Kesoram Industries

Kesoram Industries is one of the cheapest stocks in its category and may be re-rated as the management control passes on to the Aditya Birla Group
KESORAM Industries, the flagship company of the BK Birla Group, is a diversified player with a presence in cement and tyres. Octogenarian industrialist BK Birla had recently willed this company to his grandson, Kumar Mangalam Birla. Kesoram has benefited from the boom in the cement industry over the past three years, which helped the company offset the slump in profits of its tyre division. It is now set to emerge as one of country’s leading tyre makers. The company is currently one of the cheapest stocks in its category and may be re-rated as the management control passes on to the Aditya Birla Group, India’s third largest business house.

Business:

Kesoram Industries’ installed cement capacity at end of FY09 was 5.3 million tonnes, with plants in Karnataka and Andhra Pradesh. In addition, the company has recently brought on stream an additional 1.6 million tonne cement capacity. This additional capacity is expected to help the company’s net sales jump by Rs 500 crore in FY10. The tyre division’s capacity was at 37.1 lakh units at the end of FY09, with plants in Orissa and Uttarakhand. The company’s viscose filament rayon yarn capacity is at 6,500 tonne at the end of March 2009. The cement division contributed nearly 48% to the company’s topline in FY09, while tyres accounted for 45.5%. The company is currently setting up a tyre plant to cater to the twowheeler sector at Uttarakhand with a capacity of 78 lakh tyres per annum and capex of nearly Rs 190 crore.

Expansion plans:

The company is planning a further expansion plan of nearly Rs 1,550 crore, which would entail the addition of 1.65 million tonnes cement capacity in Karnataka, with a capex of nearly Rs 750 crore. Also, the company plans to invest Rs 800 crore for expansion of its tyre business. Post-expansion, Kesoram is set to emerge as one of the top three tyre makers in the country. This expansion plan will be financed by a mixture of internal accruals and debt. During FY09, Kesoram’s cash flow from operations was to the tune of Rs 370 crore. Against this, cash used for investment activities was a little over Rs 1,034 crore. The company’s debt-equity ratio had risen to 1.46 at the end of FY09, slightly higher than the previous year. However, with Kesoram’s comfortable cash flow and expected turnaround in the tyre business, the leverage ratio is expected to either remain stable or decline over the next two to three years.

Financials:

In the March 2009 quarter, the company’s net sales grew 26.1% to Rs 1,108 crore, but its operating profit margin declined due to higher operating costs, especially in the tyre business.

Stock Views on JSW Steel, Hindalco Industries,

Citigroup on JSW STEEL

Citigroup has maintained its ‘sell’ rating on JSW Steel while cutting its target price to Rs 185 from Rs 190. “We are revising our estimates to account for lower raw material prices, domestic realisation, revised volumes and capex, and weaker performance by the US subsidiary,” the investment bank said in a report. “The benefit of lower raw material prices is largely offset by weaker prices,” it said. “We expect total net debtequity ratio by March 2009 to be approximately 2x (times), making JSTL (JSW Steel) riskier in a downturn,” Citi added.

JP Morgan on HINDALCO

JP Morgan is reviewing its earnings estimates for Hindalco amid concerns over the outlook of US-based Novelis, which the Aditya Birla Group has acquired a couple of years back. Novelis reported a sharp decline in earnings in the December quarter. The brokerage has a 'neutral' rating on the stock. " On the operating front, we are negatively surprised by the sharp decline in shipments (-13% y/y) While there is a strong element of de-stocking (similar to steel), given Novelis' large exposure to Europe and North America, we expect shipments to remain weak well into the second half of financial year 2009-10 (estimated)," the investment bank said in a report.