Nilkamal - Re-rating on cards... - Nirmal Bang

Nilkamal Ltd (NKL) is the largest manufacturer of material handling plastic crates and a leader in the moulded furniture segment. The company forayed into lifestyle furniture business in 2005 through its brand '@Home' and is now expected to breakeven in the coming quarters after making on and off losses since Q2FY11. In addition, it has also started asset light mattress business in FY12 and added additional capacity recently. With most of the investments in place and improving financials, ROCE of the company is expected to rise from the current levels of ~ 16% going forward. Moreover, rupee appreciation would aid the margins of the company which had got affected with rising raw material costs. At CMP, the stock is trading at a FY12 P/E of 5.5x which is way below its peers (reason being lower ROCE). We believe with improving financials, the valuation gap would be narrowed down and recommend BUY on the stock for 15-20% returns in medium term.

Expanding the Value added Product Portfolio of the Furniture Business

The Plastic Furniture Business enjoys a leadership position with a market share of ~ 38%. The company consistently enhances its product portfolio by introducing new value added products which are also well received in the market due to its strong brand value. In addition, the company is now introducing premium products in this division which would augur well for the company in value terms.

Enhancing the coverage of the Material Handling Business

Nilkamal is the market leader in the material handling segment with a strong PAN India presence and a strong sales and distribution system. The increasing scarcity of labour and resulting wage inflation remains a major growth driver for this segment to do well. In addition, government's thrust towards food processing and food storage segment has faired well for this division with increase in demand for crates, pallets, material handling equipment and rakes. Recently, Nilkamal has introduced light, easy to erect and quick to dismantle low cost products in the market which also has received good response.

ROCE of the company to improve with Retail division nearing breakeven

The retail business of the company which is operating through the brand '@Home' is expected to breakeven in FY13E. Gross Margins in this business are more than 45%. Currently company owns 20 stores across 11 cities and the company plans to open one more store in FY13. The Indian furniture industry is highly fragmented with dominance of 90% market share by the unorganized players. The organized market is growing at a CAGR of 30% and this division stands to gain. ROCE of the company is lower at ~ 16% as in FY12 as compared to its peers due to the retail division drag which is expected to improve going forward.

Source : Equity Bulls

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