The Hindu Business Line : Nilkamal Plastics: Hold

INVESTORS can continue to retain their holdings in the stock of Nilkamal Plastics. The company makes moulded plastic furniture and crates. Its strong brand equity, stable demand for its products, wider geographical reach and improving fundamentals augur well for the earnings growth. The stock now trades at about 2.7 times its FY'04 earnings.

Demand drivers in place

Furniture: The demand for moulded furniture is seasonal. They register higher sales during festive seasons such as Diwali. The demand primarily comes from the middle- and low-income households and is generally sensitive to price. Considering the steady increase in the income levels and strong brand equity it enjoys, the company may continue to have stable demand in this sector.

Crates: The demand for crates too is seasonal and varies based on the geography. For instance, in the northern region, the sale of crates is driven by the higher cola consumption in summer. The company supplies crates to soft-drink bottlers, dairies and the fisheries industry. The revival in the manufacturing sector augurs well for the growth of the crate segment.

Improved performance

After sluggish growth in the last two years, the company's net sales in 2003-04 grew 16 per cent to Rs 310.5 crore. Post-tax profits rose 36 per cent to Rs 15.5 crore. Operating profits, however, grew only by 11 per cent to Rs 39.9 crore.

The rise in the profit at the net level is on the back of sharp drop in the interest expenses of 21 per cent. The increase in the cost of raw material appears to have dented the company's margins at the operating level.

Challenges and risks

The company faces competition from organised players such as Supreme Industries and unorganised local players. At the retail level, the price of the furniture made by the unorganised segment is lower by 10-15 per cent compared to Nilkamal. To counter this, the company has forged outsourcing relationships with several small manufacturers to widen its geographical reach, increase its volumes and cut down freight cost.

The price of key raw materials — polypropylene and polyethylene — will, to a large extent, determine the company's profitability. It will be governed by international price trends and is a factor of crude price movements.

Given the current trend, the prices of these materials may harden further. Hence, Nilkamal's profitability will hinge on how well it manages to pass on the cost hike to its customers.

Nilkamal is characterised by low floating stock. Hence, investors may find it difficult to enter and exit at the desired prices. .

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