Gladiator Stocks - Mahindra EPC Irrigation: ICICI Direct

The stock during July 2020 has registered a resolute breakout above the major falling supply line joining highs since January 2018 (Rs 208) signalling reversal of the corrective trend and resumption of fresh up trend
In the last six weeks it is seen forming higher base around Rs 155-160 levels being the recent major supply line breakout area signalling a Change of Polarity as previous resistance has reversed its role and acting as support. The sharp up move from the support area in the current week highlights strength and and offers fresh entry opportunity with a favourable risk reward set up Structurally, the stock during the current breather has already taken six weeks to retrace just 61.8% of the previous four weeks up move (Rs 137 to 194). A slower retracement highlights robust price structure and a higher base formation We expect the stock to continue with its current momentum and head towards Rs 206 levels as it is the confluence of the 123.6% external retracement of recent breather (Rs 194-154) and high of Jan’18 (Rs 208).

Fundamental View

Mahindra EPC Irrigation (EPC) is a leading micro-irrigation player in the organised segment of micro-irrigation system (MIS) industry domestically. It is into manufacturing of both sprinkler as well as drip irrigation system with presence in agri input material like greenhouse technical textiles among others. The company’s performance has improved drastically with H2FY20 being the period wherein it clocked double digit margins on consistent basis. In FY20 the company benefitted largely on account of decline in raw material costs due to economies of scale (better procurement terms) as better product mix in the favour of high margin drip irrigation business (200 bps improvement). With increase in sales, employee costs also got apportioned on the larger base with its RoCE clocking higher double digit mark in FY20, first time in last 10 years. As of FY20, Mahindra EPC reported a topline of ₹ 284 crore, up ~10% YoY. It reported an EBITDA of ₹ 37 crore with corresponding EBITDA margins at 13%. Consequent PAT stood at ₹ 23 crore in FY20 vs. ₹ 11 crore in FY19. It is presently quoting at ~1.8x P/S and ~21x P/E on FY20 numbers. Given the current outperformance by rural economy amidst greater government spend, record food grains procurement as well as healthy progress of monsoon 2020, Mahindra EPC stands to benefit and can command better valuation multiples with recent CFO as well as capital efficiency parameters. The company has also tied-up with an Israeli firm for promoting greenhouse cultivation methods in India. It also fits well under the broader M&M vision wherein they envisage all agri- related businesses under their umbrella to cumulatively attain sales of US$ 1 billion in coming years. Moreover, its key competitor with bloated balance sheet can very well get into trouble thereby benefiting the incumbent players like Mahindra EPC.

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Mahindra EPC Irrigation - 31082020-icici