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K S Oils: Powering margins - Views on News from Equitymaster

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K S Oils: Powering margins
May 21, 2008

Performance summary
  • Topline grows by 92% YoY, owing to increased penetration and improved product mix, apart from better realisations.

  • Operating profit reported whopping growth of 143% YoY as cost grew at a slower pace compared to topline growth.

  • Net profit more than doubled in FY08 on the back of healthy operating profits and nine-fold growth in other income.

Consolidated financial performance snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 2,934 6,740 129.7% 10,705 20,411 90.7%
Expenditure 2,597 6,059 133.3% 9,778 18,164 85.8%
Operating profit (EBITDA) 337 681 102.2% 927 2,247 142.5%
EBITDA margin (%) 11.5% 10.1%   8.7% 11.0%  
Other income 2 62 3541.2% 11 105 884.1%
Interest 60 116 94.3% 154 384 150.4%
Depreciation 13 34 171.2% 45 121 168.1%
Profit before tax/(loss) 266 593 122.7% 739 1,847 150.0%
Extra ordinary items - -   - -  
Tax 56 198 252.9% 166 627 278.3%
Profit after tax 210 396 88.0% 573 1,220 112.9%
Minority interest - (10)   - (10)  
Net profit 210 386 83.3% 573 1,210 111.2%
Net margin (%) 7.2% 5.7%   5.4% 5.9%  
No of shares (m)       221 332  
Diluted EPS (Rs)*         3.6  
P/E (times)         20.8  
*trailing twelve month earnings

What has driven performance in FY08?
  • Topline growth of 92% YoY has not only come in on account of continued rise in demand for edible but also owing to better realisations in the event of supply constraints. Further the, company witnessed robust 86% YoY growth in branded sales and whopping 184% YoY growth in retails sales, which fetched better realisations and hence better margins.

  • The impact of increased focus on branded sales and retail packaged sales is reflected in the improved PBIT margins of the solvent division, the core segment, from 8% in FY07 to 10.8% in FY08. The solvent segment that contributed almost 98% to the total revenues in FY08 reported 92% YoY growth in revenues, while the vanaspati and power segments reported 5% YoY and 147% YoY growth in revenues during the same period. The robust growth of power segment is the result of setting up of windmills.

    Revenue break-up (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Solvent (oil and refinery) 3,129 6,673 113.2% 10,407 20,000 92.2%
    % of total revenues 96.0% 98.4%   95.7% 97.5%  
    PBIT margin (%) 9.8% 10.3%   8.0% 10.8%  
    Vanaspati 129 96 -25.4% 454 478 5.4%
    % of total revenues 3.9% 1.4%   4.2% 2.3%  
    PBIT margin (%) 14.2% 15.2%   10.3% 10.4%  
    Power 1 14 1033.3% 17 43 147.1%
    % of total revenues 0.0% 0.2%   0.2% 0.2%  
    PBIT margin (%) 58.3% 50.7%   62.6% 43.0%  

  • The company is increasing its focus on branded and packaged retail sales. The cost of manufacturing edible oil is the same, while the incremental packaging and marketing costs are much lower as compared to realisations. Thus, apart from the base effect and cost control measures, changing revenue mix has led to 143% YoY growth in operating profits and almost 2.3% expansion in EBITDA margins.

  • Despite surging interest and depreciation costs, net profits went up by 111% YoY in FY08 on the back of on the back of healthy operating profits and nearly nine-fold growth in other income.

What to expect?
Going forward, the company has chalked out huge expansion plans to bank upon the opportunity of 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 ensuring backward integration to secure raw material supplies and avoid global price volatility.

In line with its backward integration plans and in a move to be a global player going forward, the company has acquired 20,000 hectares (50,000 acres) of Palm plantation land in Indonesia with an investment of Rs. 2,300 m spread over the next 3 years. Further the company has added 28 windmills generating 24 MW of energy during the year and plans to add more windmills during FY09. The windmills 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.

Considering these factors and huge expansion plans of the company, we expect KS Oils to grow in line with the sector growth. At the current price of Rs 76, the stock is trading at 20.8 times trailing 12-month earnings. The current valuations are not very attractive and do not offer significant upsides in the medium term.

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