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K S Oils: New initiatives drive growth - Views on News from Equitymaster
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K S Oils: New initiatives drive growth
Oct 30, 2009

Performance summary
  • Topline grows by 29% YoY on account of strong demand, penetration in newer markets and focus on retail led sales.
  • Operating costs grow at a slower pace resulting into 1.4% expansion in EBITDA margins.
  • While growth in operating profits stands at 45%YoY, bottomline grows by 19% YoY. As interest costs and depreciation charges more than double, the growth in net profits gets pared.


Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 7,336 9,465 29.0% 14,263 18,526 29.9%
Expenditure 6,513 8,269 27.0% 12,681 16,332 28.8%
Operating profit (EBITDA) 823 1,196 45.3% 1,583 2,194 38.6%
EBITDA margin (%) 11.2% 12.6%   11.1% 11.8%  
Other income 29 33 14.6% 63 204 225.7%
Interest 161 348 115.8% 280 648 131.3%
Depreciation 58 127 117.4% 109 241 120.1%
Profit before tax/(loss) 632 754 19.3% 1,256 1,509 20.2%
Extraordinary item - -   - -  
Tax 210 253 20.2% 423 515 21.7%
Minority interest       - -  
Net profit 422 502 18.9% 832 994 19.4%
Net margin (%) 5.8% 5.3%   5.8% 5.4%  
No of shares (m)       332 397  
Diluted EPS (Rs)*         4.7  
P/E (times)         13.9  
*trailing twelve month earnings

What has driven performance in 2QFY10?
  • K S Oils reported 29% YoY growth in the topline in 2QFY10 led by sustained consumer demand and retail led branded sales. The growth was also backed by the company’s focused efforts to capture the entire economic value cycle of Indian consumer and move to reach out newer markets. In this direction the company has taken few steps such as launching its products in 100 new towns, taking the total number of distributors to 1,133 to drive its pan India retail reach. It has also launched Kalash Soya and KS Gold Palm oil. This has not only helped the company widen its consumer base but also de-risk its edible oil revenues across the economic class (rich, middle class and the bottom of the pyramid).

  • The company reported 45% YoY growth in operating profits on account of increase in focus on FMCG led retail branded sales. The company’s earlier initiative to set up captive power plants must have also enabled it to improve operational efficiency and ensured the smooth functioning of plants. In general the company has been able to contain the cost of operation across the board on a percentage of sales basis.

  • 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 nearly 34% YoY growth in profit before interest and taxes (PBIT). On the other hand, the power segment that contributed merely 1% to 2% to the total revenues reported two-fold growth in sales. Growth in PBIT of the power division stood at 120% YoY.

  • While the growth in operating profits stood at 45% YoY, bottomline grew by 19% YoY. The same was owing to the doubling in interest and depreciation costs. This could be attributed to the fact that the company has outlined huge expansion plans. Thus, increased borrowings to support capex pressurised net 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.

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 across the economic value cycle of the Indian consumer. 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 has also set up wide distribution networks to increase reach.

At the current price of Rs 65, the stock is trading at 7.4 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 advise investors to reduce their holding in the stock.

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