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Skipper - To Buy or Sell - A Technical Perspective

Analysis of the chart of Skipper from technical perspective shows that a "Symmetrical Continuation Triangle (Bullish)" chart pattern has been formed on Skipper Ltd (538562:BSE).

This bullish signal indicates that the stock price may rise from the close of 126 to the range of 132- 149-156-165 level.

The pattern formed over 30 days which is roughly the period of time in which the target price range may be achieved, according to standard principles of technical analysis.

So far so good; we have seen the chart technically and now would like to see the other aspects related to the company as enumerated below:

Firing on two cylinders: Skipper is in a unique position to exploit the growing opportunities in two lucrative segments: power (transmission tower manufacturing and EPC projects) and water (PVC pipes). It is a leading transmission tower manufacturer in India and ideally placed to gain from the huge investments proposed in the power T&D segment (estimated to grow to Rs3 trillion over the next five years). It has a comfortable order book of Rs2,200 crore in the transmission business and is expected to record a steady growth of 20% CAGR during FY2014-17 with a healthy margin, given its backward integration into manufacturing of steel products.

Manifold expansion in pipes; going national from regional: In PVC pipes, the company’s footprint is well established but limited to the east and certain parts of central India. However, it has chalked out an aggressive plan to raise its capacity by 4x to 40,000TPA by FY2016 to become a pan-India player. Simultaneously, it is beefing up the hiring process to enter new regions with experienced hands and is looking to widen its distribution channel across India.

Margin expansion led by operating leverage and restructuring exercise: It enjoys the benefits of operating leverage on the margin and has restructured its low-margin steel tube business by leasing the capacities to Tata Steel on a cost-plus basis. Consequently, the overall margin will improve from 11% in FY2014 to 14-15% in FY2015 and elevate its RoE from 12% in FY2014 to around 16% in FY2015 (after the release of the working capital deployed in the low-margin tube business).

Set for strong earnings growth and return ratios; Buy: Skipper is a play on two key growth areas, power T&D and PVC pipes. While traction in the T&D space and aggressive expansion in the PVC business would drive its growth, the restructuring of the tube business would help expand the margin and improve the return ratios. We expect an earnings growth of 60% CAGR and a substantial expansion in the RoE during FY2014-17. This could be a strong re-rating trigger as the stock’s current valuations are also quite comfortable at 14x and 10x FY2016E and FY2017E earnings. Thus, we rate the stock as a Buy with a price target of Rs165 (based on 15x FY2017E earnings).

Key concern: The T&D EPC business is usually working capital intensive, hence any abnormal scale-up in this space could expand the working capital cycle and decrease the profitability. The company is also exposed to forex fluctuation risk due to overseas orders.

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