Kesoram Industries - Time to Sell

Kesoram Industries is medium size organization, which operates mainly in the segment of Tyres, Cement and Rayons.

Tyre Segment: Indian tyre industry has seen a growth of 5.3% for the last financial year.  In revenue term, though it’s not significant, this is important as we passed through economic slowdown in the last year. In the beginning of the financial year, the rubber price was Rs 240 per kg. This has been stabilized during the end of the financial year between Rs 185 and Rs 200. The softening of rubber prices has contributed to the revenue growth. The depreciating rupee also has boosted the revenue earned from export.

Despite the reduction in natural rubber prices, the general trend for the raw material is upward. The increase in tyre price is not fully commensurate the increase in raw material price. In general, Tyre maker’s revenue has grown a good 20%, whereas Kesoram’s revenue growth is only 9% for the financial year 2011-12.

Cement Segment: The overall cement segment has seen a revival in the second half of the financial year 2011-12. Most of the cement industries have increased their production capacity and they have posted a good revenue growth in the last year. However, Kesoram performance in this segment is poor. The production from its two plants namely Vasavadatta and Kesoram are as given below

Revenue and Net Profit Share:

	Tyre	Cement	Rayon	Others
Revenue (Crore)	3922	1852	293
PBIT & Dep(Crore)	(180.63)	274.15	9.13	(1.78)

Outlook: Kesoram’s revenue growth is not in line with the industry standard. The major tyre manufacturer’s statistics are as given below (in crores)

	Rev-12	Rev-11	Growth%	NP-12	NP-11	Growth%
Apollo Tyres	8906	6025	48%	181.33	198.25	-9%
JK Tyre	6148	5247	17%	11	61.32	-82%
Ceat	4824	3779	28%	7.54	22.28	-66%
Balkrishna	2015	1397	44%	185.62	206.53	-10%
Kesoram	3922	3598	9%	(428)	(15)	-2753%

To overcome the mute performance,

a)      Kesoram has concentrated on the segment of two wheelers and three wheelers, which has shown better growth in the last financial year in comparison with other segments.

b)      Passenger Car radial tyre project at Balasore with a per day production of 80 MT is currently under implementation.

c)       New management is taking initiatives in different directions to improve the profit margin.

Apart from internal challenges of Kesoram in the tire segment, it is expected that OEM demand for tyres in the financial year 2013 will be between 8 to 9%.

In the Cement segment, though the demand is expected to be high on account of emphasis on infrastructure from government. The overall production in the last financial year has been decreased whereas all its peer has produced more cements than that in 2010-11.

The revenue increase from Rayon is seemed to be flat in 2011-12.

Spun pipes and Foundries and Hindusthan Heavy chemicals facilities continued to be under suspension of work.

Overall the scenario for Kesoram is not very prospective. In the quarter ending Sep-11 and Dec-11, it has posted an operating loss of 71.88 crores and 86.36 crores. In the quarter ending March, 2012, though the gross profit is 52.43 crores, operating profit is only 9.56 croces. Whereas Kesoram needs to solve its internal problems, the external business is becoming tougher. In the tire industry, the current financial year may not see a good growth. Over and above the international brands line Bridgestone, Michelin have already entered into Indian Market. There is more concern that more and more commercial vehicle may shift from cross ply tyres to radial.

There is also high financing cost for Kesoram with a debt equity ratio of 4.5. With this high debt, this will be major outgoing source for the company. In the current financial year, the company has finance cost of 410.15 crore.

Considering the challenges both internal and external, it is recommended that the stock can be sold.

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