Innoventive Inds: Weak demand impacts volumes, says CRISIL

CRISIL Research has come out with its report on Innoventive Industries (Innoventive). According to the research firm, the management has indicated that slowdown in end-use industries such as automobiles and oil & gas are expected to impact the tube division's growth over the next few quarters.

Innoventive's Q3FY13 results were below CRISIL Research's expectations as the tube division's sales volume (mainly in ERW tubes) declined due to weak demand. However, y-o-y growth in key product segments such as CEW tubes, membrane strips, and oil & gas components were line with our expectations. The management has indicated that weak demand may impact volumes over the next few quarters too. Higher employee costs (due to wage revision) impacted EBITDA margins and led to lower-thanexpected net profits. We have reduced our FY13 and FY14 estimates and have broadly maintained FY15 estimates. We maintain our fundamental grade of 4/5, indicating that the company's fundamentals are superior relative to other listed securities in India.

Slowdown in end-user industries to impact growth in the near term
Innoventive's consolidated revenues increased 10% y-o-y (down 3% q-o-q) driven by 14% y-o-y growth in the auto division, 10% y-o-y growth in the oil and gas division, and 3% growth in the tube division. In the tube division, while sales of CEW tubes and membrane strips increased 41% y-o-y and 22% y-o-y respectively, that of ERW tubes dropped 51% y-o-y due to weak demand. The management has indicated that slowdown in end-use industries such as automobiles and oil & gas are expected to impact the tube division's growth over the next few quarters.

Wage revision impacts EBITDA margins
Innoventive's standalone* EBITDA margins declined from 26.2% in Q3FY12 to 22.9% in Q3FY13 primarily on account of higher employee costs and power costs. The company incurred additional cost of Rs 25 mn after the wage revision. According to the management, a hike in power tariffs also affected EBITDA margins. Consolidated net profits of the company declined 13% y-o-y primarily on account of lower margins.

Acquisition of Innovative Technomics Pvt. Ltd in line with broader strategy
Innoventive acquired 51% stake in Innovative Technomics Pvt. Ltd (ITPL) in October, 2012. ITPL manufactures high voltage soft starters and testing equipment which find application in various industries such as water, oil & gas, steel, cement and textile. ITPL generated revenues of Rs 70 mn during Q3FY13. We believe the acquisition is in line with Innoventive's strategy of acquiring small Indian engineering companies with niche product profile and growing their business.

Fair value maintained at Rs 215 per share
We have used the discounted cash flow method to value Innoventive at Rs 215 per share. At the current market price of Rs 137, our valuation grade is 5/5.

To read the full report click on the attachment

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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