mid-sized player in Cement and Tyres and command better valuations going forward. We revise our target from Rs641 to Rs668 based on estimated FY08 earnings upgrade. Our target discounts FY08 by 10x. We maintain our BUY rating on the stock.