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Sunday, April 9, 2017

Another small cap PVC Player with multibagger potential

Btw: Company was suggested to members at 34 bucks. Quotes around 40 now. Heck of a bet where you get all the soothing ingredients necessary for a core Portfolio bet.

Company on a whole from a rating note: Promoted by SSM in 1990, Company is engaged in the production of plastic pipes, ducts and mouldings after demerger of its solvent extraction division into a separate entity named KNL and of its auto component manufacturing division into a 100% subsidiary named KA in January 2010. It's facilities are located at Pithampur, Madhya Pradesh with a total installed capacity of 79,378 metric tonne per annum (MTPA) for pipe manufacturing and 2,076 MTPA for pipe fittings/mouldings as on March 31, 2016.As per the audited results for FY16, It reported a total operating income of Rs.463.99 crore (FY15: Rs.359.78 crore) and PAT of Rs.11.69 crore (FY15: Rs.2.69 crore). Further, as per the un-audited results for Q1FY17, Company earned a total operating income of Rs.134.02 crore and PAT of Rs.5.96 crore. 

Story:Company is engaged in the pipes business. The Company operates under Plastic segment in over four verticals, such as agriculture,building products, micro irrigation and infrastructure. Its agriculture products include rigid polyvinyl chloride (RPVC) pipe and fittings, casing pipe, polyethylene (PE) coils, sprinkler systems, submersible pipe, suction and garden pipe. Its building products include soil waste rainwater (SWR) drainage pipe and fittings, chlorinated polyvinyl chloride (CPVC) and plumb pipe and fittings, and garden pipe. Its micro irrigation products include micro irrigation lateral (inline and online), sprinkler systems, and RPVC pipe and fittings. Its infrastructure products include RPVC ring fit pipe (elastomeric) and fittings, high-density PE (HDPE) and medium-density PE (MDPE) pipes and fittings, permanently lubricated (PLB) telecom duct and micro duct. 

Here goes the story. We were actively doing scuttlebutt on our earlier find of Kisan mouldings by approaching the dealers,distributors and even other peer or competitors of the company. While discussing Kisan with a large PVC player,this company Propped up as that PVC giant liked It so much that they resorted to an acquisition offer to the promoters at over 100 bucks where in the company at that point of a time was quoting at just 35rs in the bourses. The promoters declined the offer as they have a vision to take it to the top cream league. That was it for us. Started glancing through the company and voila it looks to be an absolute bargain with all the multi bagger ingredients. 

Futile to talk about industry outlook,potential and future prospects of the industry as that's ditto to kisans note. Last couple of quarters were aberration in context to demonetisation in q3 and in q2 company undertook modernisation and relaying of plant which affected its operations.From November, it commenced operation of manufacturing CPVC pipes and fitting and water tanks which should result in higher margins going forward.

We are not going to delve much into the past as last 10 years number would include numbers of KN which got demerged few years ago. Least interested to speak about this coming quarters number or next years result. The company would probably on a conservative estimate will deliver sales of about 700crs by fy20 with ebitda margins of 10%. Keeping interest cost,depreciation and tax aside from 70crs ebitda,we get a profit after tax of  over 37crs. Company in 2016 delivered a topline and a bottomline of 479crs and 11crs respectively. Putting a 15 PE,the target value comes at 555crs or a price of 110rs. That's over a 2x from the suggested level. It's again pretty to tough to lose from this company.

Btw: PE metric ain't a sane stuff here to value a company. Most companies are valued at sales to marketcap and they tend to quote at 2-3x atleast. Astral,finolex,supreme though much bigger but all quote at over 2x sales.Even if It get1 time sales in next 3 years,the value comes at 700crs or 140rs per share. Company is probably the most efficient cum cheapest bet in the entire PVC arena.

Points which attracted us:-

1) Company with strong widespread distribution network and established operation is a leader in states like M.P,Chhattisgarh,Rajasthan with over 50% market shares.

2) Company in spite of having a loss making subsidiary where they invested 10crs earlier,still does a return on capital of over 30%. Return ratios would further better up once the capacity utilisation increases and the subsidiaries attain scale to put up better numbers.

3) The Company is venturing into newer territories with more value added products. Company' brand "Kasta" has got a very high brand recall among dealers and distributors.

4) We are very bullish on the domestic consumption stories and also on the migration from unorganised to organised industry. Company with a clean,conservative and visionary promoters-a perfect fit to both the themes.

5) The company has probably one of the best cash conversion cycle in the industry. As can be seen from the half yearly balance sheet,it has added 12crs in fixed assets by reducing debt from 52crs to 49crs. The classical show of getting stringent with your receivables and meaner on the creditors front. The business on Float or doing business on your suppliers money.

Concerns:Susceptibility of profitability to volatile raw material prices which is closely linked to international crude oil prices, seasonality associated with demand of its products, oligopolistic supply market of its raw material and intense competition in the plastic pipes industry are concerns of the industry on a whole and also of co particularly.The ability of the company to further improve its scale of operations and profitability with realization of envisaged benefits from recent expansion and modernisation capex will pave the way for the company going forward.

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