Recommendation From Other Industrial Products Sectors
This section gives a recommendation of a stock having stockmargin padding price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon
Nelcast Ltd
RIDING HIGH ON AUTOMOTIVE DEMAND
HERE IS WHY
Plans to foray into niche segment
Growth of CV segment
India’s largest producer of SG iron castings
Nelcast Ltd is the largest producer of ductile iron castings and grey iron castings and caters to commercial vehicle and tractor segments. Its product profile for the M&HCV segment includes wheel hubs, brake drums, axle housing, shackles and brackets. For the tractor segment, its product profile comprises of transmission case, centre housing, rear axle housing and hydraulic lift covers. It also supplies ribbed plates and brake discs used in metro rail projects and railways. Nelcast has an aggregate installed capacity of 150,000 tonnes per annum at its two factories, one at Ponneri in Tamil Nadu and the other at Gudur in Andhra Pradesh.
The company manufactures various parts for automobiles such as the engine, transmission, suspension, axle, brake and steering. The company’s 45 per cent of total revenue comes from heavy commercial vehicles segment. Furthermore, the company manufactures parts which are used in the tractor industry. It supplies various housings as well as engine, transmission and axle components. It also supplies to the railways and the pipe fittings industries.
The various policies of the government such as vehicle scrappage policy, increased spending on infrastructure by the government, implementation of BS-VI emission norms from CY2020 and implementation of truck overloading rules are likely to drive CV segment growth in the coming two to three years. The various initiatives taken by the government, such as doubling of farmers income by 2022, farm loan waivers, etc. are likely to aid in the company’s growth as it generates almost 40 per cent of its revenue from the division that caters to tractors. Notably, the company is looking to foray into large high-value castings, which would be margin accretive and will open up another avenue of growth. It is getting into niche markets like earth moving equipments. SG castings, which are preferred by user industries, accounts almost 75 per cent of its production. These castings are value-added, multipurpose and have higher ductility and tensile strength as compared to grey iron castings. The company enjoys leadership position in SG iron castings.
The company has recently invested Rs.79 crore for the first phase of a greenfield project for manufacture of iron castings in Andhra Pradesh. The plant's overall capacity is 54,000 MT, of which 18,000 MT is expected to get utilised in the first phase. Looking at the financial performance of Nelcast, the revenue for Q4FY18 jumped almost 61 per cent YoY to Rs.213 crore. Its EBITDA during the period surged almost 42 per cent YoY to Rs.18.8 crore, while its EBITDA margin during the same period dipped 120 bps to 8.8 per cent. The company reported 21 per cent YoY growth in bottomline to reach Rs.10.3 crore.
On an annual basis, the company’s revenue surged almost 30 per cent YoY to Rs.745 crore in FY18. The EBITDA margin for the full year rose 12 per cent YoY to Rs.72 crore, while the EBITDA margin during same period dipped 150 bps to 9.6 per cent. The net profit for the year rose 13 per cent YoY to Rs.38.3 crore. On the valuation front, the stock is currently available at around 17.9x P/E on TTM earnings, which looks attractive compared to five-year median P/E of 16.2x. The company’s D/E stands at a comfortable level of 0.23x. Also the company seems to be comfortably placed to service its debt with strong interest coverage ratio of 20.5x. We recommend our reader-investors to BUY the stock.
