Stock Pick from Iron & Steel Products

CHOICE SCRIP

Here Is Why

• Drum closure is a high-margin cash cow business of TIIL.

• Its S&F business is the key growth driver for TIIL, which is growing at over 40 per cent annually.

• Fundamentally strong, low leverage and consistently dividend paying company.

Technocraft Industries (India): Precision Means Progress

Companies that are fundamentally strong, are of low leverage, and pay dividend consistently make for good investment prospects during volatile market times. On our radar this time is a company that fulfills all such conditions. Technocraft Industries (India) (TIIL) is a diversified industrial group holding a market leadership position in global steel drum closures, scaffolding & formworks (S&F) and textile industries. TIIL is the second-largest global manufacturer of steel drum closures and continues to enjoy a worldwide market share of about 36 per cent.

Manufacturing steel drum closures requires a very high level of precession engineering which acts as a major entry barrier and therefore the company has been able to report steady growth in its high-margin cash cow business. Drum closures contributed more than 50 per cent of its operating profit and the revenues from the business are set to grow at 8-10 per cent annually with an EBITDA of close to 35 per cent along with an ROCE of over 70 per cent, thereby generating robust free cash flows.

Scaffolding, also called staging, is a temporary structure used to support people and material in the construction or repair of buildings and other structures. TIIL is the largest exporter of scaffoldings from India, which has posted growth of over 48 per cent in 9M FY15 as the company has obtained key registrations and certifications as required by its clients in the US, Canada, UK and Germany. TIIL has also entered into manufacturing of sophisticated engineered formwork systems for building, construction and infrastructure projects in India. However, its performance in the textile segment in 9M FY15 has not been satisfactory.

The company is also eyeing some acquisitions in the packing space as synergy for its drum closures segment. In Q3 FY15 TIIL reported net profit of Rs 21.3 crore as compared to Rs 7.4 crore in a year ago period. Its total income jumped by 16.7 per cent to Rs 217 crore from Rs 186 crore for the above mentioned period. It is better not to the compare current year with the last year due to the company having posted exceptional gain in forex. As on H1 FY15, the company’s outstanding debt amounts to Rs 110 crore i.e. debt to equity is at around 0.2.

Currently, TIIL is trading at a TTM PE ratio of around 10 and on the basis of its price to book value it has been trading at 1.2x. We believe the stock is trading at attractive multiples considering the strong performance of its two leading business segments. The company has also recommended dividend of Rs 5 per share which will ex-dated on May 30, 2015. We recommend our readers to buy the scrip with expectation of 35-40 per cent upside from its current market price in the next one year.