The company is engaged in the business of manufacturing, sale and supply of plastic Pipes & fittings and accessories which are used in agriculture, construction segment (building products) and drip irrigation systems. The company also manufactures and sells PLB Ducts, HDPE&MDPE pipes largely used in infrastructure sector.
Last year 2014-15 was a particularly bad year for the Co. due to the sudden fall in Polymer prices due to the fall in crude, leading to inventory losses. Last year was a one off & is unlikely to be repeated. This is already evident on the basis of the performance of the first three quarters of the current financial year. The Co. should do SALES, EBIT & PAT of about 475 Crs, 34 Crs & 13 Crs, after paying full taxes. For a Co. doing sales of about 500 Crs, under it’s own brands, it’s market cap is just about 140 Crs. The impressive part, are the return ratios. The Co. should have an RoCE in excess of 30% for the current year 2015-16.
The Co.’s product range is well displayed on its website http://kiil.kritiindia.com/
The mgt discussion & analysis give a fair idea of the demand potential of it’s products. The Co. is venturing into newer territories with more value added products. The mgt. is optimistic of a 15-20% growth p.a. in top line with better margins going forward. What is notable is that the Co. is a leader in the markets that it operates in.
The Co. has invested a sum of about 10 Crs. in a 100% subsidiary called Kriti Auto & Engineering Plastics § Ltd. This subsidiary had a top line of 20 Crs in 14-15 with a loss of 67 lacs. It should break even this year. With the auto sector looking up, it’s prospects are bright. The high RoCE is despite this subsidiary not contributing to the bottom line. In the event of the subsidiary being hived off into a separate entity, the return ratios are likely to get a further boost. The mgt. has a history of corporate restructuring.
Concerns: Raw materials constitute about 70% of the cost & a sudden fall in the price of crude could result in inventory losses, but that risk is for the industry as a whole. Another concern is that the interest outgo is eating substantially into the operating profits. This too is set to change going forward as has happened in Q3 of the current year. In case the subsidiary is sold / hived off, the interest outgo would reduce significantly.
I think the Co. is at the take off stage & should reward it’s shareholder well over the next 2-3 years.
So basically I understand that the benefit of cost reduction in prices of polymers due to crude price decline are completely being passed to the customer. Hence the topline and bottom line are impacted…so the stock price will oscillate along with the crude price…
If you see last 10 years sales it’s not great either, growing in a sluggish pace. Net profit is around 2% which looks do dismal, may be they don’t have pricing power. Even OPM
@RajeevJ do you have insights as to at what rate the topline will grow in coming years. Can it compete with Supreme Industries is my precise question, does Kriti offer any unique product in irrigation segment?
Who are their competitors in Auto Plastic Division?
I have studied Kriti Nutrients a group company of Kriti Group. The company is into sunflower/soya oil and other value added products like soya flakes, etc. which is exported. I found it good buy. The brand has good recognition in MP and other near by regions.
Disc - Not invested in any of them. Still tracking.
In a small cap stock, I generally avoid looking at 10 year figures as my focus is the next 12-24 months. As mentioned while initializing this thread, the mgt is hopeful of growing 15-20% a year going forward. The market is big n getting bigger, so there is enough space for players other than Supreme. The game here is that going forward the mgt is hopeful of increasing margins due to value added products, to go with increasing sales. That to my mind is the trigger. I also understand that the margins have been adversely impacted in the last couple of years due to monsoon failure.
I am trying to initiate a dialogue with the mgt., & would be in a better position then. Please do let me know all your other concerns, so that I am able to incorporate them as well in my questionnaire.
@abhishek90, I am invested in Kriti Nutrients as well. The Co. besides manufacturing Soyabean oil is also trading in Sun flower oil. The mgt is on record, saying that they are looking to add other products as well & use their existing distribution network, thus giving it an FMCG flavour. Dec qtr was below expectations, & we need to find out the reasons there off before taking a call on it. It is a very exciting story though.
Have been doing some scuttlebutt on Kriti & the findings have indeed been encouraging. The Co. will do about 500 crores of Sales in 15-16, which means that it would almost double its Sales in Q4. The Sales targets for 16-17 are to the tune of 750 crs. The Co. hopes to go up the value chain & hopes to improve its margins as well. It plans to concentrate more on CPVC pipes in building materials & HDPE pipes for agriculture where the margins & better. The MDPE pipes used as fibre ducts for Telecom infrastructure is the big story going forward. The Co. also plans to start the manufacturing of water storage tanks shortly.
The current installed capacity is about 90,000 tonnes per annum, with capacity utilization of about 65%. It is strategically located in central India. Its marketing spans the states of MP, Rajasthan, Chhatisgarh & part of UP. It has a strong presence in this region, with a market share of almost 65%. Of the 20 new smart cities planned by the Govt., about 7-8 of them are within the distribution range of the Co. Three cities, Indore, Jabalpur & Bhopal are in MP itself! Transportation costs play an important role in this business, so the Co. is in a bit of a sweet spot.
The major thrust on agriculture in the union budget can only be good news for Kriti, which derives about 65% of its revenues from the sector, with about 20% coming from infrastructure & balance from building materials.
Attaching a few videos which show the Co.'s focus on agriculture & its products.
The Co. board is meeting on March 12, to announce interim dividend for 15-16. Last year the Co. had skipped dividend as inventory losses had reduced profits. It is pertinent to note that the mgt. too had taken a pay cut last year in view of reduced profits.
I gather that the subsidiary Kriti Auto & Engineering Plastics § Ltd. has recently introduced a few products in the non auto sector, the initial response for which has been good. The plant itself is situated on a plot of land admeasuring about 4 acres, located in Ranjangaon near Pune. The land prices in the area are very high now & even if the Co. decides to discontinue the operations & sell the property, it is likely to recover many times its investment in the project.
Kriti Inds. has announced an interim dividend of 18% for the year 15-16. This is perhaps the highest ever dividend announced by the Co. This Co. needs to be watched closely as performance in 2016-17 has the potential to take it in a different league.
@RajeevJ can you please suggest from where you got precise numbers like doubling of sales in Q4. Regarding 750 crs. sales for FY16-17, I am unable to find this out from any public source of available information. Did you get this from your talk with management?
@Ravi_M, It’s all scuttlebutt, & by Scuttlebutt I mean talking with just about any body who could add value to the story. It also entails stepping out of your comfort zone & “kicking the tyres” as Peter Lynch aptly puts it. The problem with scuttlebutt is that that there is always a certain amount of doubt on ones basic hypothesis actually playing out according to expectations. I gathered from reliable sources, that the Co. should do 500 crores in 15-16. If that indeed turns out to be the case, then the Co. should do Sales of about 125 crs in March qtr as opposed to 70 crs in Q4 last year. What I suggest is wait for March qtr results & if they are in line, then take a call.
I am already invested & plan to add more as the story unfolds.
Scuttlebutt does provide insights. My only point was about the precise nature of your answer. 750 crs Rupees of sales for next year. Would love to know what scuttlebutt you do to come at these precise figure. I thought because you are talking to management, they must have given these figures. Thanks for clarifying.
Really appreciate your ability to dig up information and help everyone in understanding the business and fundamentals of these micro-cap companies. Superb work sir!!!
Have a question on the balance sheet - I was looking at the H1 16 results of the company and noticed that trade receivables have gone up from 26.9 cr at the end of the year to 86.2 cr - more than 200% jump in 6 months.
Do you think they’re offering loose credit terms to drive sales and actual cash flows may be an issue later?
You’ve already highlighted that raw material costs are ~70% of the sales. The Co has a 3-4% PAT margin. I see you’ve mentioned that margins should improve going forward - Can you highlight how and what is the best case scenario we could assume? (Ex - 7-8%). I think worst case might look like last year.
You mentioned interest outgo should reduce considerably going forward like Q3. I see that the interest cost was 4+ crore for both Q3 and Q2? So didn’t get your point on this.
Trade receivables along with trade payables should be seen together to get a better perspective. In the current instance, against trade receivables of 86.20 crs, there are trade payables of 112.73 crs.
About the best case scenario in terms of margins, perhaps it’s better to be cautious & see how things unfold, rather than paint rosy projections. Even a slight improvement in margins could do the trick, if it comes with sales growth.
I was perhaps referring to interest outgo in Q3 as a % of Sales as compared to Q2, but as mentioned in the opening post itself, interest costs are a concern & need to me monitored carefully.
One of the problems of researching micro / small caps is that one is forever struggling to get all the answers as the data available is inadequate & there are always a few doubts in the back of ones mind, so the risk taken in terms of exposure must be commensurate with ones appetite for such risks.
This company is total avoid. Interest costs are 30% to total debt. They are claiming loans from bank but which bank charges 30% for loans? Interest cost in annual report is 13-14% for long term. so short term loans interest cost is 44%. Big red flag.
As has been mentioned a few times in this thread already, interest outgo is a concern. To assume short term debt is at 44% would be to over simplify things & perhaps a mistake in this case. The total interest has been charged on the Term loans, Fund based & Non fund based borrowings. Non fund based borrowings refers largely to securitisation of debtors in one way or another. The cost of this funding is also added to the interest outgo. This is considered largely routine for companies where the debtor cycle is relatively long. I have not been able to get a break up of interest charges on Fund based & Non fund based borrowing.
Investing is all about betting big where conviction levels are high, while giving others a pass. I am decently invested here over the last six months & feel confident about growth, but I have been wrong often enough in the past to limit the size of my bet to levels where I do not lose sleep, but as Anthony Bolten says, by the time total clarity emerges, a major part of the gains have been made!
With due respects, you are already sounding overly biased in your views. Securitisation of debtors in no way increase interest costs the way it does here. View the break up of long term and short term debt. Long Term is mentioned as taken at 13-14.75%. The rest of interest costs are for short term debt. In investing by the time we realize our mistakes, the horses have already bolted.