Kanchi Karpooram Ltd

Stock Opportunities Untested - but worth a good look
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Kanchi Karpooram Limited

CMP : 483 (As on 11th Jan 2019) Market Cap : INR 200 Cr.

Kanchi Karpooram Limited is south India’s largest producer of variety of terpene and paper chemicals. The company’s main product is camphor. Besides camphor and its derivaties, the company also produces Gum rosin and Rosin Derivatives. As per latest annual report, “the Directors find it potential to go for an increase in the capacity of production of its products as well as add few more new value added products in its list in the years to come. The market study for the new products is encouraging.” The company is undergoing major expansion plan which is expected to be completed by June 2019. The company has already acquired land for expansion. The company has already submitted expansion plan to environment clearance. http://environmentclearance.nic.in/writereaddata/Online/TOR/16_May_2018_1845028975T3IZAYRAnnexure.pdf.

Camphor prices are increasing due to higher demand and the same is reflected in financial performance of all the camphor manufacturing companies. Demand of camphor is likely to be strong. The major raw material is imported which exposes the company to forex risk. Raw Material prices have also increased. However, company is likely to pass on the increased cost to the customers due to increased demand of its products. To fund its expansion, the company has issued 222220 share warrants @ 360 each (Including premium of Rs 350 ) on preferential basis to promoters. I see it as slightly negative for retail investors as the warrants has been issued at significant discount to current market price. However, it also indicates that promoters are .confident that the changed business scenario is here to stay for long.

Financials:-

The financial performance of the company has improved significantly during last six quarters. The same is reflected in the share price of the company.

(in Cr.) Sep-18 Jun-18 Mar-18 Dec-17 Sep-17 FY 17-18
Income Statement
Revenue 54.87 46.56 34.06 30.33 29.79 117.07
Other Income 0.02 0.01 0.22 0.42 0.01 0.72
Total Income 54.89 46.58 34.28 30.75 29.80 117.79
Expenditure -42.16 -32.23 -27.32 -24.48 -23.36 -93.87
Interest -1.25 -0.23 -0.25 -0.29 -0.40 -1.45
PBDT 12.73 14.35 6.96 6.27 6.44 23.91
Depreciation -0.24 -0.23 -0.21 -0.21 -0.21 -0.85
PBT 12.49 14.12 6.74 6.06 6.23 23.07
Tax -4.39 -4.08 -2.09 -2.25 -2.21 -7.89
Net Profit 8.10 10.04 4.66 3.81 4.02 15.18
Equity 4.14 4.14 4.14 4.14 4.14 4.14
EPS 19.56 24.23 11.24 9.19 9.69 36.65
CEPS 20.13 24.79 11.75 9.70 10.20 38.69
OPM % 23.20 30.81 20.42 20.67 21.62 20.43
NPM % 14.77 21.56 13.67 12.55 13.48 12.97

Source : www.bseindis.com

Company is enjoying ROE more than 50%. Company has reduced its debt from INR 23 Cr to INR 18 Cr during first half of FY 18-19. Company’s share is presently trading at trailing PE of less than 8. There seems to be some inventory gain in June quarter resulting in abnormal jump in margins.

Shareholding:-

As on 30th Sep 2018, promoters hold 41.67% in the company. Low promoter holding is a negative point. However, the company has issued warrants to promoters on preferential basis. The promoters’ shareholding will increase to 44.64 % if all the warrants are exercised. Approx 1/3rd of public shareholding is in physical form.

Dividend:-

The Company is regularly paying dividend since FY 2012-13. Company has increased dividend payout for FY 2017-18.

S.No Financial Year Rate of Dividend Dividend Amount Per Share (Rs.)
1 2013-14 15% 1.5
2 2014-15 5% 0.5
3 2015-16 15% 1.5
4 2016-17 15% 1.5
5 2017-18 20% 2.0

Credit Rating:-

Crisil has assigned long term rating CRISIL B+/Stable with the suffix ‘ISSUER NOT COOPERATING’. Similarly, India Ratings and Acuite Ratings have shifted the company to non-cooperating category.

https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Kanchi_Karpooram_Limited_May_14_2018_RR.html

https://www.indiaratings.co.in/PressRelease?pressReleaseID=31495&title=India-Ratings-Migrates-Kanchi-Karpooram-to-Non-Cooperating-Category

The above observation is considered very negative for and large or mid size company but for a small company, it may not be negative in all cases. Sometimes, small businesses with good credit profile do not want to spend money and efforts on review of credit rating. One should analyze the financial performance of the company before arriving at any conclusion on the above observation. Since the company is doing well, we can ignore the above credit ratings.

Summary:-

Positives

  • Well Experienced Promoters
  • Small Equity Base
  • Return on Equity @ 53%
  • Increased demand from user Industries
  • Significant expansion underway
  • Increased dividend payout
  • Comfortable leverage. Debt equity ratio is 0.33 as on 30th Sep 19
  • Share price trading at PE less than 8
  • Plant strategically located near Chennai seaport

Negatives :

  • Low Promoters’ Shareholding
  • Share already moved up during last one year.
  • Major raw material is imported. Any major depreciation in currency may lead to increase in input cost.
  • Low Liquid Share

Disclosure :- invested.

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Mangalam Organics is in same field as Kanchi Karpooram. As for why the Camphor prices are going up, the thread in Mangalam organics has interesting discussion.

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I hold small qty of Kanchi Karpooram since its ipo in 90s when it was listed only at MSE.unlike 100s of cos which melted away after collecting money thru ipos Kanchi still is growing after clearing 15 years thump rule is a positive sign . Other cos of similar track record of coming with ipos n still r listed n growing hv created big wealth like Avanti Feeds Bharat Rasayan Caplin Point n so many others. Further regular dividend cheque were received. Seems promoter quality is good which is a big essential for me.

Next sector needs to be tracked which seems to have tailwinds may be due to China factor or what ? Kanchi location close to a port gives it an edge as it allows it to import RM easily n south india being much more religious gives it a big captive market n pricing power. Stock needs to be tracked closely inspite of it having created huge wealth in last 3 odd years after getting listed at Bse

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https://www.bseindia.com/corporates/anndet_new.aspx?newsid=d615d081-69ad-4d6d-9537-5aa58f11aa11

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User industries (Paper, Pharma, Paint, tyre etc) are doing well so their will be enough demand. This is evident from the undergoing expansion plan. Please visit Mangalam Organics Thread for details. vast and very useful discussion is available there

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Why should a small company co operate to rating agencies and pay them sir. The company is so confident of selling all its produce without any delay and their repayment cycle is lesser than a month. My 2 cents only

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Guys active on this thread please note that there are a lot of 1-2 liner posts which dont add any value to the discussion. Please refrain from such posts or we will have to suspend membership of those members who litter the thread with useless comments.

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Whilst the company trades at low pE and has very high EPS in excess of Rs 60.cap I have the following concern

  1. It has very low Dividend payout ratio. It is investing in both expansion and in inventory with internal accrual. Can someone please analyse its free cash flow
  2. Last quarter there was a delay in board announcing its results due to some objection from Independent directors. Do we know if there are ant governance issues?
  3. is there clarity on the impact of expansion on P and L and on Balance Sheet

The reason i have raised these points is with the results being announced i intend to update my analysis and any input or thoughts and views will be helpful
i have some shares but stopped accumulating after the board fiasco rang some alarms

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I have already gone through the report and the analysis is quite interesting. I feel some structural changes are happening in Camphor industry as a whole. That is why we are seeing expansion happening. I would like to see this years annual report and capacity utilisation after completion of Expansion

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Good results by Kanchi

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https://myinvestmentdiary.com/industry/indian-camphor-industry/ To begin with, let us understand how Camphor is made. Camphor can be produced in 2 ways:

1. Natural Production: Made from the wood of Camphor tree, mostly found in Japan, Taiwan, Vietnam. With the growing known uses of camphor in chemical industries, Japan raised the prices in the late 19th century. This eventually led to the development of synthetic camphor. Camphor made through camphor wood gives a paltry yield.

2. Synthetic camphor: Was developed in the early 20th century. Much cheaper and scalable. Produced from Pine tree which is abundantly available. Gives a yield of about 90%.

Although India has abundant pine tree but the output from India variety is just 17% compared to 80% from the imported variety. This explains the import of turpentine for these Camphor companies.

Production through synthetic route is at a fraction of cost and available abundantly.

Natural camphor price is at least 3x of Synthetic camphor.

Technical grade(93-94% purity)- Used in Puja

Pharmaceutical grade(98% purity)- Used in pharma

The industry is asset light, without the use of any technology implying very little barriers of entry. Because of not having the requirement of technology know how there exists a number of smaller players rendering the market highly fragmented.

Good post on industry

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Please look at the expansion plan submitted by Kanchi Kapooram to environmental clearance department on 23 August 2019. Company was suppose to increase the capacity by 2x as per earlier application made in May 2018 after which they have revised their plan and made purchase of adjacent land around 3.5 acre on which the expansion is planned.

Kanchi kapooram is expanding its capacity of camphor from 110 MT per month to 550 MT per month. For other derivative product company is expanding its capacity from 1456 MT to 3596.8 MT. As per timeline given by management the capacity will be live by April 2020. Cost of project is 14 crore. Company has also highlighted the demand and supply gap during festival season. Visit of top management people in European countries and the response they got for their product has made them to go for expansion.

Once the capacity is live think of the turnover company can achieve by operating at maximum utilisation level. Company has appointed Japanese consultant for their project feasibility study.

Further the company has funded the project by issuing preferential allotment to promoter at 360 per share. Debt is negligible as can be seen in annual report. Plant and machinery will be imported through internal accruals.

EIA report of Kanchi Kapooram is attached in 2 parts as the size is big.Kanchi expansion-1.pdf (4.0 MB)

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Part 2 expansion of Kanchi Kapooram.

Environmental clearance department the file is also attached.Kanchi expansion 2_reduce.pdf (2.5 MB) Status.docx (231.6 KB)

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Superb result posted by Kanchi today.

Company achieved highest ever revenue generated in a quarter. NP margin of 15 percent is maintained after paying tax of 30 percent and one time director commission fees of 3.31 cr. CWIP has been expanded further to 5.2 cr from 2.7 cr

If we exclude this events then eps for quarter works out to be 29. Half year eps comes to 50

Company is trading at 4 pe ratio. EAC has already given clearance to expansion plan in the meeting held on 23 October. Hopefully By April 2020 the expansion number will be reflected.

Invested

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http://environmentclearance.nic.in/writereaddata/Form-1A/Minutes/1111201950Q5W8DQ13thminutesofEAC23-25October2019.pdf

Please read page no 55 to 68 for clarification purpose

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  1. Do we know why the company paid Director commission of 3 crore once off. Is this to fundd the speacial issue to promoters
    2< Why is the dividend payout ratio so low?
  2. The two in conjunction could mean the Directors are rewarding themselves and not the reatil investors

request others views on above as a concerned investor

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  1. This was already approved in AGM 2018 were company had turnover of 118 cr in March 18 which was increased from 59 cr.
  2. They have paid out all debt of 22 cr as on 31 march 2019 and became debt free and further internally funded for CWIP. The debt outstanding at 30 september 2019 is FCNR debt which is fully repaid during current period.
  3. U need to reward the management for their hard work as on 31 March 2017 the topline was mere 59 cr which is currently increased to 197 cr TTM basis. Profit increased from 3 cr to 28 cr. Operating profit is 28 cr on 43 cr of net profit means company is converting profit in to actual realisation.
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If they pay of all debt, improve operations and tactically expand capacity I think the commission is not a big issue although it is high for a small company.

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Could you also explain why the dividend payout ratio is abbysmal.it is less than 3 %. This along with rewarding the promoters means the small share holders do not get a piece of the profits whilst the owners do. This is my concern

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