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.
I was going through this report from motilal oswal about heavy engineering orders uptick in future -
I think KCP is also involved in the same activities -
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.
KCP is struggling to get the valuation that it deserves due to the number of businesses under listed company. Sooner or later market will realise and we should see a steep jump in valuation. The key in my eyes is the new cement capacity coming on stream. That should push people to research further on the company. The company is completely under researched. It seems to be a on cyclical uptick. All in all it is business that can touch 200cr in reported net profits over the next 3-4 years. Still cheap at current levels.
Results are coming out soon and I think we should see a wonderful quarter.
Only concern is the price of power. As long as volumes grow and new capacity is on track we should see some more upside over next FY.
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 .
- 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.
- 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.
- 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.
- 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.
- Price doubles or not , valuation is high or low etc. are all very subjective depending on one’s portfolio , time frame etc.
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.
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.
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.)
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.
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.
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. And thats why we have both buyers and sellers in same counter feeling themselves to be very smart.
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.
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.
You have to take the capacity of 4.2 MTPA which I think comes on stream in fy 19. Management has indicated that current debt may be peak debt, or very close to it. So we might assume EV to be close to 1900-2000 crores and do our calculations accordingly and try to figure out the valuations 1-2 years down the line.
Having said that, markets run more on sentiments and emotions of market participants rather than these kind of calculations.
Stock is underresearched. Value cement cos on capacity. KCP have fresh capacity coming on stream. You have clearly not done any research on their Sugar business in vietnam. All capex is done and hence dividends have started flowing in. Net profits from sugar in vietnam are reported once a year. Increase in income from vietnam capex will be captured next FY. Fresh cement capacity to come on stream in FY 19. Debt will peak at around 500cr and then taper off. 90% of KCP sales come from cash and carry retail. They barely have exposure to govt. These guys have been in business for years together. Volumes have been growing 20% qoq for last two quarters. Fresh capacity will be sold easily as mgmt has stated they have many unexplored markets. KCP plants are located in very beneficial locations. In cement 25% is freight cost so suppliers within the region will have better pricing. Hopefully this gives you some insight on the company.
Downside is of course if demand doesnt sustain. In that case there is almost negligible downside. These guys cater exclusively to APT and some outskirts. So for eg north Indian cement company cannot cater to the south.
If babu loses dont count on KCP. Politics and macros are something we cannot control. KCP has barely any exposure to govt contracts as it is. And if indeed this does affect KCP we have a choice right? we can exit. One thing is for sure, they are very cheap and with low doesnide and solid tailwinds, odds are in favour.
Hello VP members,
This is my first comment on VP and I am glad that my first comment is about KCP. Here are some of my observations and few of these may answer some questions posed by others in this thread.
KCP may not have the brand value as Ultratech or ACC. But its popular in AP especially in the new capital region for decades.
Many people are worried about govt contracts if there is change in state govt in 2019. But the retail prices are much higher compared to the govt prices as govt negotiates for bulk deals at lower prices.
Capital construction does not mean just govt buildings. Amaravati is a green field capital coming up over 35,000 acres of pooled land from farmers. Of this, govt giving back 1/4th of land to farmers. Most people will build new houses, apartments in their lands over next few years. Govt also giving part of land to many private companies, educational institutions, hospitals, hotels, schools. All these will be retail customers which KCP can serve.
As the plant location is closer to Amaravati, there will be less transport costs for KCP.
Real estate in and around Amaravati will be the major driver for growth in the region. There are already hundreds of small apartments being built in the region. Also, large housing construction companies started their projects already in Mangalagiri region which is closer to Amaravati.
Disc: Not invested. I started investing just 3 months back and came across VP just few days back. I did not even know that KCP is a listed company even though I know about this company for more than 20 years. Strongly considering it now.
Q3 results below.
Income 26710 vs 23619 Lakhs YoY
Profit 1,440 vs 1,065 Lakhs YoY
Profit lower than previous quarter on account of one time other income of 38691acs of Dividend received from the overseas subsidiary. (Vietnam?)
detailed results at
Results are good if one time revenue from subidiary is removed -
this q last q
Egineering 2,486 2,539
Cement 23,473 21,909
Power 2,504 1,883
Hotel 431 344
Others 131 3,927
Losses have narrowed down in engineering and hotel as management commented earlier.People initially might look only PnL and be worried but to me it looks healthy as expected.
More good news is losses in Engineering and Hotel are going down, power business is now profitable
In the table below column headings as below , Dec 17, Sept 17, Dec 16, 9 months 17, 9 month 16, and year ended Mar 17
Disclosure - started tracking position is last week
Any idea why the pat for their core segment cement is less yoy ? even though the revenue are higher? Is there pricing pressure which impacted the margins in the cement sector ?
Difficult to say about pricing - I gather that pricing has picked up and is firm - but power and fuel expense if you look - that has shoot up from 45 cr to 75 cr. I believe that is mostly due to firm coal prices - that mgmt has already commented in previous quarter that this could put pressure on margin.
It is power and fuel cost. That and freight cost. But I understand that mgmt had cleared the freight cost issue last con call. It is an accounting procedure and net net has no effect on the numbers. I we were to normalise power and fuel cost, we will see a nice jump in bottom line. Coal prices as I understand should star tapering off going forward as Australia recovers. That should benefit KCP and other cement players. Other income from vietnam seems to be to be the real kicker in earnings.
Sugar Prices in Vietnam Soar to Record High - trading at VND 7,000-7,500, up VND 500-1,000 a kilo.
In related news, the Quang Binh, Quang Nam and Ninh Thuan sugar plants are to file for bankruptcy as their losses have exceeded capital.