Nilkamal reported a good set of numbers for 2QFY2016. It posted a top-line
growth of 5.1% yoy to Rs482cr and a significant improvement in profitability. The
raw material cost as a percentage of sales declined by 603bp yoy to 58.5%.
However, the employee cost and other expenses increased by 55bp yoy and
176bp yoy to 6.7% and 24.3% of sales, respectively. As a result, the EBITDA
margin expanded by 372bp yoy to 10.4%. Aided by higher other income, the net
profit, at Rs26cr, came in higher than our estimate of Rs22cr.
Plastics division to benefit from revival in economy: After witnessing volume
de-growth in FY2014, the Plastic division witnessed a volume growth of 10% in
FY2015. Material Handling and Moulded Furniture segments of the plastic
division are directly impacted by the macro environment and we expect them to
maintain steady growth, given the positive economic outlook. Additionally, with no
major capex plans going ahead and sufficient capacity to service recovery in demand,
we expect operating leverage to come into play, thereby aiding the bottom-line.
Stable raw material cost to aid in maintaining margins: Polymer prices had
declined by ~18% in the past quarter on yoy basis, thus leading to lower raw
material costs. After showing some recovery owing to supply constraints, Polymer
prices have resumed their downward movement, mainly tracing a similar
movement in crude prices. Polymer prices are now expected to remain at current
levels, or increase by not more than 5% from here on, which should enable NILK in
maintaining its margins over FY2016-2017E.
Outlook and Valuation: We expect the company’s Plastics business to post a
CAGR of 9.0%, with an upturn in the economy, over FY2015E-2017E, which will
aid the company to post revenue CAGR of 8.0%, over the same period, to
Rs2,083cr. The EBITDA margin is expected to be at 10.3% in FY2017E. The
company has lowered its debt significantly; resultantly, a lower interest cost is
expected to boost the bottom-line. Consequently, we expect the company’s
bottom-line to more than double to `103cr in FY2017E from Rs42cr in FY2015. At
the current market price, the stock is trading at FY2017E PE of 16.9x. The stock
has run up significantly post its 2QFY2016 results and at the current juncture, we
have a Neutral rating on the stock.

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