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Mar 22, 2007

Mr. Sanjay Agrawal, Managing Director, K.S Oils

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K. S. Oils Limited is one of the leading manufactures of mustard/ rapeseed oil in India. K. S. Oils now provides all type of cooking media which include edible oils like mustard, Refined oils, Vanaspati and non edible solvent oil and DOC. The manufacturing facilities of the Company situated at Morena (MP) at a large industrial complex. The Garg family at Morena are the promoters of the K. S. Oils. The Company is leading name in the edible oil industry with an annual turn over of 6,042 Mln. in the year 2005-06. K.S. Oils has a significant market share in Eastern and North-Eastern India. The Company is one of the largest and regular supplier of edible oil to Defence organisation and exports soyabean/ rapeseed meal to foreign buyers.

Replying to Anil Mascarenhas of India Infoline, Mr. Sanjay Agrawal - Managing Director for K.S Oils, says,"We have been approached time and again by many players looking at 51% holding in our company and hence promoters would like to strengthen their position."

Q. India's per capita consumption of edible oils is estimated at around 11.5 kg. per person pa. as against the world average of 20.50 kg per person pa. Give us a brief overview of the refined oil market. What is the size and growth rate?

A. Indian edible oil economy is world's fourth Largest after USA, China and Brazil. India accounts for 7% of world oilseeds & oilmeal production and 10% of world consumption of edible oil. Edible oil demand in the year 2015 is expected to be 21.3mn tons (from 11mn tons currently.)

Q. You have three divisions. Could you give a segment wise performance of each of them?

A. KS Oils is the only company in India with a completely integrated setup of Cold press (Kachi Ghani)Oil mill, Refinery, Solvent Extraction and Vanaspati in a single location. We have currently 4 broad divisions in our company viz. Oil & Refinery, Solvent and Vanaspati. From FY07 a fourth division will be added i.e. Power Division.

Oil & Refinery division, which manufactures Mustard and Refined oil contributes nearly 80-90% to the company's revenue, the other two divisions, solvent and vanaspati evenly contribute to the revenues. From this year the power division shall also contribute to the revenues though in a very small way.

Oil division is the prime division of the company and contributes between 40-50% of the total revenue. Crude (filtered and unrefined) Mustard Oil is manufactured in this division. The crude oil is sold under our brands Double Sher and Kalash. This division will end the year at nearly 500 cr. in revenues with a gross margin of approx. 12%.

The Refinery division which refines the Solvented oil, soyabean oil (whether imported or local or own produced) and other oils should have to turnover of 350 cr. for the current year. It is expected to earn a gross margin of 38 crs. for the company on a gross margin ratio of nearly 11%.

The solvent division extracts oil from the Oil cake/ Soya seeds. The primary sales of this division are Solvented oil and De-Oiled cake. The division accounts nearly 10% of revenues.

The sales of the Vanaspati division have gone down due to the influx of large quantities of duty-free import of Vanaspati and Bakery Shortening from neighbouring countries.

Q. Is the mix likely to change significantly in the coming years?

A. The mix will more or less remain the same with Mustard oil at 50%, soya and other refined oils at 30%, 10% De oiled Cake and 10% a mix of fatty acids, by products, refined oils, and other oils. From next year revenue from Renewable energy (power division) will also start as six wind turbines will be fully operational having installed capacity of 8.5 MW and biodiesel sales.

Q. You market your mustard oil under brands `Double Sher' and `Kalash'. What is the market share in the country? Which are the pockets where you are strong?

A. Double Sher brand is mostly sold in the North-Eastern states of India where it has a dominant position and enjoys high brand loyalty. Double Sher commands a minimum 3% premium over other brands, The market share of Double Sher is 40% in North eastern Seven states, whereas Kalash enjoys 50% market share in Madhya Pradesh with a presence in Delhi, Chattisgarh, Uttaranchal, UP. This year both the brands together will have 17% market share of organized sector of mustard oil in the country.

Q. You are looking at a turnover of around Rs30bn by 2010. How do you expect to achieve the same. Would it be organically or do you have some acquisitions in mind?

A. To achieve our target we are looking at both organic and inorganic growth. In the current year, the company had expanded its Oil mill capacity by 225 mt. per day and refinery capacity by 150 mt. per day. More refining capacity of 100 mt. per day is being added at the Morena facility.

The company also acquired a unit at Jodhpur, which has a daily capacity of 225 mt of Oil mill and 100 mt of refinery. The company is in process of finalizing the lease agreement with an Alwar based plant. The company is looking for some good acquisition targets in the span of every 300 sq. kms throughout the Mustard and Soya oil belt. Talks with some targets are underway.

The company also plans to put up additional Greenfield facilities which will start by this December 2007. The growth chart is a mix of organic and inorganic.

Q. Brief us about your earlier acquisitions like the Jodhpur unit. How was it funded? Have you managed to fully integrate your operations? Any fresh funds being pumped in?

A. The acquisition and expansion of Jodhpur plant is being funded by internal accruals and from the money raised via the Private Equity placement. Jodhpur unit will contribute approx Rs500mn to the current year revenues. The operations are fully integrated from Jan 1, 2007.

Q. Give us your current utilization levels?

A. Year end utilization levels are as follows:
Oil Mill - 60%
Solvent Plant - 80%
Refinery - 70%
Vanaspati - 30%

Q. You have a tie-up arrangement with Alwar-based plant. Any significant output here?

A. The ALWAR based plant did not pass quality control standards and we have made the plant owner to make significant modifications and upgradation to our standards. The plant will start contributing from 1st April 2007 provided the QCC department approves it within the next two weeks.

Q. Retail forms around 20% of your total oil sales. To what extent do you intend to increase it. How are the margins in the retail business, especially if sold through malls.

A. Branded Sales will amount to over 60% in FY07 & FY08 out of which Retail packs will 44% and 50% respectively. The bulk/ trade packs enjoy a gross margin of 8-10% and the retail packs have an average gross margin of 13-15%.
We are currently selling our goods through our Depos, Central Distribution Points and Distributors who then service the retail clients. The company as of now is not selling directly to retail chains or Malls.

Q. Are you planning to launch spa oils for massages? Will it be mustard oil? Who will be your target customers? Outlook for the same? Revenue target?

A. Yes. We are but due to business confidentiality we are unable to provide figures unless field surveys and testing is done properly.

Q. Brief us on your fund raising plan.

A. The company has already raised Rs1.30bn through shares and warrants to Private Equity investors (Citigroup) and the Promoters. At the current stage we do not envisage any further fund raising plans.

Q. What is the rationale in the promoters increasing stake? Are we going to see some heightened activity or do you fear a hostile takeover? What is your current shareholding pattern?

A. Promoters are always looking at increasing their stake and since they have already exhausted their 5% limit for FY08 and FY09 by way of subscribing to warrants of 2.3mn shares, promoters were keen to utilize the full 5% limit of current year. We have been approached time and again by many players looking at 51% holding in our company and hence promoters would like to strengthen their position. The current shareholding pattern forms about 30% FII, 30% promoters and rest is in public holding.

Q. Your stock appears to trade very often at the circuit levels; sometimes at the top end and sometimes at the lower end? Is it more of speculative activity on the counter?

A. The company has been going under major transformation from an inward looking regional player to a more national presence vision, with strong focus on building brands and a robust FMCG network. The professionalisation of the marketing and brand building coupled with the heightened interest in stock due to venture capital CITI VENTURES investing in Dec, there is frequent trading. The stock price shot up after the private equity funding tie up of Rs900mn. Recently, it went down in line with the fall in the market and many investors selling out.

Q. What is your dividend policy? Your message to shareholders?

A. We are yet to devise a dividend policy and would take a decision in this regard soon. Last year we had given 12% dividend and this year on increased capital after the 1:1 Bonus we expect to give dividend in excess of the 12% given last year. KS OILS vision is to create high level of corporate governance and transparency coupled with a strong focus to create wealth and value for its shareholders. KS OILS has just finalized its vision statement "DELIVERING HEALTH AND PROSPERITY" which the entire 1500 strong workforce is striving to achieve. Shareholders have been well rewarded and in the time to come with increased focus on brand building, backward integration in power sector, foray into BIODIESEL from waste fatty acids, the company is poised to increase its profitability and sustainable business model to increase shareholders wealth.