Why CRISIL Research rates Innoventive Industries so high

Pune-based engineering firm Innoventive Industries Ltd (Innoventive) manufactures steel tubes, automotive components, oil & gas related products and other engineering products. Innoventive derives its competitive edge from indigenously-developed products, one of which is patented, and a strong product development pipeline. Innovative products, fiscal incentive for its manufacturing facility in Pune and growing exports will help the company maintain superior operating margins and profitability. However, working capital management will be challenging. We initiate coverage on Innoventive with a fundamental grade of 4/5, indicating superior fundamentals.

Innovation at the core of competitive advantage
Innoventive’s two key products - cold drawn electrically welded (CEW) steel tubes and membrane strips - are important growth drivers; they together accounted for 33% of FY12 revenues. The company’s patented process of manufacturing CEW tubes reduces the production cost by 10-15% as compared to the conventional process. Further, its indigenously-developed membrane strips for use in boiler and heat exchanges will substitute imports. The existing innovative products coupled with 40+ new products under development give the company an edge and will help it enter new industries and geographies.

Growth drivers: exports and acquisitions
The company intends to acquire marketing and distribution companies in overseas markets to boost exports of tubes and oil & gas related products. Production cost arbitrage coupled with a weak rupee will help Innoventive grow the share of export revenues from 24% in FY12 to 41% in FY15. The company plans to acquire manufacturing companies in India with a niche product profile which, we believe, will aid the company’s growth plans.

Working capital management will be challenging
Innoventive’s key businesses are working capital intensive as adequate inventory needs to be maintained to meet just-in-time requirement of clients. Further, the working capital may stretch as it pushes its newly developed products and target clients in new geographies and different industries.

Adjusted EPS to grow at 33% CAGR over FY12-15
CRISIL Research estimates operating income to grow by 21% CAGR over FY12-15 to Rs 13.9 bn driven primarily by tubes and oil & gas product divisions. We expect stable EBITDA margins (26-27%) over the next three years. Adjusted EPS is expected to grow by 33% CAGR over FY12-15 to Rs 28.8.

Valuations: Current market price has strong upside
CRISIL Research has used the discounted cash flow (DCF) method to value Innoventive. Our fair value is Rs 215 per share. At this fair value, the implied P/E multiples are 9.5x FY14E and 7.5x FY15E earnings. Our valuation grade is 5/5.

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