NITIN FIRE PROTECTION INDUSTRIES A GIANT LEAP FORWARD

There are few companies that remain under the shadow of old business activities for a long time. It looks like Nitin Fire Protection Industries (NFPIL) is facing such issues at present levels. Many on the street still consider them a company which is into manufacturing fire protection equipments and refilling of industrial cylinders (like Everest Kanto cylinders). It is obvious as the company, till a few years back, was into similar business activities. However a lot has changed since then. The company has not only expanded its product portfolio, but has also expanded on the geographical front. NFPIL now has its presence in Europe, Singapore and UAE. The company is also planning to take another leap to the new orbit of acquisitions to look for inorganic growth and wants to become a billion dollar company in the next five years. We met with the management of NFPIL to understand the business segments and its expansion plans. So, let’s understand whether the company has enough ammo to achieve its targets or will its ambitious plans burn down into ashes.

UNDERSTANDING THE BUSINESS

NFPIL is an end‐to‐end fire protection and solutions provider and supplies wide range of fire protection systems to protect and prevent fire. It has a product portfolio with international approvals. As stated earlier, most people consider NFPIL as a company which is into the business of manufacturing fire protection equipments. However, the scenario is a different story. Though the company is into manufacturing fire protection products, the major contributor to the company’s revenue is turnkey solutions. There are three business segments of the company. First and the foremost is the turnkey solution which contributes around 67.50 per cent, followed by products segment that contributes 28.7 per cent to the total revenue. The rest 2.4 per cent comes from AMC services offered to the clients. The turnkey solutions business can also be segmented in three ways. First is the fire detection system, second is the gas suppression system and finally the third is protection system. In regards to its geographical spread, the company has a strong domestic presence in Europe, UAE and even Singapore.

In addition to the above business segments, the company also has an 11.11 per cent exposure in the NELP VI block along with companies like GAIL, GSPC, HPCL and BPCL. However, the management has already stated that the company has no plans to explore gas. It was just a means to get better returns and hence whenever required, NFPIL would exit from the investment. The investment from the company is to the tune of `13 crore and as the investment yields good returns, the management is planning to divest its stake.

THE GROWTH DRIVER – INERT GASES

NFPIL is moving towards its vision of achieving growth in the global fire industry business and has laid down the following stepping stones. It is planning to accelerate growth via entering into growing market, develop technologically sound products and lookout for in‐organic opportunities in this space. In addition, it is planning to introduce and penetrate the largest market for fire protection in North America and CIS countries.

The company in the past has ventured into various segments and the turnkey solution, which is currently the highest revue grosser, is again expected to be the major growth driver of the company. Here Nitin Shah, CMD, NFPIL says, “The turnkey solutions segment provides good growth opportunity. In the same, we are looking for major opportunities in the Oil & Gas sector as there is no slow down in the segment. In addition to that, we feel the company has a winner in terms of inert gases which is expected to be a major growth opportunity for the company”. According to the management, it has developed a new system based on the inert gases which is cost efficient.

The new system would reduce the cost to the client as it trims down the dependency on the monopolistic gas manufacturers from USA. In the earlier system, there was a high requirement of gases viz FM 200 and Novac 1230. Even the refilling cost was of about 70 per cent of the total set up. However, in the new inert gases system it is just five per cent of the set up cost as the gases are available locally. The only requirement is a larger space than the earlier system. According to Shah, the business could be worth Rs.200 to Rs.250 crore.

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ACQUISITIONS -THE WAY AHEAD

The management is also looking for acquisitions to garner more and more market share. Here Shah says, “We are looking at acquisition in Latin America for further growth”. However, there was no mention about the size of the acquisition and how much amount would be spent on the same. Regarding the financing of the acquisition, Rahul Shah, Executive Director, NFPIL said, “We would try to leverage our balance sheet. Currently we hardly have any long-term debt on out book and it is mainly for working capital requirements. We feel it seems to be a right way as some amount of leverage would be beneficial for the company”. As for expansion, the management has stated that there is ample amount of unorganised market for the fire protection systems in India. However, eventually the unorganised players would merge with the larger organised players. Here Nitin Shah adds, “It is true that there are a lot of unorganised players eating away a major pie. The new legislation, however, will not only expand the market but would ensure that there is some consolidation in the market”.

EXPANDING THE AFTER SERVICES CONTRIBUTION

If we take a look at the current business segments, it is the after sales services which generate highest EBITDA margins of more than 40 per cent. The turnkey solutions generates in the range of 16 per cent, while the products segment generates higher single digit margins. To perk up the bottomline, the management is planning to increase its services segment contribution to the overall revenue. It is preparing to raise it to five per cent from the levels of less than three per cent. So going ahead, we expect the overall margins to go up moving forward. What gives us conviction is the possibility of increased sales revenues from international markets, where the management is looking for expansion in margins.

FINANCIAL PERFORMANCE

The financial performance of the company has been good where the topline has witnessed a good traction. Since FY11, the topline has increased from Rs.438.20 crore to Rs.536 crore in FY12 and Rs.704.7 crore in FY13. However, the declining EBITDA margins (FY11- 14.08 per cent, FY12- 14 per cent and 12.7 per cent in FY13) resulted in a stagnant bottomline. In FY11, the PAT was Rs.47.30 crore and then it declined to Rs.47 crore in FY12. The FY11 results are excluding the profit from sale of subsidiary. Else, the profit was higher in FY11. In FY13, the PAT was good at Rs.61.4 crore. The 9MFY14 performance has also been good where the topline stood at Rs.668.9 crore and bottomline at Rs.55.30 crore.

On the debt front, the current debt (working capital requirement) is around `282.80 crore. This results into a ratio of 1.05x. Debt is not a worrying factor here, but the fact that the cash flow is not positive. However, the management has opined that it is expecting the company to turn cash positive soon. There has also been a marked improvement on the debtor days front, as the company has reduced it to 88 in the Q3FY14. But, it is still on the higher side and necessitates improvement.

The company has put an ambitious plan to achieve revenues of USD 1 billion in the next five years. Though there are opportunities in the market, this seems like a highly ambitious target. However, if the company manages to get the global pie in the fire safety markets, the target seems achievable.

On investing in the counter, we feel the stock witnessed some movement ahead of its buy back. And hence the valuation is a bit rich. The CMP of Rs.52 discounts its trailing four quarter earnings by 22x. We feel the stock is a good investment in the range of Rs.46-48. We are expecting a decline of around 10 per cent from current levels. Hence, investors can accumulate the stock as the stock witnesses a decline on the bourses. For the next one year DS we put a target of Rs.68.