Scrip Code: 523385 / NILKAMAL

CMP: Rs. 1,685.15; Market Cap: Rs. 2,514.66 Cr; 52 Week High/Low: Rs. 1,841.90 / Rs. 885.00.

Total Shares: 1,49,22,525 shares; Promoters : 95,70,007 shares –64.13 %; Total Public holding : 53,52,518 shares – 35.87 %; Book Value: Rs. 392.01; Face Value: Rs. 10.00; EPS: Rs. 79.67; Dividend: 70.00 %; P/E: 21.15 times; Ind. P/E: 37.93; EV/EBITDA: 29.61.

Total Debt: Rs. 105 Cr; Enterprise Value: Rs. 2,612.36 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 locally compared with Peacock Industries, Supreme Ind, Sintex, 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. 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. 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. Nilkamal is in the process of augmenting its range of differentiated products in the ‘Premium Monoblock’ segment, which has registered a growth of 21 % over the last year. The Hybrid chairs combining metal and plastic introduced in the last two financial years has also registered a robust growth of 35 % on a year-on-year basis. The metal line facility actioned at Hosur two years back is consistently producing series of Contract Chairs with a combination of fabric & PVC with steel thereby delivering a unique buying position for the consumer as well as for architects. The year gone by has also seen an addition of innovative niche products in the plastic storage domain. The visibility equation of traded products has been accelerated with the help of 23 “Nilkamal Home Ideas” Stores ranging from 4,000- 8,000 sq.ft. at various 2 & 3 tier cities. Apart from the "Nilkamal Home Ideas” Stores, the Company also has a strong network of 40 plus depots and 1,000 plus channel partners on a pan India basis as well as 10 DODOs across various regions, who are in a way a one-stop furniture-solution provider, to their current base of approximately 6 Cr satisfied households of moulded furniture. The strong network has helped the penetration of the traded segment to the remotest rural market thus enhancing our ability to manage complex supply chain equations. The Company has also registered a fine presence in Modern Trade segment and also entered into business partnership with various E-Commerce portals to improve the sale of various value added products. In the long run the company remains bullish on the prospect of Furniture business based on a good. DP growth which would unfold a lot of opportunities for exponential growth, as the growing middle class would need quality furniture from reliable manufacturers to meet their aspirations of modern living. The rising labour costs coupled with time poverty for the working middle class consumers, softening of interest rates and implementation of GST in the near future are also positive triggers for this change. The pan India penetration and the Company’s strength of servicing customers at arm’s length through depots in major cities would definitely augment their leadership strength and help the division grow at the rate of 12 % to 15 % in revenue terms. Mattress Division During the financial year 2015-16, the division achieved revenue of Rs. 29.80 Cr. In large metros and Tier 1 & 2 cities, this growth is expected to be higher in the coming years as it becomes difficult to find people who provide customized mattresses. The organized companies are developing budget mattresses to address the need of low cost mattresses for value seekers. This should further put pressure on the unorganized trade, especially in large cities. The Company has also recently introduced low cost mattresses by carrying out value engineering to address the budget buyers’ needs. In the last financial year Company has rationalized prices, product offerings and sharply focused on applications of each product to strengthen market share. At the cost of small drop in sales the bottom line has improved. The Company has introduced several unique products, which have found good acceptance in the market. With the focus on sales, distribution and marketing, the Company envisages better growth in the next year. The Company has decided to focus on market nearer to the manufacturing base in south and east to control freight cost. The Company’s distribution network and brand name is well suited for marketing this product. Mattress requires high consultative selling; the dealer has a very high influence on converting the customer to any brand. Reaching out to such dealers, training them on the features of each of the mattress and ensuring high quality of reiteration to the customer is a challenge. First time branded mattress buyers are extremely price sensitive and seeks value. Un-organized players still dominate the industry, evade statutory levies and taxes. The mattress industry has a low entry barrier therefore competition will continue to come up in various markets from time-to-time. However, they are restricted to their local markets. Hotels, Hospitals and Hostels prefer high performance, high quality branded mattress with flame retardant, Anti – Bacterial fabrics. Wellness is gaining popularity among the large urban population, it is a question of marketing a mattress in the true light and its importance of wellness, since people use a mattress for 8 hours of the day Lifestyle Furniture, Furnishing and Accessories Division. In the financial year 2015-16, apart from the @home portal, the company has also entered into business partnerships with other leading e-commerce portals. This year, the Institutional sales channel has registered 30 % growth over the last year. @home has also improvised its supply chain management with the introduction of ARS (auto replenishment system). ARS has helped the division to improve its inventory turnover and streamline its display. The year also witnessed the streamlining of pricing and display mechanism at the operational level. @home had also started its outsourced captive unit for furniture to innovate more in terms of product offering and for better inventory management. The year also witnessed @home’s foray into the Solid Wood furniture segment. Growing competition from the online players in terms of range, pricing and burgeoning real-estate rates are areas of concern. 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. 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. 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. 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 Nilkamal’s products are polymers which are derived from crude oil and the Crude oil prices have corrected from a high of US$115 per bbl in August 2014 to US$ 53 per barrel 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. 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 Indian economy was relatively stable during the fiscal year 2015-16. The country’s gross domestic product (GDP) grew by 7.4 % compared to 7.2 % growth in GDP in 2014-15. The country’s GDP is expected to grow by 7.7 % during the year. Domestic consumption is expected to be the main driver of the likely acceleration in economic growth this year. The Plastic Business has achieved a volume growth of 3 % and value growth of 5 %. During the financial year 2015-16 it has achieved total turnover of Rs. 1,765.72 Cr as compared to Rs. 1,695.21 Cr in the previous year. To enhance product offering, this Year the Nilkamal has widen school furniture and SOHO (small office/home office) furniture range by adding more than 50 products in this segment. The Company has reinforced their market presence by adding more Modern Trade outlets, E-commerce portals and just dial to promote the sales of various value added products. The Company has rationalized the prices of Mattress and enhanced the dealer engagement programs to further enhance the market share in South, West & East. In the current financial year the Company plans to enhance its range of rubberized coir, foam and spring Mattress which will serve the comfort, back support for the spine and wellness factors sought by our esteemed customers. The company is in process to partner with digital Payment/Wallet companies to further improve customer experience both in Online and Offline Channel. Nilkamal is optimistic on a revival in demand for material handling products, going forward, supported by various initiatives (like “Swachh Bharat Abhiyan”) taken by the newly formed government at the Centre. The long awaited GST bill has been passed in both the houses of the Parliament and also got the approval from most of the states and its implementation is expected to be from 1^st July 2017. The objective of GST is to end the regime of multiple taxes on goods and services and bring them under one rate, which would make the pricing of the products more rational. The system will change from the current production-based taxation to being consumption-based, which would bring uniformity in taxes across states and is expected to increase efficiency and compliance in the system. Implementation of GST would be a game changer for the organized plastic players as it would reduce the pricing gap between organized and unorganized players and make the organized players’ pricing equally attractive. Plastic processing industry is highly fragmented with unorganized players accounted 70 % of total industry size. This would shift consumer attention and preference towards quality branded products and help to gain market share from unorganized players. Further, unorganized players are currently out of the tax purview, thus enjoying lower costs by evading taxes. Post GST implementation, this is likely to be diminished sharply and the market share of the organized players would increase significantly. Nilkamal being strong player in organized plastic sector and would be benefited from GST implementation as it would create incremental demand for its branded products. During nine months, Nilkamal’s revenue grew at 4.8 % to Rs. 1,526.2 Cr in 9MFY17 from Rs. 1,456.8 Cr in 9MFY16. The plastic segment witnessed a growth of 6.1 % to Rs. 1,370 Cr from Rs. 1,291.7 Cr same period last year. However, retail segment remained flat with drop of -1.2 % to Rs. 174.10 Cr in 9MFY17 from Rs. 176.20 Cr in 9MFY16. EBITDA margins remained flat during the nine month period at 10.4 % and grew at 5.8 % to Rs. 158.70 Cr in 9MFY17 from Rs. 150.10 Cr in 9MFY16. Retail segment EBITDA margins improved to 4.6 % in 9MFY17 from 2.4 % in 9MFY16. EBITDA grew at a healthy phase to Rs. 8 Cr in 9MFY17 from Rs. 4.20 Cr in 9MFY16 registering a growth of 91.9 %. Nilkamal’s revenue during Q3FY17 registered a double digit growth of 16.4 % YoY at Rs. 528.90 Cr compared to Rs. 454.6 Cr in Q3FY16. The plastic segment being the major contributor grew at 19.1 % YoY to Rs. 476.70 Cr mainly on account of the growth in volume and value at 22.0 % and 19.0 % respectively. Nilkamal is a pioneer in the plastic industry and is among the leading manufacturers of moulded furniture. Company has established a strong brand value over the years in the organized plastic industry, which accounts 20 % of total plastic industry. The rollout of GST from next financial year would be a game changer for the industry as it would narrow down the price differential between organized and unorganized players, thus witness a shift of consumer attention and preference towards quality and branded products, gaining market share from unorganized players. Besides, company would be benefited from lower polymer prices across the globe and would aid to improve its margins and return ratios. Management has hired consultancies like ATK earney and BCG consulting group to bring structural changes in Material handling and Furniture segment. As per the strategy, company would maintain RoE of 20 % for its future business and would bring back its pricing power. Management expects long term revenue growth of 12-15 % in next 3-5 years with EBITDA margin in the range of 13-15 %. Management intends to cap its EBITDA margin, hence any recovery in crude oil prices would not impact its margins and even company would not pass on any raw material cost benefit to customers. Further, company would maintain capex of Rs. 25-30 crore annually going ahead, hence no major capex has lineup. Pick up in domestic economy would also fuel the demand for its products as its products demand depend on the discretionary spending. Further, company has maintained healthy balance sheet by paying off the debt and generating surplus cash flows to fund its working capital requirements. It is quite optimistic on the company’s long term growth story and do believe in coming years the company would emerge as a long term wealth creator for the investors. On valuation front, company is also attractively traded. At the current market price of Rs. 1685.15, the stock is trading at a PE of 19.14 x FY16E and 17.73 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 88.00 in FY17E and Rs. 95.00 in FY18E. 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	FY16	FY17E	FY18E	FY19E
SALES (₹ Crs)	2,003.30	2,123.50	2,315.00	2,530.20
NET PROFIT (₹ Cr)	113.30	131.40	141.80	155.10
EPS (₹)	75.90	88.00	95.00	103.90
PE (x)	14.60	18.20	16.80	15.40
P/BV (x)	2.60	3.30	2.80	2.50
EV/EBITDA (x)	7.20	9.70	9.00	8.30
ROE (%)	18.50	18.30	17.10	16.30
ROCE (%)	26.10	24.50	23.40	22.50

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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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