Though Fiberweb’s prospects of a multiple re-rating cannot be ignored, given its unique product offerings and healthy financials, a change in the capex plan merits attention.
Fiberweb (India) bore the brunt of rumors pertaining to stake sale by the company’s promoters in recent times. While the promoters subsequently clarified the management’s commitment in the business, what was also reassuring was a decent set of numbers in the quarter gone by.
Fiberweb’s top-line growth was on account of a good product mix and order inflows from new and existing clients. As on September 30, 2017, the company’s order book stood at Rs 160 crore. Despite taking a hit on the gross and operating margins front (prima facie due to rising crude prices), the company’s profit after tax (PAT) margin was steady because of zero interest costs.
Extended credit to the US importers and additional logistical formalities led to an increase in receivables in an otherwise well managed balance sheet.
The company announced some changes that are worth taking note of.
Product mix alteration
Fiberweb had earlier planned to set up a 10,000 metric ton (MT) polypropylene spun-bound nonwoven fabric (PSNF) unit by the end of FY18, as stated in our earlier article. However, under the revised plan now, the company will set up a 7000 MT facility by incurring capex of Rs 110-125 crore to manufacture polypropylene flatbound nonwoven fabric (PFNF).
The move was undertaken keeping in mind the relative stagnation in PSNF margins and a shift in industry demand towards PFNF products, which are widely used for industrial and filteration purposes. Furthermore, a comparatively better margin profile in case of PFNF (approximately 45/35 percent gross/net margins, respectively) vis-a-vis PSNF could help Fiberweb boost its EBITDA margins from Q4FY19.
Future revenue driver
The company has a numero uno status in melt-blown nonwoven fabric (MBNF) in India. Growing demand for the same in industrial applications and commissioning of a 3,000 metric ton MBNF manufacturing facility in Q3FY18 will work in favour of Fiberweb in H2FY18.
Nevertheless, a lot depends on the company’s pricing power in this regard and the pace at which incremental capacity utilisation levels at the plant translate to additional revenue.
US market is pivotal
As an export-oriented unit, Fiberweb will be more focused on the US region, its core market that contributes nearly 50-60 percent to the overall sales every year. To be better connected to its North American clients, the company will set up an offshore office out of there as well.
A high geographic concentration risk in the US, apart from a strong rupee versus the dollar, may have a direct bearing on the company’s performance.
In addition, competitive threats from Chinese and Korean counterparts cannot be overlooked as no US-based buyer sources more than 25 percent of its requirements from Fiberweb alone.
Though Fiberweb’s prospects of a multiple re-rating cannot be ignored, given its unique product offerings and healthy financials, a change in the capex plan merits attention. Consequently, estimates for FY18 and FY19 have been tweaked. Commercial commencement of the PFNF unit in a full-fledged manner from FY20 would be critical to earnings visibility for the company. Our long-term view on the stock, nonetheless, is bullish on the back of a reasonable valuation at 7.9x FY19 projected earnings.For more research articles, visit our Moneycontrol Research Page.