Nilkamal (NILK) is a pioneer in the plastic industry and is among the leading
manufacturers of moulded plastic products. It is present in three verticals, viz
Plastics (83% of revenue), Retail (13%) and Mattress (4%). The Plastics division is
made up of Material Handling and Moulded Furniture segments. Material
handling accounts for ~58% of the total Plastics division’s business while
Moulded Furniture accounts for the remaining ~42%. @home is the retail division
of NILK, operating 19 large format stores across 13 cities with an average size of
16,000 sq.ft. per store. The Mattress division is its recent venture (2012) with
manufacturing facilities in Hosur, Tamil Nadu and Dankuni West Bengal.
Plastics division to benefit from revival in economy: NILK’s most profitable
division, ie Plastics, saw volume de-growth in both, Material Handling and
Moulded Furniture segments, due to a subdued macro environment in FY2014.
After a period of sluggish performance, the Indian GDP is projected (by the
International Monetary Fund [IMF]) to improve from 3.8% in FY2014 to 5.6% in
FY2015, 6.4% in FY2016 and 6.5% in FY2017. Additionally, with no major capex
plans going ahead and sufficient capacity to service the recovery in demand, we
expect operating leverage to come into play, thereby adding to the bottom-line.
Sliding oil prices to result in lower Net RM cost: The ongoing weakness in crude
oil prices will have a positive impact on NILK’s net raw material cost as polymers
are a major raw material for the plastic industry. Crude price is likely to remain at
lower levels due to declining demand from China and with OPEC’s reluctance to
cut down oil production. Despite the pressure on margins in the short run owing
to inventory loss, in the longer run, we expect the reduced raw material cost to
improve EBITDA margin from 7.5% in FY2015E to 8.1% in FY2017E
Outlook and Valuation: We expect the company’s Plastics business to post a
CAGR of 11.5% (with an upturn in the economy) over FY2014-2017E, which will
aid the company to post a revenue CAGR of 9.4%, over the same period, to
Rs2,167cr. The EBITDA margin is expected to stabilize at 7.5% in FY2015E and
improve to 8.1% in FY2017E. The debt for the company is expected to reduce by
`62cr over FY2014-17E, resulting in lower finance costs. Consequently, the
company would post a net profit CAGR of 17.5% over FY2014-17E to Rs65cr, as
per our estimates. At the current market price, the stock is trading at FY2017E PE
of 10.1x. We initiate coverage on the stock with a Buy rating and a target price of
Rs566, based on a target FY2017E PE of 13x.

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