September 18, 2015
Buy
KCP Ltd
Initiating Coverage
Industry: Diversified
“Cementing a turnaround”
KCP is a diversified business group, with business interests in cement, heavy
Stock Data
engineering, power, sugar, hospitality and building materials. It earns 85% of
Current Market Price (₹)
its top-line from cement business where it is a regional player in Andhra
69
Target Price (₹)
105
Potential upside (%)
52
Pradesh with a 2.3 mn ton capacity in its 2 plants in Macherla, AP and
Reuters
KCP.BO
Muktyala, AP. It has a heavy engineering division with 2 heavy manufacturing
Bloomberg
KCPL IN
facilities having a 4,500 MT foundry and 6,000 MT fabrication capabilities in
Tamil Nadu. It is also a player in the Vietnam sugar industry with a capacity of
Key Data
6,000 tcd, expanding to 8,000 tcd in FY16E and 10,000 tcd in FY17E.
Market Cap (₹ bn)
Locational advantage to drive KCP’s cement demand.
9
52-Week Range (₹)
87 / 46
Avg Daily Trading Value last 6 mts(₹.mn)
10
Both the cement plants are located within a 125- 175 km range of the proposed
Promoters (%)
Amaravati capital city (Area: 212 sq.km) located centrally in the proposed Andhra
FII Holding (%)
0
DII Holding (%)
12.87
Public & Others Holding (%)
39.79
Pradesh capital region site (Area: 7,420 sq. km) spreading from Vijayawada to
Guntur. In addition to this, there are a lot of infrastructure projects in the pipeline for
Andhra Pradesh and Telangana which would drive cement demand.
47.34
Fiscal YE
Production discipline to sustain rich realisations
YE Mar
FY14
FY15 FY16E FY17E
The strict production discipline followed by south cement players is expected to be
Revenues (₹ Mn)
6373
6072
EBITDA Margin (%)
9.5% 15.9% 19.3% 20.1%
PAT Margin (%)
0.2%
2.6%
5.5%
7.8%
0.1
1.2
2.9
4.5
-1.0
0.9
1.1
0.9
P/B (x)
3.9
2.5
2.3
2.0
EV/EBITDA (x)
6.7
3.7
2.3
1.6
adhered to as they would remain consistent with the demand–supply dynamics.
Hence, a sustained scenario of high realisations combined with operating leverage
EPS(₹)
benefits would assist profitability.
FCF/EBITDA
Upturn in heavy engineering provides a potential upside trigger
6629
7294
The heavy engineering division, once the stalwart of KCP, became a loss making
ROCE (%)
7.9% 13.4% 18.8% 21.8%
division in FY15 due to slowing down of the economy. The turnaround of this
ROE (%)
0.4%
4.4%
division has significant upside to the top-line, and even more to the bottom-line,
Net Debt/ Equity (X)
1.1
0.9
9.5% 13.1%
0.6
0.4
being a high margin business which has not been factored by us in our forecast.
Relative Price Performance
Unlocking value from one of its many significant investments on land
180
KCP has also constructed a business grade four star hotel at a prime property in
160
Somajiguda, Hyderabad in order to unlock value from one of their many significant
140
investments on land done over several decades of its existence.
Operating leverage to bolster EBITDA margins
120
100
Improving capacity utilisation and higher operating leverage would result in increase
80
in EBITDA margins from 15.9% in FY15 to 19.3% in FY16E.
60
Sep-14
Valuation
Jan-15
May-15
KCP Ltd.
Sep-15
S&P Bse Sensex
At 2.3x EV/EBITDA on current fiscal earnings, KCP trading multiples are attractive
for an investor and we recommend a BUY with a one year price objective of ₹105.
One Year Indexed
(3.5xEV/EBITDA)
(%)
Absolute
BSE Relative
Yashas Bhat
yashas_bhat@lkpsec.com
+91 22 6635 1220
1 Month
3 Months
12 Months
(13)
13
30
(6)
16
33
KCP Ltd.
Company Profile
KCP is a 74 year old diversified business group with a turnover of ₹6.2 bn on as per
its standalone financials of FY15. Founded as a co-operative sugar plant in 1941,
the company now has interests in:






Cement
Heavy Engineering
Sugar
Power
Hospitality
Building Materials
As a group, the company has over 9 manufacturing locations in India and Vietnam
and has set up over 40 sugar factories and 12 cement factories in India and
overseas. It has a subsidiary in Vietnam where it is a player in their domestic sugar
industry with a current capacity of 6,000 tcd. The sugar manufacturing capacity is
expanding to 8,000 tcd in FY16E and 10,000 tcd in FY17E. It has also partnered
with Fives Group (France) through a joint venture to execute turnkey sugar plants.
On a standalone basis, the main revenue stream for the company is its cement
business who’s contribution to the top-line has gone up from ~50% to ~85% in
FY10-15 and to the bottom-line from ~35% to ~83% of its profitable businesses in
FY10-15. It has 2 cement plants with a combined capacity of 2.3 million tons in
Muktyala, AP and Macherla, AP.
Trend in division wise contribution to the top-line (standalone)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2010
2011
2012
Engineering
2013
Cement
2014
2015
Others
Source: Company, LKP Research
Trend in division wise contribution to the bottom-line (standalone)
120%
100%
80%
60%
40%
20%
0%
2010
2011
2012
2013
2014
2015
-20%
-40%
Engineering
Cement
Others
Source: Company, LKP Research
LKP Research
2
KCP Ltd.
Investment Argument
Locational advantage expected to drive cement demand
Both cement plants located close to
AP capital region. Other infra projects
may drive cement demand.
KCP made foray into the cement business in 1958 with the commission of a 200 ton
facility in Macherla, AP. The company manufactures grade 53 OPC and PPC
cement variants. Since its inception, the cement business has grown exponentially
to a total installed capacity of 2.3 mn tons. The breakup of the installed capacities is
given below:
Plant
Capacity (Mn Tons)
Macherla, Guntur District, Andhra Pradesh
0.8
Muktyala, Krishna District, Andhra Pradesh
1.5
Total
2.3
Both the cement plants enjoy a great locational advantage. The plants are located
within a 125- 175 km range of the proposed Amaravati capital city (Area: 212 sq.km)
located centrally in the proposed Andhra Pradesh capital region site (Area: 7,420 sq.
km) spreading from Vijayawada to Guntur. In addition to this, there are a lot of
infrastructure projects in the pipeline for Andhra Pradesh and Telangana like the
proposed East Coast Economic Corridor, Dedicated Freight Corridor, Diamond
Quadrilateral High Speed Rail and National Waterways. With infrastructural activity
expected to gain momentum from H2 FY16E aided by higher government spending,
especially in AP and Telangana, cement demand is set to increase steadily to 7-8%
for FY 16E, which will benefit KCP greatly.
Proposed Andhra Pradesh Capital Region (7,420 sq. km)
Source: Google, LKP Research
LKP Research
3
KCP Ltd
Increasing capacity utilisation expected to improve operating leverage
Increase in cement demand may
improve capacity utilization and
operating leverage
Cement Industry in South India has faced an oversupply scenario since the past five
years due to policy paralysis and political instability in the region, completion of
incremental capacity building and tepid growth of the Indian economy in general.
Cement plants located in the South are operating at a sub optimal level of ~55% in
general. However, in our opinion, a gradual and steady upturn in sustainable
economic growth, especially in AP and Telangana, and lack of any significant
capacity additions may help KCP achieve a higher capacity utilisation of ~65% in
FY 16E and ~70% in FY 17E as compared to 60% in FY 15. This may help the
company achieve higher operating leverage and may significantly contribute to
higher EBITDA margins estimated at 19.3% and 20.1% in in FY 16E and FY 17E
from 15.9% in FY15 respectively.
Cement plant capacity utilisation
90%
85%
80%
75.1%
75%
65%
60%
70.4%
67.6%
70%
64.9%
60.0%
56.0%
55%
50%
45%
40%
FY12
FY13
FY14
FY15
FY16E
FY17E
Capacity Utilisation
Source: Company, LKP Research
Production discipline sustaining high prices
Production discipline expected to
keep realizations high which may
bolster margins
Cement players in South India have maintained strict production discipline leading
realisations to increase significantly over the past 5 quarters from ~ ₹285 per 50 kg
bag in Q1FY15 to ~₹ 376 per 50 kg bag in Q1FY16. Currently, the realisations are
the highest as compared to the rest of the country. It is expected that this production
discipline would be maintained even after demand picks up as the manufacturers
would remain consistent with the demand–supply dynamics. Hence, a sustained
scenario of high realisations combined with reducing costs due to operating leverage
would lead to robust margins.
Trends in realisation per 50kg bag in South India
385
372
378
376
Q1FY16
2016E
370
355
340
333
334
Q2FY15
Q3FY15
325
310
295
285
280
265
250
Q1FY15
Q4FY15
Source: Company, LKP Research
LKP Research
4
KCP Ltd
Upturn in heavy engineering business can result in significant upside.
Pick up in the investment cycle may
provide a significant upside to KCP
After establishing a sugar co-operative in 1941, KCP branched out to the heavy
engineering (HE) business in 1955. The company offers heavy manufacturing
capabilities with a fully integrated steel foundry, heavy fabrication, and heavy
machine shops with assembly facilities in Thiruvottiyur, Chennai and Arakkonam
(100 km from Chennai). The Thiruvottiyur plant is in close proximity to Chennai,
Ennore and L & T Katupalli ports and both the plants are well connected to national
highway routes. A brief snapshot of HE division is given below:
Particulars
Thiruvottiyur
Arakkonam
Year Established
Total
1957
1984
2
3,00,000
40,000
3,40,000
2
50,000
10,000
60,000
Foundry
4,000
-
4,000
Fabrication
5,000
1,500
6,500
Chennai, Ennore and L & T Katupalli Ports
~ 9 km
~ 100 km
Chennai Airport
~ 30 km
~ 120 km
Plant Area (m )
Cover Area(m )
Capacity Per Year (MT)
Proximity to
Close to National Highway
(For transporting upto 150T)
NH 4, 5 and 45
The demand for heavy equipment depends on the pace of industrial activity and
state of the economy in general. The recession of 2007-08 as well as the growth of
the cement business of the company has resulted in a declining trend in the
contribution of the HE division to the bottom line. The HE division, which once
contributed ~ 60% of profits in 2010 has shrunk over the years to be a loss making
entity in FY15, as the paucity in new order intake forced the company to accept low
and nil contribution orders to fill up capacities.
We believe the subpar performance of the HE division can be attributed to the
stagnation prevailing in the economy. We expect that the investment cycle will
gradually pick up in H2 FY16E. This presents a significant upside potential on
account of better performance of the HE division due to improvement in
infrastructural and industrial investments, capabilities of the HE division, it’s close
proximity to all the major transportation routes and it’s diversified clientele of reputed
companies.
Other businesses sweeten the deal through cost savings and
diversification benefits
Presently, the cement business is the main driver for the top line and the bottom line
for KCP. But the company has other business interests other than cement such as
power, sugar, execution of turnkey sugar plants and ethanol distilleries, hospitality
and building materials. These businesses have a relatively low share of the top line
and the bottom line. A brief snapshot of these divisions is given below:
The company saves on its power
costs and improves EBITDA margins
due to captive generation of power
Power
The power division of KCP commenced to meet the power needs of the cement and
HE businesses. Details of the power plants operated by its power division are given
below:
Power Type
LKP Research
Capacity(MW)
Supply to
Hydel
Wind
8.25
3.75
Macherla Cement Plant
Heavy Engineering Division
Thermal (Waste Heat Recovery)
2.50
Macherla Cement Plant
Solar
1.15
Established to contribute to
renewable energy and to accrue
Renewable Energy Certificates
Thermal
18.00
Muktyala Cement Plant
5
KCP Ltd
As a result of captive generation of power, the company has been able to save on its
power and fuel costs which help improve EBITDA margins. In addition to this, an 18
MW plant in Muktyala was newly commissioned in H2 FY15. We believe that the
new thermal plant along with higher realisations from cement sales has helped to
further reduce the burden of power costs which has seen a steady decline from Q2
FY15 as illustrated below.
Trend of percentage of power and fuel to sales since Q1 2015
35%
30.5%
30%
26.2%
25%
21.5%
17.8%
20%
15.7%
15%
10%
5%
0%
Q1 FY15
Q2 FY15
Q3 FY15
Q4 FY15
Q1 FY16
Power and Fuel % of Sales
Source: Company, LKP Research
Sugar
Expansion coupled with increased
spending on discretionary products
may drive sugar demand
KCP, through its subsidiary KCP Vietnam, is a major player in the Vietnam sugar
industry. Beginning as a supplier of sugar machinery to local factories in Vietnam in
the 1990s, on the invitation of the Vietnam government, the company set up a 2,500
tcd sugar plant in 1999. The current manufacturing capacity is at 6,000 tcd through 2
plants in Son Hoa and Dong Xuan districts in Phuyen Province. The Company has
also obtained an investment license from Province People’s Committee for
expanding the Son Hoa factory to 10,000 TCD in two phases to 8,000 TCD in
FY16E and 10,000 TCD in FY17E. EPC and financing activities for the expansion
are in progress. Also, a preliminary approval to invest in a 60 KLPD Capacity
distillery project to produce fuel grade ethanol and liquor grade ethanol has been
obtained and land has been acquired for the same.
Customer base consist of:

Well known players in the areas of carbonated soft drinks, milk and
confectionery.

Supermarkets and major distributors in HCMC (Ho Chi Minh City) and the
provinces.

Factories purchasing core sugar equipment to factories.

Turnkey projects in sugar and ethanol manufacturing sectors.
The Vietnam economy is on track with real GDP growth improving to 6.3% YOY in
the first half of 2015, driven by stronger domestic demand. Once domestic demand
picks up, demand for discretionary products like soft drinks, confectionary would
increase, which will in turn drive the demand of its prime raw material sugar. This will
improve realisations and revenues. Hence sugar prices and sales volumes are
expected to rise in FY16E and FY17E. The Company in its annual report for FY15
also concurred with this view as it expects the sugar prices to rise in FY16E.
Fives Cail KCP JV
JV has stayed profitable during the
duration of its existence, albeit it
currently being a small operation
LKP Research
Fives Cail-KCP designs and supplies process equipment and complete plants for
sugar, refining and bioethanol industries from cane. Fives Cail specializes on
engineering and design aspects of a sugar plant in order to optimize process
efficiency of sugar machinery and the general plant layout. Since Fives Cail does not
have any manufacturing facilities of its own, it sub-contracts critical equipment
6
KCP Ltd
manufacturing with KCP besides other sub-suppliers. Further, KCP also provides
after-sales service and supply of spare parts to its customers.
Hospitality
It may help unlock value of one of its
many investments in land done over
several decades of its existence.
In order to unlock value from one of their several investments in land, KCP had
proposed the construction of a business grade four star hotel at a prime property in
Somajiguda, Hyderabad. The project, presently costing about ₹853.5 mn, was
scheduled to be commissioned in mid-2013. However, the project had undergone
considerable delay due to factors like the introduction of the Hyderabad Metro.
Hence, the hotel is expected to be available to guests by November 2015. A brief
snapshot of the hotel is given below:

4 star business hotel with 128 rooms.

To be operated by AAPC Hotel management Private Limited under the brand
name “Mercure”, which has over 750 hotels worldwide.

Located at the heart of Hyderabad in the Somajiguda area, which is a major
business centre and shopping destination in the city

The debt for the hotel project is at ₹548.6 mn in 2 loans, the repayment of which
began in Q1 FY16E, amounting to ₹20.6 mn per quarterly instalment.
Hyderabad is currently the capital of both AP and Telangana, has a booming IT
sector, and is also a frequented tourist destination for both domestic and foreign
travelers. A reduced supply of new rooms has benefitted hotel rooms in cities like
Hyderabad, which has seen highest revenue per available room in the past 4 years.
Also, the debt taken for the hotel project is not expected to put a strain on the
company’s cash flows. Because of the Hotel’s locational advantage and low financial
and demand risks, we expect the hotel would not impact the profitability and
financial position of KCP and would help unlock value of one of its many
investments in land done over several decades of its existence.
Building Materials
This forward integration pilot project
can be a potential addition to the
company’s diversification
LKP Research
KCP has launched the building materials division on a pilot basis at Muktyala with
the production of bricks, normal and colored pavers and hollow blocks. Based on the
feedback from the market, more such units could be launched in different areas. In
our opinion, this forward integration pilot project is not material enough to have an
impact on the company’s profitability and financial position.
7
KCP Ltd
Financial Performance
Revenues
The revenues of KCP have grown at a CAGR of 10.1% in the period between FY11
and FY15. The company peaked at FY13 with the highest revenue in the last 5
years amounting to ₹7.8 bn, a result of a stellar performance by its cement business,
and then witnessed a decline to ₹ 6.2 bn in FY15. The reason for this was the
slowdown in investment activity and the economy in general as well as changing
dynamics within the company where the contribution of the HE business started
declining and the cement business emerged as the major contributor to the
company’s top-line and bottom-line. Having said that, we expect revenues to grow at
9.2% in FY16E on account of higher realisations from cement sales coupled with
improved demand in South India, especially in AP and Telangana.
Revenues Trend (₹ mn)
9,000
7,773
8,000
6,398
7,000
7,440
6,762
6,569
6,195
6,000
5,000
4,000
3,307
3,000
2,000
1,000
0
High realisations, improved cement
demand ,and higher operating
leverage to improve top line and
bottom line
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
Total Revenue
Source: Company, LKP Research
EBITDA and EBITDA Margins
KCP has posted very strong absolute EBITDA and EBITDA margins in the past. It
had posted an EBITDA of ₹1.5 bn in FY12 on account of its highest cement
production and sales volume in the past 5 years at ~75% capacity and a healthy
contribution from the high margin HE business at ~ 38% of total revenue from
operations. EBITDA margins have declined from ~26.0% in 2011 to ~ 15.9% in
2015, as a result of decline in the contribution of the HE business with an increase in
the share of the lower margin cement business as well as decline in cement sales
volumes. Going forward, we expect margins to improve to 18%-20% range for
FY16E on account of improving cement demand, sustaining high realisations,
operating leverage, and reducing power costs because of the newly commissioned
thermal plant in Muktyala.
EBITDA (₹ mn) and EBITDA margin trend (%)
1,521
1600
1,463
1400
1,280
1,184
30%
25%
1200
1000
966
20%
822
800
15%
607
600
10%
400
5%
200
0
0%
FY11
FY12
FY13
EBITDA
FY14
FY15
FY16E
FY17E
EBITDA (%)
Source: Company, LKP Research
LKP Research
8
KCP Ltd
PAT and PAT Margin
KCP’s PAT has jumped tenfold in FY15 because of a weak FY14, reason being
cement sales muted and HE business aggravating the situation by its negligible
contribution to the company’s profitability. Going forward we expect the PAT and
PAT margins to double on account of higher realisations, stronger demand leading
to higher sales, operating and financial leverage. We expect ~ 5.5% PAT margin in
FY 16E. In the ensuing years, due to high debt repayments, and lower capex outgo,
we expect finance costs to reduce, thus providing a boost to the bottom line.
PAT (₹ mn) and PAT margin trend (%)
700
12.0%
615
578
600
10.0%
500
8.0%
370
400
6.0%
305
300
200
4.0%
159
146
2.0%
100
13
0
0.0%
FY11
FY12
FY13
PAT
FY14
FY15
FY16E
FY17E
PAT (%)
Source: Company, LKP Research
Key Risks
The Vietnam sugar business may face an increase in competition from imports from
countries like Thailand on account of a possible relaxation of tariff quotas on sugar
imports.
Valuation
At 2.3x EV/EBITDA on current fiscal earnings, KCP trading multiples are attractive
for an investor and we recommend a BUY with a one year price objective of ₹105.
(3.5x EV/EBITDA)
LKP Research
9
KCP Ltd.
Financials (standalone)
Balance sheet
Income statement
YE Mar (₹ Mn)
FY14
FY15 FY16E FY17E
YE Mar (₹ Mn)
FY14
FY15 FY16E FY17E
Revenues from operations
6,373
6,072
6,629
7,294
SOURCES OF FUNDS
Raw Materials Cost
1,471
1,235
1,368
1,496
Equity Share Capital
209
129
129
129
Power and Fuel
1,651
1,437
1,193
1,313
Reserves and Surplus
3,425
3,459
3,765
4,278
Freight and Forwarding Charges
1,081
882
928
1,021
Total Net Worth
3,634
3,588
3,894
4,407
Stores and Spare Parts
493
386
331
365
Total Debt
4,017
3,598
2,930
2,294
Employee Benefit Expenses
525
526
534
542
Total Liabilities
7,651
7,186
6,824
6,701
Others
544
639
994
1,094
APPLICATION OF FUNDS
Gross Block
8,978
9,588
9,664
9,664
EBITDA
EBITDA Margin (%)
607
966
1,280
1,463
9.5%
15.9%
19.3%
20.1%
341
343
400
377
Depreciation
Other Income
195.0
122.4
132.6
145.9
461
746
1,013
1,232
Others
12.0%
15.0%
16.6%
449
489
484
407
Cash and Bank
Inventories
PBT
12
257
529
825
0.2%
4.1%
7.8%
11.1%
Exceptional Items
Tax
-
(12.4)
-
-
(0.7)
80
159
248
Profit from Discontinued Operations
-
(5.5)
-
-
13
159
370
578
0.2%
2.6%
5.5%
7.8%
PAT
PAT Margin (%)
Key Ratios
YE Mar
FY14
FY15
FY16E
FY17E
(0.0)
1.2
2.9
4.5
CEPS
1.7
3.9
6.0
7.4
BVPS
17.4
27.8
30.2
34.2
0.1
0.8
0.5
0.5
Per Share Data (₹)
EPS
DPS
Revenues from operation
EBITDA
PAT
Valuation Ratios (X)
P/E
530
520
507
507
408
473
1,491
Sundry Debtors
452
160
272
380
Loans & Advances
916
713
750
750
76
78
75
75
1,720
2,049
2,061
2,082
Others
Current Liabilities and Provisions
Current Liabilities
Provisions
32
191
276
301
Net Current Assets
1,123
519
526
786
Deferred Tax Liabilities
(576)
(660)
(660)
(660)
Other Long Term Liabilities
(361)
(431)
(462)
(468)
Total Assets
7,651
7,186
6,824
6,701
FY14
FY15 FY16E FY17E
Cash Flow
YE Mar (₹ Mn)
PBT
32.5%
14.3%
56.0%
Tax Paid
59.1%
289
1,358
(95.8%) 1146.9% 133.4%
48.9%
6,247
289
328
Change in Working Capital
9.2%
6,623
289
1,479
Interest
(4.7%)
6,949
289
197
10.0%
(8.9%)
6,645
1,235
Depreciation
Growth Ratios(%)
(2,333) (2,640) (3,040) (3,417)
Current Assets
7.0%
Interest
PBT Margin (%)
Net Block
Investments
EBIT
EBIT Margin (%)
Less: Accumulated Depreciation
Other Operating Activities
12
239
529
825
341
343
400
377
449
489
484
407
(463)
532
253
(83)
1
(80)
(159)
(248)
-
-
-
-
340
1,522
1,507
1,279
(921)
(646)
(75)
-
0.0
(0.1)
-
-
-
-
-
(647)
(75)
-
875
1,432
1,279
(131)
(803)
(743)
(1,725.0)
56.1
24.0
15.4
40.8
17.7
11.6
9.3
Capital Expenditure
P/BV
4.0
2.5
2.3
2.0
Change in /Investments
EV/Sales
0.6
0.6
0.4
0.3
Other Investing Activities
-
EV/EBITDA
6.7
3.7
2.3
1.6
CF from Investing (b)
(921)
(1.0)
0.9
1.1
0.9
Free Cash Flow (a+b)
(581)
1.1
0.9
0.6
0.4
Increase/ Decrease in borrowings
737
P/CEPS
FCF/EBITDA
Net Debt/ Equity (X)
CF from Operations (a)
Profitability Ratios (%)
Dividend paid
(34)
(124)
(64)
(64)
ROCE
7.9%
13.4%
18.8%
21.8%
Interest paid
(449)
(489)
(484)
(407)
ROE
0.4%
4.4%
9.5%
13.1%
CF from Financing (c)
Net Change in cash and cash eq.
Dividend payout
Dividend Yield
(250%)
61.0%
17.4%
11.2%
0.1%
1.1%
0.7%
0.7%
Closing Cash and Cash Eq.
254
(744) (1,352) (1,214)
(328)
131
80
65
197
328
408
473
Source: Company, LKP Research
LKP Research
10
KCP Ltd.
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