CRISIL Research has assigned a CRISIL IER fundamental grade of 4/5 to Innoventive Industries. The grade indicates that the company's fundamentals are 'superior' relative to other listed equity securities in India. CRISIL has assigned a valuation grade of 5/5, indicating that market price has 'strong upside' from the current levels.
The assigned fundamental grade considers Innoventive's culture of innovation which gives it a competitive edge both in products and their pricing. The company has commercialised two products: a) cold drawn electrically welded (CEW) steel tubes and b) membrane strips, which are manufactured via indigenously developed processes. Innoventive's process for manufacturing CEW steel tubes has reduced its product cost by 10-15%. The company has received India patent for this process and has applied for patents in 33 countries for the same. The management has indicated 40+ new products are under development. The grade also considers the company's strategy to acquire small/mid-size manufacturing companies with an innovative product profile in India, and marketing and distribution companies in overseas markets. In the past, it has done two key acquisitions: Sankalp Forging Pvt. Ltd (oil and gas product manufacturer) and Salem Steel North America LLC (the US-based distributor of steel tubes). We believe this strategy will help the company penetrate international markets while taking advantage of relatively low-cost manufacturing in India. The company will also benefit from incentives and subsidies for its manufacturing facility in Pimple Jagtap, Pune till November 30, 2017.
The grade is moderated by high working capital intensity of the business due to high inventory requirement to meet the just-in-time requirement of clients (inventory days as on March 31, 2012: 154). Innoventive has debtors of 107 days, which it manages through factoring of debtors. Given the diverse product profile, newly developed products and acquisition of clients in new markets, we expect working capital to remain stretched. Further, any significant strengthening of the rupee may also affect its margins.
Financial outlook: CRISIL Research expects Innoventive's revenues to grow at a three-year CAGR of 21% to Rs 13.9 bn in FY15 driven by steel tubes, and oil and gas products divisions. Acquisition of new clients, especially in India, supported by expansion in installed capacity (to be completed by March 31, 2013) will drive revenue growth. We expect EBIDTA margins to remain steady at 26-27% due to a niche product profile and financial incentives for its manufacturing facility. We expect EPS to grow at 33% CAGR over FY12-15 to Rs 28.8.
Valuation: CRISIL Research has used the discounted cash flow method to value Innoventive and arrived at a one-year fair value of Rs 215 per share. At this value, the implied P/E multiples are 9.5x FY14E and 7.5x FY15E earnings.
Disclaimer: This Company commissioned CRISIL IER report is based on data publicly available or from sources considered reliable. CRISIL Ltd. (CRISIL) does not represent that it is accurate or complete and hence, it should not be relied upon as such. The data / report is subject to change without any prior notice. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber / user assume the entire risk of any use made of this data / report. CRISIL especially states that, it has no financial liability whatsoever, to the subscribers / users of this report. This report is for the personal information only of the authorised recipient in India only. This report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person - especially outside India or published or copied in whole or in part, for any purpose.
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