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KLRF Ltd

45-year-old flour-to-foundry player

Castings business – in the right place, at the wrong time

CRISIL Equities

Grading Rationale

Small player focused on the southern market KLRF commenced operations as a roller flour mill player in 1964. Over the years it has diversified into textiles, sheet metal fabrication and manufacturing of grey iron castings. It currently derives 50% of its revenues from flour milling, 33% from textiles and 17% from the engineering division (which includes sheet metal fabrication and ferrous castings). The company has been facing operational constraints in the textiles and engineering divisions on account of inadequate power supply.

FY05

FY06

FY07

FY08

FY09

49%

51%

55%

52%

50%

50%

49%

40%

32%

33%

0%

0%

5%

16%

17%

964

928

1,196

1,431

1,449

Revenue break up for the past five years

Food Division Textile Division Engineering Division Total Revenues (Rs mn)

Source: Company data

Success of castings business key to growth and profitability KLRF’s engineering business comprises the sheet metal fabrication division (which is a small unit) and a foundry manufacturing grey iron castings. KLRF entered the business in 2007 with the acquisition of Eltex Super Castings Ltd, a sick unit formerly owned by a relative of the promoter. Under the former management, the company had enjoyed good patronage of its clients such as L&T Komatsu, Audco India Ltd, BHEL, TVS Group, Rane Group, Amalgamation Group and BEML among others. It was referred to the BIFR in 1998 owing to management issues and lack of working capital. After incurring a loss in FY09, the foundry has achieved break-even at the EBITDA level in FY10.

The installed capacity of the foundry is 7,200 tonnes per annum (TPA). Currently, 85% of the foundry’s output comprises the low value-added raw castings and the balance is the higher-end machined castings, which offer better margins. Going forward, the management intends to increase the share of machined castings, leading to higher realisations and margins.

The company is well established in Coimbatore, the foundry hub of Tamil Nadu, which is the auto, pumps and valves, and electronics hub of southern India. To run the business, the company has appointed senior staff from the casting industry. Also, Eltex Group’s brand equity is still intact, which is visible in the willingness of the old clients to resume business with the company. Hence, we believe that the company can turn around the division over the next couple of years. However, power will continue to be a cause for concern in Tamil Nadu. KLRF will also need to reduce its dependence on a few major clients, which currently poses a significant concentration risk. We expect revenue from the castings division to grow at 15.1% to Rs 336 mn in FY12 with EBITDA margins of 7.5%.

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