KCP Ltd - undervalued cyclical company

where did you get this update of waterways from? Would be helpful if you could share the source or full article - thanks .

Ah - got it -
http://greenbusinesscentre.com/energyaward2017presentations/Cement/9%20kcp%20ramakrishnapuram.pdf

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As a note: (This is my understanding - I can be wrong).

Are these operational pictures or promotional (i.e. computer generated)?

The last pic definitely looks photo shopped; based on the way ‘KCP Limited’ label is placed. The barges look to be of European setting on the canals around there.

The penultimate pic; searching the area via google maps (satellite mode), there is no sign of a ‘hub and loading station’ around Muktyala. [Satellite images could be dated]

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Even my understanding is that this is just a concept at this stage… Given the cost savings and upcoming huge demand @ Amaravati, this should be a reality soon.

Please go through the below link… work on the waterway is already started… AP Govt. is serious on developing Inland Waterways…
http://avenue.in/2017/10/03/muktyala-vijayawada-waterway-stretch-krishna-river/

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http://www.moneycontrol.com/news/business/companies/dont-plan-to-sell-any-of-the-engineering-or-hotel-assets-kcp-2466065.html

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concall notes -

http://kcp.co.in/downloads/financial-results/concalltranscript.pdf

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KCP was recently recommended by Mr. Rajnish Sharma aka valine. He has great fan following on moneycontrol and all stocks recommended by him are multibeggar last year. I don’t believe in blindly following anyone as such. I am adding this comment only to point out one of the reasons why this stock has been in discussion now a days.

Disc : Invested at about 130

KCP seems to be a good recommendation. Cement is one of their major business. KCP Shrestaa cement brand is sold across Telangana, Andhra Pradesh, Karnataka, Tamil Nadu, Kerala. With great projects in plan and currently being executed in Telangana/Andhra the stock would be a good bet. Also we could take into consideration of huge infrastructure demand in the coming years

Disc : Invested at about 101

People from construction industry have said that cement and steel prices have increased by 30-35% during the ongoing CREDAI event at Vijayawada. No other source to validate this…

I am attaching the affordable houses being built by GoAP. These are being built in all major towns/ tier 2 cities… Govt has completed major chunk of these… they are planning to spread these to much smaller places.

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Today - KCP released SHP for december. Reducing pledge amount first -

  1. September - 49,00,000 or 8.53%
  2. December - 31,00,000 or 5.40%

It has come down to 5.40% from 8.53%.

Can someone explain what happens when pledge is reduced - i am sure they are released from bank or whichever organization keeps them. But what happens after that ? The promoter gets to keep it ? I am trying to link this to liquidity.

also HDFC has almost doubled from 13 lakhs to 24 lakhs i think from SBI in last quarter.

This does not forms the basis of my investment but it helps to get a clear picture.

Q2 Concall Summary

  • First half was much better than last year.

  • PBT was Rs 84 crore (against Rs 19 crore).

  • PAT was 60.13 crore (against Rs 14 crore).

  • The profits includes dividend of Rs 38 crore which it received from its subsidiary abroad. However without the dividend also the performance is encouraging.

  • In cement the current capacity is (2 units in AP), one unit in Muktyala near new capital of AP has capacity of 1.8 million tons of capacity and another 0.8 million tons at the plant near Nagaarjun dam. The company is adding 1.5 million unit to the 1.8 million plant unit. So after expansion will be 4.2 million tons. The expansion is progressing very well. The official completion date is October 2018. Revenues from the expansion will start from October 2018. The total cost of the expansion is Rs 500 crore, including railway siding of Rs 60 crore.

  • The management does not have any plans for further expansion in cement.

  • Demand for cement continues to be good in the area it operates. The realisations are stabilizing though they are not as good as Q1. Volume growth during the quarter was 20% in cement business.

  • 80% of the cement sales is in AP and rest goes to TN. Freight and forwarding expenses have grown significantly as the company started to bill invoicing with tax.

  • The order book in engineering division is Rs 100 crore. Things have started looking up. Make In India concept is helping this division. In future the unit should look better and do better from next FY.

  • The engineering division should break even on sales of Rs 85 crore.

  • Hotel yoy losses fell during the quarter as occupancy has improved substantially. If this continues, the performance should improve further.

  • The management had made a statement 2 years ago in the AGM that it will sell the hotel business. But as of now the company is not thinking anything on those lines.

  • Vietnam capex from 6000 tons to 8000 tons is already done and is already on stream. Further capex will be completed as said in FY 2018-19 (mostly likely by the end of calendar 18 from 8000 tons to 10000 tons).

  • Power segment is doing losses because of input cost. This is not because of performance, which is doing very well but because of the rise in coal price which has grown from $ 48 to $ 80.

  • The company has Rs 350 crore of outstanding term loan as on Sept 2017 without considering Rs 35 crore working capital loan.

  • Cash and investment is Rs 25 crore.

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Cement business, majority of the costs are variable in nature. Hence operating leverage means almost nothing. Jump in volume does not mean a disproportionate jump in profits as costs are variable. But a jump in price on the other hand could have a big impact on bottom line. This is why cement cartels exist. There is no need to increase volumes and cut prices to beat competition as it really does not impact the bottom line much. So always look for rise in prices of cement. While valuing a cement company one must take an EV/EBITDA multiple followed by an EV per ton capacity valaution. You can average the two and come out with a figure. You must also make sure that debt is accounted for while valuing the company. You cannot compare two comapanies with different debt structures. So you consider the D/E ratio in such a case. You must also take into account the region that the company caters to.

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I was going through this report from motilal oswal about heavy engineering orders uptick in future -

http://m.motilaloswal.com/Research-Research-actual/40708/Capital-Goods--Emission-control-equipment-orders-to-finally-kick-start!-

I think KCP is also involved in the same activities -

http://he.kcp.co.in/bs-general-engineering.html

Players mentioned in the MOSL report above are clients of KCP as per the website.

Heavy engineering is not a big chunk of earning but I think as per management commentary and also industry outlook - heavy engineering should pick up in next few months.

everyone seems to be excited about KCP .

Well the valuations doesnt make any sense .

1 . South the cement market is already saturated and kcp doesnt have any brand name here .
2 . If you are looking at big projects i think ultratech is the one thats preferred . You could speak to someone in the construction industry about this .
3 . Bharati Cements - Owned by Jagan ( well if Babu loses dont count on KCP supplying cement )
4 . Removing the other income the pre tax profit coming from cement is 26 crores . Assuming this things doubles ie 52 crores . so taking out interest and taxes , net income comes to around 36 crores . Valuing the company at 50 time PE . I mean really you want to buy this company at 50 times PE . I am assuming the dividend from Vietnam is one time affair coz i havent seen this happening every year and sugar itself is a cyclical industry . I havent taken into account 400 crores of debt .
5 . So this company is already overvalued . Well I think you might see a good correction in this stock .

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  1. South is cement sturated - agreed.But if you read last 3 concalls, mgmt has clearly said the main area they operate is AP/Telangana. They have given percentage breakup as well.On asking why not foraying into other states, they clearly told that the demand in the state is enough to grow.We are playing the AP/Telangana story and not south story.I would say study Sagar and NCL etc. they gives a clear picture of demand in cement saturated south as they are operating mostly in AP/Telangana.
    I would appreciate if you could share how you arrive at KCP is not a brand name.
  2. Talking about government project - again if you check the growth that has come so far is mostly from retail and not govt so far - any demand from them will be added advantage.Political risks are there but this company is not owned by Babu.If demand is huge everyone grows.
  3. You are valuing the P/E of complete company on the basis of just cement sales which if close to 60% sales - this is unfair.
  4. There are many other points such as -Company’s land bank price of just its heavy engineering land in chennai is close to 1400 cr. a little less then its market cap.Dividend yield of company is good.Good accounting standard if you read last 5 years AR.
  5. Price doubles or not , valuation is high or low etc. are all very subjective depending on one’s portfolio , time frame etc.
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  1. kcp sugar used to be a part of kcp limited.Infact kcp started as a sugar company only 75 years ago.After demerger kcp sugar became a separate entity and at one point it became a darling sugar share coz of RK damani holdings in it(He still holds). Anyways - the promoter of kcp ltd exited KCP sugar and has no interest as such except for 8% holding by VRK grandsons.Under 2000 cr market cap i do not think you can search a brand in it.If you see ultratech and ramcos…they are men when it comes to cement.KCP is still a boy.Ultratech is a 1lakh cr market cap giant and thats why its a brand.I think it would be better if we buy something that becomes a brand rather than something thats already a brand.Having said that I take your point and would research more.

  2. Vijaywada I am not sure but overall AP and Telangana cement demand (not only for KCP but other players) is being driven by low cost houses only.Request you to please read AR and concalls of all cement companies in and around AP/Telangana to get a clear picture.You might be right about vijaywada that real estate is completely down.

  3. It would be unfair to value only cement business because vietnam sugar is 30% of their revenue and profit generating.I agree 10% is loss making (hotel ,power etc.)

  4. Land bank is located at Tiruvottiyur - besides KCP road.Land area is 34 lakh sq feet and price is 5000/sq feet approx. which is close of 1700 crore.This I checked with someone who attended KCP AGM and is tracking KCP since long.Still do your due diligence and double check.

  5. Valuation is subjective I said this because suppose I am ready to hold it for next 5-7 years so when I discount that today, it looks cheap to me.If someone wants to buy today and sell in 6 months - may be everything is priced in for him.In both the cases we are looking at current share price only.My holding is way below current levels.

Thanks again for bringing these points - it helps to search more about it.

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The land bank valuations comes from a very senior person who stays in chennai whom I consider mentor to me.I also double checked valuation from others and it was close to the same.Again as I said how true are these is anybody’s research and hence I wrote about due diligence.

Sure - not taking personal sir. Afterall these healthy discussions are important and constructive.I have position in this share and I may be biased.Valuation are not suiting you hence you should keep away from this stock.I would definitely try to do more home work on this.

The most conventional and universally accepted way to value cement companies is by replacement cost on an EV per ton basis. It ranges from 50 dollars to 120 to often 150 dollars per ton. ( It usually doesnt make sense to assign a PE to cement companies because we sometimes dont know where in the cement cycle we are). Atleast I found KCP to be a no brainer when it was quoting around 100-110 range while valuing it on above basis. I felt I was getting other business for free. Even if they are not profitable, any asset would be having some value unless it is hugely leveraged.

This valuation largely focusses on capacity of the company in question. Smaller companies with less than 5 MTPA usually fetch lower valuations while companies with capacities above 15 MTPA would fetch much higher valuations.

Cement has become more attractive of late because setting up a cement company requires proven limestone reserves according to new laws to set up a cement plant. Hence threat of new capacity coming up has reduced to a great extent. Plus we seem to be in an up cycle for cement companies and hence companies tend to fetch higher valuations as compared to bottom of cycle valuations.

It cannot be transported for long distances because freight costs would make the pricing unviable. Hence proximity of the company’s plants to an area with upcoming demand would make the company more lucrative.

Earlier when I had bought KCP I had found people talking about the EV per ton valuations of cement business. Now I hear a lot of guys being bullish on the heavy engg segment turning around. And still some more guys are bullish on its hotel segment.

Beauty lies in the eyes of the beholder.:slight_smile: And thats why we have both buyers and sellers in same counter feeling themselves to be very smart.

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Cement is a commodity so I feel brand doesn’t make any difference. My father is in construction business. The choice of cement is largely influenced by contractor. Builders and contractors generally don’t prefer any brand over other. However better credit terms by dealer or commission may be a factor for brand stickiness.
Further on your concern of demand pickup there are multiple factors which should work like higher infra spend, govt’s directive of only going for concrete roads for national and state highways, affordable housing, development of Amravati. We have enough evidence to believe that these factors should play out.
The company is currently available below replacement cost of cement capacity. Vietnam sugar, engineering and hotel is margin of safety. Huge amount of limestones can be counted as source of Moat as limestone is auctioned under new policy.
Disclosure: my views are biased as I am holding the stock.

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thanks hitesh ji for insights.
So at 110 , the market cap is 1400 cr. Total debt is 500 cr and cash is 25 crore.so EV comes out to be 1850 approx.Current capacity is 2.7 MTPA.
so EV/ton on dollar terms comes out to be little above 100$/ton.For a small capacity company 100$ is decent.That means rest of the business is not priced in and hence if they generate any profit is added advantage.Please correct me if I am wrong.
If the capacity close to doubles, ideally the mcap should also double to maintain the same valuations if we talk just about cement only.
Utilization should be 55 to 60% and anything above that is advantage.