Kesar Terminals

Business of Company:Kesar Terminals(KTIL) is a unique company with a very simple business model. The company simply erects storage tanks near ports and then rents them out on long term contracts.To my mind once a storage tank is build this looks like a business which anyone can run.

KTIL as of now operates 64 tanks at Kandla Port. The company is also planning to modernize this storage tanks which will help them to attain higher utilization and better margins.

Future Plan: KTIL is constructing storage tanks at Pipavav and Kakinanda at an outlay of around 50 Crs. They have also floated a JV( Kesar Multimodal) with promoter company Kesar Enterprises Ltd (KEL)  in 74:26 ratio for construction of a multi-modal railway park near itarsi. The project will be implemented in 2 phases and total cost will be around 190 Crs. First phase should be operational after 2015 and second phase after 2018.
Both projects in all likely hood will be funded through a mix of debt and equity.

Valuation:
KTIL quotes at a P/E of 4.8x with a dividend yield of 3.5%. Upfront it definitely looks cheap but my idea was to check even at this price does it offer me margin of safety.

I will try to evaluate this business assuming that both projects of the company get delayed and company has to bear interest costs & principal repayments through its existing cash flows. Essentially i want to check if the present business can support the companies future plans or is it a leap of faith by promoters.

Valuing a company like KTIL seems relatively easy considering the simple business model. A basic DCF with conservative growth rates can suffice.

So lets get started with some basic assumptions.

1) D/E of 3:1 leads to total incremental Debt of Rs.44.25 Crs. Even at this ratio their will be significant equity dilution but any equity contribution higher than this will destroy the returns of shareholders.
2) Approx annual interest of 3 Crs, assuming 70% utilization.
3) Cost of Capital 18%
4) Growth rate till 2016 is 6%, and 10% thereon till further 7 years.Terminal growth rate of 3%
5) The project at Pipavav and Kakinada will end by FY 2016 instead of FY 2014..

Scenario 1: KTIL undertakes both projects simaltaneoulsy and both get delayed, which in India is fair possibility. In this case on the assumption that albeit, with delay the projects do start the EV of company comes to around 12 Crs as compared to present EV of 35 Crs. No MOS here.

Scenario 2: KTIL like a good capital allocator does one project at a time. It starts with Pipavav and even if it gets delayed by 3 years the rough EV of the company comes to around 30 Crs as compared to present EV of around 35 Crs. Much better MOS here.

Detailed calculations are given here:: https://docs.google.com/spreadsheet/ccc?key=0ArVxMyZ-jaYtdG1DaGZzd3RKSnJLM0ZQdHJZZWFNQUE

Please do bear in mind that these are rough calculations, and idea is not to predict the cash flows, but to understand what happens if cash flows don't follow the predicted pattern.

Conclusion:
Even though KTIL has a fantastic business, they are again falling into trap of overconfidence and poor capital allocation (Uncanny similarity to Noida Toll Bridge at its inception). As an investor i would have been really happy if company had taken only one project at a time. Imagine the ROE had company taken only Pipavav Project (cost of 27 crs), which it could have easily funded through internal accurals.

So i am giving this company a miss for now, but will track it due to its unique business model and can be re-looked if they are able to execute one of the projects without any delay.

PS- I haven’t considered the impact of debt which will be taken in the JV. Had i taken that probably this post would have ended half way with a firm NO on the company :)