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Sunday, April 8, 2018

KM ltd: The Turnaround PVC Player is here

Quote:There’s little motivation in blogging as have migrated everything to the free ShareBazaar app which you can download from android play store of iOS Apple store. The app has been downloaded over 60000 times in the last few months and has changed the landscape for retail investors. It’s the only thing in town which comes with unbiased coverage on companies,interviews the genuine passionate successful investors and brings out AGM notes of hundreds of interesting smallcap companies which the retailers were always deprived of. You can also find the Concall summaries too. Happy to let you guys know about the recent interview where I shared the stuff of last 15 years. Hope you find it interesting. Here’s the interview link.

Scripscan: KM Ltd
Traded in:BSE

Note: I have talked about the turnaround PVC player a number of times in my tweet. Let’s summarise what the company is all about with some history,the issues they faced and the present situation which is so distinctively different from the horrible past. Please treat the post as educative or the way which one should analyse a company. I have tried a 360 degree view of the company. Hope it helps and you get to learn few things from it.

Key Notes:
1. Promoters were trying to set up factory in Telangana but were struggling with petition so they tied up with a factory to do job work for them. Signed a contract which would be exclusive to them.
2. Orissa, they have filed a case against Orissa government to allow other players to come and do business.
3. Company planning to keep just 4 factories and will get it down through contracts in different region of countries, to satisfy the proximity parameter. 
4. Fabricated fittings are manually made fittings which are made for different angle than standard 90° angle.
5. HDPE pipes would grow double digit, industry would grow drastically as reliance and IOC are setting up Polyethylene plants which would reduce the cost to manufacture products from Polyethylene. Good supply would reduce the prices of HDPE. Jain is the biggest to manufacture those pipes.
6. In adhesive for pipes, KM were pioneers in India, were the first to launch it. It’s a 35% EBITDA margin business. Also have got the division head from Pidilite to handle and grow this business
7. Furniture is Rs 3000 crores market and was been a dream project of Mr. Sanjeev aggarwal.
8. Company use to manufacture coolers for symphony in past as there was machinery lying idle and use to take contracts from them. They planning to start it again, as the only investment required are moulds. Cello also used to do job work for symphony.
9. Company is taking advantage of shortage of certain products in market. Would manufacture any product where customers demand and competitors don’t have it. Gave an example that if a guy in some outskirts wants those products means 1000 other people in other parts of country want it.
10.  Distributors are easy to break as they have to introduce a pipe which is in niche category and would then give better margins. Once they get entry with single products, then they enquires keep coming to them.
11. Also when competitors are increasing the price, company takes hit on margin and would start pushing their products with competitor’s distributor and would take a price hike later on. This is giving them push in markets. They have always been the second call and that is working well for them.
12. They have maximum number of SKU’s compared to all other peers in market.
13. Company has shut down 2-3 factories in recent past and has shifted that machinery to tarapur plant. This is now the biggest plant among the 5 factories remaining.
14. How is pricing of a product calculated? 22 hours a day factory would be running and 27-28 days a month. Cost of whole month is divided by number of units a mould gives in a month. This helps them in pricing the product better in market.
15. Company plans to shut down their Dewas plant which is situated in MP. It has a capacity to manufacture 8856 tonnes of agri PVC pipes. But as of now they don’t plan to do so as their brand is strong in MP and they feel there is psychological effect in their minds of consumer which would hamper their brand.
16. Would be expanding through job work model on exclusivity rather than setting up their own factory.Finolex have 3 owned factories and 7 outsourced one.
17. Tarapur is 40 acres and have enough land to expand in current location; also in other plants they have land availability.
18. Company would be liquidating assets worth Rs 35 crores which is sufficient to fund bank repayments for next 2 years as their monthly payments are around Rs 2 crores a month.
19. Raw material is bought from Quality suppliers. Company goes directly to customer rather than having middle men.
20. KM has 10 offices across India covering all major cities.
21. 3000 strong dealer network out of this 500 are exclusive.
22. Father and son duo are now handling business. Mr. Sanjeev’s sister’s husband and his 2 brothers were partners earlier. Mr. Sanjeev is gradually acquiring other’s shareholding and has been given exit from management.
23. Currently they have 250 sales guys across India and adding 20-30 more into this team.
24. Company need not invest much in capex till the time they reach revenue of Rs 1100 crores.
25. The old CFO has resigned and they have got a dynamic new CFO in place.
26. Company is comfortable to keep debts at Rs 200 crores with revenue of Rs 1000 crores. Out of which working capital will stay and term loan will be paid over time.
27. Liquidating their warehouse as earlier they use to directly supply to dealers rather than keeping CNF and Distributors. Now company have appointed distributor in last 2 years so they are not in need of warehouse.
28. They appointed Mumbai distributor, which was biggest distributor for prince. Also in Kanpur their dealer can lift Rs 5 crores month revenue.
29. Rs 30 crores stuck in subsidy payment. HCC,  L&T have defaulted on the payment.
30. USP of KM in 90’s was credit friendly. Company’s receivable is relaxed and is planning to correct it in this season to 90 days.
31.Last year Raised Rs 29 crores through equity which was done to Rs 10 crores in Tarapur automation, 8 new machines for Rs 3.5 crores, Moulds for Rs 7.5 crores and agricultural pipes of Rs 4 crores.
32. Gross margin is fixed at 28-30% and is fixed across the industry.
33. Company signed Mr. Amitabh Bachchan as brand ambassador for KM. He would be with them for 2 years at a consideration of Rs 5 crores, of which he demanded 2 lakhs shares and Rs 3 crores. 
34. Company achieves breakeven at a monthly net sales of Rs 45 crores.
35. Company doesn’t require any capex till net revenue of Rs 80-85 crores.
36. Current cost is fixed at Rs 10 crores / month.
37. Business above Rs 50 crores would led to EBITDA of 9-10%. Above Rs 60 crores it would start moving towards 13-14%
38. Company’s ad spends was Rs 6-7 crores, which would now move to Rs 10-15 crores with Mr. Amitabh bachchan joining as brand ambassador.
39. Company usually uses to spend on hoarding in rural areas.
40. Company have always been able to short supply their goods due to which their image went wrong as the most important aspect in this industry is timely delivery.
41. Not reluctant to increase their cost and are ready to automate their plant if any such thing is demanded.
42. In FY17, Company had EBITDA of Rs 45 crores and interest was Rs 36 crores and Depreciation was Rs 15 crores.
43. Mr. Rishav aggarwal was very sure to not to pay off debt with the current equity raising and would be funded working capital to grow the business.
44. Management said post this Rs 60 crs equity infusion they are good to go and would not raise any more equity.
45.  Factory has around 500 employees and out of which around 150 are on contract basis.
46. The pipe fittings division was headed by ex-Supreme head (Jalgaon Factory) the automation level at the plant is still below the likes of Supreme, Astral and others, the difference being the RM was loaded into the machines with human strength rather than being automated.
47.  In 2009, company took an ECB of INR 40cr and had an unhedged position. One of their relatives prior to that wanted to separate and formed an entity called KI and as a part of contract they were allowed to sell in select states Madhya Pradesh being one of them.
48 Key Market Drivers:-
a. Real Estate demand expected to increase in 2-3 years – constructions picking up soon.
b. Real Estate Bill –Pressure on builders to Complete Projects.
c. Smart Cities, Government spending on affordable housing – housing for all by 2020 etc.
d. Mental acceptance of CPVC and uPVC pipes as a replacement to GI – Potentially 10,000 crore markets further available.

Conclusion:Won’t be prudent to talk about fy18 as it lacked funds,GST and demon made life difficult. Though March quarter numbers should be pretty encouraging and set the trend for the whole of fy19. Company can achieve revenue of Rs 750 crores in current fiscal fy19 and this would lead to say a conservative EBITDA of 12% i.e. Rs 90 crores .With Interest obligation of Rs 38 crores and Depreciation of Rs 12crores should be able to do PBT of Rs 40 crores. With carry forward losses they would pay 18% MAT Which brings the Pat to around 33crs. With new young blood taking the control in his hands and old lazy management out-Interesting times seems ahead for the company. Prince pipes IPO is expected to hit the market anyday now which should further rerate it.

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