A good KS

PENNY WISE

Traditionally, the domestic edible oil industry has been dominated by unorganised players. However, with rising demand for packaged food, revolution in the retail space, growing health consciousness amongst the Indian consumers and the implementation of Value Added Tax (VAT), the organised players are gaining ground.

KS Oils, the largest producer of mustard oil in the country, is aggressively foraying into the retail segment. The company is spending more on brand building and distribution of its products. Apart from making efforts to integrate its plants and streamline its operations, the company also aims to grow its business through the organic and inorganic route.

"We command a market share of three per cent of the total edible oil market and are targeting to increase this to 10-15 per cent over the next three years. We aim to achieve a revenue target of Rs 3000 crore by 2010 as compared to Rs 600 crore in FY06," says, Sanjay Agarwal, managing director, K S Oils. 

FINANCIALS
Rs crore	FY06	FY07E	FY08E
Net sales	604.25	1050.00	1700.00
Operating profit	29.12	105.00	195.50
OPM (%)	4.82	10.00	11.50
Net profit	16.02	63.00	119.00
NPM (%)	2.65	6.00	7.00
P/E (x)	39.70	10.09	5.35

On firm footing
KS Oils is one of the leading manufacturers of mustard in the country. It commands a strong position in edible oils like mustard oil, refined oil, vanaspati oil and non edible solvent oil.

The company has its manufacturing facility at Morena in Madhya Pradesh, which is in close proximity to oil seed cultivating states such as Rajasthan, Uttar Pradesh and Haryana.

The company is a dominant player in eastern and north-eastern India, and accounts for three per cent of the total edible oil market and about 25 per cent of the organised segment.

Under the mustard oil segment, the company's flagship brand Double Sher commands 40 per cent market share in the north-eastern states. Besides, its premium mustard oil brand Kalash is sold in Delhi, Chattisgarh, Uttaranchal and UP and also enjoys 50 per cent market share in Madhya Pradesh. KS Oils also manufactures vanaspati oil under the brand name KS Gold and KS Gold Plus.

It sells soya refined oil branded KS Crystal Clear. Also, the company is the largest supplier of edible oil to the defense sector, supplying almost 8000-10000 tonne of refined edible oil annually, generating Rs 40 crore.

To achieve its Rs 3000 crore sales turnover by 2010, the company is looking at both the inorganic and the organic growth path. Agarwal, says "We will double our existing capacities by FY08, which we will achieve through investments in green field projects and 2-3 acquisitions."

The firm has already acquired one unit in Jodhpur in Rajasthan, which has a daily capacity of 225 tonne of oil mill and 150 tonne of refinery. The company is looking for some more such units.

Getting organised
The domestic edible oil market is controlled by a large number of regional and unorganised players. In terms of size the Indian edible oil market is estimated to be around Rs 60,000 crore and out of this mustard oil accounts for about Rs 12,000 crore. But despite being a huge market, organised players constitute only 20 per cent of the total market. Packaged and branded oil constitute only about 10 per cent.

"We expect to sell branded edible oil products to grow faster at about 20 per cent as compared to the overall industry growth of six per cent," says, Agarwal. The growing preference for branded edible oil and quality products will augur well for the company.

Besides, KS Oils is increasing its focus on the packaged oil segment. The company is actively in talks with leading retail chains, hypermarkets and foreign companies for supplying its products. It also intends to strengthen its retail presence by selling its products in smaller sachets and pouches which are more affordable.

The company plans to invest Rs 12 crore in brand building and distribution this year. It added about 300 distributors last year, which will be increased to 1000 by the end of current fiscal. In FY05, branded sales contributed almost 48 per cent to the company's total income and is likely to increase to over 60 per cent this fiscal.

The bottomline
Increase in the proportion of branded sales will not only result in higher volumes, but also help in improving the company's profitability. Presently branded products have a margin of about 15-16 per cent compared to 11 per cent from the non-branded segment.

Further, the implementation of four per cent VAT will take away the undue advantage unorganised players enjoyed so far by paying nil taxes. Organised players will thus become more competitive.

In March 2006, KS Oils established a power plant of 2.5 MW for captive consumption to slash power cost. Such initiatives have helped in improving margins. The operating margin in FY06 was merely 4.8 per cent, which has gone up to 10 per cent in Q3FY07. The company is expecting this to further improve to 12-13 per cent.

Besides, the company has commissioned a 6 MW wind power plant to sell power in Gujarat. The company will sell power at Rs 3.3 per unit providing an additional revenue of Rs 5-6 crore annually. Driven by higher operating margin and income from other sources, KS Oils will also witness an expansion in net profit margin from 6.6 per cent in Q3FY07 to 7-8 per cent over the next two years.

At Rs 288, the stock trades at price to earnings multiple of 10.1 times and 5.35 times its estimated earnings for FY07 and FY08 respectively.Apart from favourable industry dynamics, KS Oils' retail plans and expansion over the next 2-3 years makes a case for investment. Considering the consistent growth in volumes and expected margin improvement in future, the valuations seem reasonably attractive.