KSE Ltd - Moneycontrol

RESEARCH
CRISIL IER Independent Equity Research
KSE Ltd
Detailed Report
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CRISIL IER Independent Equity Research
Explanation of CRISIL Fundamental and Valuation (CFV) matrix
The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process – Analysis
of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a
five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a fivepoint scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).
CRISIL
Fundamental Grade
Assessment
CRISIL
Valuation Grade
Assessment
5/5
Excellent fundamentals
5/5
Strong upside (>25% from CMP)
4/5
Superior fundamentals
4/5
Upside (10-25% from CMP)
3/5
Good fundamentals
3/5
Align (+-10% from CMP)
2/5
Moderate fundamentals
2/5
Downside (negative 10-25% from CMP)
1/5
Poor fundamentals
1/5
Strong downside (<-25% from CMP)
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Last updated: May, 2013
Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias
the grading recommendation of the company.
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purpose.
KSE
Ltd
s
RESEARCH
Steady growth ahead
Fundamental Grade
3/5 (Good fundamentals)
August 20, 2014
Valuation Grade
3/5 (CMP is aligned)
Industry
Food Products
Fair Value
CMP
CFV MATRIX
Excellent
Fundamentals
Gained market share in FY14; continues to command a premium over peers’ products
KSE has maintained its dominant position in the Kerala cattle feed market; its share improved
marginally by 200 bps in FY14. The company continues to command a premium of 1-2% over
the products of regional peers and domestic players thanks to its widespread distribution
network, sustained quality and after-sales service.
Increase in milk prices in Kerala is a positive; should enhance KSE’s pricing flexibility
Increase in milk prices effective from July 21, 2014 is expected to boost farmers’ affordability.
This will enable them to enhance the usage of cattle feed, thereby increasing milk yield per
bovine. Owing to this development, KSE’s pricing flexibility is expected to increase. This
coupled with expected stable raw material prices should boost margins over the next two
years.
Revenues to grow at 12% CAGR over FY14-16
We expect KSE’s revenues to increase at a two-year CAGR of 12% to ₹10 bn by FY16,
driven by cattle feed volume growth of 7% and realisation growth of 6%. We expect volumes
to increase to 8% and 6% in FY15 and FY16, respectively, compared with 0.5% growth in
FY14 due to an expected improvement in farmers’ affordability. Owing to higher pricing
flexibility, we expect EBITDA margin to improve to 4% in FY15 and 3.7% in FY16 vs. 3.7% in
FY14. PAT is expected to improve to ₹200 mn in FY16 from ₹153 mn in FY14 at a CAGR of
14%.
FY16E
Operating income
5,427
6,978
8,069
9,189
10,137
232
142
299
371
379
EBITDA
4
3
5
Strong
Upside
NIFTY/SENSEX
NSE/BSE ticker
Face value (₹ per share)
Shares outstanding (mn)
Market cap (₹ mn)/(US$ mn)
Enterprise value (₹ mn)/(US$ mn)
52-week range (₹)/(H/L)
Beta
Free float (%)
Avg daily volumes (30-days)
Avg daily value (30-days) (₹ mn)
7875/26314
KSE/KSELTD
10
3.2
1,224/20
1,405/23
409/185
0.4
67.3%
1,235
0.45
SHAREHOLDING PATTERN
100%
90%
70%
60%
67.3%
67.3%
67.3%
67.3%
32.8%
32.7%
32.7%
32.7%
Sep-13
Dec-13
Mar-14
Jun-14
50%
40%
20%
FY15E
2
KEY STOCK STATISTICS
30%
FY14
1
Valuation Grade
KEY FORECAST
FY13
2
1
80%
FY12
3
Poor
Fundamentals
Valuation: The current market price is aligned
We continue to value KSE by the discounted cash flow (DCF) method. In line with the
revision in earnings and growth estimates, we have raised the fair value to ₹345 per share
from ₹280. At the current market price, the valuation grade is 3/5.
(₹ mn)
4
Strong
Downside
Government taking steps to enhance milk production; cattle feed demand to increase
Given the rise in Kerala’s dependency on other states for milk, the state government is taking
steps to enhance milk production and ensure self-sufficiency over the next two-three years.
This is expected to boost demand for cattle feed. Milk production in Kerala has been stagnant
at 1.4% over the past 10 years compared with an all-India average growth of 4.4% due to a
decline in population of bovines and lower yield owing to limited grazing land.
5
Fundamental Grade
KSE Ltd, one of the leading players in the Kerala cattle feed market, has marginally gained
market share in the past one year. A widespread distribution network, sustained quality and
after-sales service have helped it retain its dominant position in Kerala. Going forward, we
expect margins to improve as an increase in milk prices should enhance farmers’ affordability
and increase KSE’s pricing flexibility. However, competition from non-profit organisations and
ability to pass on the rise in raw material prices are monitorables. We maintain the
fundamental grade of 3/5.
₹345
₹383
10%
0%
Promoter
Others
Adj net income
104
45
153
195
200
Adj EPS (₹)
32.6
14.2
47.7
61.0
62.6
111.9
(56.5)
236.0
27.7
2.7
2.9
2.6
5.2
5.4
6.2
RoCE (%)
29.9
14.7
38.4
45.1
39.7
RoE (%)
28.6
11.3
34.2
35.8
30.4
PE (x)
11.7
26.9
8.0
6.3
6.1
ANALYTICAL CONTACT
3.1
6.2
3.0
10.5
2.5
4.6
2.0
3.8
1.7
3.6
Mohit Modi (Director)
[email protected]
Ravi Dodhia
[email protected]
EPS growth (%)
Dividend yield (%)
P/BV (x)
EV/EBITDA (x)
NM: Not meaningful; CMP: Current market price
Source: Company, CRISIL Research estimates
PERFORMANCE VIS-À-VIS MARKET
Returns
KSE
CNX500
1-m
3-m
6-m
12-m
12%
63%
74%
92%
1%
9%
34%
53%
Bhaskar Bukrediwala
[email protected]
Client servicing desk
+91 22 3342 3561
[email protected]
For detailed initiating coverage report please visit: www.ier.co.in
CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.
1
CRISIL IER Independent Equity Research
Table 1: KSE - Business environment
Parameter
Cattle feed
Revenue contribution (FY14)
Revenue contribution (FY16E)
Product offering
Geographic presence
Current market position
End market
Oil cake processing
84%
11%
86%
9%
Compound cattle feed (98% is in the
pellet form, the rest is mash)
De-oiled coconut cake and coconut oil
Kerala: over 40% in FY14
Dominant market share (~90%) in
Tamil Nadu: Less than 5%
Kerala
Dairy farmers (products sold through
dealers)
operative Milk Marketing Federation),
Sales growth two-year CAGR
(FY12-14)
Sales growth three-year
CAGR (FY14-16E)
creams
Highly fragmented industry.
KSE has a miniscule
Dairy farmers
Retail segment
Lazza Ice Creams, Amul,
Local players
Kwality, Pappai, etc.
24%
4%
8%
14%
3%
5%
■
Growing emphasis on balanced cattle nutrition
■
The Kerala government’s initiatives to increase cattle population and achieve self-sufficiency in milk
■
Rising fodder deficit
production
Source: Company, CRISIL Research
2
5%
Milk, milk products and ice
market share
Godrej Agrovet
Demand drivers
5%
Primarily Kerala and Tamil Nadu
Kerala Feeds Ltd, Milma (Kerala CoKey competitors
Dairy
KSE Ltd
RESEARCH
Grading Rationale
Gained market share in the Kerala cattle feed market in FY14
KSE’s wide distribution network, high quality products and after-sales service helped it gain
share in the Kerala cattle feed market; it improved by 200 bps y-o-y to 42% in FY14 (sales
Other leading players include Kerala
Feeds (~30% share) and Milma
(~15%)
volume of 338,750 tonnes per annum).
KSE continues to dominate the private cattle feed market in India. Of the total supply of 6 mn
tonnes of cattle feed in India, co-operative societies have ~70% market share and private
players make up the balance. KSE, with 0.4 mn tonnes volume (including 65,710 tonnes sold
in Tamil Nadu), has market share of 22% amongst private players followed by Godrej Agrovet
with ~20% share (0.35 mn tonnes).
Table 2: Cattle feed market in India
mn tonnes
Cattle feed demand
Less than 10
Cattle feed supply
6.0
Supply by co-operative societies
4.2
Key co-operative society player
Gujarat Co-operative Milk Marketing Federation
1.1
Supply by private players
1.8
Key players
KSE (by sales volume)
Godrej Agrovet (by sales volume)
0.40
0.35
Source: Industry, CRISIL Research
Maintained premium price over peers’ products
Our interaction with dealers highlights that KSE continues to command a premium of 1-2%
over regional peers and domestic players. We believe this is on account of quality products
and after-sales service. An in-house animal nutritionist and a laboratory with experienced
chemists, who are in charge of feed nutrition and quality control, ensure superior product
quality.
Table 3: KSE commands 1-2% premium
Cattle feed players
For 50 kg bag
KSE
₹945
Godrej Agrovet
₹930
Kerala Feeds
Milma
₹910
₹745
(as ₹200 is the subsidy)
Source: Industry, CRISIL Research
3
CRISIL IER Independent Equity Research
State government’s impetus to enhance milk production is a
positive; demand for cattle feed to increase
Kerala is becoming increasingly dependent on other states for its milk requirement as the
production has been stagnant for the past few years. The state government is taking steps to
enhance milk production and achieve self-sufficiency over the next two-three years. Increase
in milk production necessitates better feed for the livestock; hence, the demand for highnutrition cattle feed is expected to increase going forward. KSE and other large players in
Kerala stand to gain from this. While large dairy farms mostly have in-house nutritionists to
prepare cattle feed, small and marginal dairy farmers, who typically have less than 50 cows,
rely on compound cattle feed as they cannot afford an in-house nutritionist. According to the
Kerala Livestock Development Board, ~80% of the livestock farmers in Kerala are marginal
farmers and agricultural labourers.
Table 4: Low fodder availability in Kerala to enhance demand for cattle feed
Total availability of
Total availability of fodder
Bovine population
fodder per day
per day per bovine
(In '000)
('000 tonnes)
(kgs)
Kerala
2,187
7.6
3.5
Karnataka
13,530
97.4
7.2
Tamil Nadu
Gujarat
10,799
14,564
87.5
199.7
8.1
13.7
Source: Livestock census 2003, Indiastat
Kerala lags other states in milk production
Compared with an all-India average milk production growth of 4.4% in the past 10 years,
Kerala reported marginal growth of 1.4% due to the following reasons:
(i) Limited grazing land leads to lower fodder availability of 3.5 kg per day per bovine vs an
average requirement of 8.5 kg.
(ii) Need for better compound cattle feed.
(iii) Declining population of bovines.
4
KSE Ltd
RESEARCH
Table 5: Stagnant milk production in Kerala
Milk production
(mn tonnes)
10-year
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
CAGR
86.2
88.1
92.5
97.1
102.6
107.9
112.2
116.4
121.8
127.9
132.4
4.4%
AP
6.6
7.0
7.3
7.6
7.9
8.9
9.6
10.4
11.2
12.1
12.8
6.8%
Bihar
2.9
3.2
4.7
5.1
5.5
5.8
5.9
6.1
6.5
6.6
6.8
9.1%
Gujarat
6.1
6.4
6.7
7.0
7.5
7.9
8.4
8.8
9.3
9.8
10.3
5.4%
Haryana
5.1
5.2
5.2
5.3
5.4
5.4
5.7
6.0
6.3
6.7
7.0
3.2%
Karnataka
4.5
3.9
3.9
4.0
4.1
4.2
4.5
4.8
5.1
5.4
5.7
2.3%
Kerala
2.4
2.1
2.0
2.1
2.1
2.3
2.4
2.5
2.6
2.7
2.8
1.4%
MP
5.3
5.4
5.5
6.3
6.4
6.6
6.9
7.2
7.5
8.1
8.8
5.2%
Maharashtra
6.2
6.4
6.6
6.8
7.0
7.2
7.5
7.7
8.0
8.5
8.7
3.4%
Punjab
8.2
8.4
8.6
8.9
9.2
9.3
9.4
9.4
9.4
9.6
9.7
1.7%
Rajasthan
7.8
8.1
8.3
8.7
10.3
11.4
11.9
12.3
13.2
13.5
13.9
6.0%
TN
4.6
4.8
4.8
5.5
6.3
6.5
6.7
6.8
6.8
7.0
7.0
4.2%
UP
15.3
15.9
16.5
17.4
18.1
18.9
19.5
20.2
21.0
22.6
23.3
4.3%
Others
11.1
11.4
12.4
12.6
12.9
13.5
13.8
14.1
14.7
15.3
15.4
3.3%
India
Source: National Diary Development Board
Increase in milk prices to improve farmers’ affordability; to
benefit KSE
Price hike of ₹3 per litre in milk with effect from July 21, 2014 in Kerala is expected to benefit
cattle feed manufacturers, including, KSE as farmers’ affordability would improve. We expect
volume growth to improve to 6.5% over the next two years from 0.5% in FY14. The hike in
milk prices has come after more than a year; it was last increased by Re 1 in January 2013.
Since milk prices have a direct bearing on food inflation, state-co-operatives are under
pressure not to increase milk prices. While milk prices were stable in the past one year,
farmers had to face the brunt of a rise in key cattle feed raw material prices, including rice
bran and maize. Due to high cattle feed prices (up 14% y-o-y), farmers were hesitant to give
high price cattle feed to bovines, as was indicated by marginal volume growth of 1.8% (in
Kerala) reported by KSE. With farmers expected to get 80% benefit of the ₹3 price rise in milk,
we expect them to increase the usage of cattle feed which would enhance milk yield per
bovine.
5
CRISIL IER Independent Equity Research
Figure 1: Milk prices in Kerala increased after six quarters
(₹ per litre)
40
Milk prices in Kerala increased to
35
₹38 per litre
30
25
20
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
Q4FY12
Q3FY12
Q2FY12
Q1FY12
Q4FY11
Q3FY11
Q2FY11
Q1FY11
15
Milk price
Source: Industry, CRISIL Research
Expect volumes and realisation growth of ~7% during FY14-16
Owing to rise in milk prices and improvement in farmers’ affordability, volumes and
realisations are expected to increase over the next two years. We expect volumes to record a
two-year CAGR of 7% to 0.46 mn tonnes by FY16; realisations are expected to register a twoyear CAGR of 6.2% to ~₹19,058 per MT by FY16.
Figure 2: Expect higher volume growth during FY14-16
Figure 3: Realisations to increase by 6.2% in next two years
(₹/tonne)
('000 tonnes)
20%
500
12%
400
15%
9%
350
8%
6%
300
250
100
50
20%
10%
15%
15,000
10,000
0%
-5%
286
320
366
399
401
433
FY10
FY11
FY12
FY13
Cattle feed sales volume
FY14
FY15E
FY16E
y-o-y growth (RHS)
Source: Company, CRISIL Research
10%
8%
8%
6%
5%
5%
5,000
459
-10%
14%
9%
0%
-
10,537
11,398
12,043
14,768
16,884
18,150
19,058
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
0%
Cattle feed realisations
Source: Company, CRISIL Research
Pricing flexibility to increase; margins to get a boost
We expect KSE’s pricing flexibility to also improve going forward for the reasons mentioned
above. This coupled with expected stable raw material prices should boost margins – we
expect EBITDA margin to improve to 4% and 3.7% in FY15 and FY16, respectively, from 3.6%
in FY14. In the past, its margins have been highly volatile due to limited pricing flexibility and
rising raw material prices. Its peers Kerala Feeds and Milma, not driven by the profit
maximisation motive, have kept cattle feed prices stable. This and the government’s control on
6
25%
20,000
5%
1%
200
150
23%
25,000
14%
450
y-o-y growth (RHS)
KSE Ltd
RESEARCH
milk prices restrained KSE from raising prices to combat the pressure from increase in raw
material prices.
Figure 4: EBITDA margin volatile in the past; expected to improve in FY15
(₹ mn)
400
350
6%
5.0%
5.1%
5%
4.3%
300
4.0%
3.3%
250
3.7%
3.2%
3.3%
3.7%
3%
200
150
2%
2.0%
100
1%
1.2%
95
117
189
148
232
142
299
371
379
EBITDA
FY16E
FY15E
FY14
FY13
FY12
FY11
FY10
0%
FY09
FY06
-
34
FY08
121
FY07
50
4%
EBITDA margin (RHS)
Source: Industry, CRISIL Research
Table 6: KSE’s realisation growth was lower than that of raw materials
Four-year
₹/kg
FY09
FY10
FY11
FY12
FY13
FY14
CAGR
Rice bran cost
7.1
8.2
9.2
8.8
11.9
13.4
13%
Maize cost
9.2
9.3
10.5
12.6
14.3
14.8
10%
De-oiled coconut cake
Cattle feed realisation
12.3
9.7
10.8
10.5
13.4
11.4
15.9
12.0
NA
14.8
NA
16.9
NA
12%
Source: Company, CRISIL Research
More-than-expected rise in raw material costs could impact
margins
We have assumed 5% increase in raw material costs in the next two years. Over the past two
years, there has been a steep rise in the prices of cereal by-products, maize, oilseeds and oil
cakes. Some of the major factors driving the increase in the prices of these products are
stagnating food grain production, grains being used to manufacture bio-fuels and failure of
crops. If raw material prices increase more than our expectations of 5%, KSE’s margins could
be impacted.
7
CRISIL IER Independent Equity Research
Key Risks
High exposure to Kerala – regional concentration
Given that Kerala accounts for more than 80% of the total sales volume, KSE is exposed to
the regional concentration risk. Any untoward incidence or change in regulations by the Kerala
government with respect to cattle feed and milk prices could impact financial performance
and, consequently, valuation.
Lower-than-expected momentum in enhancing milk production
While the Kerala government has been taking initiatives to enhance milk production, growth in
the past few years has been marginal. Going forward, we expect milk production to increase
at a higher-than-historical average; lower-than-expected momentum would have an impact on
revenue and margin estimates.
8
KSE Ltd
RESEARCH
Financial Outlook
Revenues to grow at a two-year CAGR of 12%
We expect revenues to increase at a two-year CAGR of 12.1% to ₹10.1 bn by FY16 driven by
growth in cattle feed. We expect cattle feed revenues to increase at a two-year CAGR of
13.7% to ₹8.8 bn by FY16 driven by 7% growth in volumes and 6.2% growth in realisations.
The contribution of cattle feed to the top line is expected to increase to 86% in FY16 from 84%
in FY14.
Figure 5: Healthy revenue growth over the next two years
(₹ mn)
Figure 6: Cattle feed contribution to increase
100%
12,000
35%
29%
30%
10,000
8,000
25%
19%
20%
16%
6,000
14%
10%
2,000
5%
5,427
6,978
8,069
9,189
40%
FY13
FY14
FY15E
5%
5%
11%
10%
9%
81%
85%
84%
86%
86%
FY12
FY13
FY14
FY15E
FY16E
20%
0%
Cattle feed
0%
Revenues
5%
15%
60%
10,137
FY12
3%
12%
15%
10%
4,000
80%
4%
FY16E
Oil cake processing (de-oiled coconut cake and coconut oil)
Dairy (milk and ice cream)
% growth y-o-y (RHS)
Source: Company, CRISIL Research
Source: Company, CRISIL Research
EBITDA margin to improve; PAT to grow at a two-year CAGR of
14%
EBITDA margin to improve to
EBITDA margin is expected to increase to 4% in FY15 and 3.7% in FY16 from 3.7% in FY14
4% in FY15 from 3.6% in FY14
due to an expected increase in KSE’s pricing flexibility owing to a rise in milk prices. Driven by
revenue growth and improvement in EBITDA margin, we expect PAT to grow at a two-year
CAGR of 14% to ₹200 mn in FY16.
Figure 7: EBITDA margin to improve during FY14-16
Figure 8: PAT to register healthy growth
(₹ mn)
(₹ mn)
400
6%
5.0%
5%
4.3%
300
3.7%
3.2%
3.3% 3.3%
250
4.0% 3.7%
200
2.1%
1.9%
2%
1%
117
1.5%
100
189
148
232
142
299
371
379
Source: Company, CRISIL Research
EBITDA margin (RHS)
FY16E
FY15E
FY14
FY13
FY12
FY11
FY10
EBITDA
1.0%
0.7%
50
0%
FY09
FY08
FY06
-
1.2%
95
34
FY07
121
2.0%
150
2.0%
100
1.9%
200
2.5%
2.0%
4%
3%
150
50
250
5.1%
350
0.5%
104
47
154
195
200
FY12
FY13
FY14
FY15E
FY16E
0
0.0%
PAT
PAT margin (RHS)
Source: Company, CRISIL Research
9
CRISIL IER Independent Equity Research
Return ratios to remain healthy
Due to a less capital intensive business and limited working capital requirements, KSE has
had healthy return ratios in the past. Driven by healthy revenue growth and improvement in
margins, we expect RoCE to improve to 39.7% in FY16 from 38.4% in FY14. RoE is expected
to decline marginally to 30.4% in FY16 from 34.2% in FY14.
Figure 9: Healthy return ratios
(%)
50
45.1
45
35
29.9
30
25
39.7
38.4
40
34.2
35.8
30.4
28.6
20
14.7
15
10
11.3
5
0
FY12
FY13
FY14
RoE
FY15E
FY16E
RoCE
Source: Industry, CRISIL Research
Q1FY15 results snapshot
■
Revenues increased 9.1% y-o-y and 4.4% q-o-q to ₹2,161 mn. The animal feed division’s
revenues (77% of total sales) grew 4.6% y-o-y and 8.2% q-o-q to ₹1,804 mn.
■
EBITDA margin expanded by 158 bps y-o-y to 3.2% due to lower raw material cost.
Sequentially, EBITDA margin was down 180 bps.
■
PAT grew 155.6% y-o-y to ₹29 mn driven by revenue growth and improvement in
EBITDA margin. The company reported EPS of ₹9.1 in Q1FY15 vs ₹3.6 in Q1FY14.
10
KSE Ltd
RESEARCH
Earnings Estimates Revised Upwards
FY15E
Unit
Old
New
FY16E
% change
Old
New
% change
Operating income
(₹ mn)
8,501
9,189
8.1
9,060
10,137
EBITDA
(₹ mn)
258
371
43.7
266
379
11.9
42.4
EBITDA margin
%
3.0%
4.0%
100bps
2.9%
3.7%
80bps
PAT
(₹ mn)
PAT margin
EPS
%
₹
122
195
59.4
128
200
56.6
1.4%
2.1%
68bps
1.4%
2.0%
56bps
38.2
61.0
59.4
40.0
62.6
56.6
Source: CRISIL Research estimates
Line item
FY15E
Revenues
Raised factoring in increase in milk price in Kerala and improvement in
FY16E
farmers' affordability
EBITDA margins
Raised factoring in higher realisations and expected stable raw material
prices
PAT
Raised in line with revision in revenue and margin estimates
11
CRISIL IER Independent Equity Research
Management Overview
CRISIL’s fundamental grading methodology includes a broad assessment of management
quality, apart from other key factors such as industry and business prospects, and financial
performance.
Well-established record in the cattle feed business
The promoters, Mr M.C. Paul (Chairman and Managing Director) and Mr A.P. George, are
from families engaged in running coconut oil mills. The management possesses three
decades of experience in the cattle feed industry; KSE’s first cattle feed plant was
commissioned in 1976.
Experienced second line
The second line of management has been associated with KSE for a fairly long time. The
company prefers to hire personnel from the vicinity, which typically helps check employee
attrition.
■
Mr Anand Menon, Chief General Manager, has been with KSE since 1977. Currently, he
is the President of Cochin Chamber of Commerce.
■
Other key personnel include Mr Cherian V. Vattathara – Chief Marketing Manager (joined
KSE in 1999), Mr A.I. John – Chief Purchase Manager (joined KSE in 1999) and Dr V. V.
Raji – Chief Nutritionist (joined KSE recently after retiring from the Department of Animal
Husbandry, Kerala).
■
Dr. George Mathan (earlier Chief Nutritionist) is now a consultant nutritionist to the
company.
Challenges in scaling up the ice cream business
Though KSE has achieved considerable success in scaling up its cattle feed business over
the past three decades, the management was not successful in the milk processing business
which was started in 2000. After making losses for eight years, KSE was able to turn around
its dairy division in FY08 by scaling down volumes and increasing ice cream production in
2002. However, the management is likely to face many challenges in its attempts to increase
the market share as ice cream is a highly competitive business.
12
KSE Ltd
RESEARCH
Corporate Governance
CRISIL’s fundamental grading methodology includes a broad assessment of corporate
governance and management quality, apart from other key factors such as industry and
business prospects, and financial performance. In this context, CRISIL Research analyses
shareholding structure, board composition, typical board processes, disclosure standards and
related-party transactions. Any qualifications by regulators or auditors also serve as useful
inputs while assessing a company’s corporate governance.
Corporate governance practices at KSE are average supported by a fairly independent board.
However, the board is closely held.
Closely-held board
All directors (independent and non-independent) on the board either belong to the promoter
group or are associated with the promoter group. The board comprises 10 members, of whom
Corporate governance
six are independent directors. The board is chaired by Mr M. C. Paul, Managing Director. The
practices are average
composition of the board meets the requirement under Clause 49 of SEBI’s listing guidelines
(where 50% of the directors must be independent when the chairman of the board is
executive).
Board processes
The company has various committees – audit, remuneration and investors’ grievance - in
place to support corporate governance practices. The audit committee consists of
independent directors and it meets at regular intervals (met four times in FY14). Most of the
independent directors have been on the board for more than a decade. Our interactions with
independent directors indicate that they are well aware of the business and are fairly engaged
in all the major decisions.
High dividend payout, good quality of earnings
KSE has been able to maintain a healthy dividend payout ratio of 40%+; this is a positive for
minority shareholders. In our opinion, KSE’s quality of earnings is good – it has generated
healthy cash from operations on a regular basis over the past few years.
Long tenure of auditors
The current auditors – M/s Varma and Varma – have been associated with the company for
more than nine years. The long tenure may limit their objectivity and independence.
13
CRISIL IER Independent Equity Research
Valuation
Grade: 3/5
We continue to value KSE by the DCF method. In line with the revision in earnings and growth
estimates, we have revised the fair value to ₹345 per share from ₹280. At the current market
price, the valuation grade is 3/5.
Key DCF assumptions
■
We have considered the discounted value of the firm’s estimated free cash flows from
FY16 to FY22.
■
We have assumed a terminal growth rate of 2.5% beyond the explicit forecast period until
FY22.
WACC computation
Cost of equity
Cost of debt (post tax)
WACC
FY14-18
Terminal value
19.2%
19.2%
8.4%
8.4%
15.9%
17.1%
Terminal growth rate
2.5%
Terminal WACC
Terminal growth rate
1.5%
2.0%
2.5%
3.0%
3.5%
15.1%
376
384
393
403
413
16.1%
353
360
367
375
383
17.1%
333
339
345
351
358
18.1%
317
321
326
332
337
19.1%
303
307
311
315
320
One-year forward P/E band
One-year forward EV/EBITDA band
(₹)
(₹ mn)
900
2,500
800
2,000
700
600
1,500
500
400
1,000
300
200
500
100
KSE
Source: NSE, CRISIL Research
14
4x
6x
10x
EV
4x
Source: NSE, CRISIL Research
5x
6x
Mar-14
Aug-14
Apr-13
Sep-13
Jun-12
Nov-12
Jan-12
Jul-11
Feb-11
Apr-10
Sep-10
Nov-09
May-09
Jul-08
Dec-08
Feb-08
Apr-07
0
Sep-07
Mar-14
Aug-14
Apr-13
8x
Sep-13
Jun-12
Nov-12
Jul-11
Jan-12
Feb-11
Apr-10
2x
Sep-10
Nov-09
May-09
Jul-08
Dec-08
Feb-08
Sep-07
Apr-07
0
7x
KSE Ltd
RESEARCH
P/E – premium / discount to CNX 500
P/E movement
(Times)
40%
18
20%
16
0%
14
-20%
12
-40%
10
+1 std dev
8
-60%
6
-1 std dev
Source: NSE, CRISIL Research
Share price movement
Fair value movement since initiation
(₹)
250
200
('000)
450
4.0
400
3.5
350
3.0
300
150
2.5
250
2.0
200
100
1.5
150
KSE
CNX 500
Total Traded Quantity (RHS)
CRISIL Fair Value
Aug-14
Jul-14
May-14
Mar-14
Feb-14
Dec-13
Nov-13
Sep-13
Jul-13
Jun-13
Mar-13
Feb-13
0.0
Jan-13
0.5
0
Dec-12
1.0
50
Oct-12
Aug-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
0
100
Sep-12
50
Aug-14
Median PE
Source: NSE, CRISIL Research
300
Mar-14
Apr-13
Sep-13
Jun-12
1yr Fwd PE (x)
Median premium/discount to CNX 500
Nov-12
Jul-11
Jan-12
Feb-11
Sep-10
Apr-10
Nov-09
Dec-08
May-09
Jul-08
Premium/Discount to CNX 500
Feb-08
Apr-07
0
Sep-07
Mar-14
Aug-14
Sep-13
Apr-13
Jun-12
Nov-12
Jul-11
Jan-12
Feb-11
Apr-10
Sep-10
Jun-09
Nov-09
Jul-08
Dec-08
Feb-08
2
Apr-07
4
-100%
Sep-07
-80%
KSE
-Indexed to 100
Source: NSE, CRISIL Research
Source: NSE, BSE, CRISIL Research
CRISIL IER reports released on KSE Ltd
Valuation
CMP
Date
Nature of report
Fundamental
grade
Fair value
grade
(on the date of report)
13-Sep-12
Initiating coverage
3/5
₹227
3/5
₹220
07-Nov-12
Q2FY13 result update
3/5
₹220
3/5
₹227
06-Mar-13
Q3FY13 result update
3/5
₹220
3/5
₹211
11-June-13
Q4FY13 result update
3/5
₹220
3/5
₹219
26-Aug-13
Q1FY14 result update
3/5
₹220
3/5
₹200
27-Nov-13
Q2FY14 result update
3/5
₹208
3/5
₹186
24-Jan-14
Detailed Report
3/5
₹227
4/5
₹195
03-Mar-14
Q3FY14 result update
3/5
₹227
3/5
₹238
25-June-14
Q4FY14 result update
3/5
₹280
2/5
₹330
20-Aug-14
Detailed Report
3/5
₹345
3/5
₹383
15
CRISIL IER Independent Equity Research
Company Overview
Incorporated in 1972, KSE began operations by setting up Kerala’s first solvent extraction
plant to extract coconut oil. In 1976, it set up a plant to manufacture ready-mixed cattle feed. It
increased cattle feed capacity to 399,247 tpa in FY13 from 178,500 tpa in FY09 and has
emerged as an established cattle feed supplier in Kerala with more than 40% share (by sales
volume). In 2002, it started producing ice cream.
Milestones
1972
Began operations by setting up a 40 tpd solvent extraction plant in Irinjalakuda, Kerala
1976
Set up a 50 tpd ready-mixed cattle feed plant in Irinjalakuda
1988
Commissioned a new cattle feed plant of 100 tpd capacity in Swaminathapuram, Tamil Nadu
1996
Commissioned a new cattle feed plant of 240 tpd capacity in Vedagiri, Kerala
1998
Acquired a cattle feed manufacturing unit in Palakkad, Kerala
2000
Began procuring, processing and marketing milk and milk products
2002
Launched VESTA ice cream
2003
Started production of cattle feed in a leased plant in Edayar, Kerala
2006
Commissioned 200 tpd solvent extraction plant in Koratty. Dismantled solvent plant in Irinjalakuda
2008
Commissioned an ice cream production unit in Thalaiyuthu, Tamil Nadu
2009
Commissioned a new cattle feed plant of 500 tpd capacity in Irinjalakuda
2010
Commissioned an ice cream production unit in Vedagiri
Source: Company
16
KSE Ltd
RESEARCH
Annexure: Financials
Income statement
(₹ m n)
Operating incom e
EBITDA
EBITDA m argin
Depreciation
EBIT
Interest
Operating PBT
Other income
Exceptional inc/(exp)
PBT
Tax provision
Minority interest
PAT (Reported)
Less: Exceptionals
Adjusted PAT
Balance Sheet
FY12
5,427
232
4.3%
46
186
30
156
3
0
159
54
104
0
104
FY13
6,978
142
2.0%
42
100
37
63
3
1
67
21
47
1
45
FY14
8,069
299
3.7%
38
261
30
231
3
1
235
82
154
1
153
FY15E
9,189
371
4.0%
39
332
34
298
2
300
105
195
195
FY16E
10,137
379
3.7%
41
338
32
306
2
308
108
200
200
FY12
FY13
FY14
FY15E
FY16E
Ratios
Grow th
Operating income (%)
EBITDA (%)
Adj PAT (%)
Adj EPS (%)
19.5
57.3
111.9
111.9
28.6
(38.6)
(56.5)
(56.5)
15.6
109.5
236.0
236.0
13.9
24.2
27.7
27.7
10.3
2.1
2.7
2.7
Profitability
EBITDA margin (%)
Adj PAT Margin (%)
RoE (%)
RoCE (%)
RoIC (%)
4.3
1.9
28.6
29.9
23.9
2.0
0.7
11.3
14.7
13.4
3.7
1.9
34.2
38.4
28.9
4.0
2.1
35.8
45.1
32.9
3.7
2.0
30.4
39.7
28.8
Valuations
Price-earnings (x)
Price-book (x)
EV/EBITDA (x)
EV/Sales (x)
Dividend payout ratio (%)
Dividend yield (%)
11.7
3.1
6.2
0.3
33.7
2.9
26.9
3.0
10.5
0.2
68.8
2.6
8.0
2.5
4.6
0.2
41.6
5.2
6.3
2.0
3.8
0.2
34.0
5.4
6.1
1.7
3.6
0.1
37.6
6.2
B/S ratios
Inventory days
Creditors days
Debtor days
Working capital days
Gross asset turnover (x)
Net asset turnover (x)
Sales/operating assets (x)
Current ratio (x)
Debt-equity (x)
Net debt/equity (x)
Interest coverage
29
7
0
17
7.6
15.2
14.7
2.7
0.7
0.5
6.2
26
9
0
15
9.2
19.0
18.7
2.4
0.7
0.7
2.7
24
9
0
12
10.1
21.6
21.4
2.0
0.3
0.3
8.7
28
9
0
17
11.2
25.7
25.5
2.6
0.4
0.3
9.9
28
9
0
18
11.9
28.7
28.4
2.7
0.2
0.2
10.6
FY12
32.6
47.0
124.1
11.0
3.2
FY13
14.2
27.4
127.2
10.0
3.2
FY14
47.7
59.5
151.8
20.0
3.2
FY15E
61.0
73.1
188.5
20.7
3.2
FY16E
62.6
75.3
223.6
23.5
3.2
Per share
Adj EPS (₹)
CEPS
Book value
Dividend (₹)
Actual o/s shares (mn)
(₹ m n)
Liabilities
Equity share capital
Reserves
Minorities
Net w orth
Convertible debt
Other debt
Total debt
Deferred tax liability (net)
Total liabilities
Assets
Net fixed assets
Capital WIP
Total fixed assets
Investm ents
Current assets
Inventory
Sundry debtors
Loans and advances
Cash & bank balance
Marketable securities
Total current assets
Total current liabilities
Net current assets
Intangibles/Misc. expenditure
Total assets
FY12
FY13
FY14
FY15E
FY16E
32
365
397
262
262
18
678
32
375
407
299
299
17
723
32
454
486
167
167
16
668
32
571
603
217
217
16
836
32
683
715
165
165
16
896
346
9
355
5
387
4
391
6
360
3
363
5
356
3
359
5
352
3
355
5
415
2
27
54
498
186
312
5
678
474
3
42
33
552
230
322
4
723
497
2
58
27
584
287
297
3
668
655
4
66
31
755
287
468
3
836
736
4
82
28
850
317
533
3
896
FY12
159
(57)
46
(67)
81
FY13
66
(22)
42
(32)
55
FY14
234
(83)
38
19
208
FY15E
300
(105)
39
(167)
67
FY16E
308
(108)
41
(67)
174
(25)
(5)
(30)
(77)
(0)
(78)
(8)
0
(7)
(35)
(35)
(37)
(37)
-
37
(37)
2
(133)
(75)
1
-
10
(41)
0
50
(78)
0
(52)
(88)
0
(31)
20
54
2
(21)
33
(207)
(6)
27
(28)
4
31
(140)
(3)
28
Cash flow
(₹ m n)
Pre-tax profit
Total tax paid
Depreciation
Working capital changes
Net cash from operations
Cash from investm ents
Capital expenditure
Investments and others
Net cash from investm ents
Cash from financing
Equity raised/(repaid)
Debt raised/(repaid)
Dividend (incl. tax)
Others (incl extraordinaries)
Net cash from financing
Change in cash position
Closing cash
Quarterly financials
(₹ m n)
Net Sales
Change (q-o-q)
EBITDA
Change (q-o-q)
EBITDA m argin
PAT
Adj PAT
Change (q-o-q)
Adj PAT m argin
Adj EPS
Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15
1,980
1,990
2,029
2,069
2,161
7%
1%
2%
2%
4%
32
41
114
104
69
-74.5%
28.0% 176.1%
-9.3%
-33%
3%
1.6%
2.1%
5.6%
5.0%
11
17
66
59
29
11
17
66
59
29
-84.7%
46.4% 295.8% -10.9%
-51%
1.4%
0.6%
0.8%
3.3%
2.9%
3.6
5.2
20.7
18.5
9.1
#Abridged financials
Source: CRISIL Research
17
CRISIL IER Independent Equity Research
Focus Charts
Milk prices in Kerala increased after six quarters
Cattle feed contribution to increase over the next two years
(₹ per litre)
100%
40
80%
4%
3%
5%
5%
5%
15%
12%
11%
10%
9%
81%
85%
84%
86%
86%
FY12
FY13
FY14
FY15E
FY16E
35
60%
30
40%
25
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
Q4FY12
Q3FY12
Q2FY12
Q1FY12
Q4FY11
0%
Q3FY11
15
Q2FY11
20%
Q1FY11
20
Cattle feed
Oil cake processing (de-oiled coconut cake and coconut oil)
Milk price
Dairy (milk and ice cream)
Source: Company, CRISIL Research
Source: Company, CRISIL Research
EBITDA margin to improve from FY14 levels
PAT to record healthy growth
(₹ mn)
400
(₹ mn)
6%
5.0%
350
5%
4.3%
300
3.7%
3.2%
3.3% 3.3%
250
4.0% 3.7%
200
1.9%
2%
117
FY09
189
148
232
142
299
371
379
FY16E
FY15E
FY14
FY13
FY12
FY11
FY10
EBITDA
1.5%
100
1.0%
0.7%
0.5%
50
104
47
154
195
200
FY12
FY13
FY14
FY15E
FY16E
0.0%
0
PAT
EBITDA margin (RHS)
PAT margin (RHS)
Source: Company, CRISIL Research
Source: Company, CRISIL Research
Strong return ratios
Share price performance
(%)
300
50
45.1
45
250
200
29.9
30
25
39.7
38.4
40
35
2.0%
150
0%
FY08
FY06
-
1%
1.2%
95
34
FY07
121
2.0%
1.9%
200
2.0%
100
2.5%
2.1%
4%
3%
150
50
250
5.1%
34.2
35.8
20
150
30.4
28.6
100
14.7
15
50
10
11.3
KSE
-Indexed to 100
Source: Company, CRISIL Research
18
Source: Company, CRISIL Research
CNX 500
Aug-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
FY16E
RoCE
Jul-10
FY15E
Jan-10
FY14
RoE
Jul-09
FY13
Jan-09
FY12
Jul-08
0
0
Jan-08
5
RESEARCH
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CRISIL IER Independent Equity Research
CRISIL Research Team
President
Mukesh Agarwal
CRISIL Research
+91 22 3342 3035
[email protected]
Analytical Contacts
Sandeep Sabharwal
Senior Director, Capital Markets
+91 22 4097 8052
[email protected]
Prasad Koparkar
Senior Director, Industry & Customised Research
+91 22 3342 3137
[email protected]
Binaifer Jehani
Director, Customised Research
+91 22 3342 4091
[email protected]
Manoj Mohta
Director, Customised Research
+91 22 3342 3554
[email protected]
Sudhir Nair
Director, Customised Research
+91 22 3342 3526
[email protected]
Mohit Modi
Director, Equity Research
+91 22 4254 2860
[email protected]
Jiju Vidyadharan
Director, Funds & Fixed Income Research
+91 22 3342 8091
[email protected]
Ajay D'Souza
Director, Industry Research
+91 22 3342 3567
[email protected]
Ajay Srinivasan
Director, Industry Research
+91 22 3342 3530
[email protected]
Rahul Prithiani
Director, Industry Research
+91 22 3342 3574
[email protected]
Business Development
Hani Jalan
Director, Capital Markets
+91 22 3342 3077
[email protected]
Prosenjit Ghosh
Director, Industry & Customised Research
+91 22 3342 8008
[email protected]
Business Development – Equity Research
Vikram Thirani – Associate Director
Email : [email protected]
Phone : +91 9820199188
Saurabh Sabharwal – Business Development Manager
Email : [email protected]
Phone : +91 9650228684
Priyanka Murarka – Regional Manager
Email : [email protected]
Phone : +91 9903060685
RESEARCH
Our Capabilities
Making Markets Function Better
Economy and Industry Research
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Largest team of economy and industry research analysts in India
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Coverage on 70 industries and 139 sub-sectors; provide growth forecasts, profitability analysis, emerging trends,
expected investments, industry structure and regulatory frameworks
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90 per cent of India’s commercial banks use our industry research for credit decisions
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Special coverage on key growth sectors including real estate, infrastructure, logistics, and financial services
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Inputs to India’s leading corporates in market sizing, demand forecasting, and project feasibility
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Published the first India-focused report on Ultra High Net-worth Individuals
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All opinions and forecasts reviewed by a highly qualified panel with over 200 years of cumulative experience
Funds and Fixed Income Research
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Largest and most comprehensive database on India’s debt market, covering more than 15,000 securities
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Largest provider of fixed income valuations in India
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Value more than ₹53 trillion (US$ 960 billion) of Indian debt securities, comprising outstanding securities
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Sole provider of fixed income and hybrid indices to mutual funds and insurance companies; we maintain 12
standard indices and over 100 customised indices
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Ranking of Indian mutual fund schemes covering 70 per cent of assets under management and ₹4.7 trillion
(US$ 85 billion) by value
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Retained by India’s Employees’ Provident Fund Organisation, the world’s largest retirement scheme covering
over 60 million individuals, for selecting fund managers and monitoring their performance
Equity and Company Research
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Largest independent equity research house in India, focusing on small and mid-cap companies; coverage
exceeds 125 companies
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Released company reports on 1,442 companies listed and traded on the National Stock Exchange; a global first
for any stock exchange
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First research house to release exchange-commissioned equity research reports in India
Assigned the first IPO grade in India
Our Office
Ahmedabad
706, Venus Atlantis
Nr. Reliance Petrol Pump
Prahladnagar, Ahmedabad, India
Phone: +91 79 4024 4500
Fax: +91 79 2755 9863
Hyderabad
3rd Floor, Uma Chambers
Plot No. 9&10, Nagarjuna Hills,
(Near Punjagutta Cross Road)
Hyderabad - 500 482, India
Phone: +91 40 2335 8103/05
Fax: +91 40 2335 7507
Bengaluru
W-101, Sunrise Chambers,
22, Ulsoor Road,
Bengaluru - 560 042, India
Phone: +91 80 2558 0899
+91 80 2559 4802
Fax: +91 80 2559 4801
Kolkata
Horizon, Block 'B', 4th Floor
57 Chowringhee Road
Kolkata - 700 071, India
Phone: +91 33 2289 1949/50
Fax: +91 33 2283 0597
Chennai
Thapar House,
43/44, Montieth Road, Egmore,
Chennai - 600 008, India
Phone: +91 44 2854 6205/06
+91 44 2854 6093
Fax: +91 44 2854 7531
Pune
1187/17, Ghole Road,
Shivaji Nagar,
Pune - 411 005, India
Phone: +91 20 2553 9064/67
Fax: +91 20 4018 1930
Gurgaon
Plot No. 46
Sector 44
Opp. PF Office
Gurgaon - 122 003, India
Phone: +91 124 6722 000
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CRISIL Limited
CRISIL House, Central Avenue,
Hiranandani Business Park, Powai, Mumbai – 400076. India
Phone: +91 22 3342 3000 | Fax: +91 22 3342 8088
www.crisil.com
CRISIL Ltd is a Standard & Poor's company