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We recommend ADD on Kesoram Industries (KIL), as its
share price has corrected sharply and is available at a steep
discount to replacement cost. The tyre industry increased tyre
prices sharply to pass on the rise in rubber prices in 1QFY12.
Thus, we expect KIL’s tyre segment to report modest profit
from 2HFY12. We expect cement margins to be volatile, as it
is largely dependent on sustainability of pricing discipline in
the southern region. Note that KIL’s cement capacity is
located in the south and 43% of its sales volume originates
from here, with the balance coming from the western region.
KIL is trading at a reasonable 5x FY13ii EV/Ebitda and
EV/tonne of US$66 (adj. for the tyre segment).
Series of price increases undertaken by the tyre industry in the
past three months: KIL was slow in passing on the rubber price
increase in FY11, as the company focused on volume growth. It
expanded tyre capacity from 250tpd in FY08 to 823tpd in FY10;
capacity will increase further to 988tpd in 2QFY12. Our channel checks
indicate that KIL increased tyre prices to pass on the rise in rubber
prices, after it recorded huge losses in 4QFY11. We expect KIL’s tyre
segment to turn marginally profitable from 2HFY12, when the price
increases taken through 1QFY12 reflect fully. Natural rubber prices
have declined 16% from the peak in April 2011. We expect further
decline in prices with likely increase in supply (yield from new
plantations to begin from 2012).
Cement segment likely to remain volatile: Profitability of KIL’s
cement segment depends on sustainability of pricing discipline in the
southern region. We expect volume growth to improve marginally,
with likely improvement in demand; however, margin recovery
would be volatile on likely increase in competitive pressure in the
southern region.
Large debt continues to be a headwind: KIL has a debt-equity
ratio of 2.4x, as the company resorted to debt to expand its tyre
capacities. We expect debt-equity ratio to remain high for the next
two years as well and result in higher interest costs. However,
further increase in debt-equity ratio is unlikely as the company has
postponed its capacity expansion plans in the cement division. We
believe that the company is unlikely to expand its tyre division as
well on account of low utilisation of existing capacities.
KIL available at a sharp discount to replacement cost; ADD:
KIL’s share price declined sharply over the past two years, owing to
decline in profitability in the tyre segment and poor fundamentals of
the cement sector in the southern region; we believe that the
negatives are largely discounted in the share price. We expect KIL’s
profitability to be volatile, owing to low cement utilisation in the
southern region. We value the stock at one-year forward rolling
EV/Ebitda of 5x. Our revised target price offers 35% upside from the
current level.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recommend ADD on Kesoram Industries (KIL), as its
share price has corrected sharply and is available at a steep
discount to replacement cost. The tyre industry increased tyre
prices sharply to pass on the rise in rubber prices in 1QFY12.
Thus, we expect KIL’s tyre segment to report modest profit
from 2HFY12. We expect cement margins to be volatile, as it
is largely dependent on sustainability of pricing discipline in
the southern region. Note that KIL’s cement capacity is
located in the south and 43% of its sales volume originates
from here, with the balance coming from the western region.
KIL is trading at a reasonable 5x FY13ii EV/Ebitda and
EV/tonne of US$66 (adj. for the tyre segment).
Series of price increases undertaken by the tyre industry in the
past three months: KIL was slow in passing on the rubber price
increase in FY11, as the company focused on volume growth. It
expanded tyre capacity from 250tpd in FY08 to 823tpd in FY10;
capacity will increase further to 988tpd in 2QFY12. Our channel checks
indicate that KIL increased tyre prices to pass on the rise in rubber
prices, after it recorded huge losses in 4QFY11. We expect KIL’s tyre
segment to turn marginally profitable from 2HFY12, when the price
increases taken through 1QFY12 reflect fully. Natural rubber prices
have declined 16% from the peak in April 2011. We expect further
decline in prices with likely increase in supply (yield from new
plantations to begin from 2012).
Cement segment likely to remain volatile: Profitability of KIL’s
cement segment depends on sustainability of pricing discipline in the
southern region. We expect volume growth to improve marginally,
with likely improvement in demand; however, margin recovery
would be volatile on likely increase in competitive pressure in the
southern region.
Large debt continues to be a headwind: KIL has a debt-equity
ratio of 2.4x, as the company resorted to debt to expand its tyre
capacities. We expect debt-equity ratio to remain high for the next
two years as well and result in higher interest costs. However,
further increase in debt-equity ratio is unlikely as the company has
postponed its capacity expansion plans in the cement division. We
believe that the company is unlikely to expand its tyre division as
well on account of low utilisation of existing capacities.
KIL available at a sharp discount to replacement cost; ADD:
KIL’s share price declined sharply over the past two years, owing to
decline in profitability in the tyre segment and poor fundamentals of
the cement sector in the southern region; we believe that the
negatives are largely discounted in the share price. We expect KIL’s
profitability to be volatile, owing to low cement utilisation in the
southern region. We value the stock at one-year forward rolling
EV/Ebitda of 5x. Our revised target price offers 35% upside from the
current level.
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