NILE Limited-Lead Supplier

Dear All,

I have gone through the NILE Limited. and this is my first post in value pickr. Please correct me if any mistakes. A brief description below,

Market Cap : 186.56 Cr
CMP : 621.85
Face Value : 10
P/E : 6.54

Nature of Industry:

Recycling of Lead, Power Generation through wind farms.

Industry Structure and Development:

Lead and Wind Energy are the two divisions of the Company.Pure Lead and Lead alloys are supplied to manufacturers of Lead acid batteries.Wind energy generated is sold to Andhra Pradesh Southern Power Distribution Company Limited.
The operational performance of the company during the fi nancial year 2016-17, which shows a signifi cant increase in turnover as well as profit.Result in brief

Particulars 2016-17 2015-16

Total Income (in lakhs) 58,005.71 42,784.86
Profi t Before Interest,
Depreciation & Tax 5,283.69 2,154.66
Profi t/ (Loss) Before Tax 4,020.11 1,127.68
Profi t/ (Loss) After Tax 2,623.07 706.45
Net worth 9,858.82 7,344.14
Dividend-Rupees per
share (%) Rs.3 (30%) Rs.3 (30%)

Operations:

Operations of the Company’s two divisions for the year under review were as follows:

Lead Division:

This year, the Lead division recorded sales of Rs.57,883 lakhs as against Rs.42,465 lakhs in the previous year, an increase of 36%.

Windmills:

The entire energy generated at Ramagiri was sold to Andhra Pradesh Sourthern Power Distribution Company Ltd. The total revenue was Rs.53 lakhs against Rs.62 lakhs in the previous year.
Total:
The combined turnover of the Company, thus, was Rs.57,936 lakhs for the year under review, as against Rs.42,527 lakhs for the previous year.

Please find annual report with below link.

http://www.bseindia.com/bseplus/AnnualReport/530129/5301290317.pdf

and the quarter results was good.

Looking for value pickr reviews and suggestions.

Disclaimer : Not Invested.

2 Likes

This came up in one of my screens also and got me interested. However, looks like FY profits may be a 1 time affair (lead prices increased but raw material costs did not increase proportionately)

Pasting excerpt from management discussion and analysis in annual report. Hence, my suggestion will be to assess valuation assuming steady state margin and decide.

“The company’s performance during 2016-2017 was excellent.
The international Lead prices remained firm throughout
the year, while the domestic raw material prices remained
subdued, particularly in the second half of the financial year,
leading to a substantial increase in profitability. This rather
large gap between the raw material and finished product
prices has already started narrowing, and the current financial
year will see a return to more traditional, and modest, margins.”

Not invested

3 Likes

The major reason for this coming on various screens is its cheapness.
However, there might be some genuine reasons for its cheapness, like:

  1. Industry: The lead recycling industry is highly competitive with around 134 players. (Lead Recyclers in India - Lead battery scrap, Recycling Directory: Traders, Manufacturer, Supplier, Exporter & Importer). Making it a commodity with little differentiation
  2. Customers: 80% of Nile Ltd.'s lead division’s revenues come from a single customer (Amara Raja). This customer being a leader in its industry, definitely has high appetite for purchasing raw materials but at the same time will command bargaining power and force the suppliers (Nile Limited) to take up any risk in the international lead prices. Nile Limited will be at the receiving end rather than commanding.
  3. Management: Although it is a family owned business, with succession planing in which both father and son hold management positions, I am not comfortable with the quantum of renumeration that each of them is drawing (around Rs. 1.3 cr each)
  • Both of them are drawing remunerations at the ceiling level under the Companies Act 2013 atleast for the past 6 years.

  • Despite recognizing that high profitability for the last year was a one time affair, the management took full advantage of this and increased their remunerations by more than 130%, hence raising it to the ceiling level as per Companies Act 2013

  • In 2013-14 Annual report, the company reported:

However the company is still using deposits and inter company borrowings as a major source of short term financing carrying interest of 11% which is significantly higher than the one offered by banks under there Open Cash Credit Facility.

It seems that the directors are also looking at there self interests and not the shareholder interests by providing financing at higher rates to the company.

Final Words:
Given the commodity nature of the industry, revenue concentration from a single customer, lack of bargaining power and doubts regarding management’s and directors’ intentions, it’s highly doubtful that the company can generate super normal returns and even if it does its doubtful that an individual shareholder will benefit from it.
The profitability of the company is highly dependent on the raw material prices and it is not even able to pass on any increase in raw material prices to its customers. I believe there will be a lot of volatility in the results of the company for the years to come. The current P/E ratio for such a company offers a margin of safety, with regards to the safety of principle but for achieving a satisfactory return commensurate with the effort put in the analysis an investor will have to wait for the P/E ratio to expand (which in itself is speculation I believe) in the absence of any moat present in the business.

Disclosure: Not Invested

P.S.: The views expressed are in light of the present facts and are subject to change in the light of newer ones.

7 Likes

I was looking to compare Nile Ltd. with Gravita over the weekend as well and came up with similar conclusions. There is a reason why Nile is cheap and Gravita appears expensive. Nile being a local player with single Customer concentration and lacking pricing power, fluctuating margins and management issues and Gravita with lead capacities in India and abroad with a diverse clientele from different sectors, relatively consistent margins and growing capacities and volumes. And of course there is the fact that Gravita has gotten into Aluminium and PET recycling as well and is not a pure lead company anymore.

Within the sector people seem to think Nile Ltd is cheap and market would re-rate it on par with Gravita but I don’t see that happening anytime soon. Would love to hear your thoughts on Gravita if you happen to take a look.

4 Likes

Did below analysis after Q4, Nile looked under valued compared to peers but did not invested due to reasons explained by others

Nile Pondy Oxides Gravita
MCAP 169.07 246.65 531.3
Sales 579 817.4 656.6
Profit 26.2 27.93 30.29
PE 6.45 8.83 17.54
EPS 87.33 47.14 4.42
Price to Sales 0.29 0.31 0.81
Price to book 1.70 3.41 3.56
Equity 3 5.58 13.67
CMP 563.55 416.3 77.5
Long Term Debt 3.60 15.04 20.00
Short Term Debt 19.52 91.25 130.00
Interest Cover (latest quarter) 10.9 8.9 10.35
Inventory Turnover 19.7 11.5 5.97
ROE 27% 42% 20%
ROCE 40% 30% 15%
Inventory (in days) 32.97 31.63 61.31
AR (in days) 18.50 28.04 27.11
AP (in days) 1.46 1.51 7.91
Working Capital (in days) 50.01 58.16 80.51
Capacity (in tonnes) 82000 57000 50000
Capacity Utilization 52% 98% 88%
Promoter Holding 50% 51% 73%

2 Likes

Just went through the annual report and would like to highlight the below points :

  1. Management indicated that FY19 would again not be a good year due to decreasing lead prices and increasing cost of transport, fuel and manpower.

  2. Windfarm is becoming expensive to maintain.

  3. They are looking to diversify to counter all these problems but I think they might generate another problem if the diversification is not done right and if the management is not a good capital allocator.

Disclosure : Invested and in loss at CMP

1 Like

I recently wrote my research thesis on Nile Ltd. Share your feedback after reading.

Thanks
Nile Ltd. By Deepesh Nathani.pdf (938.8 KB)

6 Likes

It is interesting to see this thread
I was going by the quarterly results of December 2020 and the profit has risen to Rs 6 cr from Rs 2 crore in September 2020.

Looking at the very low capital base of just 3 crore it appears to be undervalued at the cmp.

If any member can through some inputs in recent developments if any it will help in taking investment decisions.

Thanks all.