Small Cap Stock Idea - KCP

In the small cap space, KCP ltd could be a good bet. KCP has diversified portfolio. However, cement is the major contributing segment for KCP. It has good potential in the sugar and heavy engineering space as well. KCP completed 70 years in the last financial year. Recently, KCP declared a dividend of 0.75 per share (or 75%).

In the financial year 2011-12, it has shown significant growth in spite of gloomy scenario in Indian economy. Income from operation has been increased from 36173 lakhs to 68725 Lakhs, an increase of 90%. The operating profit jumped from 5537 Lakhs to 8344 lakhs, an increase of 50%. Net profit has been increased from 4135 Lakhs to 6153 Lakhs, an increase of 48.8%.

On a consolidated basis, the revenue has been increased from 70465 Lakhs to 110557 Lakhs, an increase of 57%. Operating profit has been increased from 11316 Lakhs to 15074 Lakhs, an increase of 33%. Net profit has been increased from 9590 Lakhs to 12751 Lakhs, an increase of 33%.

Standalone	Revenue			Profit
Segment	2012	2011	% Growth	2012	2011	% Growth
Engineering	14401	13314	8%	3405	4541	-25%
Cement	54232	22494	141%	5384	1886	185%
Power	1905	1752	9%	748	745	0%
Sugar
Others	245	556	-56%	-107	-120	-11%
Total	70783	38116	86%	9430	7052	34%

Consolidates	Revenue			Profit
Segment	2012	2011	% Growth	2012	2011	% Growth
Engineering	22172	20296	9%	3712	5081	-27%
Cement	54232	22494	141%	5384	1886	185%
Power	1905	1752	9%	748	745	0%
Sugar	34061	26680	28%	6941	5515	26%
Others	245	556	-56%	-107	0
Total	70783	38116	86%	9430	7052	34%

There is a loss in engineering sector mainly owing to the poor demand and realization. Cement sector has seen significant rise in demand almost 141%. Sugar has also seen a spurt in profit of 26%.

India is the second largest producer of cement in the world. The cement industry has good potential to boom as there is thrust to improve the infrastructure. In the financial year 2011-12, most of the companies have posted good revenue growth on the account of economic recovery in the second half. In 2011-12, the cement industry grew from 5% to 6.4%. In the cement segment, KCP has put major effort to increase its capacity. In March, 2011, it has commissioned its clinkerisation facility at Muktalaya. Also it has started production in the cement unit II in May, 2011. However, this segment is having risk from its input of coal and power. According to a report on the industry for the 12^th five year plan, India would require overall cement capacity around 480MT, whereas the current capacity is 330 MT.  As a result, most of the cement companies are planning to increase their production capacity. It is expected that the ccountry’s cement production will grow at CAGR 12%.

Risk :

a ) The cement sector is cyclical in nature. The boost in demand accompanied with fall in cement price.  The cement price has been fallen from 306/50kg to Rs 290. There may be further slip in cement price. This will put pressure on the profit margin.

b) Coal availability – Cement industry is very much dependent on coal. Though the coal price has seen a slide of 20% this year. This is owing to oversupply and tepid Asian demand. Any rise in coal price from hereon will impact the net profit.

c) Uncertainty in power supply – Power supply is predominantly controlled by the power transmission company, which are mostly under direct control of the government. To reduce such risk, KCP is using the captive power plant in parallel with power procurement.

EPS – From 2.99 to 4.56 and on consolidated basis it has been increased from 5.89 to 8.01

Concern: Though the long term borrowing has been reduced from 21844 Lakhs to 17627 Lakhs, the debt equity ratio needs to be improved.

The stock is available in very cheap valuation of PE 7 (trailing) whereas the industry PE (for cement sector) is 17.

The book value of the stock is also quite high i.e. 26.73

Based on the thrust on Infrastructure from Government, potential growth and cheap valuation, the stock can be a good bet for a one year period.

Suvendu – 04-Aug-2012

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