Multi Baggers

Kesoram Industries

Promoted by BK Birla Group Kesoram industries is possible contender for a transition shift a big turnaround story as they look to hive off and sell their loss making tyre business.

The BIG BET:

Kesoram recently announced transferring of tyre business into a wholly owned subsidiary. There is a strong market buzz of Birla Tyre division to be sold and this is what we feel will be a big trigger for the stock to turnaround. We expect the deal to be closed anywhere between 2500-2700 odd crores. This will be big for Kesoram Industries.
 
Catch Situation: Company deferred the result and experts believe had they posted the result the stock would have been a BIFR case. Considering the rumors and aligning the announcements we feel this could be a good risk reward given the company will be left with Cement Business and Rayon Power& other Businesses. 

About Kesoram

Kesoram Industries operates under three major divisions Cement Rayon and Tyre.

Cement is marketed under the Brand Birla-Shakti with total installed capacity of 7.25 million tonnes. Kesoram Industries Ltd (KIL's) cement manufacturing facilities are based in Southern India, four units are based at Sedam in Karnataka & one at Basantnagar, Andhra Pradesh

Birla Tyres is among the top five tyre markers in the country. Currently the company has two production facilities in Balasore, Orissa and Laksar, Uttrakhand with a total capacity of 12.1 million tyres per annum. This has been a main culprit for draining profits from other divisions of Kesoram Industries.

Kesophane the rayon division contributes appx 280 crore of sales to overall group

Key Triggers:

If one adjust the proceeds as expected of around 2600 cr also the net debt stands will be appx 1600 crore and market cap at 1100 makes it relatively cheap given the EV per ton is USD 110 appx even if one assigns 500 crore of EV per ton on conservative basis there is atleast 50 percent upside on the stock.

The company investments worth at 150 odd crores & residual business at 1 time sales is appx 250-300 crs. There is potential upside on the stock once the group exits its tyre division.

Investments has its risks and key risks is the tyre division sale as expected, if does not go through.

Technically the stock has made 3 bottoms in this zone of 99-108 and created a resistance around 146. So its better to assign a price stop of 98 closing basis and look at targets of 146-168.

There should be time stoploss also on the stock as another key risk is time spent in the stock given the balance sheet position. We expect if market buzz, price vol-charts and others factors pointing out to be a good deal than the first target of 145-55 zone should be tested before the end of this quarter. Thus revisit the stock a) on news basis b) results c) till end of quarter. Reward of 40 rs on stoploss of 7 rs is highly beneficial on risk reward front. 

Valuations and Concerns:

Cement division of this size is being valued between 3600-4000 crore. Other businesses & investments can be valued at 400 crores and Tyre division on conservative side we feel if sold will be at 2600 crs. Thus there is lot of cushion for equity holders.

However the catch situation is there if the deal does not go through the resultant situation will be adverse for equity owners. Thus the risk reward being favorable and we expect the deal to go through in less than 45 days (before q1) because the time is definitely running out and management if has to repair things at ground level will have to do in this short span. This can be good short term idea but one should also consider the associated risks of deal falling apart.

Disclosure: