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For 3QFY2011, Kesoram Industries (Kesoram) posted net loss of `15cr, primarily
on account of poor operating performance of its tyre division, which suffered due
to a surge in rubber (a key raw material) prices (up 64% yoy). However, the
cement division posted an improved performance, reporting operating profit of
`62cr in 3QFY2011 as against loss of `27cr in 2QFY2011. Going ahead, the
performance of the cement division is expected to improve due to improving
demand scenario in the southern region, although the tyre division is expected to
face margin pressures due to high rubber prices. We maintain Buy on the stock.
Net loss of `15cr due to poor operating performance of the tyre division:
Kesoram’s 3QFY2011 top line grew by 11.2% yoy to `1,341cr, led by a 20.4%
increase in the tyre division’s revenue, aided by 70tpd of additional capacity in
Uttarakhand plant. However, the operating profit declined by 7.2% yoy to `125cr,
due to a surge in rubber prices. The company posted net loss for the second
quarter in a row due to poor operating performance and higher depreciation (up
66% yoy) and interest costs (up 144.7% yoy).
Valuation: We have valued the cement business at EV/tonne of US $55, 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
an SOTP Target Price of `315.
Tyre business faces margin pressure due to higher rubber prices
The tyre division’s revenue grew by 20.4% on account of 70tpd of additional
capacity in the Uttarakhand plant. However, the division posted operating loss of
~`1cr (profit of `15cr in 3QFY2010) impacted by high rubber costs, which stood
at `194/kg during the quarter (up 64.5% yoy).
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
going ahead with the political situation in Andhra Pradesh showing signs of
improvement, which would result in a pick-up in government spending on
infrastructure and housing projects.
Poised to capitalise on presence in the 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 $110–135 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 $55, which is at
a considerable discount to its replacement cost of US $80/tonne and other
southern peers, India Cements and Madras Cements. The tyre business is currently
trading at an implied EV/tpd of `1.9cr, which is at 14–40% discount to peers,
Apollo Tyres (`3.2cr/tpd) and JK Tyre (`2.2cr/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 an SOTP Target Price of `315. We continue to maintain our
Buy rating on the stock.
India Equity Research Reports, IPO and Stock News
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Kesoram Industries – 3QFY2011 Result Update
Angel Broking maintains a Buy on Kesoram Industries with a Target Price of Rs. 315.
For 3QFY2011, Kesoram Industries (Kesoram) posted net loss of `15cr, primarily
on account of poor operating performance of its tyre division, which suffered due
to a surge in rubber (a key raw material) prices (up 64% yoy). However, the
cement division posted an improved performance, reporting operating profit of
`62cr in 3QFY2011 as against loss of `27cr in 2QFY2011. Going ahead, the
performance of the cement division is expected to improve due to improving
demand scenario in the southern region, although the tyre division is expected to
face margin pressures due to high rubber prices. We maintain Buy on the stock.
Net loss of `15cr due to poor operating performance of the tyre division:
Kesoram’s 3QFY2011 top line grew by 11.2% yoy to `1,341cr, led by a 20.4%
increase in the tyre division’s revenue, aided by 70tpd of additional capacity in
Uttarakhand plant. However, the operating profit declined by 7.2% yoy to `125cr,
due to a surge in rubber prices. The company posted net loss for the second
quarter in a row due to poor operating performance and higher depreciation (up
66% yoy) and interest costs (up 144.7% yoy).
Valuation: We have valued the cement business at EV/tonne of US $55, 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
an SOTP Target Price of `315.
Segmental performance
Cement division posts recovery due to improvement in realisation
Kesoram’s cement division derives its revenue from the southern and western
regions. During the quarter, the cement division’s revenue declined by 4.7% yoy to
`405cr due to a substantial 13.3% yoy fall in its dispatches to 1.17mn tonnes.
However, the company’s average cement realisation rose by 7.6% yoy to
`3,118/tonne. During the quarter, the division reported profit of `62cr down
16.5% yoy. However, on a qoq basis, the cement division posted a healthy
recovery from `27cr of loss reported in 2QFY2011.
Tyre business faces margin pressure due to higher rubber prices
The tyre division’s revenue grew by 20.4% on account of 70tpd of additional
capacity in the Uttarakhand plant. However, the division posted operating loss of
~`1cr (profit of `15cr in 3QFY2010) impacted by high rubber costs, which stood
at `194/kg during the quarter (up 64.5% yoy).
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
going ahead with the political situation in Andhra Pradesh showing signs of
improvement, which would result in a pick-up in government spending on
infrastructure and housing projects.
Poised to capitalise on presence in the 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 $110–135 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 $55, which is at
a considerable discount to its replacement cost of US $80/tonne and other
southern peers, India Cements and Madras Cements. The tyre business is currently
trading at an implied EV/tpd of `1.9cr, which is at 14–40% discount to peers,
Apollo Tyres (`3.2cr/tpd) and JK Tyre (`2.2cr/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 an SOTP Target Price of `315. We continue to maintain our
Buy rating on the stock.
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