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K S Oils: Other income booster - Views on News from Equitymaster
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K S Oils: Other income booster
Jul 31, 2009

Performance summary
  • Topline grows by 30.9% YoY on account of increased focus on retail led sales and strengthening of distribution network.
  • Operating profits grow by 32.4% YoY as costs grow at a lower pace as compared to the topline.
  • While profit before tax grows by 21% YoY, the bottomline clocks a growth of 20% YoY.
  • During the quarter, the company issues 27,921,406 equity shares (fully paid shares of Re 1 each) to foreign investors and 28,807,339 share warrants to promoters.
  • The company also issues 12,409,520 equity shares (fully paid shares of Re 1 each) underlying the issue GDRs worth US$ 12.34 m.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 6,929 9,070 30.9%
Expenditure 6,168 8,062 30.7%
Operating profit (EBITDA) 761 1,008 32.4%
EBITDA margin (%) 11.0% 11.1%  
Other income 32 161 399.4%
Interest 119 300 152.4%
Depreciation 51 114 123.3%
Profit before tax/(loss) 623 754 21.0%
Extraordinary item - -  
Tax 213 262 23.1%
Net profit 410 492 20.0%
Net margin (%) 5.9% 5.4%  
No of shares (m) 332.4 356.3  
Diluted EPS (Rs)*   5.1  
P/E (times)   10.7  
*trailing twelve month earnings

What has driven performance in 1QFY10?
  • The company reported 30.9% YoY growth in the topline in 1QFY10. The company was able to maintain growth momentum on account of sustained consumer demand and retail led branded sales. The company’s initiative to strengthen distribution network also aided the growth in revenues. During the quarter, the company had 1,000 distributors all over India driving its pan India retail reach. The company’s Guna plant became fully operational during the quarter after the Kota plant, which went fully operational last quarter. These factors helped the company to not only reach out to newer markets but also cater to the unmet consumer demand for Kalash and Double Sher.

  • The company was able to report marginal expansion in operating margins on account of its initiative to set up captive power plants that enabled the company to improve operational efficiency and ensured the smooth functioning of plants. The company is also continuously focusing on retail branded sales. All of this enabled K S Oils to sustain profitability.

  • If we look at the segmental performance, the company’s core business that is the oil division reported a 28% YoY growth in revenues and 25.5% YoY growth in profit before interest and taxes (PBIT). On the other hand, power segment that contributed merely 1% to 2% to the total revenues and little over 6% to the profit before interest and taxes witnessed an 83.2% YoY growth in revenues and 27.4% YoY growth in PBIT.

  • While the EBITDA margins remained almost stable at 11.1% in 1QFY10 (11% in 1QFY09), net margins contracted by 0.5%. The same was owing to increased interest costs, higher depreciation charges and tax outgo. This could be attributed to the fact that the company has outlined huge expansion plans. Thus, increased borrowings to support capex seem to have pressurised margins. The expansion plans also shored up asset replacement costs. The expansion plans will exert pressure on margins till the time the benefit of capex starts flowing in.

  • Profit before taxes reported a 21% YoY growth on account of higher other income. If one excludes other income that reported a nearly five-fold growth, at the PBT level the growth was flat. Net profits grew by 20% YoY in tandem with the growth in operating profits.

What to expect?
While K S Oils is still growing at a decent rate, the growth rate has slowed down. The company operates in a competitive environment and therefore inability to sustain brand premium can affect the margins of the company. While we do not foresee that as a major threat as the company’s brands are well established in the existing markets, the possibility of the same cannot be ruled out. The company is likely to witness stiff competition particularly in new markets as it ventures into new geographies with a motive to establish a pan India presence. Apart from venturing into newer markets, to enhance sales the company has chalked out huge expansion plans. The company not only benefits owing to its integrated operations but also has set up wide distribution networks to increase reach.

At the current price of Rs 55, the stock is trading at 6.2 times our estimated FY12 earnings. After accounting for dilution of earnings per share on account of issuance of fresh capital and considering an optimistic scenario, we maintain our revised view on the stock.

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