NILKAMAL LTD : GRAB AT EVERY LEVEL !!!

Scrip Code: 523385 / NILKAMAL

CMP:  Rs. 457.80; Market Cap: Rs. 683.15 Cr; 52 Week High/Low: Rs. 205.30 / Rs. 505.80.

Total Shares: 1,49,22,525 shares; Promoters : 95,70,001 shares –64.13 %; Total Public holding : 53,52,524 shares – 35.86 %; Book Value: Rs. 310.10; Face Value: Rs. 10.00; EPS: Rs. 23.39; Dividend: 40.00 %; P/E: 18.39 times; Ind. P/E: 31.37; EV/EBITDA: 6.80.

Total Debt: Rs. 268.81 Cr; Enterprise Value: Rs. 885.10 Cr.

NILKAMAL LIMITED: The Company was founded in 1934 and is headquartered in Mumbai, India. The company was earlier know as Creamer Plastic Ltd and changed its name to Nilkamal Plastics Ltd on August 23, 1990. Nilkamal Limited, together with its subsidiaries, manufactures and sells injection molded plastic articles and polymers primarily in India. It operates in Plastics; Lifestyle Furniture, Furnishings and Accessories; and Others segments. Nilkamal Plastics Ltd came with an IPO on February 1991 with issue of 18,00,000 shares of Face value of Rs. 10 each at par. The company offers various material handling products, including crates, pallets, metal shelving and racking products, material handling equipment, hospitality products, golf cart & resort vehicles, tool storage cabinets, ice boxes, fish tubs, vaccine carriers, road safety products, plastic formwork products, waste management tools, PE manhole products, and cold storage solutions. It also provides premier chairs, baby chairs, chair shells, dining tables, stools, racks, trolleys, school benches, sofa sets, tables, wall units, TV trolleys, cabinets and cupboards, drawers, bedroom sets, metal beds, wooden wardrobes, crystal chairs, office tables and chairs, computer tables, junior study sets, and planters. The company also offers its products to automobile, pharmaceutical, engineering, electrical, logistics, textiles, supermarkets, electronics, retail, food and beverages, agriculture, seafood, hospitality and catering, and other allied business. In addition, the company manufactures and sells mattresses; provides storage systems of metal and mass housings; and operates 19 retail stores in 13 cities under the @home brand. The company also exports its products to Middle East, Europe & America. Company’s subsidiary includes Nilkamal Eswaran Plastic Pvt. Ltd (Sri Lanka) whereby Nilkamal holds 76 %; this company is a leading manufacturer of moulded furniture in Sri Lanka. Another such subsidiary is Nilkamal Crates & Bins FZE (UAE), this a wholly owned subsidiary, which manufactures and exports plastic containers, pallets, parts bins, waste bins, ice boxes, metal wire cage and hand pallet trucks. Nilkamal has two Joint Ventures Nilkamal BITO Storage Systems Pvt. Ltd with 50 % JV, an Indo German JV, this is into manufacturing and selling of metal storage systems. The second JV is Cambro Nilkamal Pvt Ltd: 50 % JV which is into manufacturing of hospitality products suited for large restaurants and hotels. The company is compared with Supreme Industires Ltd, Astral Poly Technik Ltd, Sintex Industries, Peacock Industries, Wim Plast Ltd and Globally compared with Hume Industries Bhd of Malaysia, Teems Inc of South Korea, Duc Thanh Wood Processing JSC of Vietnam, LenCheong Holding Berhad of Malaysia, Crown Holding of USA, AEP Ind from USA, AptarGroup of USA, Avery Dennison Corp of USA, Ball Corporation of USA, Berry Plastics Group Inc of USA, The Pack Corp of Tokyo, Nampak Ltd of South Africa, Mpact Ltd of South Africa, Polyplex Pcl of Thailand, Billerudkorsnas Ab of Sweden, British Polythene Ind of UK, DS Smith Plc of UK, Huhtamaki Oyj of Finland, Resilux NV from Netherlands.

Investment Rationale:

Nilkamal Ltd is one amongst the world's largest manufacturer of moulded furniture and India's leading manufacturer of Material Handling Systems. Company is also a pioneer in the home retailing segment. Company is spread across the country with 16 large format retail stores with an average of 25,000sq.ft. Per store and plans to open 30 more stores in till 2017. Company is well positioned as a Home Maker store and is a perfect one-stop solution store for home planning, with finest quality furniture, soft furnishing, home accessories and a plethora of a whole lot of Services to enhance customers indoor and outdoor spaces. The design of the products of this company is contemporary yet practical, mirroring Indian taste & finesse. The comprehensive product mix right from bins, crates, pallets to Material Handling Equipment ranging from Pallet Trucks to Stackers, Forklifts, shelving and racking plus which are the equipment’s required for the rapid growing logistics industry. Product quality of Nilkamal is widely accepted, nationally & internationally and has an office in Ajman, UAE to cater to the Middle Eastern Markets. It also exports to most major markets in Europe and Americas which are known for being sticklers for quality. It has consistently won prestigious export awards and is now an Export House. The Company has advanced machinery in Injection Moulding, Rotational Moulding, Vaccum Forming, Polyurethane Injection (of insulation) and capabilities for SMC and Blow Moulding. Occupying a massive total constructed area of 11, 33,738 sq ft. All of Nilkamal’s manufacturing plants are ISO 9001/2008 Certified and practices 6 Sigma manufacturing process and the extensive manufacturing infrastructure is ably supported by their wide and strong sales network, operating through 50 Regional Offices and 77 Warehouses spread across the India. All the plants, warehouses and offices are connected to the Head Office in real time by ERP, SAP-R3. 

Nilkamal in joint venture with Bhoomi Realty has successfully completed it project in Borivali named AURABIPLEX which also homes the famous Kalyan Jewellers. This was a 21 storey Premium project build with an unique and innovative techinques. As far as Moulded Furniture is concerned, Nilkamal is a recognized name in the industry with a market share of 39 % amongst organized players. The demand for moulded plastic furniture is expected to improve owing to its cost effective nature vis-à-vis traditional wooden furniture. Plastic products have application in various industries as well as in households. As per a report by India Brand Equity Foundation (IBEF) on the India plastic industry, the per capita consumption of plastic in India is very low. According to industry reports, the plastic processing industry is highly fragmented with approximately 35,000-40,000 plastic processing units in India, most of which can be classified as small-scale operations. The Annual household income in India is expected to increase from $2632 in 2005 to an estimate of $3823 in 2015 and $6790 for 2020. Citing these increases in household incomes, the usage of plastic across various industries and households would increase also the per capita consumption of plastic is expected to double in the next five years. As per a FICCI 2014 report, the plastic industry is one of the fastest growing industries in India. It has protracted at around 8 % CAGR to reach 8.5 mtpa in FY2014 from 6 mtpa in FY2008. Currently, the Indian plastics industry employs about 40 Lakh people and India has over 2,000 exporters. India operates more than 30,000 processing units, of which 85 % to 90 % are small and medium enterprises (SMEs). India is one of the most promising exporters of plastics among developing countries. The Indian plastics industry produces and exports a wide range of raw materials, plastic moulded extruded goods, polyester films, laminates, moulded-soft luggage items, writing instruments, plastic woven sacks and bags, PVC leather cloth and sheeting, packaging, consumer goods, sanitary fittings, electrical accessories, laboratory-medical surgical ware and travel ware, among other products. Due to change in government at the centre, which has started focusing on development of Infrastructure including power sector, it is expected that Plastic companies will be benefited substantially in near future. Nilkamal has already done a capex of Rs. 460 Cr & has decided to go slow on @Home brand business and may even look at divesting its stake, it will focus on its core business. Nilkamal’s other business segments are also on the verge of a turnaround. Management has expressed confidence that all negatives like aggressive capex, moderation in volume and the pressure on margins is factored in its valuation at present and that likely improvement in volumes and margins and free cash flow generation can lead to a re-rating of the stock. 

Outlook and Valuation: 

NILKAMAL was incorporated in 1985, and is a pioneer in the plastic industry and is credited as the leader amongst the leading manufacturers of moulded plastic products in India. The company has three divisions, viz Plastics division which contribute around 82 % of the revenue, Lifestyle Furniture & Furnishings and Accessories, Retail contributes around 12 % of the revenue and Mattress & others contributes 6 % to the Nilkamal’s revenue. The products of these divisions are sold through the company’s own retail chain “@home”. The company has recently forayed into the mattress business. The company’s manufacturing plants are located at Barjora and Hooghly in West Bengal, Hosur in Tamil Nadu, Jammu, Kharadapada and Vasona in Dadra & Nagar Haveli, Noida in UP, Sinnor in Maharashtra and in Pudducherry. Nilkamal is a market leader in the Material Handling segment too, backed by its ability to directly reach a very diverse set of industrial customers through 400+ self-employed sales people & operating from 50+ regional sales offices which is located across India. The Moulded Furniture segment of the company enjoys a 39 % market share in its category. Nilkamal has 26 small format stores along with a strong network of 40+ depots and 1000+ channel partners on a pan India basis, this not only increases the division’s ability to serve remotest rural markets but also further augment Nilkamal’s leader ship position in the near future. Its retail store chain “@home”, operates 18 stores across 13 cities covering a retail space of over 3.15 lakh sq. ft. Nilkamal is well poised to see robust growth across its key segments plastic furniture, mattresses and material handling business on the back of strong economic growth and expected revival in industrial activity from the “Make in India” campaign. Nilkamal enjoys leadership position with a market share of around 32 % and a lead of over two times its closest competitor. While economic growth leading to higher investments by corporates will lead to higher demand & Nilkamal is well geared by adding a variety of products in the seating solutions segments like office chairs, designer chairs etc. for commercial establishment like food courts, malls etc. to address the raising need of the personal consumption for plastics furniture the company has set up one stop furniture showroom “Nilkamal Home Ideas” for all Nilkamal furniture products in the categories of living, bedrooms, sofas, dining, designer chairs etc. In FY14 the company added 7 such new stores ranging from 4,000 to 8,000 sq.ft, taking the total of stores to 26. Company had a huge success in launch of mattress in South, East and West. Nilkamal is currently preparing itself to stabilize with a positioning of an innovator and facilitator for the consumer in selection of right mattress. Higher purchasing power backed by the higher income levels and increased urbanization rising construction activity in housing segment will continue to boost the growth in mattress industry. Such scenario leads to increase in spring mattress segment where Nilkamal has invested in machinery and marketing strategy for growth. Mattress market is throwing up opportunities for premium products which are technically superior. Nilkamal supplies crates, Pallets, metal storage racks and material handling equipment to various industries. The “Make in India” campaign will start the ball rolling for pick up in Industrial activity which eventually will lead to high demand for Nilkamal products. Nilkamal’s Plastic products are made from polymers such as polyethylene (PE), polypropylene (PP), polystyrene (PS) and polyvinyl chloride (PVC) which are processed in numerous ways to achieve the desired shape and design of the product and so the key raw material used in manufacturing of Nilkamals products are polymers which are derived from crude oil and the Crude oil prices have corrected from a high of US$115 per bbl in August 2014 to US$ 55/bbl currently which makes Raw material cost for Nilkaml cheaper. Furthermore demand for polymers in China has weakened substantially on the back to economic slowdown. This will translate into marked reduction in raw material prices for Nilkamal resulting in a strong CAGR in nearer future. Nilkamal is one of the strong brands in the plastic segment that can be further classified into material handling commanding market share of around 36 % and moulded furniture category commanding value market share of 40 %. The company has 1200 distributors and over 5000 touch points across India. Further, the consolidated revenues recorded 12.5 % CAGR in FY10-14 while the EBITDA margin remained under pressure due to losses from its retail segment at the operating level till FY13. PAT remained flattish in FY10-14 due to a decline in margin and rising interest cost. Nilkamal has nine manufacturing units for manufacture of plastic moulded furniture and material handling solutions. Material handling and moulded furniture contribute 57 % and 43 % to segment revenues, respectively. The financial performance in the last five years was dragged down by lower volume of the plastic division coupled with losses from the retail segment. This finally resulted in higher working capital requirement and lower returns ratios which were 9 % of RoE & RoCE of 12 %. However, the management guided at an improvement in EBITDA margin, going forward, due to benign raw material prices such as crude derivatives & volume growth in plastic division. Manufacturing products contribute 65 % to top line. The EBIT margin of the segment declined from 12.6 % in FY10 to 8 % in FY14 on the back of a decline in volume growth in the material handling segment. The management is optimistic on a revival in demand for material handling products, going forward, supported by various government initiatives like “Swachh Bharat Abhiyan”. The retail segment especially the large format retail shop @home of the company operates on a completely asset light model wherein the company does not own any retail shops where the average size of the stores is 16000 sq ft. These retail stores are mainly located in Tier-1 cities and the company is aiming to add two to three new stores every year. Apart from this, “Nilkamal Home Ideas” is another format of retail shops with a focus on catering to Tier-2 and Tier-3 cities mainly. The average size of the stores is 8000 sq ft. The revenue of this segment recorded a CAGR of 14 % in FY10-14. However, the segment remained loss making till FY13 and turned into profit in FY14. Nilkamal focused on maintaining the topline growth which is over 10 % for FY16-17E with an EBIT margin of 6 % from this segment. The company has no major capex plans apart from maintenance capex of around Rs. 30 crore for FY16-17E to augment production capacity. It will largely focus on reducing the debt burden from cash generated through operations. This will also help in improving return ratios, going forward under the new business segment i.e. mattress which recorded revenue of Rs. 35 crore in FY14, the company is aiming to achieve Rs. 100 crore turnover by the end of FY18-19. Nilkamal is currently trading at 16x FY14 EPS. NILKAMAL can post EPS of Rs. 24.46 for FY15E & of Rs. 27.02 for FY16 E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.  

KEY FINANCIALS	FY13	FY14	FY15E	FY16E
SALES (₹ Crs)	1,610.65	1,654.76	1,800.57	1,951.82
NET PROFIT (₹ Cr)	31.20	40.03	36.50	40.31
EPS (₹)	20.90	26.83	24.46	27.02
PE (x)	18.83	14.67	16.09	14.57
P/BV (x)	1.37	1.27	1.18	1.09
EV/EBITDA (x)	7.00	5.64	6.06	5.70
ROE (%)	7.27	8.65	7.31	7.47
ROCE (%)	22.38	26.98	25.46	25.93

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*As the author of this blog I disclose that I do not hold NILKAMAL Ltd in my any of the portfolios.

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