KEMROCK INDS: Building a New Composite to Drive Business

The increasing demand for Kemrock’s fibre-reinforced plastics (FRPs) and its successful foray into carbon fibre will prove key growth drivers for the company in coming quarters. In spite of a leveraged balance sheet and low promoter holding, the company’s steady share price in the latest market crash has proven its mettle. Long-term investors should accumulate the scrip.

BUSINESS
After being the leader in plastic composite products for several years, Kemrock Industries has also become India’s first company to manufacture carbon fibre on a commercial scale. The company makes a large variety of products using FRPs or plastic composites. These find application across industries such as windmills, aerospace, petroleum, mass transport and infrastructure. The FRPs are better performing substitutes for traditional materials such as metals, wood, concrete and glass and are predominantly consumed in developed countries. As a result, more than twothirds of Kemrock’s revenues come from exports.

GROWTH DRIVERS
Kemrock recently commissioned its first carbon fibre plant, which will be doubled to 800 tonne per annum in FY12. Once the company gets all the quality approvals for carbon fibre and starts supplying to aerospace industry its revenues and profits will jump substantially. It has acquired an 80% stake in Italy-based Top Glass, which manufactures a variety of composite profiles. It has also tied up with Netherlands-based DSM Composite Resins for production of specialty composite resins in India.

VALUATION AND CONCERNS
Kemrock’s net profits tripled from 25 crore in FY08 to 75.5 crore in FY11. Its return on capital employed (RoCE), which fell steadily from 16.5% in FY08 to 8.4% in FY10, improved to 11.5% in FY11.
Although the business is growing well, the company needs to fix a few things. In its bid to achieve highspeed growth it has raised huge debt and diluted equity often. Its debt-equity ratio of 1.6 at the end of June 2011 was the lowest in five years, but needs to come down further. The promoter's holding in the company has dropped to 28.5% of which over 61% shares are pledged. Still US-based RPM International, which controls 18.2% stake in the company, recently made an open offer at 539 for 20% stake.