Nilkamal (NILK) reported an in-line set of numbers for 3QFY2016. The top-line
reported a modest growth of 1.8% yoy to `428cr. The raw material cost as a
percentage of sales declined by 738bp yoy to 54.8% owing to declining in
polymer prices. However, the employee cost and other expenses increased by
176bp yoy and 217bp yoy to 8.6% of sales and 25.8% of sales, respectively, thus
partially offsetting the benefits of lower raw material costs. The EBITDA margin
expanded by 345bp yoy to 10.8%. Aided by lower raw material cost and lower
interest outgo, the net profit grew by 138.6% yoy to Rs20cr.
Plastics division to benefit from revival in economy: After witnessing volume
de-growth in FY2014, the Plastics division witnessed volume growth of 10% in
FY2015 and is estimated to have posted a volume growth of ~5% for 9MFY2016.
With the fourth quarter tending to be the best in terms of volume, the growth for
FY2016E is likely to be ~7%. Material Handling and Moulded Furniture segments
of the Plastics division are directly impacted by the macro environment and we
expect them to maintain steady growth rate due to the positive economic outlook. The
company has sufficient capacity in place and we do not foresee any substantial capex in
the near future.
Stable raw material cost to aid in maintaining margins: Polymer prices declined
by ~16% in 3QFY2016 on a yoy basis, thus leading to lower raw material costs.
With crude likely to be range bound, we expect polymer prices to remain at current
levels and increase by ~5% from here on, which should enable NILK in maintaining
its margins over FY2016E-2018E.
Outlook and Valuation: We expect the company’s Plastics business to post a
CAGR of 8.3%, with an upturn in the economy, over FY2015-2018, which will aid
the company to post revenue CAGR of 7.5%, over the same period, to Rs2,220cr.
The EBITDA margin is expected to be at 10.3% in FY2018E. The company is
expected to be net debt free by FY2018E which will lead to higher profitability.
Consequently, the company would more than double its PAT to Rs116cr in FY2018E
from Rs42cr in FY2015, as per our estimates. At the current market price, the stock is
trading at FY2018E PE of 17.3x. We have a Neutral rating on the stock.

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