Friday, May 12, 2017

Kesoram Industries - Trusted Technology – Solid Strength

CMP = 144

Kesoram Industries is part of the BK Birla Group and one of the oldest conglomerates in India since 1919. It has grown from strength to strength with diversified presence in the cement, tyre and rayon yarn.

Birla Shakti Cement 

Kesoram Industries operates two cement manufacturing plants with a combined capacity of  7. 5 million metric tons. 'Birla Shakti Cement' is the flagship brand of cement division and others brands  'Kesoram' and 'Vasavadatta' are also well established over long period. The cement manufacturing plants are located at Sedam in Karnataka 'Vasavadatta Cement Plant' and Basantnagar in Andhra Pradesh 'Kesoram Cement Plant'. Both are catering to regional demands in Andhra Pradesh, Maharashtra, Karnataka, Goa, Kerala, Madhya Pradesh, Telangana, Chhattisgarh and Tamil Nadu. The plants are strategically located near company leased limestone deposits in the states of Karnataka and Andhra Pradesh. Its cement grinding units are also located close to captive power plants. Further, Kesoram procures much of its fly ash from NTPC which has power plants in close proximity to both the cement plants.

Cement division is accredited with ISO 9001, 14001, 18001 and 50001 standards and it is only “Greenco Platinum Certified by CII” plant in the country.

'Birla Shakti Concrete' is the ready mix concrete (RMC) brand of  Kesoram Industries with annual capacity 6.5 lakh cubic meters, it is the largest ready-mixed concrete and aggregate production plant in India. It also offer consulting, research, trading, engineering and other services according to customer requirement. It is the first plant in India to offer customers a mobile application for placing orders.

Birla Tyres

Kesoram tyre manufacturing facility at Balasore was originally set up in 1991 with technology sourced from Pirelli UK, the world-renowned tyre manufacturer. Today Birla Tyres meticulously developed in house technology ensures that the Balasore factory manufactures a wide range of tyres for commercial Vehicles, light commercial vehicles, tractors, construction vehicles, and 2 and 3 Wheelers. 

It is one of the few tyre companies in India that offers complete range of tyres across all vehicle sectors under 'Birla Tyres' brand name. It is among the top six tyre manufacturing companies in India.

Investment Rationale 

Kesoram Industries owns very strong business and well recognised brands like Birla Tyres (Tyre division) and Birla Shakti (Cement   division). Its business was performing very well (EPS was above 50) and stock was trading in the range of Rs 400 - 500 in year 2006 - 08. Company went for setting up an ambitious greenfield project at at Laksar (Haridwar) to produce 250 MT of truck tyres per day with cost around 1000 crores. Company get caught on wrong foot due to recession during 2008 and later slow down of business growth in cement and automobile sector. Debt burden keep mounting until last year when Aditya Birla group has raised its stake to get ownership control in Kesoram Industry. After that new promoter K Mangalam Birla has taken several restructuring process to trim the debt and make the company profitable.

The truck and bus radial tyre plant at Haridwar was sold to J K Tyre for Rs 2,200 crore to get rid of a much delayed project carrying high debt burden.

Hiving off its rayon and transparent paper business to unlisted entity, Cygnet Industries, a wholly-owned subsidiary for Rs 480 crore 

Loss making heavy chemical business sold off and divestment in listed companies ( cross holding) at market prices aggregated approximately Rs 470 crores.

After above steps debt and interest came down significantly near to half. Now debt is well manageable at par with industry peers with similar sales and production capacity.

Low rubber prices and positive growth in auto  sector are the major trigger for the tyre business of the company and company supply contract with major auto OEMs in India as well as abroad.

Company has already started the  production of radial tyres for two wheeler, three wheeler and car radial tyre from Balasore new plant. The production of commercial vehicle radial tyre  will start in coming quarters. It is high margin tyre segment which will further enhance the tyre business profitability. 

In cement business, the company sources limestone from its two leasehold mines (one each at both the locations) against royalty payment.

The company meets the entire power requirement for cement manufacturing from its captive coal based power plants, while it sells the surplus power generated (if any) from the plant in the open market.

Company is expected to be a key beneficiary of a cement demand revival in Andhra Pradesh and Telangana where growth of infrastructure will be very high due to creation of new state.

Company has developed a good market for RMC (Ready Mix Concrete). Penetration of RMC has been low at about 8 per cent in India  (USA: 88 per cent; China: 33 per cent; Brazil: 32 per cent) because retail sales comprise mostly of bag cement. It gives good growth possibilities in RMC segment.

Going forward with government’s focus on infrastructure and affordable housing, Housing for All' by 2022, where 11 crore houses have to be constructed at an investment of $ 2 trillion. The cement industry's medium to long term outlook is very optimistic as demand for cement is likely to get boost from industrial and commercial segments as well as from mass housing and mid-income housing schemes across the country.  Cement demand is likely to improve, resulting in higher capacity utilization. Demand from rural market is also expected to rise as better than expected monsoon as well as strong government push for the rural sector will improve rural income. The government has also increased its budget allocation for the IAY (Indira Aawas Yojana), PMGSY (Pradhan Mantri Gram Sadak Yojana) and MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) that have the potential to further improve cement demand. 

Further details reports on Housing growth, Infrastructure growth,  Commercial real estate growth, Development in Metro, Roads, Airports, Urbanisation and industrialisation development in the country and Government Initiatives towards New Schemes are given in below link


Kesoram Industries has very good assets,  strong brand name in cement and tyre segment, business network across the country and  capable promoters.  New promoters has taken every step to bring back the company on track. Significant reduction in debt and interest cost has given very clear visibility that company will make turnaround in coming quarters. The cement industry is expected to continue the growth trajectory for long term because government pushing infrastructure development at full stretch. In the recent past tyre sector has shown good momentum coupled with low cost of rubber and improvement in vehicle demand.  Kesoram Industries at cmp 144 is giving very good investment opportunity for mid to long term. It can be given allocation 10 -20% and bought + /- 10% from cmp.