KCP Ltd - undervalued cyclical company


(rbhutoria) #1

CMP- 120 rs
Market Cap - 1500 crs
Debt - 500 crs

KCP is a conglomerate which has 4 business divisions:

  1. Cement - KCP operates 2 plants in Andhra Pradesh with a capacity of 2.6 MT. It has announced a brownfield expansion of 1.7 MT which will take the total capacity to 4.3 MT. Cost of the project is around 500cr and is expected to be completed by Q3 next year. KCP has captive limestone reserves and 30MW power. Cement produced this year was 1.7 MT and capacity utilization was 67%. Current EBITDA per ton is 700 and has declined a bit from last year due to pricing pressure, however there was volume growth of 15%. Cement constitutes 60% of the topline.

  2. Sugar in Vietnam - Company has expanded capacity from 7000 TCD to 9000 TCD in March this year. It is expanding this to 11000 TCD by next year. It has also commissioned a 30MW co-gen plant in March. Sugar division last year reported lower profitability as it got impacted by unseasonal rains. Thus cane availability and recovery rates were lower. The expansion from 7000 to 9000 TCD was done in March and thus last years revenues did not capture increase in capacity. Further expansion to 11000 TCD would only contribute to revenues in FY19. Sugar is currently 30% of the total revenue.

3)Engineering - KCP has 2 engineering units in Chennai. This division has a turnover of 80crs and has a loss of 16crs. This division has been making losses for a few years but used to report operating profit of 50+ crs few years back.

4)Hotel - KCP built a 4 star hotel in Hyderabad for 100crs. It has given the management to Mercure hotels. Hotel reported a loss of 10crs.

KCP also has a JV with fives which makes turnkey sugar plants. This JV makes a small profit.

Outlook:

KCP’s cement division has reported healthy volume growth in Q1 and is expected to do well due to building of Andhra’s new capital, road and irrigation projects. Realizations should improve with increase in capacity utilization.

Sugar division should report good revenue growth for the next 2 years on the back of expansions.

Management has guided that engineering division should break even this year on the back of orders from defense and railways.

Hotel division should report operating profits with increased occupancy levels.

Risks:

  1. Further diversification into container freight station.
  2. Delay in infrastructure spending
    3)Sugar division numbers are reported only once a year thus it is difficult to track.
    4)Engineering and hotel could be a drag on KCP’s overall profit
    5)Rise in input costs

At 70$/ ton KCP’s cement division itself could be worth 1900crs even though replacement cost would be 100$/ton.

Disclosure: invested


(Hitesh Patel) #2

Thanks for the detailed write up. You have covered all the businesses quite comprehensively.

I had invested in this company earlier based on a technical pattern of flag pattern. On subsequent deeper dive, I found that the cement division was quoting at very attractive valuations. The other businesses were practically available for free.

q1 fy 18 results have been fantastic for the company.

I think the company is being viewed as a conglomerate bcos of the other non cement businesses. For me the main business to focus on are the cement and sugar. Rest of the businesses are just optionalities which may or may not play out.

disc: invested.


(anshul jain) #3

I would like to add one more point here. Company’s Vientnam sugar unit is expected to give good result this year. As they are done with major capex in last year they are supposed to pass entire earning to Indian Parent company i.e. KCP Ltd. To avoid double taxation company may further distribute these inflows among its shareholders.
Disclosure: Invested


(nikhilv) #4

Finally a thread on KCP started :slight_smile: - In my humble opinion it is still undervalued at 120 - the mcap and sales are almost same even when Nifty has touched 10000.Very conservative management (read last 5 year annual reports - better cash management).Huge land bank in chennai - valued around a little less than the market cap.Small portion used for the hotel - rest might be used in future for container freight in future(though have not mentioned this in this year’s AR).Debt to Equity is healthy when most expansion is underway - so chances of less downside.Best part is cement business isnt valued the way other cement companies are - its not even half of where other companies are quoting - so sooner or later they will have to either de-merge it for value unlocking or shareholders will have to be rewarded by other means.Vietnam plant is icing on the cake.
Disc - invested


(harishm) #5

KCP is indeed interesting. How is the outlook for Cement Industry for the next 2-5 year period? My view is that most real estate companies are not doing good and hence I am not sure about how many new projects will thay be able to launch. Sure, govt has bold policies for housing leading up to 2022 but private players must be in good shape to help towards that vision. So given that KCP has 60% of its business coming from Cement, an understanding of the demand would be helpful.


(nikhilv) #6

Cement is always a regional play or a project play.KCP will surely benefit from the new capital amravati coming up nearby its plant and i think thats one of the reason they have expanded capacity.That should be the growth driver.In general also housing is only one aspect of the demand.Road construction (govt switching to old damar roads to RCC ) , other infrastructure related construction etc augurs well.Infra push is still yet to come in a big way.So I see no downside.


(Rohinipathi) #7

This may sound bizarre. My bet on KCP Ltd is AP Chief Minister N Chandra babu Naidu. He is known for his execution skills. He is credited with completing the river linking project in 9 months, right from land acquisition to pumping Godavari water to Krishna river. I am betting on his execution skills which may trigger the demand for cement. My thesis for investing in the company are:

  1. Polavaram project, which is one of the largest irrigation project in India is now a Central Govt. project. This will require huge quantity of cement i believe.
  • Tenders for 16 packages for road building has already called for. construction will start at any time soon
  • Apart from capital city, beautification of tier 2 and tier 3 towns have already started, fully leveraging the central Govt. schemes. He is known for this.
  • Three big private universities have already started constructing the campuses
  • There will be a huge demand going forward to build the necessary Govt. buildings for the new capital. there are no buildings except the temporary secretariat currently.
  1. The other big cement capacity in the state is owned by the main opposition party leader. If anyone know the political situation in AP, this capacity is a big no no for Govt. projects.

Though my thesis is not built on number crunching, i foresee big demand in next 2 to 3 years.

Disclaimer : Invested.


(chets) #8

And what will your strategy be if Chandrababu is not selected in next term? :slight_smile:


(Rohinipathi) #9

Thats around 2 years ahead. Will take a call accordingly! :grin:


(nikhilv) #10

True but whoever comes will have to work on development of the state.Let management worry about that part - point is that they have done a good capex and they know it better that it will be utilized.Could you or someone also provide a breakup of all the business segment value - for eg -
total business we are getting at around 1400 cr
how much is worth - cement , engineering , hotel , and vietnam sugar.

I was trying that part - will share more if I get.I have the revenue and probably we can take very conservative number for future earnings to reach at a consolidated valuation.
at 110 rs sales is equal to market cap.

Please share if someone can on that front.


(Akshay Kumar) #11

Screenshot from marketmojo


(nikhilv) #12

thanks - these are sales. We want valuation - someone who could find valuation based on assets and liabilities from
balance sheet?


(nikhilv) #13

Few points I prepared on long weekend -

Total mcap - 1470 cr
total sales - 1403 cr

sales breakup is as follows -

  1. cement is close to 847 cr (60%)
  2. Sugar is 412 cr (30%)
  3. Others (include heave engineering , power generation, hotel etc.) - 131 cr (10%)

PBIT is already shared in above screenshot (112 cr , 66 cr and -7 cr respectively)

Now by next year company will have -

  1. cement capacity close to double from current 2.5 MTPA to 4.6 MTPA.
  2. Vietnam sugar will be 11000 from current 7000 Tonnes of Canes per day (TCD)
  3. Hotel should breakeven.
  4. Engineering should see uptick.

The capex in cement it seems has been done purely on the basis of upcoming development in Amravati and around areas because south India is actually cement saturated.

I think even if company maintains a 50 to 60 % utilization going forward according to annual report -

" On a regional level, South, where KCP operates, has the lowest utilization rates at ~55% and continues to be a drag on pan-India utilization rates. With players curtailing capacity additions, the region’s operating rate, which is hovering around 55%, is expected to gradually reach 60-63% by 2020-21. "

We can see sales of cement to go around 1500 cr.(2.6 MTPA = 850 cr so 4.7 MTPA should be around 1500 cr conservatively).

Noe vietnam sugar -

Particulars
2016-17
Crushing Capacity (TPD)
9,000
Cane Crushed (Mts.)
733,142
Sugar produced (Mts.)
95,024
Recovery Rate (%)
8.39%
Turnover (Rs Lacs)
41,272

Now when the crushing capacity goes to 11000 ,lets conservatively take the sales at 550 cr.
There are a lot of factors that can affect these numbers but a rough long term view looks like above.
So overall - sales should be around 2000 cr (any support from engineering , hotel and other business such fives cail kcp and all should be added advantage) by 2020 i think.

**price to book is close to 2 which is lowest among other cement peers even when the ROE and ROCE is decent enough if not the best among them.

**debt to equity is 0.7 which is fine i think.

**Dividend paid this year was 2 Rs.

**The management I think is very conservative - I could not find any negatives on web atleast.To me they are those slow and steady movers if not game changers or high growth , fanatics etc etc.

**They are sitting on huge land bank in Chennai which they will start putting to optimal use as we see some signs of that in AR.

Few points to be noted from AR -

  1. Container Freight Station Project: The Company is in the process of obtaining necessary approvals for the project. The Company is also exploring the possibility of improving the logistics and connectivity for the container movement between the station and the ports.

  2. READY MIX CONCRETE - During the year the Company undertook Ready Mix Concrete (RMC) business on experimental basis, by hiring the equipment temporarily, as the demand for the product is on the rise. Having gained the expertise, the company is ready to foray into this area by setting up own units, subject to availability of land nearer to the places of demand.

  3. FIVES CAIL KCP - The Company’s sugar vertical performed better during the year under review as compared to the energy vertical. Due to delay in the operationalization of overseas orders, annual turnover has dipped substantially. During the latter half of the year, new orders were booked by the energy vertical which will be executable in the ensuing financial year. Scope for the energy vertical, with the incineration boiler using spent wash from molasses based distilleries as fuel,is expected to generate considerable revenue in the next few years.

  4. Bricks:The Company also has a brick unit in its cement unit at Muktyala. Considering the demand traditional bricks, the unit has not made much progress. However, the unit is ready to meet the demand from upcoming capital of AP in Amaravati.

I invite others to share and let me know if there is any negative you see with this.

Also difficult to find but there was a conference call scheduled this year - I could not find the transcript of the same anywhere - seems company has not published it - so let me know if anyone have notes or find something about it.

I would also like to interact with someone who attended their AGM in recent past.

Disc - Invested

Not - numbers used above may vary a bit if not exact . (cement i later noticed is 2.6 mtpa and expansion will be till 4.3 mtpa )


(Rohinipathi) #14

This is why I have been interested in KCP Ltd. The current CM is infrastructure hungry guy. If we have to go by reports of regional TV channels, the target is to construct 10 lakh homes in FY 17 -18.


(Jay Sanjay Badiyani) #15

Hitesh bhai could you please explain why you feel that the cement division is quoting at attractive valuations ie based on which metrics ?


(anshul jain) #16

The stock is vailable at 9 10 PE if I annualise q1 standalone earnings (they don’t provide consolidated numbers in quaeterly results) and add 70 80 crore annual profits from Vietnam sugar unit being the past run rate not factored for new capacity addition. Capacity expansion in Vietnam from 6000 TCD to 10000 TCD should increase its earnings in FY18. The capacity expansion in Indian cement unit should increase earnings from FY19 onwards. Cement is said to be the safe place to play on housing and infra theme. At these valuations Stock gives good margin of safety alongwith plenty of real estate in its name on top of it. Stock can give decent returns over next 2 3 years due to expansion in earnings as well as PE multiple.
Disclosure: Invested


(nikhilv) #17

anshul do you mean that whatever results we get QoQ doest not include Vietnam Sugar - so picture becomes clear only when Vietnam sugar numbers are released and you are trying to add the profit part across a quarter.
Can you give us figures ex sugar i.e. only standalone eps and so no…


(Vivek) #18

KCP reports Vietnam Sugar results only yearly and not on QoQ.
You can get segment figures from BSE itself
http://www.bseindia.com/stock-share-price/stockreach_financials.aspx?scripcode=590066&expandable=0


(malayruparel) #19

Cant we as shareholders enforce company to declare sugar results on quarterly basis?


(malayruparel) #20

I have inquired through friends staying closer Amravati. Construction / infra activity has not started yet and optimistically will start in 2018. There is probability that it will start after 2019 state election. In case if Chandra Babu Naidu looses state election, opposition party may try shifting capital however probability of this happening looks low.