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K S Oils: Growth everywhere… - Views on News from Equitymaster
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K S Oils: Growth everywhere…
Feb 21, 2008

Performance summary
  • Topline grew by 85% YoY, owing to increased penetration, better realisations and growth across its offerings.
  • Operating profit reported 94% YoY growth, backed by strong demand for the products and improved efficiency.

  • Net profit grow by 61% YoY. Despite healthy show at operating level net margins contracted by 0.8% owing to higher depreciation, interest outgo and taxes.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 3,052 5,637 84.7% 7,139 13,671 91.5%
Expenditure 2,745 5,044 83.7% 6,545 12,104 84.9%
Operating profit (EBITDA) 306 593 93.6% 594 1,566 163.7%
EBITDA margin (%) 10.0% 10.5%   8.3% 11.5%  
Other income - 17   2 43 2070.0%
Interest 47 85 80.8% 90 268 198.6%
Depreciation 13 31 145.2% 30 87 192.0%
Profit before tax/(loss) 247 494 100.3% 476 1,254 163.4%
Tax 45 170 281.3% 78 429 449.9%
Net profit 202 324 60.5% 398 825 107.3%
Net margin (%) 6.6% 5.8%   5.6% 6.0%  
No of shares (m)       202 324  
Diluted EPS (Rs)*         3.1  
P/E (times)         28.1  
*trailing twelve month earnings

What has driven performance in 3QFY08?
  • Topline grew by 85% YoY in 3QFY08 and 92% YoY during 9mFY08, backed by optimum utilisation levels and better realisations owing to higher demand for the commodity. The impressive performance has also been a result of shift in revenue mix. KS Oils is focusing on retail pack sales where margins as well as volumes are high.

  • The company’s core business, the oil division that contributes over 97% to the total revenues, reported whopping 104% YoY growth and witnessed 0.9% expansion in PBIT margins owing to its strategy of foraying into retail packaged sales and increased focused on branded sales.

    Segmental information
    EBIT (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Solvent (oil and refinery) 278 567 104.3% 499 1,476 195.5%
    PBIT margin (%) 9.4% 10.3%   7.0% 11.1%  
    Vanaspati 15 10 -32.9% 58 35 -39.0%
    PBIT margin (%) 14.8% 8.3%   17.8% 9.2%  
    Power 1 2 125.0% 9 12 28.9%
    PBIT margin (%) 30.8% 22.5%   63.4% 39.5%  

  • The operating profits growth stood at 94% YoY and 164% YoY during 3QFY08 and 9mFY08 respectively owing to base effect.

  • During 3QFY08, costs as a percentage of sales have remained flat. The raw material as a percentage of sales basis have declined considerably from 97% to 75%. However, traded goods as a percentage of sales basis have witnessed sharp spurt. This could be attributed to the fact that company purchases crude oil (soyabean oil) and refines it to be sold.

  • Going forward, the company has chalked out huge expansion plans to bank upon the opportunity, demand supply mismatch in the edible oil segment and increased preference for oil with less saturated fat. With increase in scale of operation the company will be better placed in terms of procuring raw materials and will benefit from economies of scale. Further, the company is also setting up windmills, which apart from providing tax shields will fetch carbon credits for the company. Thus, with savings in cost (operational and corporate), increased penetration and shift towards retail packs will result in margin expansion.

    Cost break up
    (% of sales) 3QFY07 3QFY08 9mFY07 9mFY08
    Increase/decrease in stock in trade -13.7% -6.8% 1.1% -9.1%
    Raw materials consumed 97.1% 75.4% 81.9% 83.1%
    Purchase of traded goods 0.7% 14.9% 2.1% 8.1%
    Staff cost 0.3% 0.3% 0.2% 0.3%
    Other expenditure 5.6% 5.6% 6.4% 6.1%

  • While the EBITDA margins have expanded by 0.9%, net margins have contracted by 0.8% owing to increased finance charges, higher depreciation and higher tax outgo. This could be attributed the fact that the company has outlined huge expansion plans, which calls for fund raising. The company has raised Rs 1.3 bn by issuing shares and warrants to private equity investors towards the end of FY07, which has resulted in increased interest outgo.

  • During 9mFY08, net margins expanded by 0.4% owing to escalation in other income. Even if one excludes the, the other income effect the net margins have expanded by 0.2% on the back of 3.2% expansion in operating margins during the same period under consideration.

What to expect?
The company not only benefits owing to its integrated operations but also has set up wide distribution network and which it plans to expand it in line with FMCG players, resulting into increased reach.

Further, the edible oil market is growing at the rate of 6% per annum, 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 these factors and huge expansion plans of the company, we expect KS Oils to grown in line with the sector growth. At the current price of Rs 87, the stock is trading at 28.1 times trailing 12-month earnings. We shall soon update investors with our view on the stock.

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