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K S Oils: Research meet extracts
Feb 18, 2008

We recently met K S Oils, the largest integrated manufacturer of edible oils particularly mustard oil, to get the company’s view on the sector, its performance and growth prospects going forward. Following are some of the key excerpts from the meet. Company overview
K S Oils (KSO), established in 1985, with crushing capacity of 1,475 metric tones per day of mustard seeds is one of the largest manufacturers of mustard oil in India. It enjoys a 4.5% share of total mustard oil market with a dominant 25% market share of branded mustard oil market. The company accounts for 40% market share in North Eastern India. KSO's product portfolio also comprises of refined oils, vanaspati and non-edible solvent oil. KSO is one of the largest and regular supplier of edible oils to the Indian Defence Organisation and a leading exporter of soyabean / rapeseed (mustard) meal to foreign buyers.

Expansion plan: The main manufacturing plant of the company is situated within a large industrial complex at Morena (Madhya Pradesh). Over and above its facility in Morena, the company acquired a new plant at Jodhpur (Rajasthan) and operates a leased facility at Alwar (Rajasthan). The processing capacities of various units at K S Oils are viz. oil mill of 1,475 MT per day, refinery 500 MT per day, solvent extraction plant 900 MT per day, vanaspati 150 MT per day.

In line with the edible oil market, mustard oil market is growing at the rate of 6% YoY, while the branded / organised mustard oil segment is witnessing 25% YoY growth. K S Oil has the largest mustard seed crusher capacity in India and enjoys leadership position in mustard oil segment. In order to retain its leadership position, to capture 20% edible oil market and capitalise upon the growth prospects within the edible oil segment, the company has chalked out huge expansion plans.

In FY07, the company has added 225 MT per day crushing capacity and 150 MT per day of refining capacity by organic route. The company has acquired edible oil plant at Jodhpur, which has crushing capacity of 225 MT per day and refining capacity of 100 MT per day. It has also entered into a strategic tie up with an edible oil plant in Alwar, Rajasthan, which has crushing capacity of 50 Mt per day, solvent plant extraction of 300 MT per day and refinery plant capacity of 100 MT per day. Thus, the company is ramping up its manufacturing crushing capacity from the current 1,475 MT per day to 5,000 MT per day by 2010 either by organic (greenfield) and inorganic route.

To support its facilities smooth functioning, the company is planning to set up 4 windmills in Gujarat of 1.5 MW each out of which 3 windmills have been commissioned in FY07 at an investment of Rs 255 m. These windmills have been set in Gujarat, however, the company does not have a manufacturing facility in the state. It benefits from power tariff arbitrage (it sells power in Gujarat and purchases power from the states where its manufacturing facilities are located). It also enjoys income tax shields owing and will also earn carbon credits as wind energy being pollution free and environment friendly.

Distribution network: The company has planned to expand its reach and enter newer markets to enhance revenues. This calls for a wide distribution network and supply chain management. At present, the company has set up a network of 350 distributors and over 45,000 retailers, which it plans to increase to 1,000 distributors and 1,30,000 retailers.

Funding: To fund its huge expansion plans to the tune of Rs 6,500 m to 7,500 m, for the plants to be operational in next two years, land acquisition and construction work for the proposed greenfield project, the company is considering a mix of debt, equity and internal accruals. In FY07, the company has raised Rs 1.31 bn through issue of shares and warrants to private equity investor Citigroup Venture Capital and promoters.

The journey so far…: In the past three years, the company’s net sales have grown at a CAGR of 32%, while net profits have witnessed whopping 194% growth for the same period under consideration. The company has been enable to clock such a robust growth in earnings owing to healthy growth of operating profits (improved operational efficiency and improve realisations) and benefits of income tax shields (clean energy). The shift in revenue mix has also propelled topline as well as bottomline growth. The smaller retail packs, whose volumes as well as margins are higher compared to large (bulk selling) packs, contribute almost 20% to the total revenues of the company. In order to improve margins and revenue mix, expand customer base and bank upon organised retail boom, the company is focusing on retail packs sales. This move is expected to give a further fillip to topline of the company. The margin expansion is brought about by the retail sales and the same is expected to continue going forward, as the company has plans to increase focus on retail packs.

Look at past numbers…

(Rs m) FY04 FY05 FY06 FY07 CAGR
Net sales 4,681 4,525 6,082 10,875 32.4%
Operatiing profits 121 138 272 927 97.3%
EBITDA margin (%) 2.6% 3.1% 4.5% 8.5%  
Net profits 23 34 152 573 193.8%
Net margin (%) 0.5% 0.7% 2.5% 5.3%  
ROIC 12.5% 14.9% 21.8% 43.1%  
Debt/equity 3.6 3.2 1.9 0.6  
EPS       3.3  
P/E*       25.6  
* trailing twelve months earnings

Indian edible oil is pegged at Rs 675 bn and it is second largest import bill item for India. The domestic supply of edible oil is estimated at 7.72 MT, while demand being 12 MT, this highlights opportunity for domestic edible oil manufacturers like K S Oils Ltd to expound and grow. With an annual consumption of 12 m tonnes (MT), the per capita consumption is at 12 kg p. a., which is very low compared to the world average of 20 kg per annum, which indicates huge potential to grow. The edible oil market is growing at the rate of 6% p.a, while the barded (organised packaged oil market) is growing at the rate of 20% p.a. With increased health care consciousness, edible oil demand supply mismatch and preference for packaged products (avoidance of adulteration) and preference for low saturated fat cooking mediums (mustard oil compared to other oils contains least saturated fats) there is significant scope to explore untapped markets.

Thus, considering the growth prospects and huge expansion plans of the company to maintain its market share, we expect KS Oils to grown in line with the sector growth. The stock is trading at 25.6 times trailing 12-month earnings. We shall soon update investors with our view on the stock.

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