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Kesoram Industries– 2QFY2011 Result Update
Angel Broking maintains a Buy on Kesoram Industries with a Target Price of Rs424.
Kesoram Industries (Kesoram) posted net loss of `33cr during the quarter, on
account of a steep 20% decline in cement prices in the southern region and surge
in rubber prices (up 72% yoy), a key raw material used in manufacturing tyres.
Going ahead, the performance of the cement division is expected to improve due
to the improving demand scenario in the southern region and improvement in
realisations post the recent cement price hike, while the tyre division would face
margin pressures due to high rubber prices. We maintain Buy on the stock.
Net loss of `33cr due to poor operational performance: Kesoram’s 2QFY2011
top line grew by 9.3% yoy to `1,252cr, aided by a 16.3% increase in the tyre
division’s revenue. Growth in the tyre division was on account of 70tpd of
additional capacity in the Uttarakhand plant. However, the cement division’s
revenue declined by 9.1% yoy. The company’s OPM fell by 1,372bp yoy to 4.5%,
primarily due to fall in cement realisations and higher rubber prices, which is a
major raw material used in manufacturing tyres. The company reported net loss
of `33cr during the quarter, primarily due to poor operating performance and
higher interest and depreciation costs.
Outlook and valuation: We have valued the cement business at EV/tonne of
US $65, which is at a considerable discount to its replacement cost of
US $80/tonne. The tyre business has been valued at `2cr/tpd. We maintain our
Buy view on the stock with a revised SOTP Target Price of `424 (`437) due to
revision in earnings estimates.
Investment arguments
Favourable regional exposure: Kesoram’s relative proximity to the western markets
(40% of the cement division’s revenue is derived from Maharashtra) is expected to
cushion its cement operations from the short-term demand-supply mismatch likely
to prevail in the south. Even in the south, we expect demand to start improving
from 2HFY2011E with the political situation in Andhra Pradesh improving, which
would result in increased government spending on infrastructure and
housing projects.
Poised to capitalise on presence in high-margin, high-growth T&B radial segment:
Kesoram is in the expansion phase in the emerging T&B radial segment in its bid
to capitalise on the prevailing scarce supply situation. The company expects to
ramp up capacity from 140tpd (FY2010) to 225tpd by end-FY2011E, taking its
T&B radial capacity to 23% of its overall FY2011E tyre capacity, one of the highest
in the industry.
Valuation
On the valuation front, currently the country’s large pure cement players such as
ACC, Ambuja and UltraTech are trading at US $120–170 on FY2012E capacity.
In case of Kesoram, despite its well-spread geographic presence and superior
realisations, we have valued its cement business at EV/tonne of US $65, which is
at a considerable discount to its replacement cost of US $80/tonne, and
almost at par with the current valuations of its southern peers, India Cements
and Madras Cements. The tyre business is currently trading at an implied
EV/tpd of `1.4cr, which is at 30–60% discount to peers, Apollo Tyres
(`3.6cr/tpd) and JK Tyre (`2.0cr/tpd). For our target price, we have assigned a
target EV/tpd of `2cr (also at a discount to peers) for the company's tyre
business. The captive power plants (CPP) have been assigned a value of
`4cr/MW. Rayon and other businesses have been valued at mcap-to-sales
of 1x. We have arrived at a revised SOTP Target Price of `424 (`437) due to
revision in earnings estimates. We continue to maintain our Buy rating on
the stock.
Investment arguments
Favourable regional exposure: Kesoram’s relative proximity to the western markets
(40% of the cement division’s revenue is derived from Maharashtra) is expected to
cushion its cement operations from the short-term demand-supply mismatch likely
to prevail in the south. Even in the south, we expect demand to start improving
from 2HFY2011E with the political situation in Andhra Pradesh improving, which
would result in increased government spending on infrastructure and
housing projects.
Poised to capitalise on presence in high-margin, high-growth T&B radial segment:
Kesoram is in the expansion phase in the emerging T&B radial segment in its bid
to capitalise on the prevailing scarce supply situation. The company expects to
ramp up capacity from 140tpd (FY2010) to 225tpd by end-FY2011E, taking its
T&B radial capacity to 23% of its overall FY2011E tyre capacity, one of the highest
in the industry.
Valuation
On the valuation front, currently the country’s large pure cement players such as
ACC, Ambuja and UltraTech are trading at US $120–170 on FY2012E capacity.
In case of Kesoram, despite its well-spread geographic presence and superior
realisations, we have valued its cement business at EV/tonne of US $65, which is
at a considerable discount to its replacement cost of US $80/tonne, and
almost at par with the current valuations of its southern peers, India Cements
and Madras Cements. The tyre business is currently trading at an implied
EV/tpd of `1.4cr, which is at 30–60% discount to peers, Apollo Tyres
(`3.6cr/tpd) and JK Tyre (`2.0cr/tpd). For our target price, we have assigned a
target EV/tpd of `2cr (also at a discount to peers) for the company's tyre
business. The captive power plants (CPP) have been assigned a value of
`4cr/MW. Rayon and other businesses have been valued at mcap-to-sales
of 1x. We have arrived at a revised SOTP Target Price of `424 (`437) due to
revision in earnings estimates. We continue to maintain our Buy rating on
the stock.
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