K.S. Oil- My take

ET has an story on KS Oil which seem to imply that it is the greed of the promoters and consequent gambling in the seed futures market that has led to the present state of affairs. Here is the story if you hv not read it  KS Oil ET Aug 30, 2011.

My take is that management in its quest to keep its shareholding above 26% bought more than they could afford. Over a period of approx 4 years, they spent about 455 Crs in shoring up their stake by way of prefertial allottments, Convertible warrant subscriptions and open market buy. Of this 455 cr, approx 300 crores went to the company ( equity expansion ) and 150 cr in open market operations.

Now how did a man with humble beginning suddenly come into possession of so much of money that he could afford to spend so much money? That is the million dollar question. I believe the modus operandi was two fold. First one appears to be a classic case of over invoicing. Company with the money raised from PE funds and GDR issues and allottment to promoters and raising debt bought about 1,38,000 acres of palm plantation in Malaysia ( 50,000 Acres ) and Indonesia ( 88,000 Acres ), bought an existing oil refinery in Haldia and expanded it. It also bought and installed Wind Power plants ( classic device ). People like me who have worked with Lalas  understand how this game works.

Second was to buy shares and pledge them. Edelweiss appears to be one who kept lending money to the promoters right from 2008 onwards. It was great as long as share price held up but once the share price started to tank, perhaps management did not want to pledge any more shares and that is when Edelweiss decided to dump the pledged lot.

Siva’s entry into the company and a holding of more than 12%  besides elevation of RC Garg’s son Saurabh as VC seems to have ruffled lot of feathers and PE directors have all resigned. Rajiv Kalra of CITI in April 2011 and Jimmy Mehtani of Baring and Vivek Sett of NSR sometime thereafter ( interestingly company has not filed this with the exchanges and my query to them in this regard is still unanswered.). June quarter results are as yet not declared ( meeting to be held on 31st August for unaudited results )

A hallmark of company under Sanjay Agarwal’s leadership has been governance but this seems to have gone for a toss as company has yet to publish the audited results for year ended March 2011, send the annual report it its shareholders and hold the AGM.  Meanwhile two more independent directors have resigned in August perhaps sensing trouble.

What do I think of the future of the company? In the short run, the investment in plantations will only bear fruit from 2012 onwards. There is overcapacity in the crushing of oilseeds and also refining. Market has biggies like Adani Wilmar, Cargill, ITC, Ruchi etc. Company is still a commodities player and has not been able to build the brand which it wanted to by hiring the ex Britannia honcho Sunil Alagh.  Prices of Oil palm are now on the way down after touching a peak of 3500 Malaysian Ringgit per tonne. On top of this, private equity funds want out and their clauses of tag along/drag along may force the management to sellout. Perhaps Siva was seen as a white knight which is kind of surprising but desperate times call for desperate measures.

Company’s stock is definitely undervalued with a market cap of 450 cr and a debt of about 1500 cr. An EV of 2000 Cr for a company with these assets and a sale of more than 4000 cr  is definitely worth buying unless there are hidden skeletons in the closet a la Satyam which I very much doubt.

A risk factor which is as yet not quantified is stated policy of Indonesia in the area of Palm Plantation relocation and banning in the wet/forestland  and if this were to fructify, company may have some trouble on its hand.

Investing is a game of probabilities and risk weighing and all things considered, I would say that the scale tilts in favor of gains more than losses.  but that’s just me


PS: for those interested in the field, Nidhi Nath Srinivas is one of the best writers in this area. She writes for ET. A Sample  ( http://blogs.economictimes.indiatimes.com/something-fresh/entry/edible-oil-industry-is-subsidising )

PPS: This is my first entry in the blog so comments are welcome