Monday, December 28, 2009


Capturing opportunities in growing edible oil market: KS Oils (KSO) is a market leader in the Rs130bn mustard oil market, with 11% market share (FY09). It also has ~30% market share in branded mustard oil segment (current market size of ~Rs39bn) which is expected to grow at ~25% CAGR, going forward. By FY11, the company is expanding its mustard oil crushing capacity by ~3x (of its FY09 capacity). We believe that the multi-product brand portfolio will push KSO to capture the growing branded mustard oil market. Further, KSO is expanding ~4x of its FY09 refined oil capacity by FY11. We believe that a strong market presence in mustard oil, strong brands and rich experience in edible oil industry will help KSO capture the ~Rs600bn refined oil market in India.

Striding towards sustainable growth

Capacity expansion will support growth: KSO is expanding its capacity across segments like crushing, refining and vanaspati by ~3x, ~4x and ~2x (its FY09 capacity), respectively by FY11. We believe that it would support KSO to attain ~40% plus FY09- 12E volume CAGR. We believe that KSO Sales and PAT would grow at FY09-12E CAGR of ~31% and ~33%, respectively. We expect contribution from the sales of high margin branded mustard oil to go up in the future and consequently, increase overall EBITDA margins of the company. However, this growth in the EBITDA margins would be offset by rising contribution of low margin refined oil business to total sales, going forward.

Backward integration through palm plantation: KSO has acquired a land bank of 34000 hectares for palm plantations in Indonesia. This will ensure a steady supply of crude palm oil for its refining business and EBITDA margin is expected to be ~50% once the plant matures in 3-4 years. KSO has further acquired 23,000 hectares in Kalimantan in Indonesia. We have not considered any income from these palm plantations since the income would start accumulating from FY13.

Valuation: Based on one year forward P/E, KSO is trading at a discount to its global as well as domestic peers despite having higher earnings CAGR and higher return ratios (RoE). We are positive on the stock on account of its strong edible oil market presence, its growth potential and discounted valuation. At present, stock is trading at near to lower end of its historical forward P/E band of 8x-14x. Hence, we recommend ‘BUY’ the stock.

To read the full report: K S OILS