Background: Cement is the basic infrastructure element and an investor who believes in the India’s infrastructure story should surely consider investing in the Cement sector which is a direct proxy to it. Although the sector is well researched, it still has some very interesting ideas left undiscovered and Shri Keshav Cement & Infra (Formerly known as Katwa Udyog) is one of them. The company is one of the most profitable cement companies in india backed by a very capable and intelligent management. Company has two brands namely, “Jyoti” and “Keshav” and is based in south india supplying mainly to Karnataka, Maharashtra and Goa (within 100km of its Cement Plants).
The Company: Shri Keshav Cements (previously knows as Katwa Udyog) was started by Mr. H D Katwa in 1984 by setting up a small cement plant with a capacity of 30 TPD (Tonnes per day) which is now increased to 3000 TPD. The company had last year taken a capex to expand the capacity by three times and this capacity would come onstream by end of this year. The story of this evolution is very inspiring and promising for the shareholders. The promoters have always been conscious of doing business “profitably” and therefore, they have also made some quality investments which bore fruits thanks to Management’s superior operational excellence. The simple strategy was to take up ailing cement plants and turn them around -which they did. Shri Keshav Cements took over the ailing – Sangam Cements from KSFC and Shri Quality Cements Ltd from IDBI and turned around those sick units into profitable entities and its noteworthy, that Shri Keshav Cements boasts about one of the best Operating parameters in the industry. The company is also in plans to have its own solar power unit to rationalize the power cost – details of which shall be known in the next couple of months (and should be online in next couple of years).
The company’s revenues, in last five financial years have grown from 22.36cr 50.96 cr whereas the bottomline grew from 1.14cr to 2.9cr during the same period. The company’s debt has reduced by 1/3rd during the same period and this is despite of sector tailwinds and takeover of loss making sick Cement plants. This gives tremendous credibility to the management’s operational pedigree. Turning around not one, but two sick cement companies at a time when the infrastructure activity was at its lowest, reducing debt etc is great testimony of management’s capability. Company has also paid dividends, whenever distributing wealth to shareholders has made more sense than capex. I believe this is the most judicious way of using shareholder money. Shareholder wealth is increased by improving business prospects of company and not by distributing dividends. The promoter holding has also increased to more than 67.8% in the last few years (without any pledge), by way of creeping acquisition. To back this all, the economic activity has also started to look up, especially in the Roads construction where 13km/day of roads are now being built as compared to mere 3km/day till last year. This is eventually going to go upto 20km/day. Furthermore, government moving to kick-start the stalled projects, along with new capex, the Cement demand is set to move up further.
- More than three times present capacity coming on-stream by end of this year.
- One of the best Operating Margins in the Industry.
- Excellent Cash generation.
- Significant reduction is debt in the past few years and very comfortable Interest Coverage Ratio.
- Promoter holding increased from 56% to present 67.81% without any pledge.
- Power Plant to bring in more cost savings which could further increase OPMs.
- Good return ratios and efficiency parameters.
- Very good Management
Valuation: The stock which has one of the highest Operating margins in the industry, is available dirt cheap at just trailing 7.5 PE, whereas most small sized cement companies trade in the 20s PE and the biggest ones trade at much higher valuation. The company has a very healthy interest coverage ratio. One very important point to note is the Zero Contingent liabilities. This is very rare in any company and therefore, very healthy. The company has superb cash flows and again, this is very significant given that they had acquired and turned around heavily loss making companies.
Technicals: The stock was oscillating in a very small range for almost an entire decade (which is very rare) and recently broke out of that range. This is a life altering breakout for the stock. This is evident as every small consolidation is bought. Combined with the extreme cheap valuations, the breakout, the re-rating and expected exponential increase in topline and bottomline, it can create tremendous wealth in the coming times for the shareholder.
The company is on path to tremendous earnings growth and given that it has one of the best operating parameters in the industry, this earnings growth would cause significant bottomline growth. The company is steered by a very capable, profit conscious management which has proved its business and financial acumen. The company has been improving its performance metrics every year with reduced debt and excellent cash generation. Backing all these fundamentals is a superb technical picture. Given the massive breakout of a very short trading range of around a decade, the stock should go up multiple folds in the times to come.
God Bless !!!
Disclaimer: It is safe to assume that I may have some vested interests in the stock. Also, the above stock view is my personal view in individual capacity. For rest, please look at the About page.