Recommendation From Cement Sector

Here is why:

The Indian economy and especially industrial activities seem to be turning a corner of late. The latest IIP numbers give an indication towards that. The July IIP growth stood at 4.2 per cent YoY while the IIP growth for June too was revised upwards from 3.8 per cent to 4.4 per cent. All this augurs well for companies engaged in manufacturing activities. Therefore we have selected a company for this column that will directly benefit out of this heightened economic activity.

KCP is a diversified business group with business interests that majorly fall into cement, heavy engineering, power and sugar segments. On a consolidated basis KCP earns 50 per cent of its revenue from the cement segment and on a standalone basis it contributes more than 80 per cent of the revenue. As Indian economy gather pace, the demand for cement will rise. Nevertheless, KCP has location advantage too that will help it post growth better than the industry. KCP is a south-based cement player with both its manufacturing facility in Andhra Pradesh. The overall prices of cement have remained muted and declined in most part of India in the last couple of quarters except for South India, which saw an increase of more than 20 per cent on a yearly basis.

This is reflected in the performance of the cement segment of KCP, which saw its sales increasing by 36 per cent on a yearly basis to Rs 202.42 crore for the quarter ending June 2015 while the cement segment profit increased from Rs 1.31 crore to Rs 41.18 crore in the same period. Going forward, led by an increase in government spending on infrastructure and schemes such as “housing for all” and smart cities, this segment will continue its robust performance.

The next big segment of KCP on a standalone basis is engineering, which contributes around 11 per cent of the total revenue. The company offers heavy manufacturing capabilities with a fully integrated steel foundry, heavy fabrication, and heavy machine shops with assembly facilities in Thiruvottiyur, Chennai and Arakkonam. This segment had been doing well till 2010 and contributed around 60 per cent of profits; however, as economic activity slowed down, this segment saw deterioration in its performance and it posted loss in FY15. However, as the investment cycle picks up, this segment will gain its lost prominence. In Q1 FY16, this segment saw a turnaround and posted profit of Rs 1.55 crore against loss of Rs 4.02 crore in Q1 FY16. The power division of KCP commenced to meet the power needs of the cement and engineering businesses.

On a consolidated basis, the sugar segment through its subsidiary, KCP Vietnam Industries, contributed 40 per cent (Rs 539.85 crore) of total revenue at the end of FY15 and the share of profit (Rs 57.76 crore) in the same period was 45 per cent. The Vietnamese economy has witnessed robust growth of 6.3 per cent in the first half of 2015.  Once domestic demand picks up, it will drive the demand of sugar, which will improve realisations and revenues.

The stock of KCP discounts its consolidated EPS of FY15 by 13.24 times, which looks quite attractive considering the expected growth in different segments of the company. Add to that the 26 years of dividend payment history and this makes it a perfect investment opportunity with growth of 25 per cent in the next one year.