Stock Pick From Miscellaneous Sector
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Choice Scrip is a fundamentally strong stock pick that is expected to give returns within a 1 year horizon. The recommendation is based on a fundamental analysis of the company. Hence DSIJ has selected a stock with good fundamental base.
HERE IS WHY
PVC pipes segment a new growth engine
Scale up each of its businesses with an asset-light model
Focusing on export market in T&D business In India traditionally for every rupee invested in power generation has a corresponding half a rupee invested in transmission and distribution (T&D). Due to this, transmission capacity in India lags behind the generation capacity. Therefore huge investments are required in T&D infrastructure. On another side, the government’s thrust on water, irrigation, river management, improving sanitation, sewerage and urbanisation, the PVC pipes and fittings markets is expected to grow at much higher pace then its historical 8-10 per cent CAGR rate. Therefore this time we are focusing on a company who engaged in both the segment.
Skipper is an integrated transmission tower manufacturing company which is also the third largest (10-15% market share) in the segment with capacity of 1,75,000 MTPA in India after KEC International and Kalpataru Power Transmission. The company has lined up big expansion plans for its PVC pipes business. The company has a strong play on domestic transmission business where it generates around 80 per cent of domestic revenue from PGCIL and the company is also scaling up globally through strategic alliance with South America’s largest Transmission Service Operator (TSO). This has provided company huge opportunity in the export market (45 per cent of current order book).
Skipper is a leading player in plastic pipes in West Bengal and has captured 10 per cent market share in eastern India, through network of around 500 dealers. Currently the total capacity of the PVC Pipes & fittings division is 29,000 MTPA having manufacturing facilities at Kolkata, Ahmedabad and Guwahati. The company plans to eventually increase its capacity to 40,000 MTPA and work at its Sikandarabad and Hyderabad is going on and the company expects to get it commissioned by Q4FY16. Going forward, the company has ambitious growth plans of increasing it’s the total capacity to 100,000 MTPA by FY19 and target 10 times revenues from PVC pipes by FY19 from Rs 89.7 crore in FY15. Overall, the company plans to scale up each of its businesses with an asset-light model, and focus on increasing tower exports. It also plans to expand its foot print across the nation in the PVC pipes business.
On financial front, the company’s topline grew by 20.1 per cent to Rs 976.5 crore in the nine months of FY16 from Rs 812.9 crore in the same period of the previous year. Continuously falling commodity prices restricted value growth, even though sales volumes have increased. However operating profit and bottom-line reported at flat at Rs 145.83 crore and 59 crore respectively due to operating margin contracted by 308 bps at 14.93 per cent. Still the company’s margins are better than its peers due to its strategic location and backward integration.
Robust order book providing revenue visibility in T&D business; multifold expansion in PVC business on a pan India level provides a scalable growth opportunities to convert into superior earnings performance in the forthcoming years. Therefore we recommend buying the scrip with the expectation of 30-35 per cent return in the next one year.