Company is a 50-year-old manufacturer of steel pipes, PVC pipes, LED lights and consumer durables. It is the largest exporter of ERW pipes in India and second largest GI pipes producer. They export to over 50 countries.
In the FMEG segment, it has strong rural distribution network with over 2,50,000 retail outlets. They are leaders in AP, Telangana MP, Chhattisgarh, Uttar Pradesh, and Jharkhand and second in Karnataka, Delhi, Maharashtra, Bihar, Rajasthan among others.
In B2B lighting too, they have worked on prestigious projects like Indore Airport Facade lighting, Bharuch Bridge Façade, Karimnagar smart city etc.
The company has won PLI for large investment in manufacturing of components of LED lighting.
Company intends to become debt free by end of this fiscal year or early next year.
Steel pipes division contributes to 80% of their revenues. Exports contribute around 16% of gross revenues.
Stock is available at a cheap valuation of 15 PE. Ace investor Mukul Agarwal holds a minor stake in the firm.
Company has 2 exclusive management teams for the 2 different divisions. Company’s capital allocation policy is 50% capex and 50% dividend.
Value added products contribution is 35%. This will increase to 50% by next year.
Reasons for buying:
Risks:
Compared to peers like APL Apollo, JTL industries, Focus Lighting, Polycab etc, the company’s valuation is very low and is unlikely to grow because that’s the nature of the market – it gives a conglomerate discount when there are too many different businesses under 1 entity. So, valuation convergence with peers is unlikely to happen in the near term unless company announces a demerger.
Due to lack of substantial capex, sales have been mostly stagnant for the last 3 years. Company has stated that capacity expansion will come onstream in next 9 months to 1 year. Thereafter, may take some time for full utilization. So FY25 too may not be significantly higher than FY22-24. This stock while cheaply valued can turn out to be a value trap.
Management has not shown aggressive appetite for growth. I consider the 50% dividend payout policy as negative especially when company is still small. This could change in the future – we need to track this.
Leave a Reply