Kesoram Industries: One of the cheapest cement stocks

Beta 0.8
Institutional holding 32.8%
Dividend Yield 2.1%
P/E 3.2
M-Cap Rs 1228.4 cr
CMP Rs 268.5

Kesoram Industries, the flagship company of the BK Birla Group, is a diversified player with a presence in cement and tyres. Octogenarian industrialist BK Birla had recently willed this company to his grandson, Kumar Mangalam Birla. Kesoram has benefited from the boom in the cement industry over the past three years, which helped the company offset the slump in profits of its tyre division. It is now set to emerge as one of country’s leading tyre makers. The company is currently one of the cheapest stocks in its category and may be re-rated as the management control passes on to the Aditya Birla Group, India’s third largest business house.

Business:

Kesoram Industries’ installed cement capacity at end of FY09 was 5.3 million tonnes, with plants in Karnataka and Andhra Pradesh. In addition, the company has recently brought on stream an additional 1.6 million tonne cement capacity. This additional capacity is expected to help the company’s net sales jump by Rs 500 crore in FY10. The tyre division’s capacity was at 37.1 lakh units at the end of FY09, with plants in Orissa and Uttarakhand.

The company’s viscose filament rayon yarn capacity is at 6,500 tonne at the end of March 2009. The cement division contributed nearly 48% to the company’s topline in FY09, while tyres accounted for 45.5%. The company is currently setting up a tyre plant to cater to the twowheeler sector at Uttarakhand with a capacity of 78 lakh tyres per annum and capex of nearly Rs 190 crore.

Expansion plans:

The company is planning a further expansion plan of nearly Rs 1,550 crore, which would entail the addition of 1.65 million tonnes cement capacity in Karnataka, with a capex of nearly Rs 750 crore. Also, the company plans to invest Rs 800 crore for expansion of its tyre business. Post-expansion, Kesoram is set to emerge as one of the top three tyre makers in the country.

This expansion plan will be financed by a mixture of internal accruals and debt. During FY09, Kesoram’s cash flow from operations was to the tune of Rs 370 crore. Against this, cash used for investment activities was a little over Rs 1,034 crore. The company’s debt-equity ratio had risen to 1.46 at the end of FY09, slightly higher than the previous year. However, with Kesoram’s comfortable cash flow and expected turnaround in the tyre business, the leverage ratio is expected to either remain stable or decline over the next two to three years.

Financials:

In the March 2009 quarter, the company’s net sales grew 26.1% to Rs 1,108 crore, but its operating profit margin declined due to higher operating costs, especially in the tyre business.

Valuations:

At Rs 268.55 Kesoram trades at a discount to its book value and just 3.2 times it’s FY 09 earning per share. This is lower than valuations enjoyed by diversified companies like Orient Paper, Century Textile and Birla Corp among others.