At the CMP of Rs 72.50, KS Oils is trading at commodity valuations of EV/Sales of about 1.6x and EV/EBITDA of abou 14.9x its TTM Sales, which is extremely low compared to its peers in the FMCG industry
KS Oils Ltd is the one of the reputed players in the domestic edible oil industry with major presence in Mustard Oil. It is the largest Rapeseed crusher in the country with largest crushing capacity of 1225 MT/day in India. Its manufacturing facilities have close proximity to raw materials and consumption markets i.e. Rapeseed growing and Mustard Oil consuming regions of Madhya Pradesh and Rajasthan.
This provides the company an edge over its peers by ensuring uninterrupted raw material supply and ready market for its products. KS Oils earns majority of its revenues from Crude Mustard Oil (otherwise known as Kachhi Ghani Mustard Oil, which has special preference in cold regions of India – North, East and North-East. KS Oils through its Double Sher and Kalash brands of Mustard Oil dominates the North-Eastern region with 50% market share.
After the recent expansion, the Company’s total installed capacity stands at:
• 1225 MT/day Crushing capacity
• 400 MT/day Refinery capacity
• 600 MT/day Solvent Extraction capacity
• 150 MT/day Vanaspati manufacturing capacity The Company has been growing at a rapid pace in the recent past and is expected to do so in the coming two-three years due to the economics of packaged edible oil sector.
The Company operates through three divisions, namely:
• Mustard Oil, which is involved in crushing and processing of Crude Mustard Oil often termed as Kachhi Ghani Mustard Oil. This is sold in loose as well in branded form under two brands, Double Sher and Kalash.
• Refining division, which is involved in refining of Sunflower, Mustard and Soy Bean Oils. These oils are also sold in loose as well as branded form under KS and KS Gold brands.
• Other division, which comprises of Vanaspati division and Solvent Extraction division. The Vanaspati division is involved in the processing of Vanaspati which is marketed solely in branded form under Gold and Gold Plus brands. The Solvent Extraction and others division is involved in extraction of oil from pressed mustard seeds and exports of Soy Meal.
We are extremely bullish on the domestic packaged edible oil sector in general and companies like KS Oils in particular. We like KS Oils for the following compelling reasons:
Capacity expansion to fuel volume growth - KS Oils may go for inorganic growth or setting up Greenfield projects in order to capture increased market share. At the same time it may increase its capacity utilizations. The company has created a war chest of Rs 650- 750 crore which will be used to fund capacity expansion in new projects, acquisitions as well as the company’s foray into the exciting wind power generation. Its expansion plan includes five plants out of which three are located in Madhya Pradesh and the other two in Rajasthan. The company expects to commission the projects over the next 24 months. The expansion will add 4000 tonnes per day to the company’s oil seeds crushing capacity — 3000 tonnes per day in solvent extraction and 1000 tonnes per day in refining.
Transition from loose oil player to branded player – With strong brands under its fold, KS OILS has ascended from manufacturing & selling loose oil to manufacturing & selling branded oil in bulk and retail packs. Branded sales are likely to increase with higher contribution in revenues from small retail packs. The management’s vision to become a Rs3000 crore company in next three years by increasing the share of its branded products would enable it to exercise pricing power as well as command higher margins compared to
loose bulk oil business leading to improved Return on Capital.
Edible Oil sector at crossroads – Indian packaged edible oil industry is expected to continue its high growth rate due to lower per capita consumption of oil, rising population, increasing disposable income from buoyant economic conditions, growing health & hygiene awareness promoting demand for packaged products and a boom in organized retail fuelling demand for branded products.
Economies of scale – KS Oils with its huge capacities and world class state of the art plant benefits from economies of scale as well as has an efficiency of more than 33% compared to other crushers. This improves its profitability from increased operating efficiencies. Diversification into bio-diesel business – KS Oils with spare capacities at its disposal plans to foray into lucrative high margin bio-fuels and palm plantation business in near future, placing it on a different growth trajectory.
Key Developments and Impact
Joint venture in Malaysia
KS Oils has entered into joint venture in Malaysia with a stake of 49% for the purpose of investments / acquisitions of palm plantations / manufacture of crude palm oil. This joint venture would enable the company's long term objective of backward integration and to secure raw materials sourcing for its crude palm oil requirement from South East Asia. The joint venture company is also in the process of acquiring its first plantation in Malaysia for a negotiated consideration up to 11.50 Malaysian ringitt.
Financials
Net Sales of the company grew by 69% to Rs 366.33 crore from Rs 216.48 crore on the back of robust branded sales growth. Operating Profits also grew at a much faster pace compared to sales, 259%, due to increasing contribution of branded sales, which enjoy substantially higher margins vis-à-vis unbranded sales. PAT has increased by 177.4% from Rs 8.5 crore to Rs 23.6 crore. Interest cost increased as a percentage of sales.
Valuations
At the CMP of Rs 72.50, KS Oils is trading at commodity valuations of EV/Sales of about 1.6x and EV/EBITDA of abou 14.9x its TTM Sales, which is extremely low compared to its peers in the FMCG industry.
Risks
The company operates in highly competitive oil business and any inability to pass on the increase in input costs could affect the margins.
Growth
• KS Oils has managed to pass on any increase in raw material prices to its consumers inpsite of operating in a commodity business. Hence we believe the company would be able to do so in the future also.
• Buoyant economic conditions leading to a tremendous rise in disposable income would lead to an increase in the per capita consumption (pcc) of oil. With global scale capacities created at low cost and presence in both premium and popular segments, KS OILS is best placed to tap this opportunity.
• India with fastest growth in population is also the largest edible oil market in the world, but has one of the lowest pcc of oil (12kg as compared to 15kg in China and much higher in other developed countries). Low pcc offers tremendous scope for expansion of market as well as share of individual players like KS Oils, which has already witnessed a strong surge in its market share recently.
• The growth in the branded segment has been extremely good contributing 61% of revenues. The small retail packs contributed around 30% to revenues. This segment is expected to keep its pace going.
• With the competition from the unorganized segment expected to be eliminated with the introduction VAT, it will give KS Oils an advantage to capture the market.
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