Sunday, March 09, 2008
K S Oils (KSO), established in 1985, is a leading name in the edible oil industry.The company has been promoted by the Garg family of Morena, Madhya Pradesh. The Garg family has been dealing in agro-based products since the past 150 years. KSO currently figures among the top-five edible oil companies in India. KSO brands are actively traded in the leading commodity markets and are often looked upon as trend setters in the largely unorganised edible oil segment.KSO has won prestigious awards like "Highest Processor of Rapeseed Oilcake" for 2004-05 and 2005-06 from The Solvent Extractors Association of India. KSO was also awarded the "Emerging Company of the year" in September 2006 by Globoil India.
The company is a manufacturer of mustard and rapeseed oil in India. The company is engaged in the manufacturing of cooking media such as mustard oil, refined oil, vanaspati and non-edible solvent oil and DOC. Double Sher and Kalash (mustard oil) are the company`s flagship brands. Some of its other brands include KS Refined Oil, Crystal Clear (soya vegetable refined oil), KS Gold (vanaspati ghee) and KS Gold Plus (vanaspati ghee). The company has a strong presence in parts of eastern and north-eastern India.
KSO being the largest rapeseed crusher in India enjoys market leadership in the mustard oil segment. The company also enjoys lower manufacturing costs resulting from economies of scale and integrated production, secure raw material supply, extensive distribution network through central distribution points and the company's extraction efficiency of 33% which is more than the other crushers.
KS Oils registered a 60.47% growth in net profit to Rs 324.30 million for the quarter ended December 2007 as compared with Rs 202.10 million for the corresponding quarter, last year. Net sales for the quarter rose 84.72% to Rs 5,636.70 million as against Rs 3,051.50 million for the same quarter, a year ago. Total income for the quarter rose 85.28% to Rs 5,653.90 million as compared with Rs 3,051.50 million for the corresponding quarter, last year. The diluted earnings per share (EPS) of the company stood at Rs 1.05 in the quarter ended December 2007.
Promoters are utilizing this fall to increase their stake. Ramesh Chand Garg(Promoter) increased its stake in the company to 10.77% from 5.19%.
Further FII's have increased their stake in the company for the quater ended December 2007.
We have a buy rating on K S oils Ltd (C.M.P 74.55). Targets - 140+ in 9-12 months and 200+ in 18 months.
Disclaimer: DP does NOT vouch for these recomendations. These are by a independent analyst who may have vested interest in the stock
If you have tracked book-built initial public offers on the stock exchange Web sites, you would have noticed that retail investors typically rush in at the last hour.
This is because most lay investors are looking out for the subscription numbers for the QIB (Qualified Institutional Bidders) portion of the IPO, especially of FIIs, before they decide to take the leap.
Retail investors often rely on the extent of over-subscription in the QIB portion when deciding to invest or refrain from IPOs. This is built on the premise that FIIs have a much better understanding of new businesses or untested business models when it comes to evaluating IPOs.
Now for the detour. What if the big guys you were tracking were in the issue for the short term? What if they flipped on listing day itself, after securing the much-sought-after allotment?
Business Line looked up large transactions (bulk and block deals) that occurred on both the BSE and the NSE platforms for the 35 IPOs listed from mid-October. The evidence of institutional investors making a short-term profit on the day of listing (known commonly as ‘flipping’) was strong.
Of the 62 transactions (both buy and sell) that occurred on the listing days, 34 were “sell” trades. Of these, institutional investors exited the stock with substantial profits on 25 occasions.
The numbers may be small but the trend reveals that FIIs too have not been averse to taking a short-term view with their IPO investments.
Mauritius-based investment firms or arms of well-known investment banks feature prominently on the list of investors that made a killing on listing.
Right from BSMA (affiliate of Bear Stearns), Mavi Investment Fund (sub-account of Switzerland-based M.M. Warburg Bank) to less known entities such as Prime India Investment Fund, ITF Mauritius, Amas India Investments; all have been regular investors in IPOs, who have taken profits on listing.
Could it be the overall market mood that caused FIIs to rush in on the day of listing and cash in on their profits? Maybe not. True, the Sensex lost around 22 per cent in value since the first week of January, with many volatile ups and downs in between. However, even through this period, FIIs did keep up steady buying in shares of companies such as Maytas Infrastructure, Edelweiss Capital, Consolidated Construction Consortium (CCCL) and BGR Energy Systems, on Day One.
When it comes to a fancy for newly listed stocks, FIIs do not seem to be very different from the small investor.
Just as a small investor would try to buy shares in the secondary market for a company in whose IPO he/she did not get allotment, foreign investors too seem to follow this practice. This may partly explain the bulk deals in Maytas, Edelweiss, CCCL and BGR, whose issues were oversubscribed over 50 times during their IPOs!
What about other constituents of the QIB group who are allocated around 50-60 per cent of a company’s net issue? Apart from FIIs, mutual funds and financial institutions, insurance companies also are included in this list.
An analysis of the reported transactions shows that domestic mutual funds have not engaged in ‘flipping’, as much as the foreign investors. They feature prominently in the buyers list on the day of listing, with funds such as JM Financial, Franklin Templeton MF, ICICI Prudential and HDFC MF actively engaged in buying shares.
India’s largest bank, the State Bank of India, also seems to be a participant in the IPO segment, making quick gains with investments in IPOs of Barak Valley Cements and Renaissance Jewellery.
But could it happen that daily market movements too influence these deep-pocketed investors? They do not, as an analysis for the October-February period shows. ‘Sell’ transactions in IPO stocks were roughly the same in number whether the Sensex finished lower or higher on listing day.
While most transactions by institutions on listing day appeared to be motivated by the chance to make quick gains, a few also helped limit the downside. DB International, India Diversified Mauritius, Ultra India Mauritius, Deutsche International and Elara India Opportunities were some institutional sellers on day one, in stocks such as Empee Distilleries, KNR Constructions and Bang Overseas.
Their move to exit was well-timed, as each of these IPOs lost as much as 20 per cent on listing day. Cords Cable Industries was among the exceptions, which managed to close at a 3 per cent premium after listing at a discount.
What’s in it for you
Many small investors take cues from strong QIB subscription numbers to subscribe to and project listing gains on IPOs.
Strong institutional interest during an IPO is taken as a sign that the stock may attract buying post-listing. However, if above trends are any evidence, it is possible that institutional investors too (at least a few of them) are in the game for the short term.
Remember the hype surrounding Reliance Power IPO? Overall, the IPO was oversubscribed 62 times, while the QIB portion was over-subscribed a massive 83 times. But the stock still closed Day One well below its offer price.
Although there is no record of bulk/block deals related to the Reliance Power stock on listing day, one must remember that quite a bit of institutional selling may escape the “bulk deals” net, if transactions are broken into smaller trades, thus escaping notice.
Apart from ‘flipping’ being a risky game (refer ‘Flipping your stock is a risky game’, Business Line, September 30, 2007), these trends are reason to take IPO subscription numbers with a pinch of salt.
Large investors too are driven by profit motives and their mere presence in an IPO may not be a vote of confidence in the company or its long-term prospects.
Investors can consider buying the JK Tyres stock with a two-three year perspective. The company is the third largest manufacturer of tyres in India with a market share of 17 per cent. While the commercial vehicles segment brings in 75 per cent of the revenues, passenger vehicles chip in with the rest.
As is the case with most companies, bulk of these earnings (over 60 per cent) comes from the replacement market; exports contribute 14 per cent to the revenues.
Volume growth resulting from capacity expansion, increased demand from OEMs and an improved product mix in favour of radial and OTR (off-the-road) tyres suggest good earnings prospects. At the current market price of Rs 130, the stock trades at around a 5 times trailing 12-month (TTM) earnings. This valuation is at a discount to bigger players such as MRF and Apollo Tyres, which quote at about 10 times their TTM earnings.
The replacement market has been the key driver of growth for the industry so far. But the buoyant trends in automobile sales in the past few years has enabled the company step-up its supplies to OEMs. JK Tyres is the exclusive supplier for the Swift, SX4 and the Zen Estilo from Maruti and the Logan from the Mahindra stable.
The company will also be supplying to the Nano. The success of the Swift and the SX4 and the potential market for the Nano will translate into higher revenues for the company.
Besides, the duty cuts on buses and trucks announced in the Budget, coupled with the possibility of a softer interest rate regime, may provide a fillip to the commercial vehicle industry, which has otherwise been reeling under a slowdown in the medium and heavy commercial vehicles segment. JK Tyres, a supplier to Tata Motors, Force Motors and Volvo is a likely beneficiary from this revival.
Radial and OTR tyres
India has low levels of radialisation at less than 5 per cent for trucks and buses due to constraints such as higher costs and maintenance involved and poor road infrastructure. The fast improving highway infrastructure, the Supreme Court ban on the overloading of vehicles and the move towards a hub and spoke model are expected to indirectly rev-up the demand for radial tyres as they offer better fuel efficiency, have longer life and turn out to be cheaper in the long run.
The company already has the first mover advantage in the manufacture of radial tyres for commercial vehicles where its market share is around 80 per cent. To cater to this expected increase in demand, the company plans to increase its radial tyre capacity to 10 lakhs by FY-09 and 12 lakhs by FY-11.
Besides, the company is also increasing its capacity in the OTR segment. It has entered into a tripartite agreement with Bharat Earth Movers (BEML) along with Apollo tyres for the manufacture and supply of OTR tyres. The company will, thus, be able to ride on the construction boom to bring in higher revenues. The improved product mix in favour of high value, high margin radial and OTR tyres will also benefit the company in terms of greater realisations and healthier margins.
For the quarter ended December 2007, net sales grew by 10 per cent to Rs 723 crores on a year-on-year basis and net profits, by 175 per cent to Rs 22 crore. EBITDA margins also improved from around 8 per cent to 10.6 per cent. But both profits and margins have declined marginally on a sequential basis. This can partly be attributed to the firm trends in raw material prices.
The reduction in Cenvat duty in the budget has been a welcome relief and the company has already announced price cuts to pass on the benefit to its customers. But with the reduction passed on, operating margins are likely to be under pressure due to firm trends in the prices of natural rubber and crude oil based raw materials. Any increase in prices pegged to increase in cost of raw materials could face resistance from its OEM customers. Net margins may also be affected from increased depreciation and interest costs due to ongoing capacity expansion.
Investors can refrain from subscribing to the initial public offer from Sita Shree Food Products.The risks associated with the company’s new business foray are high and may outweigh the return potential from this offer.
The company, which has been engaged in making wheat products such as atta, rava and sooji, proposes to raise Rs 31.5 crore through this book-built IPO to fund the setting up of new manufacturing facilities for soya oil and deoiled cake (500 tonnes per day) and to expand flour milling capacities (additional 275 tpd). The offer is being made in a price band of Rs 27-30, valuing the company at a stiff 24-27 times its earnings, without considering the equity expansion due to the offer.
Sita Shree Foods makes wheat products which are sold mainly in bulk form. It has managed a steady ramp up in its sales from Rs 23 crore to Rs 82 crore between FY-04 and FY-07.
Operating profit margins in this business, however, have been thin, hovering in the 3 per cent range in recent years and net profits have risen from Rs 16 lakh to Rs 92 lakh over the same period.
The company has in the past been one of the suppliers to Godrej Pillsbury and Unilever and also counts retail chains such as Pantaloon Retail and Reliance Retail among its clients. Going forward, the opportunity for supplying wheat products in bulk or packaged form to retail chains may continue to expand as these players lay a greater thrust on dry groceries and private label sales.
Though the company’s expansion plans for wheat products may come in handy in this respect, margins may continue to be wafer thin, given competition from much larger and unorganised players in the flour milling segment.
The company’s foray into soya oil and soyameal business (used and exported as animal feed) comes at an opportune time, when global demand and prices for soya products are firm. Though good location advantages and the promoter’s experience in commodity trading may translate into procurement advantages, the lack of scale (competitors such as Ruchi Soya and Gujarat Ambuja Exports control capacities of over a million tonnes per annum) and an overseas presence pose risks to the company’s ability to find and sustain a market for its products. Though the company also plans to establish its own brands as well as a marketing network in the domestic market, it will face competition from players with much deeper pockets. The stiff pricing also pegs up the risk element.
Investors can stay away from the initial public offer of Gammon Infrastructure Projects Ltd. (GIPL). While the company’s unique positioning as a developer in the infrastructure space does provide long-term potential, the offer appears stiffly priced. At the price band of Rs 167-200, the offer values the company at 33-40 times the expected per share earnings for FY 2010. We, therefore, advocate revisiting the stock at a later date either when the secondary market offers better entry opportunities or when the company’s projects under development start contributing significantly to cash flows.
There is unlikely to be significant upside in GIPL’s earnings in FY 2009 as three of the seven projects under development are expected to become operational only by FY-10. The rest of the projects, mostly in the power segment, may have a longer gestation period before contributing to revenues. Besides, a number of other players in this business (not necessarily with the same business model) such as, IRB Developers and IVRCL, offer higher visibility for returns and have attractive valuations.
On the company and offer
GIPL is a holding company with subsidiaries and associates that are engaged in infrastructure project development. The company is a subsidiary of Gammon India. The parent will hold 73 per cent, post-issue. The company plans to raise Rs 270-330 crore through this offer, the proceeds of which would be invested in projects of subsidiaries and repayment of loan to the parent company. Post-issue, the market capitalisation of the company would be Rs 2,400-2,900 crore at the two ends of the price band.
GIPL can be termed as one of the few pure infrastructure developers in the country as against a good number of players which remain part contractors. The company’s operations are clearly demarcated from its parent, as all infrastructure development projects are routed through GIPL.
The company also has a diversified basket of projects ranging from roads to power and ports with substantial holding in each of these. However, only four of the 11 projects are currently operational with the rest in the development phase (excluding the SEZs).
Of the operational projects, GIPL has two annuity road projects that provide a steady stream of revenues (by way of annuity and operation and maintenance) based on fixed long-term concession agreements. However, the fixed agreement rules out any scope for significant ramp up in revenues from these projects. Income from annuity constituted 70 per cent of revenues for the six months ended September 2007.
While the third subsidiary — Cochin Bridge Project — is toll-based, the project’s contribution to the revenue stream is minimal. Further, the Government has stipulated fixed toll rates, thus reducing the scope for any significant acceleration in revenues. The possibility of any surge in traffic also appears unlikely given the location of the bridge.
The fourth project — management of two berths in Visakhapatnam Port — now accounts for 12 per cent of revenues. While this subsidiary is yet to become profitable, we believe that the project holds high earnings visibility and lower risk, with favourable clauses such as take-or-pay. GIPL’s stake in this project is, however, restricted to 42 per cent at present as the project is in consortium with Portia Management Services of the UK. Of the four operational projects through subsidiaries, we expect the Vizag Sea Port to be the key revenue driver.
Revenue on a consolidated basis was Rs 147 crore for FY 2007 and Rs 77 crore for the half-year ended September 2007. Consolidated net profits for the above period stood at Rs 30 crore and Rs 11 crore respectively.
Future holds potential
GIPL’s more recently formed subsidiaries which have seven projects under development offer a diversified basket with toll and annuity road projects as well as hydro and bio-mass projects. Of these, the hydropower projects have longer gestation periods with operations expected to commence in FY 2011 and FY 2012. The renewable energy and container terminal projects are yet to witness financial closure and, therefore, not considered by us for valuation purposes.
The power projects could well hold potential what with a judicious mix of projects with power purchase agreements and those that can be sold as merchant power. For the biomass projects, while steady supply of raw materials such as rice straw or bagasse could be a constraint, the company is likely to be supported with good power tariffs in States such as Punjab and Haryana. Hydro and bio fuel projects hold the potential to improve the company’s profitability over the long term.
Similarly, the Mumbai Offshore Container Terminal Project in which the company has a 50 per cent stake holds favourable revenue sharing and exclusivity terms. The operation and maintenance clause is yet undecided with financial closure also pending. The business per se holds potential given the extreme congestion in the Mumbai harbour. Revenue flow from this stream has to be watched before assessing profitability.
Advantage of developer model
While the infrastructure space is generally known to offer low operating and net profit margins, infrastructure development lends potential for earning superior margins. Once the initial expenditure on building the asset is complete, such projects could provide a regular/accelerated stream of revenues.
As O&M cost of such assets are also paid for by the concessionaire, the profit margins are different from what are typically derived in a construction contract. GIPL’s operations currently earn margins of over 70 per cent on a consolidated basis. However, high interest costs (as each project involves significant debt-financing) can lead to more moderate net profit margins.
Though debt-free on a stand-alone basis, GIPL, on a consolidated basis, has a debt equity ratio of close to three. While the funds from the issue would strengthen the networth, the proceeds appear insignificant compared to the size of projects under implementation. Hence the subsidiaries would have to either tap debt avenues or look at further equity expansion at a later date. Such expansion over the medium term could dilute earnings, given that the payoff profiles for the company’s projects are fairly long.
The offer is open from March 10-13. Retail and non-institutional investors have the option of applying through a part-payment of Rs 50.