Nilkamal (NILK) reported an excellent set of numbers for 4QFY2016. The
standalone top-line grew by 2.6% yoy to Rs503cr. On the operating front, the raw
material cost declined by 582bp yoy to 56.4% of sales while employee and other
expenses increased by 104bp yoy and 146bp yoy to 6.8% and 23.6% of sales,
respectively. Aided by lower material cost, the EBITDA margin expanded by
333bp yoy to 13.1%. The interest outgo declined by 30% yoy to Rs4cr while the
depreciation expense increased by 27.6% yoy to Rs16cr. Consequently, the net
profit grew by 50.6% yoy to Rs33cr.
Recovery in overall economy to aid in maintaining top-line growth: The plastics
division which accounts for a majority of the company’s revenue (86%) reported a
marginal volume growth of 3% in FY2016 after strong growth of 10% in FY2015.
Going forward, with gradual improvement in the macro environment, both the
moulded furniture and material handling segments should perform well as they
stand to be direct beneficiaries of an economic revival.
Strong Balance sheet: NILK has been steadily reducing its debt and should be
debt free by FY2017E, thereby resulting in interest cost savings. It has carried out
incremental capex of Rs38cr in FY2016 and we do not foresee any large
expenditure in the near future. The company’s return ratios have improved
significantly in FY2016 on account of RM cost benefit along with better asset
turnover. Going forward, although the return ratios are estimated to regress on account of
lower margins which would be due to an anticipated increase in RM cost, the company’s
return ratios are expected to continue to be stable on back of increase in turnover.
Outlook and Valuation: The company’s core plastics division has posted a CAGR
of ~8.0% over FY2011-16 and is expected to maintain similar pace over
FY2016-18E, thereby resulting in an overall revenue CAGR of 7.6% over FY2016-18E to
Rs2,165. On account of increase in RM cost, the EBITDA margin is expected to soften to
10.4% and the net profit is expected to be at Rs120cr in FY2018E. At the current market
price, the stock is trading at FY2018E PE of 16.3x. We have a Neutral rating on the stock.

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