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Independent Research Report - KLRF Ltd

Casting about for higher profitability

Industry: Wheat flour milling, textiles, castings

Date:

May 21, 2010

Tamil Nadu-based KLRF (formerly known as Kovilpatti Laxmi Roller Flour Mills Ltd) is a small South India-focused player. It commenced operations in 1964 with the setting up of a roller flour mill. Over time, it has diversified into sheet metal fabrication, textiles and manufacturing of grey iron castings.

CFV Matrix

Excellent Fundamentals

Success of castings business key to growth and profitability KLRF entered the castings business through the acquisition of the loss-making Eltex Super Castings Ltd in 2007. We expect the company to turn around the business over the next two years, since: (a) Eltex Group’s brand equity is intact; (b) the company has recruited senior staff

from the castings industry to manage its operations; and (c) KLRF is well established in Coimbatore, the foundry capital of Tamil Nadu, which is the auto, pumps and valves, and

Fundamental Grade

5

4

3

2

electronics hub of southern India.

1

Flour milling, yarn segments lead to moderate growth and cash surplus The company’s wheat flour and cotton yarn businesses are now in a steady state of operations and are expected to continue to generate operating cash surplus. The company’s flagship brand “Kuthuvilakku” enjoys premium pricing in the wheat flour markets of Tamil Nadu and Kerala. It claims a market share of ~15% in southern Tamil Nadu and Kerala. However, these businesses are low margin businesses and offer limited opportunities for growth.

Spindle overcapacity, power cuts limit growth and margins in yarn segment CRISIL Research expects the overcapacity of spindles in southern India to impact players like KLRF. The company may not be able to pass on the complete price increase in cotton to its customers, thereby impacting margins. Tamil Nadu is a power deficit state and manufacturers

are compelled to bear up to 30% power cuts, adversely affecting utilisation rates and sales volumes.

Revenues to grow to Rs 1.8 bn by FY12 at a two-year CAGR of 7.7% We expect revenues to grow at a CAGR of 7.7% to Rs 1.8 bn in FY12 led by growth across business lines. EBITDA margin is expected to be 9.5% in FY12 vs. an estimated 9.2% in FY10. PAT margin is expected to turn positive in FY10 to 1.3% and rise to 2.2% in FY12. RoE is forecast at 16.1% in FY12, while EPS is expected to be Rs 7.9 in FY12.

Debt-equity ratio to improve to 2.2x by FY12 from 3.4x in FY10E We expect KLRF’s debt-equity ratio to improve from 3.4x in FY10E to 2.2x in FY12, considering higher cash flows from the castings division and steady stream of cash flows from the flour milling and textiles divisions.

Poor Fundamentals

1

2

3

4

5

Valuation Grade

Strong Downside

Strong Upside

Fundamental grade of '2/5 indicates moderate fundamentals Valuation grade of '3/5' indicates aligned valuation w rt CMP

Key stock statistics

NSE Ticker Fair Value (Rs per share) Current market price (Rs per share)* Shares outstanding (Mn) Market cap (Rs Mn) Enterprise value (Rs Mn) 52-week range (Rs) (H/L) P/E on EPS estimate (FY11F) Beta Free float (%) Average daily volumes

  • *

    as on May 20, 2010

KLRFLTD 35 32 5.0 161 809 36/14 4.5 1.90 60.98% 4,360

We assign KLRF 2/5 on fundamentals and 3/5 on valuation We assign KLRF a fundamental grade of 2/5, indicating that its fundamentals are ‘moderate’ relative to other listed securities in India. While an established brand in flour milling and expected revenue growth from the castings business positively influence our grading, the overall spindle overcapacity in Tamil Nadu, geographical concentration across business lines

Share price movement

300

250

200

and paucity of power weigh down on our overall grade. CRISIL Equities has assigned a valuation grade of 3/5, indicating that the fair value of the stock is aligned with the current

150

100

market price of Rs 32 (as on May 20, 2010). Our one-year fair value for the stock is Rs 35.

50

Apr - 06 Jul-06 Oct-06 Jan-07 Apr - 07 Jul-07 Oct-07 Jan-08 Apr - 08 Jul-08 Oct-08 Jan-09 Apr - 09 Jul-09 Oct-09 Jan-10 Apr - 10

(Rs Mn)

FY08

FY09

FY10E

FY11F

FY12F

Operating income

1,403

1,423

1,553

1,694

1,802

EBITDA

124

70

144

167

171

Adj Net income

30

(43)

20

36

40

EPS-Rs

5.9

(8.7)

4.0

7.2

7.9

EPS growth (%)

78.6

n.m.

47.7

76.7

10.0

PE (x)

4.8

(1.5)

7.9

4.5

4.1

P/BV (x)

0.7

0.4

0.8

0.7

0.6

RoCE(%)

11.0

2.0

11.1

13.5

13.6

RoE(%)

15.6

(23.3)

11.4

17.3

16.1

EV/EBITDA (x)

7

10

6

5

4

Chetan Majithia (Head, Equities)

+91 22 3342 4148

Sudhir Nair (Head, Research)

+91 22 3342 3526

Suresh Guruprasad

+91 22 3342 3531

Niyati Dave

+91 22 3342 3569

Email: clientservicing@crisil.com

+91 22 3342 3561

Key forecast

n.m. - Not meaningful Source: Company, CRISIL Equities Forecast

0

  • -

    Indexed to 100

Analytical contact

KLRF

Nifty

1

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