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Mitali Wagle / Mumbai October 9, 2006

Oil for Profit

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Mustard oil-maker KS Oils' move to directly cater to the retail segment should enhance its profitability. The hectic pace and high stress levels are taking their toll on people, forcing them to become more health-conscious. And this promises a good harvest for KS Oils, the country?s largest mustard oil-maker.

With consumers demanding 'sarson ka tel' (mustard oil), which reportedly lowers heart attack risks by around 70 per cent, the company plans to address the retail market directly. This would mean high realisation for the Rs 600 crore company.

An integrated oil producer, KS Oils also processes rapeseed oilcakes, refines soyabean oil, and makes vanaspati for households and solvent for industries.

Based in Morena, Madhya Pradesh (MP), near the mustard belt and in proximity to major mustard trading markets such as Rajasthan, Haryana and Uttar Pradesh (UP), the company procures the best seeds ? and at competitive prices. The largest supplier of edible oils to the defence forces, KS Oils controls more more than half the north-eastern market. While 40 per cent of its revenue comes from mustard oil, refined soya oil contributes 33 per cent. The solvent segment chips in 20 per cent to its revenues, while the balance 7 per cent comes from vanaspati sales.

From commodities to retail : KS Oils is currently going in for a makeover to enhance its retail presence. ?We are moving away from being a commodity player to become a branded player. Talks are on with leading retail chains and hypermarkets to strengthen our retail basket and improve realisations,? says CEO Sanjay Agrawal.

Last fiscal, the retail segment contributed 20 per cent to the company's revenue. This year, the management expects the contribution from retail to increase to 40 per cent. KS Oils markets mustard oil under Double Sher, and Kalash, the leading brands in the northern and eastern regions, and vanaspati under the KS Gold brand. Double Sher enjoys 70 per cent market share in the North-East. The company is setting up 200 distribution centres in Orissa, Bihar,Chattisgarh, Uttaranchal, Delhi, Haryana, Jammu and Rajasthan to improve its brand visibility. As many as 42 distribution units are already operational.

KS Oils has come up with attractive packages to tap retail customers, who have been using unbranded oil for household consumption. It is setting up a Rs 50 crore integrated packaging plant that can pack 400 mtpd to enhance product quality. The company will spend Rs 2.5 crore between December this year and March next year for advertising its brand on television channels and in print media. It has earmarked an advertising budget of Rs 4.5 crore for the next financial year.

The expansion plan

The Rs 60,000 crore domestic edible oil market, which is growing at 6 per cent a year, is witnessing a shortage. So, more than 40 per cent of local demand is met through imports.

As high as 80 per cent of the country?s cultivated oilseeds output comes from groundnut, soyabean and mustard. While oil content in other seeds is around 20 per cent leading to lower yields, at 40 per cent mustard has double that amount. So, the government is encouraging mustard production, which augurs well for mustard oil producers.

KS Oils is eyeing potential mustard oil companies for takeover. Earlier this year, the company acquired a Jodhpur-based edible oil plant with a crushing capacity of 225 mtpd for Rs 25 crore. It is now investing Rs 10 crore in expanding the refinery capacity of its Morena plant by 200 tpd. It is in talks for acquiring another plant of a similar size in MP.

Besides, the company is also focusing on cutting costs. In addition to the two windmills it owns currently, KS Oils is setting up two more for Rs 18 crore in a bid to reduce power costs. This will help the company save around Rs 3 crore in the next two fiscals.

Financials & valuations

KS Oils' net sales rose by an impressive 33 per cent in FY06, while its operating profit jumped 96 per cent to Rs 29 crore and net profit surged a whopping 297 per cent to Rs 16 crore.

In the June 2006 quarter, its net sales registered a robust 53 per cent y-o-y growth at Rs 216.5 crore. Operating and net profits surged 95.5 and 491 per cent, respectively.




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We are expecting Rs 1,100 crore revenues in this fiscal and Rs 1,500 crore in the next. With increasing exposure to the retail business and power cost savings, we see our operating margins to move to 8 per cent over the next two years,? says Agrawal.

At the current price of Rs 157, the KS Oils scrip trades at 10.2 times its FY06 earnings. The valuations of other players in the segment are: Ruchi Soya Industries (11.2x), Agro Tech Foods (18x) and Sanwaria Agro Oils (8.3x). The stock trades at 8 and 5.8 times its estimated FY07 and FY08 earnings, respectively.

Analysts feel that the stock is fairly priced at the current levels. Considering the company?s changing business focus in favour of the high-margin retail segment, the counter looks attractive from the long-term perspective.

KS Oils looks very promising as it is moving towards being an FMCG firm,? says Arun Kejriwal of Kejriwal Research & Investment Services.