KSE Limited --- Interesting Business

(Sumeet Shah) #43

You are absolutely correct. It is ‘individual share capital in excess of 2 lakhs’. Here, it’s not the actual share price which is considered but the face value of the share. For a share of face value 10, someone holding more than 20k shares will come in the list. For a share of face value 5, someone holding more than 40k shares will be included in that category. And for a share of face value 2, some one holding more than 1 lakh shares will be included in the list.

(Satya Prakash) #44

Very good result by KSE Ltd.
Oil cake processing division has done best.
Diary division is doing very good but small part of overall sales and profits.

50% EPS increase YoY.

PDF link to the result on BSE

Extract from the same PDF

Disc: Invested

(Satya Prakash) #45

If anyone can prepare rough estimates of the flood effects on KSE Ltd! Please share.

This share is rarely discussed publicly on TV, article Online.

Disc: invested.

(abrahamappu) #46

I don’t know the about the damage. For the last 15 years we are the stockist and supplier of there cattle feeds. Inventories are not affected badly from the floods.Because yesterday we ordered for 300 bag of cattle feeds 50kg per bag And today it got delivered.We are a leading supplier of cattle feeds and grocessry items in central Kerala.We yesterday ordered for various grocessory and cattle feeds items from various companies across Kerala.But only kse delivered their items promptly.I think kse doesn’t got affected from this flood. There factory in kottayam district is working normally.

(shyamutty) #47

Reason for fall could be ex dividend date

(Satya Prakash) #48

KSE Ltd has issued clarification on Kerala flood.
Short summary:

  • Almost all plants are safe. Only Rs 15 lakhs of items perished.
  • How much Animal feed sales will get impacted is not calculated yet as farmers lost everything in the flood.

Company submitted clarification:

Kerala is in the midst of an unprecedented flood havoc. The calamity has caused immeasurable misery and devastation. Many lives were lost. Hundreds of homes were totally destroyed and many more were damaged. For the first time in history, 27 dams in the State had to be opened. Never before had the State witnessed a calamity of this magnitude. We are receiving concerns from some of the shareholders regarding the status of the flood and how our business was affected, as the prime area of operation of the Company is within the State of Kerala. As per our preliminary assessment the situation is as follows:
We have nine production units and one sales depot in Kerala. Though the flood was widespread all over Kerala, all our Units are safe and there was no damage to production facilities. Only we have lost some milk and ice cream worth about Rs. 15 lakhs in Konikkara Dairy Unit, wherein a small portion of the plant was under water for a few days. All the other plants and stock are safe and we taking regular production. As our entire assets are insured, we will be putting our claim for the loss of milk and ice cream with the insurance company in due course.
It is too early to predict the impact of the flood on the volume of our feed sales. Many farmers had lost their homes, cattle and all their life-long savings. The number of cattle dead in the flood is not known. At this stage, we are not expecting any considerable impact on our overall feed sales.
Kindly arrange to announce the above to the members. We also take this opportunity to request all the investor community to contribute liberally to the Kerala Chief Minister’s Distress Relief Fund and help to build back the flood-wrecked Kerala. On the preliminary estimate, the fund required for the recovery of the State of Kerala is stated around Rs. 20,000 Crores. Your Company will be incurring a total expense of around Rs. 2 Crores on account of flood relief.

Disclosure: invested and sitting on loss of 20%.

(abhi2525) #49

Wrote this for own use. Comments and feedback invited


Market Cap: Rs. 905 Cr, CMP – Rs.2,810

Buy at 5-7% of portfolio value with 3/5 years horizon

What does the company do?

KSE is the largest manufacturer of compound cattle feed in private sector in the country, focused only in Kerala. It has emerged as a leader in the ready mixed cattle feed industry in the country. Today KSE manufactures a range of livestock feed in high volumes, coconut oil from coconut oil cake and refined edible oil. It has also entered the field of milk procurement and processing – A) KS Milk, B) KS Ghee and C) Vesta Ice Cream have become popular in many districts in Kerala.

KSE operates in broadly three segments – Animal Feeds (78% of Revenues in FY18), Oil Cake Processing (20%) and dairy (2%). The mix has been stable over the years; however, Oil Cake Processing is the most lucrative business with ~13% operating margins compared to ~6-7% in animal feeds and breakeven in the dairy segment.

KSE did Rs.1,304 Cr revenues in FY18, up 24.5% from FY17 led by higher feeds sale due to lowered prices but higher volumes (prices declined by ~10%, volumes up by ~33%). It has grown at a CAGR for ~13.5% during the last 5 years. PAT was at Rs. 70 Cr, up more than 326% due to higher operating leverage in both feeds and cake processing division. It has increased at a CAGR of 73% during the last 5 years.

Financial Analysis – Good growth, decent incremental return on capital with worryingly razor-thin margins

  • KSE has improved incremental return on capital to ~40% in FY18 from ~16% in previous years. However, it operated at ~35% in F12-14 and it looks like to be moving in cycles. The key would be to monitor the incremental ROC going forward on a quarterly basis. Return on Equity is at 60% and has moved between 10% to 70% in last 4 years, in line with prices of feed input.
  • Feed inputs consist of coconut and other agri-commodities. KSE has resorted to importing these from middle eastern markets due to high price differential (15%-25%) from the local market prices. Hence, it is exposed not just to commodity prices, but also to rupee and govt. regulations. As per initial analysis, every 5%-rupee depreciation will lead to 0.3% erosion in net margins
  • Management doesn’t think raw materials prices will decline further from the current levels. As such, expect margins to come down to more normalized levels of ~3.5-4% in FY19-20
  • KSE operates on very thin net margins and its PAT margin has fluctuated from 0.8% to 5.3% in last 4-5 years. Building in anything more than 2-3% while analysing this would be a mistake
  • KSE has manageable debt with Debt/Equity at 0.3x and is adequately covered by cash it generates. Management has been prudent in not over-expanding and over-leveraging
  • KSE provides a dividend yield of ~2% from the current prices and can be a major yield machine going forward
  • KSE has been maintaining a healthy OCF/PAT of ~1x over the last 5 years with one bad year in FY16. Overall, it has been able to convert its accounting profits into operating cash flows and there are no concerns on this front
  • Asset turnover has remained at ~7x with fixed asset turnover increasing from 21x to ~40x. Management reckons they can stretch it up to ~55x after which significant capex would require to be undertaken

Operational & Management Analysis – Highly dependent on Kerala Milk Price (set by govt.), feed inputs price

  • Feed prices are a direct result of milk price in the state of Kerala. And the milk prices are set by govt. of Kerala. However, this is not a major concern since milk prices have been increased by an average of ~13% during the last 5 years
  • But then, KSE has grown by ~13% during the last 5 years – The growth in KSE revenues are a direct result of growth in milk prices, which in turn impact the purchasing power of farmers.
  • Dairy segment, which has been operational for last 13 years, has been an absolute drag on the company and the prudent thing would be to divest it instead of continuing it as a cash burning machine. Overall margins will improve if management focuses on its core competency – Feeds and Oil cake
  • Till now, KSE has been active only in Kerala. Now, with new plant in Karnataka, it opens up new growth opportunities for KSE. Key exponentials to monitor would be:
    • Milk prices in Karnataka
    • Feed prices
    • How much of the market can KSE capture?
  • Kerala flood impact is being downplayed by the management currently with net impact said to be around ~Rs. 25 Lakhs worth inventory loss. However, we need to monitor Q2 numbers to get an idea of an impact on the revenue – This is the most important thing to track before entering/increasing exposure
  • One of the key issues is that management owns only 26% of the company – There seems to be not enough skin in the game. If it declines further, it is a major concern
  • Godrej family (Adi Godrej) owns ~1.5% stake in the company and if they increase it, we need to study it further – This would be a key monitorable

Valuation and what should we do?

  • The implied growth rate at 15% discount rate at current prices is at around 6.1%, which is ~50% of its historical growth rate. The implied growth rate is at reasonable levels and the street is expecting lower growth going forward
  • At a ROE of ~60% (normalized of 30%), PE of 13x, a 13% growth rate and implied growth rate of 6%, this is a decent, if not a great opportunity to enter the stock at current prices. At 15% growth (considering 15% growth rates) and 3.5% margins, we are looking at an exit market cap of ~Rs.1,250 Cr, which is 11% CAGR. We are building our margin of safety in the margins and growth both – a 4% margin will up our return to 17% CAGR
  • The above scenario doesn’t consider any growth from Karnataka operations and this has been built in our price as key margin of safety here – Any upside from this will add onto our growth
  • If we can get it a lower price (After announcement of Q2 results) at, say, Rs. 700 Cr, our return at steady state growth of ~13-15% and at 4% margins, our returns get bumped to ~27% CAGR – what we should aim
  • We should buy this at staggered prices – Buy 30% of our intended investment currently, rest 50% after Q2 results and remaining 20% after Q3 results – If results are as per our expectations

What are the key risks and concerns?

  • Inability to pass on costs – There is an upper cap to the prices it can charge of feeds. However, lower feed prices are a boon here and it increases the volumes – Need to monitor this
  • Lowered volumes in next 2/3 quarters due to floods and resultant lower cattle count. However, this can provide good opportunity to buy based on margins and loss aversion of management – Need to monitor
  • It is a one state wonder and until and unless it manages to grow in other states, there is a probability of it hitting a growth roadblock – We will get out in this case. And this is precisely the reason we need to build margin of safety by not paying for any new growth!

(EL) #50

I am looking at this, if farmers lost everything including some livestock the company might not do well until Kerala is rebuilt

KSE always was a one state company, agree they were slowly trying to diversify but hadnt managed much in that respect

I think next 3-4 quarters are not going to be great. Hopefully stocks dont take a beating.

Someone on Telegram app with a good following issued a buy recommendation today so it went up quite a bit but I am not sure if the bottom is reached yet.

(Satya Prakash) #51

It sells in TN and some part of Karnataka also along with Kerela as you have mentioned.

(sagarhalbe) #52

Looks like a leading money magazine recommended KSE today with Rs 3900 as target price.

(Satya Prakash) #53

If sales loss is not more than 20% then I will try to add more. Will see in coming quarter result.

Disc: Invested

(Bhupesh) #54

Animal feed volume down by 20%, Dairy down by 15%

(Satya Prakash) #55

Yes, but profit is down by 50%. That could be due selling on credit to help farmers and retain customers. If management could tell us about when flood effects could be neutralized then that would add clarity. Some growth prospect could help in running of the stock. Now, I am tired of waiting. Big amount stuck here.

Disclosure: Invested.