Tuesday, 08 March 2016 00:00

Garware Wall Ropes: A Multibagger In The Making

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Research Overview – In the last 12 months, Garware Wall Ropes has provided investment returns of 48% as compared to negative returns of 16% for the NIFTY index. In the next 5 years, I expect Garware Wall Ropes to outperform the index and potentially give investors multi-fold returns. This article elaborates on the bullish factors.

Garware Wall Ropes – A Technical Textiles Major

Garware Wall Ropes was established in 1976 and is a technical textile major with customers spread across 75 countries. The company claims to be the largest producer of polymer cordages and a pioneer in the synthetic cordage industry in India.

Fishing Nets Garware Wall

The company provides products and solutions to the fisheries, aquaculture, sports, coated fabric, agriculture, geosynthetics and shipping & industrial segments. Recently, Garware Wall Ropes has forayed in the defense segment.

From an introduction perspective, the point that I like about Garware Wall Ropes is the company’s focus on R&D and innovation. The company’s R&D unit has been recognized by the Department of Science & Technology, Government of India and new products are one of the key growth drivers for the company.

Growth Drivers For Garware Wall Ropes

Protected Agriculture Farming In IndiaAccording to Garware Wall Ropes, protected cultivation in horticulture, floriculture and growing fruits among others is just 0.5% in India as compared to 65% to 70% in Israel, Spain, Holland and other European countries. The company is looking at one-to-one contract with the farming community to encourage protected farming that significantly increased yield. With government focus on the agriculture sector, I see this segment as a big growth driver in the next 3-5 years.

Protected Farming Garware Wall

Caged Fish Farming In India – Garware Wall Ropes has the largest market share in India in the fishing net segment. Just like the agriculture sector, the Indian aquaculture sector needs rapid transformation and progress. One of the major changes is shift from wild catches to caged farming. The process of caged farming improves the catch and income. Garware Wall Ropes expects caged farming to be the next big leap in the industry. Similar to the agriculture segment, I see big potential in the caged farming segment from the company’s growth perspective.

Foray In Defense Business – Garware Wall Ropes has recently forayed in the defense business and I see big potential from the segment in the next 5-10 years. To put things into perspective, Garware Wall Ropes expects INR100 Crore revenue every year for the next five years from the defense sector. The company, in partnership with DRDO, has built inflated structures for radars for the first time in India in addition to products like Tethered Aerostat Radar System, Flexible Helimat, camouflage nets and high performance cordage for defense. With “Make In India” campaign, I see bigger revenue coming in the long-term from this high potential segment.

Foray Into Latin America – Garware Wall Ropes has strong presence in North America and Europe where the company sells sports nets and fishing nets among others. Recently, the company has forayed into Chile as a first market in Latin America. While Latin America is witnessing sluggish growth, there is huge potential from the market in the long-term. I believe fishing nets and agriculture nets will drive growth over the next 3-5 years.

Financial Analysis For Garware Wall Ropes

The table below gives some of the key financial metrics for Garware Wall Ropes and it is clear that the company has done exceedingly well on the EBITDA and profit growth front.

Financial Analysis For Garware Wall Ropes

I have the following key observations from my financial analysis –

Garware Wall Ropes has a strong balance sheet with minimal working capital debt. In the coming quarters, the company can potentially be net debt free.

The company has muted top-line growth, but the company’s EBITDA margin has been expanding on increased revenue from high margin products coupled with lower raw material cost backed by lower oil prices.

Garware Wall Ropes has robust operating cash flows and OCF matters from a valuation perspective. While the company’s EPS for March 2015 was INR20 per share, the cash flow per share was INR34 per share. I expect even higher OCF in the coming years.

Valuation Analysis For Garware Wall Ropes

Garware Wall Ropes has no direct competitor listed in the Indian stock exchange. However, on a standalone basis, the stock is trading at attractive valuations.

For the first nine months of 2015-16, the company reported EPS of INR20.4 and this translates into annualized EPS of INR27. Considering the stock’s current market price of INR294, Garware Wall Ropes is trading at 10.8 times FY16 earnings. These are indeed attractive valuations for a company that has witnessed 50% plus EPS growth in the last 12-24 months.

Currently, the NIFTY is trading at a PE of 20 and even if Garware Wall Ropes were to trade in-line with NIFTY PE, the stock has the potential to double from current levels. I must add here that the company’s OCF per share for year ended March 2015 was INR34 and this implies cash PE of 8.6. Using both metrics, Garware Wall Ropes seems undervalued.

Recent Correction In Garware Wall Ropes

Amidst all these positives, it is also important to mention that the stock was trading at INR436 on December 29, 2015 and the stock has corrected by 33% to INR294 in a matter of two months. There are two important reasons for the correction –

First, broad markets corrected sharply in January 2016 and mid-cap stocks were hit hard. Garware Wall Ropes corrected in-line with broad markets.

Second, the global economy is slowing down meaningfully and Garware Wall Ropes derives 55% of revenue from outside India. The slowdown has impacted the company’s 3Q16 results and translated into correction for the stock.

Correction Is An Opportunity

I see this correction as an excellent opportunity to buy Garware Wall Ropes with an investment horizon of 3-5 years. The stock currently trades at attractive valuations and with focus on growing business in India, I expect higher chunk of revenues from India in the coming years.

Further, Garware Wall Ropes has long standing relationship with clients that ensure steady order flow and revenue even in an economic slowdown. Focus on new products, high end products and new markets such as Latin America will also support growth and EBITDA margins.

Conclusion

For investors willing to hold with a time horizon of 3-5 years, Garware Wall Ropes can be a potential multibagger. I must add that the company paid dividends of INR3 per share for the year ending March 2015. For the coming year, I expect higher dividends and with a solid balance sheet profile coupled with robust cash flows, dividends will continue to increase.

 

Image Source: Company Annual Report 2014-15

 

Note: The article is not a research report but assimilation of information available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that I have long-term positions in the stock discussed. Investors should carefully do their own research and verify points discussed before investing.

 

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