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History and Business Model
Innoventive Industries Ltd (IIL) is a multi-product company catering to applications in
diverse sectors such as automobile, boiler & heat exchangers, energy, oil and general
engineering. The company specializes in processing various types of steel, faster
development cycles, flexible production systems, effective supply chain management
for efficient delivery and capability to make tubular transformations. They have six
manufacturing facilities located across Pune and Silvassa. The focus on R&D and
innovation has enabled IIL to make its manufacturing process more efficient and
widen its product range. IIL is increasing its capacity to expand the portfolio of its
value-added products, including CEW tubes, membrane strips, etc.
Financials
For the year FY11, net sales of Rs 703.6 crores was reported, i.e. a Y-o-Y increase of
67%. Net profit increased to Rs 68crores over Rs 31crores reported in FY10, an
increase of 124%. Net sales Q1FY12 grew by 26% at Rs 137 crores against Rs 108.7
crores in Q1FY11. IIL is expected to grow at earnings CAGR of 36% over FY11-14E
supported by broad product offerings led by constant innovation.
Growth Drivers
• Cost Effective CEW Process to drive revenues and margins: IIL makes cold
drawn electrically welded (CEW) tubes out of electric resistance welded (ERW)
tubes using the pilgering process. This is more cost effective as this process
enables manufacture of tubes of different sizes in a shorter time with better surface
finish and mechanical properties; it also results in reduced material wastage (7%
reduction) energy savings of 80% and labour saving (70%) without compromising
on quality. The company has sought to patent this process of pilgering technology
(of converting ERW tubes into CEW) to maintain its competitive advantage.
• Capacity Expansion to drive growth: IIL is also expanding its CEW capacity by
end of FY12 from 28,785 tonnes in FY11 to 76,701 tonnes. The enhanced capacity
would result in increasing contribution from CEW to the total revenues over next 2-3
years from 23% in FY11. Cost of this expansion is estimated at Rs 180 crores and
will be funded through internal accruals as well as through IPO proceeds.
• Strong focus on R&D and new product development: The focus on R&D and
innovation has enabled IIL to make its manufacturing process more efficient as well
as widen its product offerings. This poses as one of the differentiation factor over its
peers. It spent 2.3% of its revenues as R&D expenses in FY11. It has 122 products
under various stages of development and commercialization. IIL has been able to
scale up rapidly due to its cost-competitive products and constant introduction of
new product offerings, enabling it to broaden the customer base.
• OCTG segment: IIL’s subsidiary Sankalp Forging (IIL owns 51%) makes oil
couplings and pup joints. Sankalp has obtained API approvals, a prerequisite to
supply to all oil majors globally. Sankalp now also caters to original equipment
manufacturers (OEMs) and oil majors directly. It has also diversified its markets
geographically.
• Fiscal Benefits granted to drive up margins: IIL’s plant at Pimple Jagtap has
been granted ‘Mega Project’ status by the Government of Maharashtra under the
‘Package Scheme of Incentives 2007’. Under this IIL will be eligible for ‘Industrial
Promotion Subsidy’ equivalent to 75% of eligible investments in the plant, less the
varied benefits accrued by the company under the scheme. The total investments
made already by IIL is to the tune of Rs 260 crores of which Rs 94 crores have been
sanctioned as eligible investments to date, while the balance is in the process of
validation. This would impact the operating profits and cashflows positively.
Valuations:
At CMP of Rs 91.8, stock trades at PE of 6.9x and 4.9x its FY12E and FY13E
earnings of Rs 13.4 and Rs18.7 respectively as per Bloomberg estimates. With its
competitive advantage in CEW, huge expansion of its capacity and its focus on value
added products, we believe IIL is well placed to ride on sustained growth and
profitability.
Technicals
This scrip is having limited history as it got listed this year itself. However it has been
in broad range of Rs 77-97. Currently it is making an expanded triangle on top of the
channel. For initiating longs, the lower boundary would provide higher margin of
safety. Once we are out of this range, move towards Rs 120 levels seems possible.
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