KSE Ltd- Fodder for thought

KSE Ltd (previously known as Kerala Solvent Extractions Ltd) was established in 1963. 

It operates  3 business divisions: Animal feed, Oil-cake processing and Dairy which produce  cattle feed, solvent extracted coconut oil, rice bran oil, de-oiled and oiled coconut cakes and other oil cakes

It is the very first solvent extraction plant in India

KSE Ltd ( KSEL) was promoted by K L Francis, M C Paul, T O Paul and A P George.

The company came out with a public issue at a premium of Rs. 20 aggregating Rs. 2.43 cr in May '94, to meet part of the long-term working capital needs. 

Multi Locational Multi product organization- has 5 production units in Kerala and 2 in Tamil Nadu. Apart from these, it also has 2 outsourced units

Promoter Shareholding : 32.44%

Current Segment revenue mix:

Cattle Feed ( KS brand) to dairy farmers: 75-76%

Oil Cake processing: 21-22%

Dairy products ( Vesta brand sold on a retail basis): 3-4%

All the above products are largely sold in Kerala & also in TN.

Cattle feed division has a network of about 600 distributors.

The above products could be broken down into the following brands:

• KS Milk (milk)
• KS Vesta (ice cream)
• KS Supreme Pellets, KS Delux Plus and KS Forte (cattle feed)
• KS Supreme (sunflower refined oil)

Key positives:

Cattle feed segment has strong prospects as:

Fodder (Feed for livestock, especially coarsely chopped hay or straw) is becoming scarce.

Grazing grounds are getting limited offering exciting opportunity in this space for cattle feed manufacturers.

The company is the market leader in the cattle feed segment. Moreover its has been increasing market share.profitably . 

Main competitor Kerala Feeds is a state govt enterprise and hence has more of a social rather than profit focus.

Current year results have been helped by high price of coconut oil to some extent.

Excellent demand for products as can be seen from low debtors of 1.24 cr  ( which is less than one day’s revenue) as against revenue of 259 cr for six months ended sept 11.

Uninterrupted dividend record since 1976

Challenges:

Employees: 926 . Problems at Vegadir unit. History of periodic labour unrest

Copra cake needs to be imported due to domestic shortages.

Increasing raw material costs

Indirect control by Kerala Govt over price of milk which is a bottleneck in increasing price of feed to offset increase in raw material price.

Financials:

Equity : Rs.3.20 cr

Debt: Rs.17.40 cr

Current Market price: Rs.234

Market Cap: Rs.75 cr

2010-11:

Revenue: Rs.455 cr

PBT: Rs.6.67 cr

PAT: Rs.4.50 cr

EPS: Rs.14.06

Dividend: Rs.10 per share

6-months ended September 2011:

Revenue : 259 cr ( 20% growth yoy)

PBT: Rs.8.69 cr

PAT: Rs.5.88 cr

Promoter Shareholding : 32.44%

Reasons for fodder becoming scarce:

Decreasing area under grasslands, combined with an increasing diversion of crop resdiues for fuel and industrial uses, is creating an acute scarcity of fodder supply for India’s livestock.

Of late, villagers are choosing to use crop residues, such as wheat and rice straw, as fuel wood, instead of diverting it to fodder,

Due to low per acre yield and minimum area under fodder production, the available fodder supply is much less than actually needed.

Valuation:

Dividend payout ratio has been a minimum of 40% of PAT. Current year EPS is conservatively expected to be between Rs.30 & 35.Fodder scarcity offers a large & exciting growth scope for the company . The management is conservative and investor friendly. They have been reducing debt . Also promoter stake has slowly increased over the last one year. Additionally the company has about 4 acres plus land in Mysore which may be monetized in the future. A resolution to this effect has been passed by the company 4 years back.

At the current market price of Rs.234, the company is available at an  EV of about 92 cr. I leave the rest of the valuation math to readers.

At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock.  This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.