TATA MOTORS LTD: DVR THE BEST !!!

Scrip Code: 570001 / TATAMTRDVR

CMP:  Rs. 310.70; Market Cap: Rs. 14,974.71 Cr; 52 Week High/Low: Rs. 391.35 / Rs. 219.27

Total Shares: 48,19,66,945 shares (17.61 % of Share Capital); Promoters : 24,78,587 shares –0.51 %; Total Public holding : 47,94,88,358 shares – 99.48 %; Book Value: Rs. 203.82; Face Value: Rs. 2.00; EPS: Rs. 47.67; Dividend: 105.00 % ; P/E: 10.67 times; Ind. P/E: 245.44; EV/EBITDA: 4.85.

Total Debt: Rs. 54,954.47* Cr; Enterprise Value: Rs. 2,01,927.08* Cr.

*DVR being a class of equity capital, Tata Motors financials are used

TATA MOTORS LIMITED: Tata Motors was founded in 1945 as a Public Limited Liability Company under the Indian Companies Act VII of 1913 as Tata Locomotive and Engineering Company Ltd and changed its name to Tata Engineering and Locomotive Company Limited (TELCO) in 1960 and later on it again changed its name to Tata Motors Limited in 2003. The company declared its first Bonus in 1977 in ratio of 1:5; then in 1979 2:5; in 1982 2:5; in 1995 3:5. The company declared split in its face value in the year 1996 from Rs. 100 to Rs. 10; and then in 2011 from Face value of Rs. 10 to Rs. 2. The company is leading manufacturer of commercial & passenger vehicles in India and is among the top three passenger car manufacturers in India and world's fourth largest truck manufacturer and is also world's second largest bus manufacturer. Through its subsidiaries, the company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools & factory automation solutions. Tata Motors has operations in UK, South Korea, Thailand & Spain. The company has many subsidiaries but the most prominent among these is Jaguar-Land Rover (JLR- a popular brand of British car manufacturing company Ford Motors, Jaguar was bought at $238 Cr from General Motors in 1989 and Land Rover was bought from BMW for $300 Cr in the year 2000) which was acquired in 2008 by Tata Motors at $230 Cr ($60 Cr for JLR Pension fund + $170 Cr to Ford motors) and turned it from a loss making company to a profit making company. JLR contributes 54 % to the company’s revenues. Tata Motors other subsidiaries include Tata Precision Industries Pte. Ltd; Trilix S.r.l; PT Tata Motors Indondesia; Sheba Properties Ltd; TML Holdings Pte. Ltd; Tata Motors Insurance Broking Advisory Services Ltd; Tata Motors Finance Ltd; Concord Motors (India) Ltd; TML Distribution Company Ltd; Tata Technologies Ltd; Tata Motors European Technical Centre Plc; TAL Manufacturing Solutions Ltd; TML Drivelines Ltd; Tata Motors (SA) (Proprietary) Ltd; Tata Motors Thailand Ltd; Tata Motors Marcopolo Ltd; Tata Daewoo Commercial Vehicle Company; Jaguar Land Rover Automotive Plc. The company’s product portfolio ranges from the ultra-low cost car Nano which was launched in 2011 to the luxurious cars from JLR, from its ground breaking invention of the light commercial vehicle (LCV) the Ace to the international Prima Truck range. Tata Motors is compared to Toyota Motors Corp of Japan, Mazda Motor Corporation of Japan, Suzuki Motor Corporation of Japan, Jardine Cycle & Carriage ltd of Singapore and Bayerische Motoren Werke AG (BMW), Audi AG, Daimler AG, Volkswagen AG of Germany, Ford Motors of USA and Mitsubishi Corporation. 

Investment Rationale:

Tata Motors Limited is largest automobile company in India. The Company is the leader of commercial vehicles in all segments, and also among the top in passenger vehicles segments. Tata Motors is the fifth largest truck manufacturer and fourth largest bus manufacturer in the world. The Company’s manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand), Sanand (Gujarat) and Dharwad (Karnataka). The Company’s dealership, sales, services and spare parts network comprises over 6,600 touch points. Through subsidiaries and associate companies, Tata Motors has operations in the UK, South Korea, Thailand, Spain, South Africa and Indonesia. Among them is Jaguar Land Rover, acquired in 2008. According to Industry body “SIAM”, Passenger car sales in India is forecasted to grow at rate of 3 % to 5 % with an ongoing expectations of an improvement in overall macroeconomic conditions of the country, despite witnessing a fall of 6.69 % during 2012-13. Overall, the passenger vehicle revenue is estimate to rise by 5 % to 7 %. The financial year 2013 was a challenging one for Tata Motors. However, despite difficult economic conditions and rising competition, the Company retained its market leadership in commercial vehicles, on the back of new offerings and introduction of innovative technologies. Its highly successful and reliable Ace and Magic vehicles crossed the sales mark of one million units. The Company is working on a slew of new products, with a plan running up to 2020; this includes appropriate focus on alternate fuels, hybrids and electric vehicles. The organization is resolved to foster a culture of customer centricity and innovation, so that the Company’s products and services consistently exceed customer expectations. In the commercial vehicles segment, Tata Motors expects to remain the preferred brand for customers. Given the Company’s scale, it is in the best position to efficiently integrate its products and services and deliver the maximum value to its customers at the best prices. The global vehicle sales have been growing at a CAGR of 6 % for the last five years. Among the major regions, Asia Pacific has been the largest contributor to the total sales. The contribution from Asia Pacific rose gradually from 35 % in 2008 to 48 % in 2013. The highest sales came in from China (within Asia Pacific) i.e. 47 % in 2008 to 61 % in 2013. The other major demand came in from North America and Europe. The number of passenger cars and light commercial vehicles sales worldwide rose by nearly 5 % to 76.28 million units in 2013, mostly on the back of increased demand in the USA and China. The strongest momentum for growth was generated in China, where the market grew by 1.93 Cr to 2.19 Cr units reported a growth of 13.94 % in FY2013. Sales of UK grew by 10.76 % in 2013 to 22,70,000 units from 2,04,000 units. Tata Motors' narrow economic moat is driven by the strength and global recognition of its Jaguar and Land Rover brands. This allows Tata Motor to have premium pricing, also Tata motors has low-cost advantage as it is enjoyed by its Indian business which is driven by low labour costs and with the favourable tax structure for the domestic manufacturers it enjoys its narrow moat. In 2014, Tata motors derived more than 80 % of its operating profit from its Jaguar and Land Rover brands. JLR's profitability has helped Tata Motors to consistently generate excess returns. While premium, luxury, ultra-luxury, and exotic brands commands high prices and are quite often purchased to make a personal statement, consumers of these products can still easily switch to one of many competing products. Automakers in this luxury segment do not necessarily have an economic moat just because of brand strength and premium pricing. Even though Bentley (owned by Volkswagen) is globally recognized as an ultra-luxury brand that commands a commensurate price, poor margin performance would suggest that the company has not earned its cost of capital since 2007. However, based on Jaguar Land Rover's profitability in the last three fiscal years, Tata's luxury brands have been contributing significantly towards building an economic moat. Company would be able to manage the Jaguar and Land Rover brands, as indicated by its initiative to make its brand experience and marketing uniform in all the 177 markets worldwide. With new facilities in China by end of fiscal 2015 and in Brazil by 2017, the company will have a manufacturing presence in the world's top seven automobile markets. The Global growth, coupled with increased capital expenditure to regularly roll out new products which will maintain JLR's brand image and this will help Tata Motors for premium pricing and in turn Tata Motors narrow economic moat will be sustained. JLR's focus on premium segments, with an obsessive attention to design and detail, has driven substantial excess returns over its weighted average cost of capital. Overall, Tata Motors has generated returns higher than its cost of capital during 10 of the past 11 years. During eight of those years, excess returns were more than 5 % and this can be termed as an outstanding performance for an automotive manufacturer. To Tata's advantage, the company's domestic mass-market passenger vehicle and its commercial vehicle operations enjoy substantial growth potential and has low-cost manufacturing base, this is an advantage for Tata Motors. Global automobile manufacturers face a steep import duty in India. This ranges from 60 % to 200 % based on the price tag which, when coupled with insurance and domestic inland tax of 20 % to 30 %, makes them an unattractive option for the domestic buyers. Now Indian currency has depreciated more than 40 % over the last few years which have further raised the prices for the imported automobiles for the domestic market. This provides a competitive advantage to the domestic manufacturers including Tata Motors and this attracts globally automobile manufacturers and they may choose to set up manufacturing plants or assembly lines in India which could give them a level playing field versus domestic manufacturers such as Tata Motors. But still, it takes about two years to apply, receive various approvals, build a plant, and start production. Also, immediate market acceptance is not guaranteed and usually it requires more than one model.  Given the time it takes for competitors to establish a presence and that Tata is already well positioned to benefit from significant growth potential, and so Tata Motor will enjoy a moat from its cost advantage for at least 10 years. 

Outlook and Valuation: 

Tata Motor’s new launches at JLR, including the all‐aluminum bodied Range Rover have generated huge positive response from the customers which shows it potential to command such PE multiples. Tata Motors declared rights issue in January 2015 in ratio of 6 new shares of Rs. 2 each for every 109 shares held. The company fixed its book closure on April 08, 2015 for the purpose of rights issue entitlement of ordinary shares and A' ordinary shares of face value of Rs. 2 each. Tata Motors will issue around 15,06,44,759 ordinary shares at Rs. 2 each at Rs. 450 each to its existing shareholders aggregating amount of Rs. 6,779 Cr, this would mean a dilution of 5.50 % on the total outstanding shares of 2,73,67,13,122. Tata Motors will also issue 6 new DVR shares of Rs. 2 each as Rights issue for every 109 DVR shares held. It will issue 2,65,30,290 ‘A’ Ordinary Shares (DVR) at Rs. 271 each to its existing shareholders aggregating amount of Rs. 719 Cr, this would mean a dilution of 5.50 % on the total outstanding DVR shares of 48,19,66,945. Tata Motors will utilize this monies for buying back its NCD of Rs. 1250 Cr this will reduce a part of Tata Motors liability and the rest Rs. 6250 Cr of funds collected will increase its net worth. FY16 is an important year for JLR with major developments including: Launch of the Discovery Sport, Jaguar XE, F-Pace and other new products and derivatives. Launch of the new Ingenium Engine plant. Launch of the Chery Jaguar Land Rover (CJLR) plant in China starting with production of the Evoque for the Chinese market to be followed by at least 2 further JLR products over the next 18 months. But this will have a transitory impact on the profitability of Tata Motors in FY16. These developments are expected to support the continued growth and profitability of JLR with strong EBITDA margins. In addition, JLR benefits when the GBP£ weakens against the Dollar. As a result, 1 % depreciation of GBP£ against USD improves its EBITDA margins by 0.50 %. Similarly it benefits when GBP appreciates against EURO. As a result, 1 % appreciation in GBP£ against EURO€ improves its EBITDA margins by 0.15 % to 0.20 %. JLR payables are 60 % in GBP£ and 40 % in Euro. Given that JLR buys about 40 % of its components from Europe & than it sells about 20 % vehicles in that continent hence JLR is a net importer of 20 % in Euro terms. As a result, it benefits when the GBP£ strengthens against the Euro. Increase in addressable segments, coupled with new products, would lead to a 20.0% CAGR in volumes over FY13-FY15E period for TATA MOTORS. The valuation of Tata Motors on SOTP basis for Core business comes at Rs. 92 per share, Value of JLR at Rs. 528 per share, based on 3.6x FY16E EV/EBITDA. And the value of other investments and JV’s are valued at Rs. 148 per share. The value of the unfunded pension liability of GBP£ 93.5 Cr is deducted to arrive at JLR’s Valuation translating into Rs. 27 per share. So, the value of Tata Motors shares after holding discount comes to Rs. 576 per share and accordingly, the price for Tata Motors DVR considering 30 % discount to ordinary shares comes to Rs. 403 per share. The long term investors can buy the ( Tata Motor DVR ) in view of attractive valuation. The long term holders of ordinary shares of Tata Motor can switch to Tata Motor DVR. TATA MOTOR has been the third company after Jagatjit Ind & Pantaloons to come out with a DVR in September 2008. The key reason for Tata Motors behind the issue of DVR was to fence itself from any takeover threat and to part finance the acquisition of Jaguar land Rover deal. Tata Motor DVR was issued at 10 % discount to issue price of main Tata Motor Share in 2008. Tata Motors DVR shares carry 1/10th of voting rights i.e. 10 % of voting right of main share. 1 vote for every 10 DVR held. DVR shareholders are entitled to a 5 % higher dividend than ordinary shares in lieu of surrendering their voting rights. Tata Motor DVR accounts for 15 % of total outstanding capital the cap is 25 %. In event of rights or bonus issue the offer holds equal rights for both main and DVR shares and any further shares issued under DVR will be termed as ‘A’ – ordinary shares DVR. In case of a buyback the buyout offer has to be for the same % of the outstanding capital of the ordinary and the DVR. Even the discovered price premium to the exit price would have to be equal for the main and the DVR. Tata Motors DVR trades at a discount of 39.97 %. The average discount for the DVR to Tata Motors ordinary share was 36.7 % since inception. The average discount for the DVR share over the last two years has been 40.5 %. At the Current Market Price of Rs. 310.70, the DVR is trading at a 38.86 % discount to Tata Motors’ ordinary share which is at Rs. 508.25. At the current levels, the probability of the discount narrowing is higher. On SOTP basis and after giving holding discount the valued of Tata Motors ordinary shares comes at Rs. 576 and applying 30 % discount to it gives DVR valuation at Rs. 403. One can buy Tata Motor DVR at all lower levels for better returns. On February 2015 S&P BSE Indices, the index provider for the BSE, has announced the inclusion of DVRs into the main indices, including the S&P BSE Sensex, S&P BSE 100, S&P BSE 200 and S&P BSE 500. S&P BSE Benchmark Indices will consider inclusion of DVR Shares if a company’s ordinary share class is also a part of the new index portfolio and are 10 % or more of total shares outstanding of the company. The inclusions would be effective from the next rebalancing of the indices, in June 2015. This is the similar to S&P Dow Jones which included Google's 'C class shares' which are without voting rights into its S&P 100 &S&P 500 index. The inclusion of Tata Motors DVR share into Sensex and/or Nifty would reduce the price difference between it and the Tata Motors share. The inclusion into a main index would also lead to index-fund managers and exchange-traded funds to buying more of the stock. Inclusion of Tata Motors DVR in Nifty or Sensex will enable global ETFs and index focused domestic fund managers to invest in the stock so that it will completely eliminate the price discount. Indian investors haven't warmed up to the idea of investing in shares with differential voting rights. Tata Motors DVR shares have given a return of about 54 % so far this year against 18 % of the ordinary shares. Recently, UK based fund house Knight Assets had recommended Tata Motors to list its DVR shares on the New York Stock Exchange, saying that the investors in the US are more familiar with the "dual class" setups, which could help correct the valuation gap. The steep discount in Tata Motors DVRs is due to a lack of balance in the economic rights and liquidity between the two share classes and lack of experience and understanding in investing in such securities. Globally DVRs trends to trade between 10 % - 15 % discounts to its Equity shares, Tata Motors DVR currently trades at 40 % discount to its Equity shares. One should buy Tata Motor DVR at 40 % - 45 % discount to its EQ SH & Sell when DVR arrives at 10 % - 15 % discount to its EQ SH. It is expected that the discount to the Equity shares will reduce to at least 30 % over next one year given the attractive valuations and increasing free float. 

SOTP valuation (FY2016E)

BUSINESS SUBSIDIARY	Value per Share(₹)
Core Business	92.00
Jaguar Land Rover Plc (3.6x FY16E EV/EBITDA)	528.00
Tata Daewoo Commercial Vehicle Co. Ltd	11.00
Tata Motor Finance Ltd	34.00
Tata Technologies	23.00
HV Axles	6.00
HV Transmission	5.00
Investment in Tata Sons	59.00
Value of other Subsidiaries & JV's	10.00
TOTAL PER SHARE	768.00
Less: NET DEBT	48.00
TOTAL VALUE PER SHARE - Ordinary Sh	720.00
Less: 20 % Holding Company Discount	144.00
TOTAL VALUE PER SHARE (after disc)	576.00
TOTAL VALUE PER DVR SHARE (30%)	403.00

KEY FINANCIALS	FY14	FY15E	FY16E	FY17E
SALES (₹ Crs)	2,32,833	2,62,100	3,62,100	3,64,500
NET PROFIT (₹ Cr)	14,198	14,700	20,700	24,700
EPS (₹)	44.10	45.60	64.40	76.80
PE (x)	13.00	12.50	8.90	7.40
P/BV (x)	2.80	2.30	1.80	1.50
EV/EBITDA (x)	5.30	4.50	3.60	2.80
ROE (%)	27.50	20.10	22.90	21.90
ROCE (%)	25.70	24.30	25.10	25.20

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*As the author of this blog I disclose that I do not hold TATA MOTORS DVR in my any of the portfolios.

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RETURN ON CAPITAL

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

 As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

*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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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.

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RETURN ON CAPITAL

GOD & INVESTOR STORY !!! (FPFS – Day 5)

Hii Friends , 

This is my Fifth and the last day for Five Pics Five Stories challange and my all posts relating to this challenge is here (FPFS- day 4). 

I am into a proffession whereby we deal with money, mostly other people's money, so it takes great responsibility to manage that, off course when you win you are praised but when you loose you are criticized. People always asks us what will the markets be, what will so and so stocks prices will be, and I say I don't know, I only know that this company is doing its best and is well managed and I see its future cash flows being intact and so I feel that this business should grow. But do I know what would be its prices be, NO I Don't know, M not GOD we are humans as you are and so we also cant predict future... 

Remember no one can buy at the bottom prices & Sell at top, So we try to find out stocks which are available at discounts and looking at margin of safety, we are humans too and so can do mistakes and that's why we have Strict Stop Loss (why stoploss of 8% - read Here) on our stock picks. Talking on Prices reminds me a short story told by my Uncle about an Investor who met God - 

Commuter reading Daily in Firstclass compartment in
mumbai local in rush hours 

A man dealing with stocks met God - God asked him to make one wish - he said "GOD please give me the copy of news paper dated excatly after 2 years from now"!. God was suprised but still granted his wish and Gave him the NEWSPAPER which was dated 2 years from now...... 

The first thing that man did was opened up the business page & Saw the stocks prices and invested in those stocks immediately which could fetch him multi-millions after 2 years.... After few days of buying spree and as tended by the Human psychology, he felt let me see what would be the news around the world after two years from now and turning on the pages he landed on Obituary section - On Which his Name was the First !!  - So, what this tells us, that do live in present and dont worry what will be there in future, Just live your life at the fullest .. 

This is my last day for the challenge series and I hope you all must have enjoyed reading some of the offbeat post, it was bit difficult for me to going into the creative zone after a long long time, I dont know how it has turnout.. but will say I enjoyed this very much.. after a very long time I was thinking beyond markets ..hehehe :)
Anyways thanks friends for your amazing supports !!

Please do keep on ur support for me & pl do visit again and share the posts :)
 Regards
Bhavikk shah
mumbai  

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I have been tagged by my dear friend Shweta, to take part in Five Photos Five Stories Challenge (FPFS) which is - Post a picture for 5 consecutive days and attach a post to it, fiction,poem or short wrtie-up. It can be anything to suit your taste. Thanks Shweta for tagging me :) I am tagging my blogger friend Priyanka Artiste, She is a brilliant, passionate & talented photographer.. All the best Priyanka... I hope u all enjoyed the 5 day series :)