This microcap company is well placed to benefit from pick-up in rural demand

Categories: Blog
January 8, 2018Posted By Admin

Sahyadri Industry Ltd (SIL) is mainly engaged in manufacture of Fibre Cement Corrugated and Flat Sheets and Non-Fibre Cement Flat Sheets. The Company is also into manufacturing of Fibre Cement Roofing Sheets under the Brand Swastik, Mezzanine application sheets under the Brand Cemply, Cellulose Fibre Cement Boards under the Brand ECOPRO, and Cemply Swachhalay – an innovative Green Toilet Technology made for Swachh Bharat Abhiyan. The Company is also collectively operating 31 windmills in Maharashtra, Tamil Nadu and Rajasthan.

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Company has seen good turn around in its financials in FY17 after two years of poor performance. Though the revenues have decreased, the operating profit and net margins have increased substantially. The EBITDA has grown by 46% to Rs.44.2cr in FY17 from Rs.30.3 in FY16. Company reported a PAT of Rs.3.2cr in FY17 against loss of Rs.10cr in FY16. This mainly due to steps taken to reduce the various costs. Many of the depots of the Company are closed, strength of employees, where ever possible, has been reduced. The Company is also closely monitoring the interest cost and freight cost very minutely. The interest cost also reduced by Rs.4cr to Rs.17cr from Rs.21.1cr.

The restructuring of operations coupled with uptick in demand for company’s products led to consistent improvement in its financials over the last few quarters. The sales of roofing sheets are highly dependent on rural prosperity as the use of these sheets is highest in rural and semi-urban areas. In rural areas, thatched roofs and tiled roofs are replaced by Fibre Cement roofing sheets when affordable, as Fibre Cement roofing sheets has several advantages. Rural prosperity is highly dependent on agricultural productivity, which in turn is dependent on the monsoon.

Favorable monsoon conditions and various government policies lead to improvement in rural economy over the last couple of years. The increased income in the hands of rural people creating good demand for basic products. The central government in its upcoming budget is expected to focus on increasing rural income. The companies which are reliant on rural economy are going to benefit out of the increased rural demand. We believe, Sahyadri Industries whose products are catered to the rural India will be one of the beneficiary. The same can be observed from the recent quarterly performance.

Huge improvement in profitability over the last few quarters:

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Over the last few quarters, SIL has shown good improvement in its numbers in terms of margins. The business has seasonality and June quarter is very important for the company.  Last year business got adversely impacted due to demonetization. The cost cutting measures and new products led to strong improvement in margins in the recent quarters. The EBITDA margin has increased from low of 18.1% in Q1FY17 to 24.6% in Q1FY18 and 23.8% Q2FY18. The interest cost came down significantly from Rs.4.4cr in Q1FY17 to Rs.2.7cr in Q2FY18. The PAT margin has improved from 12% and 8% in the last two quarters respectively. We expect the sustenance in the performance to continue in the coming quarters.

Risk from the exchange rate fluctuations, increase in cost of power, transport, and raw material, inadequate monsoon are major concern to the industry.  A poor monsoon impacts the demand for roofing in rural India. Any government initiative to completely ban or restrict the use of Fibre Cement will force industry to look for alternative and may increase its overall cost.

SIL is a micro cap company with a market cap of Rs.279cr. Company is trading at 20x its trailing earnings. Good monsoon season and key government policies are expected to boost rural incomes thereby creating strong demand for basic products. We believe SIL is well positioned to capture the opportunity from surge in rural demand. SIL share prices have seen huge appreciation in last one year giving 4X returns after getting rerated. Stock continues to remain in strong uptrend and is still a buy at current levels and should be added on any major dips. We have a target price of 400 in a timeframe of 6-12 months which is 37% upside from its last closing price of 292.