BUY KS OILS - LONG TERM

 KS OILS  CMP: 21.90  TARGET 40.00

Action: Negative sentiment priced in, maintain BUY
KS Oils has corrected 26% in June due to a series of setbacks like the
speculation surrounding the Indo-Mauritius tax treaty (a large part of KS
Oils’ investor base is Mauritius-based private equity) and an unexplained
delay in 4Q11 results. Moreover, a disappointing 4Q11 result (weak
margins and flat volumes due to increased competition and higher working
capital interest) has done little to soothe investor sentiment (although we
admit to being stumped by the extent of stock underperformance).
We are cutting our FY12F/13F earnings by 20%/23% to account for our
muted operational outlook. We lower our target P/E multiple to 10x (from
12x earlier), based on an historical one-year average discount of 33% to
our 15x target multiple for Ruchi Soya (RSI IN, INR97, BUY), to account
for a lower earnings CAGR (FY11-14F core earnings growth of 14% for
KS Oils vs 23% for Ruchi), and the negative sentiment surrounding the
stock. However, we think that most risks are being built in the stock at
current levels and the correction seems overdone. Maintain BUY.
Valuation: trading at ~50% discount to replacement value of assets
After the correction, KS Oils is trading at 4.3x CY11F P/E and at a ~50%
discount to replacement value of assets (based on KS Oil’s total crushing/
refining capacity of 3.3mn mT and a benchmark replacement cost of
USD100mn per mn mT, KS’s replacement value + cash comes to
INR39/share, slightly below our new price target).
Catalysts: Any positive newsflow (eg, favourable resolution of tax
issues, asset tie-ups in the palm / edible oil space and plantation
hectarage ramp up) may lead to a bounce-back in stock