Nilkamal Plastics: Hold

Investors can retain their exposures in the Nilkamal Plastics stock, which trades at about 18 times its likely FY-07 earnings.

Nilkamal Plastics, which is among the larger players in the injection-moulded plastic business, recently moved into retailing of plastic furniture. Though the prospects for revenue growth appear bright, thin operating margins and poor returns are a cause for concern.

Nilkamal manufactures a range of plastic furniture consisting of chairs, tables and racks. This product line, which is its mainstay, accounts for 65 per cent of its revenues. The company has a significant market share of about 28 per cent in the domestic sector. Though the company faces competition from unorganised players, the geographical spread of its plants across the four regions mitigates this risk. Nilkamal also has subsidiaries in Sri Lanka and Bangladesh, allowing the company to cover much of the sub-continent. This product line, besides catering to the middle- and low-income groups, also caters to the commercial segment. Rising disposable incomes and growing acceptance for plastic furniture are expected to translate into revenue growth for Nilkamal's furniture business.

Nilkamal Plastics also manufactures crates for industrial and commercial purposes. This product line, which accounts for about 25 per cent to its revenues, caters to cola manufacturers; Coca-Cola is its key customer.

Aided by better penetration in the manufacturing and agriculture sectors, the company has reduced its exposure to the cola manufacturers. Sustained growth in the manufacturing sector is expected to translate into volume for the company's crates business.

New Forays

In 2005, Nilkamal forayed into retailing plastic furniture by opening `@ home' stores.

The company, which has six such stores, plans to open three more by the end of the year.

Though the revenue growth prospects are bright, this foray is unlikely to contribute significantly to earnings in the medium term.

The company should strengthen its position in the materials handling and storage business once its latest joint venture starts off. In April, Nilkamal entered into an agreement with Bito Lagertechnik of Germany, a leading materials handling company in Europe, to set up a 50:50 partnership. Nilkamal plans to set up a 15,000-tonne facility in Jammu and Kashmir at a cost of about Rs 40 crore to manufacture metal-based heavy-duty racks and shelves.

The company also plans to enter into real-estate development.

Financials

Nilkamal Plastics operates on thin margins, which have in turn impacted its profitability with returns shrinking to the single digit.

Though margins are likely to expand in the near term on the back of a consolidation in the plastic furniture business and dipping prices of crude oil, the company's foray into the retail sector is likely to cut down scope of expansion.