Summary: I had recommended Nilkamal as one of the attractive players in the Plastic industry, but upon closer analysis I believe it is not a safe bet for immediate future but is a good bet for longer future. The company’s shares have been pounded lately because its retail segment has taken long to take off that well, its subsidiaries are not adding much value and it issued more shares when it should not have. All these 3 made the shareholders nervous. If the company refrains from this and if the market improves, there are some good days ahead for an investor investing in present levels.  Personally, I have unrealized loss on the scrip and I am staying put as I am okay with a longer timeframe. I will also accumulate this stock further in dips.

My Holdings:

My Present Holdings
Avg. Purchase Price	Holding period	Highest Purchase Price	Lowest Purchase Price	Unrealized Profit/Loss
266.21	3-6 months	265	265	(11.56%)

About NILKAMAL:

 We know it is a plastics company. However, it is not only that. The company currently operates in three business segments:

• Plastics Moulded Furniture: The plastic moulded furniture segment manufactures and markets plastic moulded furnitures like chairs, tables and cabinets
• Material Handling: The material handling segment manufactures varieties of crates like injection moulded crates, roto moulded crates, customised crates, corrugated PP crates, vaccum formed crates, bins, vertical storage systems, industrial pallets and automated storage & retrieval systems. The company also provides material handling solutions and intra logistics warehouse solutions.
• Lifestyle Furniture, Furnishings and Accessories: Under this segment, the company operates it retail business. It owns a chain of home decor product store across cities in India called @home. These stores sells products like imported furniture, readymade furniture, soft furnishings and home decor accessories.

The company was listed in stock market in 1990.

  NILKAMAL’s Ecosystem:

If one looks at product segment for Nilkamal, one sees that in the last FY, the company made just under 13% of its revenue from its retail venture. To the extent that one gives weight age to these 2 different types of business (manufacturing and retail), one has to look at Nilkamal in terms of 2 different ecosystems.

In one ecosystem, Nilkamal is a manufacturer of molded plastic products. It is a market where one single raw material can be molded into anything you want it to be. On one hand the manufacturer has to keep a control on the cost that goes into the raw materials for the production, on another hand the premium in price can be charged based on the design of the eventual product. This leads us to a situation where a manufacturer of run of the mill materials has to operate on very but at the same time, an additional increment of design is good enough to command disproportionately high margins. It is in this light, one can say that bigger companies with a penchant of well designed products should be able to operate profitably in the markets.

In the other ecosystem, Nilkamal is a retailer. The company sells its own and imported products under @home brand. Obviously the company has a point of view that says products, including those made of plastic, sold as lifestyle accessories have a market for their own and retailing is one of the better ways to preserve margins on the same. With the changing profile of an Indian customer, one can say that there is market for the same. In such a market, it is easily for the company to look at potential advantages, while ignoring the pitfalls. The biggest pitfall in such a business is that the company is exposed to higher fixed expenses in terms of lease rentals. Lease rentals are the regular rent the company pays for the shops it is occupying and like any form of rent, irrespective of whether there are sales or not, the company has to shed out expenses. In this way, the company needs to look at lease expenses as debt with fixed interest expenses. When looked at this way, the balance sheet becomes  more debt heavy and so the overall business projections can go haywire easily.

In this second ecosystem, success depends on how soon the company has entered in its target market segment (early movers have a distinct advantage) and how easily the company is able to market its service line. It is retail business which is growing and is still highly disorganized. The market is still in its nascent state and the penetration is low. Though aspirational, the customer is still a sucker for price advantage and that is a negative thing. The only stores that generally work well in this market are the ones which are in a post market or in the viscinity of a post market. The standalone stores, generally, don’t attract customers consistently. As a consequence, the retailers in this business have to take buildings on higher rent and that means that the cost pressure becomes so much tougher. The cost of carrying inventory due to obsolescence is high and one cannot simply remold an existing product into a new one. J

It is easy to see that the above two ecosystems don’t mix, just like air and water. For a company to do consistently well in both the segments is a very tough ask.

NILKAMAL’s position in its ecosystem:

I had mentioned the relative size of all companies in plastic industry in India and we saw that Nilkamal is the 6^th biggest in the industry. That is true even if one discounts the retail business in the company. Apart from that, we know that Nilkamal does possess a definite brand value in the plastic furniture segment, even though I had argued that it may count for little in run-of-the-mill products like crates etc. Nilkamal did show remarkable vision in carving a brand identity of its own and that has definitely served the company well. Specifically in that term, the company knows how to create a brand and sustain it.

Since sustainability of brand in the plastic industry is inextricable linked to design, one can say that the company hid show, to some extent, its expertise in crafting out well designed products and hence there is a chance of it doing so in the future too.

The company has to sell to the normal retail customer more often than not. This customer is both a sucker for price and design. And durability! Just from personal experience alone I believe that Nilkamal has got an offering that is good in all these parameters. The only aspect that one needs to investigate more is how much penetration the company has in its chosen market, and in that regard too I believe the company does enjoy a pretty good brand recall and penetration.

Above is more from my personal experience, and not from any objective study.

From the above statements, I believe that the in its 1^st ecosystem the company is an important player. It is resilient and has been so for a long time. It is big enough to command respect and influence the fortunes of the industry. All of these are only good.

In the 2^nd ecosystem, however, we have a different story. The company has opened up stores to sell their furniture/home accessories as lifestyle offerings. However, the company is one of quite a few original entrants in the market. Most of its products, although new offerings for the market, are sourced from nearly the same vendors in foreign markets and so do not bear a distinct retailer’s footprint. Nilkamal’s size too is very small. The company did a miniscule 171 Cr. of business in 2011 in this segment, the highest since its inception. That is not big.

Overall, in the 2^nd  ecosystem the company can take brownie points for having vision to enter into this market, but has little going for it otherwise. The products are as different as chalk and cheese and the cost structures are very different. In the larger scheme of things, the company can lay claim to being an important player but not significant. Hence it is not resilient and can easily succumb to market forces.

As mentioned earlier, for Nilkamal to do consistently well in both the segments is a very tough ask. Luckily for us, as of now Nilkamal’s retail arm is relatively small (under 13% in size). Even though the size of this arm is growing consistently since its inception, I am willing to believe that it is still small in size for to affect the performance of the larger company in a big way. I mean both positively and negatively.

For now, I believe that the company would have been even more resilient if it were a purely plastics company. Given that the new business is still small in size, if one can prove that the company has been equally profitable despite its foray into the retail business, then one can be confident that the company will be a better bet into the future.

Consolidated or Standalone:

For Nilkamal, 5% of the sales comes from its subsidiaries. It owns 76% of one subsidiary and so lays claim to 76% of its profits, assets and liabilities.  For the 2^nd subsidiary, it owns 100% of the company and so we should consider this as a part of the parent company in its totality.

When one buys the shares of a company, one is buying into income derived by the core company (standalone) + all its subsidiaries (consolidated) in the proportion in which those subsidiaries are owned. The consolidated balance sheet for the company follows these principles and is able to give a clear picture of how the subsidiaries combine with the overall balance sheet of the company. For this analysis I am using the consolidated sheet as reported by the company.

The figures below mentioned by Nilkamal are on a consolidated basis (parent company + subsidiaries). The numbers mentioned in my “Plastic Industry Analysis” were on standalone basis. That is why there is a slight divergence between the two set of numbers. I will mention the differences and their ramifications wherever they are relevant.

Reported Financial Performance:

The in the last FY2010-11, the company’s total revenue and PAT increased on a YoY basis.

Below is a high level view of the company’s consolidated finances as reported in its annual report. It can be seen that the revenue and profits have improved rapidly in the last 3 years.

FY	2008-09	2009-10	2010-11
Net Sales (Rs. Cr)	955.19	1094.4	1317.21
Reported pat (Rs. Cr)	11.06	52.06	54.07
Average Net Worth (Rs. Cr)	205.47	232.02	306.5

Free Cash Flows to Equity Owners:

 Along with the above finances, one can look at the below measures from the company’s annual financial statements.

FY	2008-09	2009-10	2010-11
Cap Ex	4.9	-12.52	79.13
Dep + Amortization	34.88	35.09	35.11
Absolute change in Non-Cash W/C	-60.58	-40.27	-68.27
Total Increase in Debt	48.1	-98	17.73
Total Increase in Deferred Tax Liability	2.27	-0.16	2.08

 One can see that the company has invested heavily into Capital Expenditures in the last year. As per its own annual statement, it is a opening up a plant in Hosur. It is necessary for any growing company to invest in capacity, and so this is not an unsound investment. Apart from this the company has been investing more into its working capital as well and that is reflected in the consistent negative cash flows over the past few years.

 2 years ago the company paid a lot of debt back and so has spent a lot of cash in doing so. The last FY, the company took some debt to finance a part of the CAPEX but there has been a less than proportional increase in debt as compared to CAPEX.

So from where did the company get the money for the CAPEX? For the remaining funds, the company has issued more equity (i.e. distributed ownership tp more people by issuing shares). In the present year, the company increased its shares by over 16% over last year, by going through QIP (Qualified Institutional Placement). That is a bad thing as the earnings will have to be spread over more folks. I will discuss that later.

  The change in non-cash W/C status of the company has been consistently negative, but has not changed pace with the revenue change. The absolute amount of change is also not small in the bigger scheme of things and so one has to normalize this factor too to understand its impact on the company’s financials.

When I normalized the above factors and calculated the FCFE, I get the following data (all amounts in Rs. Cr.):

Average last 3 FY Sales	1122.27
Net Profit (latest)	54.07
Cash Value	29.68
Latest FCFE after Normalization of Debt and Capex	35.96
Latest FCFE before Normalization of Debt and Capex	-23.99
Average FCFE after normalization for the past 3 years	36.23
Average FCFE before normalization for the past 3 years	-3.13

Clearly for NILKAMAL, one can see that its Free Cash Flows on a 3 year normalized basis is just over 66% of what the profit is. This depression is entirely due to the CapEx project the company took last FY.

It is interesting to see, how the free cash flows stand for the parent company. When one compares the free cash flows of the standalone parent company and the consolidated one, one sees that the consolidated nos. are much worse than the standalone numbers.

Parameter	Standalone	Consolidated
Average last 3 FY Sales	1058.21	1122.27
Net Profit (latest)	52.46	54.07
Cash Value	26.46	29.68
Latest FCFE after Normalization of Debt and Capex	67.90	35.96
Latest FCFE before Normalization of Debt and Capex	-27.26	-23.99
Average FCFE after normalization for the past 3 years	57.48	36.23
Average FCFE before normalization for the past 3 years	35.15	-3.13

This indicates that as of now the company is investing more in its subsidiaries and reaping less than optimal results.

Fit vs Flab:

In the last FY its interest coverage (the parameters that tells us how much money is left after mandatory obligations are paid) was at 3.64.  This indicates that the company has decent enough earnings over and above its mandatory obligations, and that is advantageous. However, we have companies right in the same business which are having a coverage of many times more, ad so there is definite a scope for improvement.

 However, one should know that this relatively low coverage is a result of the fact that the company has forayed into a business that has been completely different in its dynamics and cost structures than the parent business. Also, the Hosur project for which the company took loans will come into business this year and so the interest to be paid on debt will also start coming out of operating income. This means that the chances for the company to improve this performance is slim in the coming future. To boot, the interest rates have peaked in Q3and so the expense will only increase.

Net-net, one can say that the interest coverage for Nilkamal is an indicator of that the company is managing its finances decently as of now. However, it is very near the situation where its interest coverage can become too big for comfort. That means the company will have little space to maneuver when that happens.

To gauge the health of the company in another way, let us compare its current assets to the current and total liabilities. In this regards, there is a sign of relief. One can say that the company’s current assets not only far exceed its current liabilities but also its total liabilities (current liabilities + long term debt). That is only a good thing as if a time comes when the company has to be auctioned, the liabilities can be paid off without touching any of the fixed assets. The promoters are sleeping peacefully.

Based on above, I believe Nilkamal is fit to survive the vagaries of its industry, its situation is similar to a fast bowler risking an injury due to his bowling action. There is a chance that the bowler can improve his action to improve his effectiveness and avert the injury. At the same time, there is a chance that the bowler can be sidelined for the coming season.

Ownership Structure:

61.03% of the company is in the hands of its promoters. This is not ideal under normal conditions; as if the company performs poorly then it will be difficult for someone else to buy it. Having said that, one advantage that comes with a company that has high promoter holding is that such a company prefers to pay handsome dividends (as dividends are tax free in India).

This is not so with Nilkamal.

In the immediate past 2 years, the company has paid 4-5 Rs. dividend per share (14% of its average free cash flows). This means that the company is retaining 86% of its cash flows for itself. That is generally a high number and generally happens when any company has plans to grow. Given that the company has its forays into retail and has shown increase in revenue and profit in the past few years, it is logical to assume that the company is putting its money where its word lies. We may doubt the company on the choice of its business foray, but cannot doubt its implementation.

Based on this, I can say from a lay investor’s perspective that that the ownership of above 61% is not ideal, but can be tolerated for Nilkamal.

Return on Net Worth:

The PBIT/Avg. Net Worth for NILKAMAL was 12.3% 6 years ago. It was 33.4% in the last FY. In this time, the lowest was 6 years ago but has been between a healthy 33% and a great 65% in the last 4 years.

Based on this statistic alone, one can say that the company HAS GOT the formula to make good money in general economic conditions and is using that formula wisely.

Value Judgment:

To understand how the market is seeing this company, one needs to superimpose the above judgements on finances with the price the market is paying for this. When we do that, we see,

Company	Nilkamal
Latest BSE closing Price	237.4
P/E Reported	6.6
P/FCFE Updated (After Normalization – Latest)	9.0
P/FCFE Updated (Before Normalization – Latest)	-13.5
P/FCFE Updated (After Normalization – Last 3 FY Avg)	9.0
P/FCFE Updated (Before Normalization – Last 3 FY Avg)	-103.7
P/Trailing 4 Qtr Earnings	6.5 (this is for standalone as company does not give quarterly result for consolidated accounts)
P/Bv	1.16
Current Assets > Current Liabilities	TRUE
Interest Coverage	3.64

As we can see, if one looks at the recent free cash flows for this year have been negative and so the recent performance is not that good. That is expected as recently the company invested in a lot of CapEx projects/subsidiaries/new business ventures, without much results till now.

However, one can see that if one normalizes the performance over a period of time the numbers look much better.

In the last few months, the performance of the company has taken a hit. Is it only because the company is perceived to be not making good cash flows despite making good profits? The answer could be yes, but only partly so.

Impact of QIP:

As mentioned earlier in the article, in the last FY the company issues 16% more shares to institutional bidders. What it meant is that the company brought in more owners. That was presumably to bring in more equity. But was that money needed?

Above, one sees that the company paid a part of debt in 2009-10 and made great profits. It would not have any issue in taking in more debt? But it still chose to get in more equity, which is nearly always more expensive than debt.

If we were to look at financials without the additional shares, they would have looked like below:

Total # of shares	14922525 (Right now)	12782344 (if the company had not brought in more equity)
Latest BSE closing Price	237.4	237.4
P/E Reported	6.6	5.6
P/FCFE Updated (After Normalization – Latest)	9.0	7.6
P/FCFE Updated (Before Normalization – Latest)	-13.5	-11.4
P/FCFE Updated (After Normalization – Last 3 FY Avg)	9.0	7.6
P/FCFE Updated (Before Normalization – Last 3 FY Avg)	-103.7	-87.4
P/Trailing 4 Qtr Earnings	6.5 (this is for standalone as company does not give quarterly result for consolidated accounts)	5.5 (this is for standalone as company does not give quarterly result for consolidated accounts)
P/Bv	1.16	0.99
Current Assets > Current Liabilities	TRUE	True
Interest Coverage	3.64	3.64

 It could be seen that by bringing in more no. of shareholders, the company’s earnings are spread over a larger population and so on an average a normal shareholder lost by about 17%. This, on the base of this evidence, looks like a bad corporate finance decision by the company. Still the company is trading about 16% more than its book value. I believe that at their worst, a company with good brand and profitable financials can trade at a minimum of just about the book vaue. In that regards, the company may have some more price to pay in case the shareholders do get more jittery with economic prospects.

Verdict:

In its heyday, Nilkamal commanded a lot of premium for its superior brand value and its vision in marketing the plastic products. Lately, however, the company has given a set of not so great news for the investors. One, the company went into a business segment that had little synergies with its existing product line. That business has barely broken-even this year after 5 years. Secondly, the company has taken a corporate finance decision to bring in more shareholders on board and this decision can be termed at best – “questionable”.

I personally feel that if nothing changes in our environment, then the company still has a slight downside for it. (may be about 10-15%). However, if the market turns for the better in terms of overall economic condition, the company will be able to bounce easily. Even if the broader market does not do well but the retail FDI comes in eventually (there are concerns in government as I write this) then the company will gain well. That is because its prospects will get a boost for being a direct supplier to retail chains and for being in retail sector itself.

In this light, I believe the company does not have margin of safety if the investor is looking for an immediate future (say 6 months). However, if the investor is willing to pin his/her hope on a longer and brighter future, this company is a very decent bet.

Personal Note on NILKAMAL:.

When I first analyzed Nilkamal, I had not looked at its business mix and its subsidiary data. I had looked at the company purely from a financial standpoint and the numbers made for a compelling reading. However, now I know that there is a larger picture where the company has given some wrong signals to investors and has paid for it.

Lessons learnt:

• In case there is a spike in no. of shares of a company over an year, pls understand the reason for the same. Equity is expensive than debt and so a company should seldom look for it.