Sharekhans New Stock Idea : TECHNOCRAFT INDS (TARGET PRICE: 56% UPSIDE FROM THE CURRENT LEVEL) Key Points CMP - 173-182 Global leader in the drum closure space; remains as cash cow: Technocraft Industries (TIIL; diversified player with interest in drum closures, scaffoldings, yarn and garments) is the second largest player globally in the drum closure manufacturing space with estimated market share of close to 35%. Given its dominant presence and efforts to penetrate newer markets, the company has been able to report a steady growth in this high margins cash cow business segment. Drum closures contributed to almost 50% of its operating profits in the last fiscal. The revenues are set to grow at 8-10% annually with operating margins of close to 35% in the segment. Scaffolding & formwork -- the growth driver: While drum closure is the cash cow business segment, the scaffolding & formwork (S&F) business growing at over 30% annually has emerged as the key growth driver for the company. Till now, the company has been focused on overseas markets for S&F business segment catering to needs to oil & gas and other corporate clients. However, it is also witnessing growing demand among domestic users especially from the infra sector. Thus, the business segment is likely to sustain a growth momentum of close to 22-25% annually for the next couple of years. Potential value unlocking aid to stronger financials: Financial health of TIIL is steadily improving; earnings are on a strong growth trajectory and cash generation has stepped up off late. This has helped TIIL to achieve a leaner balance sheet and very healthy returns on equity. Going ahead, we expect value unlocking from hiving off its low value added and non-core businesses of yarn manufacturing and garments (23% of the capital deployed in these low margins’ low return businesses). The move would have a favourable impact on return ratios and also likely to result in re-rating of the valuation multiples for the stock. Attractive valuation; a value Buy: At current market price, the stock is attractively trading at 5x its FY16 earnings and 2x its FY16 EBITDA which is quite attractive for a debt-free company with healthy cash flows and potential to improve return ratios through hiving off of non-core businesses. Thus, it is an attractive value pick for patient investors (not a growth story). We initiate coverage with Buy recommendation and target price of Rs270. Risk: As reported in the first quarter, the exceptionally robust margins shown in FY2014 in the yarn business is not sustainable and lower profitability in yarn would drag the overall growth in earnings during FY2015. Thus, the stock might not get re-rated to the extent anticipated of the management does not hiving off the yarn business to better focus on other two major businesses of drum closure and scaffoldings.
Posted on: Tue, 19 Aug 2014 05:43:21 +0000
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