This article provides an in-depth fundamental analysis of KSE Ltd, a manufacturer of compound cattle feed in India.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
KSE Ltd Research Report by Reader
Q: sir, I am big fan of you. I found a small cap and studied it as if you would study. I am a new person so i may be wrong. Therefore, request you to check and guide me. The company’s name is KSE Ltd.
- Market Cap: INR 220.48 Cr. Stock P/E: 7.29, which provides safety margin to the investment. Industry PE: 39.29.
- Dividend Yield: 2.41%. It proves that KSE Ltd is earning good profits and giving dividends to shareholders from the profit, which is a good sign. KSE Ltd is regularly giving dividend from 2004 until date .In fact, it have given dividend twice in 2015.
- KSE Ltd has reduced debt from 19.11 secured loans + 7.23 unsecured loans in FY13 to 7.03 secured loan +6.75 unsecured loan in FY14.
- Cash from Operating Activity is also positive.
- EPS – TTM is INR 93.25
- Rating company has rated CRISIL A-(Stable) from CRISIL Ltd
- Compounded Sales Growth: 10 YEARS:15.97%, 5 YEARS:18.15%, 3 YEARS:21.13%, TTM:12.85%
- Compounded Profit Growth: 10 YEARS:9.56%, 5 YEARS:32.31%, 3 YEARS:51.50%, TTM:121.20%
- Return on Equity: 10 YEARS:19.57%, 5 YEARS:23.72%, 3 YEARS:25.42%, LAST YEAR:34.43%
- The promoters’ holding is low
- P/B Ratio – 4.48
Please guide me with more details about KSE Ltd. Can KSE Ltd be multibagger or there are many other opportunity in market?
Dr Vijay Malik’s Response
Thanks for writing to me! I am happy that you have started your own stock analysis and have highlighted important parameters for analysis of KSE Ltd.
Financial Analysis of KSE Ltd:
KSE Ltd has been growing its sales at a decent pace of 15-20% year on year since last 10 years (FY2005-14). However, profitability of the company is very low. Operating profit margins (OPM) are barely 2-4% and net profit margins (NPM) are in the range of 1-2%. Moreover, profitability margins (both OPM & NPM) have been fluctuating wildly in the past.
Such low fluctuating margins are usually found in trading companies, which have very low pricing power with the customers. They are not able to pass on the increased cost of their raw materials to customers and thereby suffer in terms of low profitability.
Operating Efficiency Analysis of KSE Ltd:
KSE Ltd has been reflecting improved operating efficiency over the years as shown by increasing fixed assets turnover and inventory turnover. Receivables days are extremely low at 0.1 days, reflecting that the company seems to be supplying material mainly after receiving advance payments from customers, which is a good sign.
Fixed asset turnover is very high at 22.2, which indicates that KSE Ltd needs to invest very low capital in its operations to generate additional revenue. This again is a pattern for trading companies. The high asset turnover compensates for low profitability and the company is able to churn its resources multiple times in a year and can generate cash sufficient to fund its operating requirements.
KSE Ltd has been able to convert its profits in to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 61 cr. whereas the CFO over the similar period is INR 81 cr. This is a good sign.
The company has used its cash generated from operations to fund its operating & capex requirement and to reduce debt. This is another good sign of a company.
You have rightly pointed out that KSE Ltd has been paying regular dividend to its shareholders and thereby sharing the fruits of growth with shareholders. These are signs of a shareholders’ friendly management. The company has been paying taxes at a rate near to standard corporate tax rate in India, which is again a good sign.
Market also seems to have recognized it as the market capitalization of the the company has increased by INR 219 cr. against retained earnings of INR 35 cr. over last 10 years (FY2005-14). Management has created a lot of value for shareholders from the earnings retained and not distributed to shareholders.
Margin of Safety in the market price of KSE Ltd:
KSE Ltd is currently available at a P/E ratio of 6.7, which offers good margin of safety as described by Benjamin Graham in his book The Intelligent Investor. I do not consider P/B ratio to be of much use to investors, therefore, would not be overly concerned with P/B ratio of the company.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, the company appears to be a company growing at a decent pace, however with poor profitability margins. The company has been able to improve its operating efficiency over the years. High fixed asset turnover has enabled the company to generate good amount of cash from its operations until date. However, an investor needs to be wary as companies with low profitability turn to losses very soon, in tough business environments.
These are my views about KSE Ltd. However, you should do your own analysis before taking any investment related decision about the company.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
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Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.