KCP Ltd - undervalued cyclical company


(1.5cr) #127

you can take a look at sagar cements from the same region. As you may already know that cement is a local play, as logistics is a big cost. We have taken 80$ per ton as it is on the lower side. KCP dont have any plans of selling their cement business. They have a sugar business in Vietnam that generates decent profits in addition to their engineering, Five cail JV and hotel that is a drag on profitability. You cannot say the plant is worth nothing as the cement business does generate profits.


(shreys) #128

I did have a look at Sagar cements as suggested by you. Most of these smaller cement companies have had such mediocre performances in the past few years. Maybe due to slowdown in construction activity. Now, that it’s expected that construction will finally move in the right direction these companies may be benefitted. May be not. Only time will tell if all most orders will be secured by the lager players or the smaller ones as well. Frankly, looking at their financial’s there’s hardly anything impressive. It seems to me to be an asset play. An asset play on the cement plant. Now, only time will tell if these valuations based on their assets will sustain or not. All I’m saying is that the plant is worth anything at all only if larger players are interested in smaller plants. If not, I find it hard to believe that with such erratic performance financially it can sustain these levels.


(harshb232) #129

Sugar business might nor generate profit in future given the fact that Vietnames government has to remove import duty from sugar according to a pact with ASEAN. In such a scenario importing sugar from Thailand is much cheaper because price of sugarcane are less in thailand. And as a result sugar business in Vietnam can get adversely effected.


(1.5cr) #130

Yes it is a play on infra/cement demand picking up.Volumes have been growing consistently this FY. Capacity is not even close to full utilisation, so as demand picks up you should be able to see better numbers… Time will tell with every investment haha!


(shreys) #131

True. Since you believe it’s undervalued what in your opinion is its fair value?


(1.5cr) #132

Should be around 2000-2200cr. I see demand picking up in the region and that is supported by strong volume growth this year. So let us see… downside is minimal so that is good. Assuming EBITDA of 150cr in FY20 and assigning 8x (can easily fetch 12-15x) 150 is around 1200cr. Take 80$ per ton that gives you around 2300cr EV. Average both gives you around 1700-1800cr for cement business.


(Hashims) #134

Relevant articles published in early 2017. Im not aware though, any M&A took place based on this underlying value from these small capacity cement plants with larger players?


(nikhilv) #135

I think the point you are making is on assumption of KCP selling its cement plant.The price we are talking about is the replacement cost.It’s a way to get close to the value of cement plant.I do not think that KCP has a broken balance sheet that it has to put their cement plant in line for a deal.If you see the cement plant buyouts and takeovers happening, most of them were gasping for breath because of enormous debt.Cement revenue is growing healthily - margin might get impacted however demand seems to be strong.Also, in my case for KCP I am trying to protect downside which I see is less.Anything from other businesses is cherry on cake.Also management is good - they are less noisy, ethical and values in place.


(distilled_feni) #136

Looks like KCP’s capex is right on time.


(nikhilv) #137

So results are out -
The overall topline is flattish.
Positives -

  1. Engineering has become profitable earning 4 crores for the first time in more than 2-3 years which management indicated in last concall although the revenue is on the lower side.
  2. Cement sales are still strong - indicating good demand.
  3. Hotel loses reduced - revenue flat.
  4. Interest outgo reduces.

Negatives -

  1. Margins reduces drastically - Looks like fuel expenses and freight expenses are hurting cement and especially power.Power infact has become loss making.
    Although the cement sales has increased, the marging reduced by 50% almost. -
Mar-18 cement engineering hotel power total
sales 249 19 4.3 22 294
Profit 17 4 -1.4 -4.2 15.4
Margin 6.827309237 21.05263158 -32.55813953 -19.09090909 5.238095238

Amount in Crores.


(nikhilv) #138

Overall - YOY Revenue growth is 10% and Net profit growth is 18%.
Vietnam Sugar Profit has grown 14% from 66 crores to 77 crores annually.
Company has declared a dividend of 1 Rs.
Total Sales including vietnam sugar is now 1672 crores annually.

I am interested to know low margin for cement.I pulled out data of last few years and historically March has been the lowest margin quarter for Cement.But this one is the lowest of all with only 6.82%.


(Pratik--Patel9) #139

The real question is whether the fuel cost or fright cost is here to stay or is it a phase to pass? If the company can not sustain its margins then that’s a big concern.


(nikhilv) #140

**Electricity Duty on captive power generation levied by the State amounting to Rs.87llacs was contested by the Company in Hon’ble Supreme Court. Hon’ble Supreme Court through interim order directed the Company to pay part amount of
Rs. 5231acs. Pursuant to this, the Company has provided Rs. 871lacs and reported the same as an Exceptional Item, pending the final decision of the Hon’ble Supreme Court.

**The Supreme court, vide its order dated 13-10-2017, has ruled that the contribution to District Mineral Fund(DMF) for limestone under the Mines( Development and Regulation) Amendment Act,2015 shall be applicable from 17-9-2015
instead of 12-1-2015. Accordingly, the Company has reversed the provision amounting to Rs. 2.93 Crores in the financial results during the quarter ended 31.12.2017.


(Pratik--Patel9) #142

Declining profit margins is a big concern. Can anyone who is also following the business throw some light on it? Is it a temporary phase or is it here to stay?