Global leader in drum closure space; remains a cash cow: Technocraft Industries India Ltd (TIIL; a diversified player with interests in drum closures, scaffoldings, yarn and garments) is the second largest player globally in the drum closure manufacturing space with an estimated market share of 35%. Thanks to its dominant presence in the existing markets and efforts to penetrate newer markets, the company has been able to report a steady growth in its high-margin cash cow business of drum closures. Drum closures contributed almost 50% of its operating profit in the last fiscal.
The revenues from the business are set to grow at 8-10% annually with an OPM of close to 35%. Scaffolding & formwork--the growth driver: While the drum closure business is the cash cow, the scaffolding & formwork (S&F) business, has emerged as the key growth driver for the company. Till now, the company was focused on the overseas markets for the S&F business and was catering to the needs of the oil & gas and other corporate clients globally. However, TIIL has also started witnessing a growing demand for S&F among the domestic users especially the infrastructure sector.
Thus, the business segment is likely to grow at 22-25% annually for the next couple of years. Potential value unlocking to lead to stronger financials: The financial health of TIIL is steadily improving; its earnings are on a strong growth trajectory and cash generation has stepped up of late. This has helped it to achieve a leaner balance sheet and very healthy returns on equity. Going ahead, we expect value unlocking from the hive-off of its low value-added and non-core businesses of yarn manufacturing and garments (23% of the capital is deployed in these low-margin, low-return businesses).
The move would have a favourable impact on the return ratios and is likely to result in the re-rating of the valuation multiple of the stock. Attractive valuation; a value Buy: At the current market price, the stock is attractively trading at 5x FY2016E earnings and 2x FY2016E EBITDA which is quite attractive for a debt-free company with healthy cash flow and potential to improve return ratios through the hive-off of the non-core businesses. Thus, it is an attractive value pick for patient investors (TIIL is not a growth story).
We initiate coverage on TIIL with a Buy recommendation and price target of Rs270. Key risk: As reported in the first quarter, the exceptionally robust margin seen in the yarn business in FY2014 is not sustainable and lower profitability of the yarn business would drag the overall growth in the earnings in FY2015. Thus, the stock might not get re-rated to the extent expected if the management does not hive off the yarn business and increase focus on the other two major businesses of drum closures and S&Fs.
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