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KSE Ltd, a Kerala-focused cattle feed supplier, enjoys better pricing than its peers due to brand name, quality and after-sales service. However, the ability to fully pass on raw material price rises is a challenge because of competition from non-profit organisations and regulated milk prices. We assign KSE a fundamental grade of 3/5, indicating that its fundamentals are good relative to other listed securities in India.
Deep-rooted cattle feed player in Kerala
KSE is a leading cattle feed player in Kerala due to its established brand name (30-year vintage), quality and prompt after-sales services. It operates three plants in Kerala and one in Tamil Nadu. With cattle feed sales volume of 365,947 tonnes per annum (tpa) in FY12, KSE commands a market share of 49% in Kerala.
Sufficient opportunities exist within its domain but leads to regional concentration too
So far KSE has not expanded outside Kerala and Tamil Nadu as significant opportunities exist largely within these states. There is an increased need for cattle feed in Kerala as the fodder requirement per day per bovine in Kerala is one of the lowest in India at 3.5 kgs. Cattle feed is a localised industry due to the short shelf life of cattle feed; hence production centres need to be in proximity to the end-market. However, this leads to regional concentration.
Limited pricing flexibility due to competition and regulated milk prices
Prices of raw material required for cattle feed have increased sharply in the past few years. The limited pricing flexibility allowed by competition (non-profit organisations) exerts pressure on KSE's margins. Further, milk prices are influenced by the decisions of the state co-operatives to fix a procurement price. Hence, rise in input costs for the farmer in the form of high cattle feed prices without a commensurate increase in milk realisations discourages cattle feed purchase. However, milk prices grew at a two-year CAGR of 19% in FY12 which offered some flexibility to KSE to increase realisations.
Revenue to grow at a two-year CAGR of 10% to Rs 6.6 bn in FY14
We expect KSE's revenue to register a two-year CAGR of 10% to Rs 6.6 bn in FY14. Our estimates are based on limited scope available to KSE for improving its price realisations in proportion to the raw material price increase. Due to a sharp rise in key raw material costs in Q1FY13 following poor monsoons, we expect EBITDA margin to compress to 2.6% in FY13 compared to 4.3% in FY12. EPS is expected to be Rs 30.6 in FY14. We expect RoEs to be 21.4% in FY14.
Valuations: Current market price is aligned
We value KSE based on the discounted cash flow method. Based on DCF, we arrive at a fair value of Rs 227 per share which implies P/E of 14.1x and 7.5x on FY13E and FY14E earnings, respectively. At the current market price of Rs 220, our valuation grade is 3/5.
| CRISIL Fundamental Grade |
Assessment |
| 5/5 |
Excellent fundamentals |
| 4/5 |
Superior fundamentals |
| 3/5 |
Good fundamentals |
| 2/5 |
Moderate fundamentals |
| 1/5 |
Poor fundamentals |
| CRISIL Valuation Grade |
Assessment |
| 5/5 |
Strong upside (>25% from CMP) |
| 4/5 |
Upside ( 10-25% from CMP) |
| 3/5 |
Align ( +-10% from CMP) |
| 2/5 |
Downside (negative 10-25% from CMP) |
| 1/5 |
Strong downside (<-25%from CMP) |
CRISIL IER reports provide the Fundamental Grade and the Valuation Grade of a company, which are presented in the form of a proprietary CRISIL Fundamental and Valuation (CFV) matrix. The Fundamental Grade is based on an analysis of the business and industry prospects, financial performance and outlook, management quality and corporate governance of a company vis-a-vis other listed companies in India. The Valuation Grade provides an assessment of the fair value of the company's stock relative to its current market price.
Mukesh Agarwal
President - CRISIL Research | | 
