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KS Oils: SWOT analysis part II - Views on News from Equitymaster
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  • Mar 5, 2008

    KS Oils: SWOT analysis part II

    In our previous article we looked at KS Oils' strengths. In this article, we continue our analysis with a study of its weaknesses, opportunities and threats.

    No pan-India market: The company enjoys market leadership position in the mustard oil segment of edible oils and a dominant position in the northern, northeastern and central states. However, currently KS Oils has no presence in the southern and western parts of India. In that sense, it lacks geographical reach. However, the company is looking at expanding its reach and plans to foray into newer markets.

    Robust expansion plans: KS Oils has chalked out huge expansion plans to capitalise upon the opportunities in the edible oil sector and sustain its market share. The company will be ramping up its crushing capacity from the current 1,475 MT per day to 5,000 MT per day by 2010 either by organic (greenfield) or inorganic route. The organic growth of the company is dependent upon the adequate supply of kohllu (devise used for crushing mustard seeds). Although the company has already booked the same to meet its requirements for the next two years, any delay in the supply will have a direct impact on the company's expansion plans, apart from issues related to land acquisition, clearances, and construction work delays. In case of inorganic growth, the company needs to upgrade facilities or align the process and environment of the acquired unit in line with the company's operations.

    Though the company is confident about its timely execution of proposed expansion plan based upon its past experience, any delays will impact the company's growth. Further, the company has planned more than three fold expansion of its crushing capacity. This calls for huge fund infusion (Rs 6,500 m to Rs 7,500 m) by way of equity and debt that will dilute the returns for shareholders.

    Derived prices and no pricing power: The raw material prices for the company are derived from the selling price. Further, the sales price of mustard oil has to be aligned with the cheaper soyabean oil. Else, the soyabean oil gets blended with the mustard oil to be sold out as refined cooking oil. Thus, the price variation is in the range of 10% to 12% and mustard oil does not fetch higher realisations (above 10% to 12%). If the price variation increases or the gap widens then the unorganised manufacturers opt for blended oil. Hence there is no pricing power as such. Margin expansion is possible only by way of value addition, branding, retail packaging or introducing cost effective manufacturing process.

    Low per capita consumption: India is the fourth largest edible oil economy in the world. With an annual consumption of 12 MT, per capita consumption at 12 kgs per annum is very low as compared to the world average of 20 kgs per annum. Further, there is supply mismatch in the edible oil segment with domestic supply being approximately 7.72 MT against demand of 12 MT. The shortfall is made up by imports, the second largest import bill item for India. This highlights the opportunity available for domestic edible oil manufacturers to grow and expand their business.

    Growing organised sector: The Indian edible oil sector and especially mustard oil market is largely fragmented and unorganised (85% market share), which is shifting to the organised (15% market share) sector owing to the tax reforms (VAT) and on account of preference for packaged and branded products. Increase in awareness regarding adulteration and increased health consciousness (mustard oil is one of the healthiest oil as it contains leas amount of saturated fats) has further aided the growth of the organised sector. Also, it is used in various Ayurvedic applications for skin treatment, building immunity, etc.

    The retail boom backed by rising income levels has opened up another frontier for the companies like KS Oils to sell in retail packs that enjoy high margins and develop brand equity in line with other FMCG products to create pricing power. These moves will not only help company expand customer base with increased volumes but will also lead to margin expansion.

    Complete integration: The company is one of the largest integrated manufacturer of mustard oil in India. The company's integrated operations with respect to manufacturing process of edible oil and with in house packaging unit has resulted in cost savings, which results in better margins and in turn, higher returns to share holders. However, still there is ample scope left to further integrate the operations both ways - backward and forward integration.

    In terms of backward integration, the company can look at captive power and plantations option. The company has already chalked out plans to set up 6.93 MW DG gensets and 8.5 MW of windmills to generate power. However, as the company is setting up windmills in the state of Gujarat where the company does not have a manufacturing facility, it benefits from power tariff arbitrage. If the company opts for captive power, it will further minimise manufacturing costs for the company. KSO has entered into a joint venture in Malaysia with a 49% stake for the purpose of investments in and acquisitions of palm plantations for manufacture of crude palm oil. The plantations acquired by the JV will ensure secure raw material sourcing for crude palm oil production. The same can be mirrored in the domestic markets to bring down production cost and enhance margins.

    Talking about the forward integration, the company intends to get into bio diesel and value added products for personal care and oleo chemicals. However, all these plans are considering the long-term prospects of the business and which will only materialise over a period of time.

    Expand geographical presence: When we discussed about the company's weaknesses we highlighted the fact that the company is dominant in the northern, northeastern and central states. Currently, it lacks presence in the south and west India. This itself brings to the table an opportunity for the company to foray into newer markets and increase customer base. With increased penetration levels the company will be able to increase it market share along with volumes. The company is not only scouting for shelf place but is also planning to set up manufacturing facilities in strategic locations to increase its presence in new markets. The move is in line with the company's objective to be cost effective while adhering to quality standards and near to consumption markets.

    Competitive environment: KS Oils operates in a highly competitive environment. Its inability to pass on the costs would affect its margins and returns to shareholders. Further, the possibility of new entrants cannot be denied given the opportunities available in this sector and the other existing players ramping up their capacities and market share.

    Gets substituted: The company's products have not yet developed the requisite brand image and hence get substituted with other refined edible oil brands especially in the urban markets. Thus, as a remedy to this problem the company has chalked out investment Rs 200 m for advertising, promotions and trade push to strengthen its brands.



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