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K.S. Oils: Retail focus aids growth - Views on News from Equitymaster
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K.S. Oils: Retail focus aids growth
Aug 11, 2008

Performance summary
  • Topline grows by nearly 91% YoY during 1QFY09, led by FMCG retail sales focus.
  • Operating margins decline by 1.5% YoY on the back of faster rise in expenses as compared to the topline.
  • Net profit grows by 75% YoY during the quarter.


Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 3,636 6,927 90.5%
Expenditure 3,180 6,168 93.9%
Operating profit (EBITDA) 455 760 66.8%
EBITDA margin (%) 12.5% 11.0%  
Other income 14 34 145.7%
Interest 88 119 34.6%
Depreciation 26 51 100.4%
Profit before tax/(loss) 355 623 75.4%
Tax 120 213 77.1%
Net profit 235 410 74.6%
Net margin (%) 6.5% 5.9%  
No of shares (m) 221 332  
Diluted EPS (Rs)*   3.6  
P/E (times)   17.5  
*trailing twelve month earnings

What has driven performance in 1QFY09?
  • K.S. Oils (KSO) continues to report robust performance with increased penetration and on the back of its move to focus on retail sales. The nearly 91% YoY growth in topline in 1QFY09 is further backed by better realisations.

  • The solvent (oil and refinery) segment that contributes over 95% to the total revenues has reported nearly 94% YoY growth in revenues during 1QFY09. However, the divisional PBIT margins (earnings before interest and taxes) were lower by nearly 2% YoY on account of increased procurement cost of oil seeds (raw material).

    Segmental performance
    Revenue break-up (Rs m) 1QFY08 1QFY09 Change
    Solvent (oil and refinery) 3,497 6,769 93.5%
    % of total revenues 95.4% 96.3%  
    PBIT margin (%) 12.1% 10.2%  
    Vanaspati 156 192 22.9%
    % of total revenues 4.3% 2.7%  
    PBIT margin (%) 8.7% 3.3%  
    Power 11 70 557.0%
    % of total revenues 0.3% 1.0%  
    PBIT margin (%) 50.5% 66.0%  

  • KSO’s overall EBITDA margins contracted by 1.5% YoY in 1QFY09 as costs grew at a faster pace compared to topline. The increased focus on branded and retail packaged sales has though enabled the company to restrict fall in is profitability during the quarter. 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. The effective supply chain management system in place has also enabled the company to control hike in cost of operation. Thus, the changing revenue mix and the company’s efforts to curtail costs has restricted fall in profitability.

  • While the interest and replacement costs are increasing on account of expansion plans, the same have not impacted growth in net profits during 1QFY09. The net profit growth of around 75% YoY outpaced operating profit growth on account of nearly two-fold growth in other income.

What to expect?
    At the current price of Rs 63, the stock is trading at a multiple of 17.5 times its trailing 12 months earnings. KSO has chalked out a large expansion plan 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. Moreover, it has also increased its focus on branded and retail sales that fetch better margins.

    In line with its backward integration plans and in a move to be a global player going forward, the company in FY08 acquired 20,000 hectares (50,000 acres) of palm plantation land in Indonesia at an investment of Rs 2,300 m spread over the next 3 years. Further the company added 28 windmills generating 24 MW of energy and plans to add more windmills during the current fiscal. 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.

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