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Sunday, Jun 05, 2005

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Nilkamal Plastics: Buy

Alagappan Arunachalam

AN INVESTMENT can be considered in the stock of Nilkamal Plastics, which quotes at about 10 times its expected FY-05 earnings. At Rs 126, the stock hovers around its book value, which is attractive considering the growth prospects.

Operating profile

Nilkamal Plastics is among the larger manufacturers of injection-moulded products in India; its main products are furniture and industrial crates. Its factories are located across the four regions in the country, besides subsidiaries in Sri Lanka and Bangladesh. This gives Nilkamal Plastics a sub-continental reach for its products. Nilkamal has made a mark for itself in the furniture segment through its established brand.

The company enjoys a strong presence in the moulded furniture segment in the South. Though plastic furniture manufacturers face a threat from the unorganised sector, Nilkamal's diverse locations and outsourcing tie-ups have helped mitigate this risk. Traded items of moulded plastic account for about 25 per cent of the total turnover.

The retail foray into the exclusive marketing of its products would further strengthen the already-established position that Nilkamal enjoys in the plastic furniture segment. An increasing shift towards plastic furniture in the Indian market provides a strong base for its revenues.

Nilkamal boasts of a 12 per cent operating margin, which is higher than most of its competitors. Also, with such high margins, the demand outlook too appears promising. Capacity additions in the textile sector would boost demand for its crates business.

Nilkamal plans to reach out to the end consumer by opening outlets of its own and establishing franchisee stores. Apart from increasing volumes, the expansion of such brand-centric business is expected to enhance its margins in the long run.

Raw materials are a major cost component, accounting for about 70 per cent of its revenues. Polypropylene and polyethylene are the major raw materials. Despite a surge in crude prices, which is expected to push up prices of raw material prices, a strong growth in the manufacturing sector is expected to provide a cushion for its margins.

The rise in raw material prices appears to cut down on its operating margins in the third and fourth quarters. However, with crude prices stabilising, Nilkamal Plastics, along with other manufacturers, is expected to pass on the rise in costs to the consumers. This could lead to a turnaround in profitability that took a hit in FY-2005.

Unlike its other competitors, Nilkamal Plastics has a low debt-equity ratio and a lower interest component. The debt-equity ratio has been going down consistently; a lower interest outgo has further shored up its earnings. Given the higher interest-cover ratio, the company would be able to withstand a jump in raw material prices.

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