Ramp up in utilization to boost revenues:
Nile Limited (Nile) engaged in the business of Lead recycling, has been able to utilize its manufacturing facility at an optimum level and has increased capacity on a regular basis in a timely manner. The company has expanded its capacity from 3,000 TPA (Tons per annum) to 82,000 TPA. The company’s latest capacity expansion was in FY17 when it enhanced the capacity of its Lead recycling plant at Choutuppal by 10,000 TPA to reach 32,000 TPA.
The company’s superior project execution skills have resulted in increasing the fixed asset turnover ratio Y-o-Y. In the last 5 years, the Fixed Asset Turnover ratio has increased from 5.20x to 11.40x.
Nile to benefit from higher Lead Prices:
Nile, primarily a Lead recycling company, is focused on earning the conversion margin by buying scrap, the prices of which are linked to the London Metal Exchange (LME), and converting it into refined metal. Prices on the LME are on an uptrend; this is expected to continue, which in turn, would increase the operating margins of the company.
During 2016, Lead prices swung sharply in both directions. From the level of $1,600/MT in January, prices rose to over $2,500/MT in November and eventually settled at $1,950/MT by the year-end. Recovery in Lead prices was primarily due to limited production at the global level, strong demand from China and a correction in the US dollar index. After recording significant upticks in price in 2016, Lead prices have been currently moving in the range of $2,000‐$2,450/MT. However, the scenario is expected to shift to a deficit by 2018, which will hold the prices at above $2,100/MT.
Demand boost for Lead Acid Batteries (LABs):
Lead is witnessing strong growth in the global market which is driven by growth in vehicle sales from countries like China and India. New vehicles sales globally are forecasted to continue growing at over 2.5% till 2025.
The global market for LAB was $47 bn in 2015; this is likely to reach $60 bn by 2020. The LAB market in India stood at $4.47 bn in 2016, and is expected to grow at a CAGR of 8%, in value terms, to reach $8 bn by 2022, on the back of growing demand for automobiles, continuous expansion of telecommunication infrastructure and an increasing number of solar power projects.
GST a boon for organized players:
With the implementation of the Goods and Services Tax (GST) and the threshold limit being set at Rs. 20 lakh, the unorganized and small scrap battery traders, who were earlier able to evade taxes, have now been compelled to either fall within the GST net and work at lower margins or simply let their market share be taken over by organized players.
Improving return ratio:
The company’s ROE and ROCE have seen significant improvement from 10.05% and 18.50% in FY16 to 30.55% and 45.10% respectively in FY17. The ratios are expected to further improve. The net debt/equity is expected to remain constant at 0.25 in both FY18 and FY19. Currently, the working capital cycle is 33 days on account of higher dependence on imports of raw materials to be processed at the company’s Indian facilities. However, we expect marginal improvement in the working capital cycle as the company further develops its sources for scrap from the domestic market over the next 3 years.
In 2017, the global demand for Lead was 12 mn MT; the Indian demand was 0.9 mn MT. Secondary Lead producers cater to about 55% of the Indian Lead demand. The leading lead producing country is China with 50% followed by Europe, North America and India. It is expected that India would grow at 12% for the next 2 years.
The major growth drivers for the Industry would be the Automobile, Telecom and Power (Solar, Wind and Invertors) sectors, and Industrial Applications (UPS & Radiation protection).
Nile Limited was founded in 1987 for the manufacture of Glass Lined Equipment. The company now has two secondary lead recycling plants located at Choutuppal and Tirupati, both near Chennai. The combined capacity of these two plants is 82,000 tons of Lead and Lead Alloys per annum. This company’s 2MW Wind Farm is located at Ramagiri, Ananthapur district, Andhra Pradesh. The company has established its Non-Ferrous division with facilities for secondary manufacturing of Lead and Lead Alloys per annum.
|DESCRIPTION||Mar 14||Mar 15||Mar 16||Mar 17||Mar 18E||Mar 19E|
|Profit Before Taxation||8.39||12.16||11.28||40.20||57.62||83.69|
|Profit After Tax||5.21||8.12||7.06||26.23||37.46||54.40|
With Lead price on a run and scrap lead not increasing in line the company should witness expansion in EBITDA margin, supported by growth in Automobile, Telecom and Power sectors, and Industrial Applications.
We Initiate ‘BUY’ on attractive valuations with Target Price of Rs 1770 based on 9.77x FY19E EPS. The stock trades at 7.08x FY18E and 4.90x FY19E EPS.