Stock Pick from Non-Durable Household Product

CHOICE SCRIP

INDO-NATIONAL LTD.

All Charged Up

Here Is Why:

• Diversification initiative by entering into the lighting segment.

• INL is known to be a consistent and good dividend payer.

• RoCE expected to improve to 20 per cent by end of FY15; 12 per cent in FY14.

The low per capita consumption of dry cell in India and changing life style gives good opportunity for companies in this sector to grow. Indo-National (formerly Nippo Batteries Company), the second largest player in this sector gives good prospect to investors to charge up there portfolio. Despite intense competition in the dry cell battery industry, INL has demonstrated its ability to maintain volumes at increased prices by leveraging its healthy market share of around 25 per cent. It is the second-largest player in the dry cell battery industry.

The company’s operating profitability has almost doubled during the first half of FY15. This improvement has been driven mainly by INL’s increase in the average selling prices. Further, INL’s management has undertaken cost-saving initiatives, including closure of its loss-making factory at Nellore (Andhra Pradesh) and setting up of solar power capacity to reduce its power costs. We believe the benefits from increased realisations and cost reduction initiatives will continue to accrue over the short to medium term; thereby benefitting INL’s operating efficiency and business risk profile.

The improved margins will result in higher cash accrual to thereby create headroom for the management to pursue its various diversification initiatives, including its entry into lighting segment products. The company currently markets a wide range of lighting products, including compact fluorescent lamp (CFL), LED bulbs/lamps, emergency power back-up units and solar products. It has also launched home UPS and tubular battery on a pilot basis in the states of Tamil Nadu, Andhra Pradesh and Telangana.

During the first half of FY15 INL’s net profit jumped by 122 per cent at Rs 13.49 crore as against Rs 6.07 crore in H1FY14 on the back of strong operating margins. Its EBITDA margin has improved by 645 bps to 13.32 per cent in H1FY15 as against 6.87 per cent in H1FY14. INL, which is known to be a good dividend payer, has a consistent track record of paying a dividend. The company has paid a dividend of Rs 20 per share three times over the last five years. For the remaining two years it paid a dividend of Rs 10 per share on account of weak financial performance. What this shows is company intention to maintain a consistent dividend paying policy depending upon the financial position. Looking at H1FY15 profit that has already passed last year full year profit, we believe company is likely to increase its dividend payout ratio.

On the valuation front, the share price of INL is quite attractively valued compared to its peers. INL is currently trading at a price to earnings ratio of 14.5x based on trailing 12-month (TTM) EPS of  Rs 53.75 as per the quarter ended September 2014 where as Eveready Industries India is currently trading at  a PE of 25x. INL’s return on capital employed is expected to improve to 20 per cent by end of FY15 from 12 per cent in FY14. Hence we recommend this stock with 30 to 35 per cent upside in the next one year.