Kesoram Industries

Kesoram Industries has expanded capacities to take advantage of growth opportunities in its product segments. The stock looks attractive

   KESORAM Industries, the flagship company of the BK Birla Group, is one of the leading players in the domestic tyre industry. The company also has a cement division, with a prominent presence in the southern market. We had recommended this stock in our issue dated July 6, 2009, and since then the stock has gained barely 11.6% as compared to a 28% rise in the Sensex. While Kesoram's stock has so far lagged the returns of the broader market, it is expected to see momentum in future. It has aggressively expanded its capacities to take advantage of the growth opportunities in its product segments over the next few years.

   The veteran industrialist BK Birla willed this company to his grandson Kumar Mangalam Birla, while the nonagenarian's daughter Manjushree Khaitan would take an active role in the day-to-day management of Kesoram Industries.

CAPACITIES:

The company's installed cement capacity was 7.25 million tonne at the end of March 2010, a rise of 59% from three years earlier. The company's plants are located in Karnataka and Andhra Pradesh. As part of increasing its cement capacity, Kesoram had brought on stream 1.65 mt capacity in August 2009 in Karnataka.

   Kesoram Industries, like other players in the southern region, has been grappling with sluggish realisations on a per tonne basis, due to rapid capacity expansion in the region, and weak demand conditions. The cement division contributed 38.1% to the company's total segment sales of Rs 5,020.6 crore for its year ended March 2010. The company's tyre division's capacity was 12.1 mt at the end of March 2010, and it had more than quadrupled from three years earlier. The company's tyre division's capacity is amongst the top five players in the country, and Birla Tyres is also among the largest players in the truck tyre segment.

   This growth in capacity was due to the start of commercial production of truck radial tyres at its unit three at Haridwar, Uttarakhand, in March 2010, and the start of commercial production of unit four at Haridwar for LCVs and motorcycle tyres. The tyre division contributed 56.8% to the total segment sales for the year ended March 2010. In addition, Kesoram's viscose filament rayon yarn capacity was 6,500 tonnes at the end of the previous financial year.

EXPANSION PLANS:

The company's board, in a recent meeting, approved plans to instal a clinker plant of 1.71 mt and captive power facilities, at its plants at Karnataka. In addition, the company plans to set up a cement grinding plant with a capacity of 2.5 mt at Sholapur, Maharashtra and the capex involved for these projects is estimated at Rs 925 crore.

   The company has also got board approval to set up a waste heat recovery system to generate captive power at different units of its Vasavadatta cement section, Karnataka, at a cost of Rs 200 crore. These expanded facilities are expected to be broughton-stream by September 2012.

   This expansion plan would be financed via a combination of internal accruals and debt. Kesoram had invested Rs 3,357.5 crore during the period March 2007 and March 2010, while its operational cash flow during this period was just Rs 1,274 crore. As a result, its leverage ratio was 1.9 at the end of March 2010, as compared to 1.4 times, three years earlier. However, the company's recently expanded capacities in the tyre and cement divisions are expected to provide healthy cash flows over the medium term and help to keep Kesoram's leverage ratio in check, going forward.

FINANCIALS :

The company's operating profit margin fell 780 basis points y-o-y to 10.2% in the March 2010 quarter. This is despite the 12% rise in net sales at Rs 1,274.2 crore in fourth quarter. In the company's cement division, realisations declined nearly 7.9% y-o-y to Rs 3,439 per tonne given sluggish demand conditions in the south, while dispatches grew 2.7% to 1.51 million tonnes. Segment profit of the cement division also fell 39.6% y-o-y to Rs 96.8 crore in the fourth quarter.

   In its tyre division too, Kesoram was adversely impacted by higher prices of the key input price of rubber. For instance, the average price of this input was Rs 142.7 per kg levels in the March 2010 quarter, a jump of nearly 71% y-o-y. As a result, in the tyre division, there was a segment loss of Rs 3.87 crore in the quarter under review. Also, for the year ended March 2010, Kesoram's operating profit margin declined 100 basis points y-o-y to 14.9%, despite its net sales that grew 21.8% to Rs 4,804 crore.

VALUATIONS:

The stock trades at just 0.9 times its book value for year ended March 2010. During the period March 2006 and March 2009, it had traded in a range of 0.4 and 2.4 times trailing book value.

   Kesoram Industries, at Rs 299.8 per share, trades at 5.8 times its trailing four-quarter earnings. Other diversified players like Century Textiles and Industries trades at 12.6 times, while Orient Paper & Industries' P/E is 6.8. Kesoram Industries is expected to benefit from its capacity expansions given an uptick in industrial demand. Investors can consider Kesoram Industries as a long-term investment given its growth prospects.