Stock Talk-Great Business backed by improper management-KTIL

March 17, 2016 | Stock Talk

Name	Kesar Terminal Infrastructure Limited
Scrip Code	KTIL
Current Market Capitalisation	Rs 210 Crore
CMP	Rs 399
P/E X 2014-15	14.5
BVPS	Rs 107
Date	17th March 2015

I have chosen this company to tell you how great businesses are run by improper management.Firstly, lets understand the Business of KTIL.

About the Company

Kesar Terminals & Infrastructure Limited (KTIL) was incorporated on 21^st January, 2008 as a wholly owned subsidiary of Kesar Enterprises Ltd. (KEL). The Company ceased to be a subsidiary of Kesar Enterprises Limited with effect from 1^st June, 2010.The Company is mainly involved in two business:-

Sr. No	Business	Entity
1	Storage	KTIL Standalone
2	Logistics Became operational in Feb’16	KMM Subsidiary

Storage Business

KTIL owns and operates Liquid Storage Terminals. It has capacity of storing 1,27,000 KLs of Bulk Liquid in 64 Tanks in 2 Terminals located closed to each other in Kandla, Gujarat. Bulk Liquid comprises of Crude Oil, Liquefied Natural Gas (LNG), Petroleum Oil & Lubricant products (POL) and vegetable oil.

Logistic Business

KTIL has set up SPV (99.94% ownership) named Kesar Multimodal Logistics (KMM) for development of Logistic Hub of an area of 88.3 acres of land.It is set up through a PPP basis, where KMM has a concession period of 33 years to run this Hub. Strategic location of a logestic hub plays the most important role in logestic business. A key advantage is the strategic location of the Kesar Multimodal Logistics Hub, located at Powarkheda Railway Station, 6.5 Kilometres from Itarsi, which is situated at the centre of the Indian Railway Map. The hub is at the intersection of the North-South and East-West Railway Corridor. Furthermore, it is adjoining the NH69 that connects Bhopal to Nagpur - the centre of the country. Within 24 hours, goods can be transported to any part of the country.The central location as well as the Company’s approach to comprehensive logistical services indicates a sustainable competitive advantage for KMLL’s logistics hub. This business has become operational from January’16.

Hope you have understood the business. Now let’s understand the profitability and competitive advantage of this business through numbers.

The above sets of numbers don’t include the revenue from logistic hub as it was not operational by that time. More than 50% of the KTIL’s money has been invested in Logistic Hub. So you can expect the topline and Bottom-line to shoot in future as the Logistic hub has become operational in Jan’16. You’ll think that KTIL it is run by a powerful management . But on further due diligence I found the following things:- (1) The Management bided for the Logistic Hub project worth 150 Crores in 2011-12, when its Book Value (In 2011-12) was 28 Crores. Isn't that a risk seeking nature from the side of management ? There should be a balance between risk and return, which the management has failed to balance. Any economic downturn coupled with such aggressive expansion leads to insolvency. Currently Debt/Equity Ratio is peaking out at 2:1. Some examples from the past who did such aggressive expansion and destroyed shareholders wealth were Suzlon acquisition of RE Power in 2007, Tata Steel’s disastrous acquisition of Corus in 2006.I can recall one of the most important quotes.

What has prevented the company from insolvency is the storage business which has continued to generate cash. But is there a guarantee that management will never take such decisions in future? (2)Capacity utilization of Storage business has been more than 90% since past 4 years. Hence, Instead of reinvesting in the same business which is cash generating and profitable, It has invested around 42 Crores in KMM (Logistic Business) via equity and 8 Crores via term Loan. The project has been under construction since 3 years. So now you can imagine the opportunity cost of not investing in the same business.It is a clear misallocation of funds.

(3)Kesar Terminal has deployed a lot of Cash in Logistic Business, however Management is opaque with respect to sharing information related to Logistic Business. Thus, Promoters are not acting in the favour of minority shareholders. So,is investing in a management who doesn't want to tell you where you money will be deployed a rational call ?

Cheers! Happy Investing! Devansh Nigotia Team Niveshaay Source:- Annual Report of KTIL 2009-10 to 2014-15 Diclaimer :- Logistic business has a great potential and if it's able to generate cash flows then there can be a lot of stock appreciation, but our focus is not on whether it turns out to be a multi bagger or not.Our focus is on striking a balance between risk and return.This is not a recommendation to buy/hold/sell a stock.We don't have any stake in KTIL. We are not SEBI registered Analyst.