Nilkamal Plastics – More then just plastics

Nilkamal Plastics (CPM Rs 173) is a direct play on the great Indian consumer boom. The company is a domestic market leader in the plastic crates and molded furniture business.  Their recent foray into the lifestyle furniture business which extends to setting up a multiple chain of branded stores ('@home') is expected to drive growth over the next two years.

This venture is supposed to be huge and with the shortage of organized players in this segment the business model displays scalability and potential for growth.

Nilkamal has been very aggressive with its pricing policies and plans to create mass market products so that it is able to cater to a large section of the society.

                   Sales and EPS are SSKI estimates

The branded furniture business is expected to grow into a total market size of Rs Rs2200 crores by FY10 from Rs600 crores currently.  The company has already opened a few '@home' outlets and plans to have about 28 outlets in the next two years. The management expects to capture ~10% of the market by FY08. The problem with Nilkamal is its existing business but brokerages opine that consolidation in plastic furniture industry is improving Nilkamal’s pricing power. Till now Nilkamal was a dominant player in supplying crates to the cola companies. But of late the lower off take of crates and rising raw material prices have affected profits.

The company has managed compensate this decline in revenue by expanding its client base. Market men believe that some the operations of the traditional business of the company has seen the worst and looks set for improvement.

While Nilkamal has the distinction of being the world's largest manufacturer of molded furniture (production of more than 10m chairs a year the business has been largely stagnant due to a rise in raw material prices which has forced a number of smaller companies to shut down.

The company has planned to introduce a series of new models and upgrade its product line by getting into like sofas, cabinets etc.

Recommendation: While there is no significant downside in Nilkamal since  it is  available at near book value it would make sense to stick to a leader in case an investor wants to play the Indian Home furnishing market. One leading brokerage is extremely bullish on the prospects of Nilkamal. If the company delivers on its promises the stock can create significant shareholder value.

Now that crude prices have come down  and with reports of very very large ethylene capacities coming up  in Middle -east and SE Asia ,presssures on raw material prices should ease and boost the proftablity significantly as polythelene and polypropylene purchases amounted to Rs 161.27 crores last year.Also todays report in Busiess Line regarding entry into commercial property in Mumbai with 40-50 crore investment and possiblity of @home tie-ups with hypermarkets is heartening  for shareholders.