K S Oils: Poor quarter, good year

KS Oils Ltd has announced its FY10 results. The company has reported a 28% YoY and 12% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary

• Revenues grow by 28% YoY. The growth comes in on account of new brand launches and increased penetration.
• During the year, operating costs grow at a slower pace as compared to net sales resulting in 30.7% YoY growth in operating profits.
• Higher depreciation and interest costs restrict growth at profit before tax (PBT) level at 9.9% YoY. Had not the other income reported two-fold growth, growth in PBT would have come in lower by 2.9% YoY.
• At the net level, growth in profit stands at 12% YoY. Excluding other income, growth in net earnings stands lower by 8.4% YoY.

Financial performance snapshot

(Rs m)	4QFY09	4QFY10	Change	FY09	FY10	Change
Net sales	8,873	10,627	19.8%	31,467	40,271	28.0%
Expenditure	7,925	9,583	20.9%	28,161	35,952	27.7%
Operating profit (EBITDA)	948	1,045	10.2%	3,306	4,320	30.7%
EBITDA margin (%)	10.7%	9.8%		10.5%	10.7%
Other income	137	175	28.2%	315	639	103.0%
Interest	251	508	103.0%	744	1,564	110.3%
Depreciation	91	146	60.5%	268	528	97.1%
Profit before tax/(loss)	743	565	-24.0%	2,609	2,868	9.9%
Tax	262	187	-28.6%	916	965	5.4%
Net profit	482	378	-21.4%	1,694	1,903	12.3%
Net margin (%)	5.4%	3.6%		5.4%	4.7%
No of shares (m)				356	409
Diluted EPS (Rs)*					4.7
P/E (times)					12.0

*trailing twelve month earnings

What has driven performance in FY10?

• K S Oils reported 28% YoY growth in the topline in FY10. The new brands launches (Kalash Soya and KS Gold Palm oil) and penetration into tier II and Tier III cities propped up the revenues for the year. The consumer demand has been robust. To capture the same and increase its market share, K S Oil is reaching out to urban and rural areas by widening its retail and local distribution network.

• At the operating level, the company has reported, 30.7% YoY growth. The same has been the result of better performance in 1HFY10. The company’s increased focus on FMCG led retail branded sales has also cushioned margins. However, scaling raw material costs that impacted performance during second half of the fiscal restricted growth in profitability.

• Profit before tax level (PBT) grew by 9.9% YoY. This is on the back of two-fold growth in other income. Excluding the same, growth in profits has come in lower by 2.9% YoY. This is because of twofold growth in interest income and substantial increase in depreciation costs. This could be attributed to the fact that the company has outlined huge expansion plans. The capex plans resulted in an increase in borrowings and asset replacement cost, which in turn has pressurized margins.

• At the net level, growth in profit stood at 12% YoY. If one excludes other income, it would be lower by 8.4% YoY.

What to expect?

Increase in edible oil consumption is predicted to reach the 8% range instead of 6%. Thus, domestic edible oil demand will automatically increase and this unmet demand has to be met by industry players. Organised players with backend scale like K S Oil stand to gain. We still maintain our cautious view on the stock as the current valuations, on diluted capital base, seem to have factored in the future benefits. At the current price of Rs 56, the stock is trading at 12 times its trailing twelve month earnings.