Hidden Gem Stock - Zenith Fibres - ROI @ 100% in 7 Months

Dear Reader,

We are pleased to inform you that our Hidden Gem stock of February 2016 - Zenith Fibres Ltd (BSE Code: 514266) which was released on 13th Mar'16 is giving as on date returns of 100% to our Hidden Gems members in period of 7 months. Our team suggested Buy on Zenith Fibres Ltd at price of Rs. 103.60 on 13 Mar'16 with a target price of Rs. 210. We are glad to inform our readers that stock has almost achieved our target price within 7 months, Zenith Fibres stock made its 52 week high of Rs. 209.85 today and currently trading at Rs. 206 giving absolute returns of 99% to our Hidden Gems members in period of 7 months. 

In June 2016 quarter, net profit of Zenith Fibres rose 69.57% to Rs 2.34 crore as against Rs 1.38 crore during the previous quarter ended June 2015. Sales rose 11.70% to Rs 16.23 crore in the quarter ended June 2016 as against Rs 14.53 crore during the previous quarter ended June 2015. We suggest our members to continue to hold the stock.

Below is the summary of Zenith Fibres Ltd shared by our team under Hidden Gem stock of Feb'16 released on 13th March 2016.

Note: This report is shared only for the purpose of information and not an investment advice. Kindly carry out your own due diligence in case of investment in Zenith Fibres Ltd. 

1. Company Background:

Zenith Fibres Limited incorporated in the year 1989 and promoted by Aaekay Rungta Group of Kolkata, is the only company in India manufacturing virtually the entire range of Polypropylene Staple Fibre (PPSF) from very fine to coarse Denier.

The company is also involved in the marketing of PP Spun and DREF-2 yarn. Its products are very well established both in the domestic as well as in the international market. Zenith Fibres is an ISO 9001:2008 Certified Company.

Company with State of Art Technology has set up a plant to manufacture PPSF at village Tundav, near Baroda, India. It has expanded its production capacity to current level of 8400 MTPA.

Growing Automobile sector, infrastructure development, construction sector and many other related industries present a huge market potential for PPSF. Apart from servicing domestic market the company has a significant presence in overseas market. The quality of PPSF is very well accepted in both domestic and overseas markets.

Zenith Fibres is one of the leading manufacturer and exporter of Polypropylene Staple Fibre (PPSF) in India. Company manufacture Polypropylene Staple Fibre in denier range of 2.5 to 40 in different cut length in natural white and 4 to 40 Denier in dope dyed colours for different applications.

PPSF has wide ranging applications in view of its being a light weight fibre with high insulation properties and good resistance to abrasion. PPSF is finding new and varied uses over older and more traditional synthetic fibres. Among all synthetic fibres in the world, the share of PPSF has increased substantially and the growth trajectory continues.

Company’s product Apolon is the ideal PPSF material for use in a truly wide variety of areas. Some of these include spun yarn filter fabrics, non-woven filter fabrics, geo-textiles, floor coverings and carpet backings, furnishing fabrics, blankets, wall-coverings, in construction industry.

Company is also marketing 100% Polypropylene Spun Yarn by spinning its PP fibre into yarns of various English counts which is used in weaving good quality filter fabric. Company also supply PP Dref-2 yarn which is used in filtration candles.

2. Recent Developments:

India has a large textile manufacturing base and has the potential to become a leading producer and exporter of nonwoven products. The cooperation between fibre suppliers and nonwoven fibre producers is an important factor for the growth of the industry.

Unlike Europe and USA, the technical textiles industry in India is still at a nascent stage and is widely fragmented. This leads to lower production and high cost. Product knowledge and expertise too are available to a limited extent. 

Investment in latest technology for production of nonwoven products is essential for the sector to chart its own course. Till that time, the industry will have to follow the model set up by European and US producers.

The growth of the non wovens sector will have a direct impact on the fibre sector, particularly the polypropylene and polyester fibre segment. However, the share of polypropylene fibres in nonwovens industries in US and Europe is higher than that of polyester, while the consumption of virgin polyester/reprocessed polyester fibres is more than polypropylene fibres in India.

Nonwovens are rapidly growing in the following areas:

§  Automobile segment – cars, carpets, acoustic/thermal insulation, backing for tufted carpets, liner for trunks, storage box, filters, and seat upholstery.

§  Hygiene products – Disposable diapers, female hygiene products and adult incontinence products.

§  Civil Engineering geotextiles – Road under lays, erosion control, canal lining, artificial turfs and pavement overlays.

§  Filtration - Dust filters, liquid filters, oil filters, air conditioner filters and filters for pharmaceutical producers.

§  Medical textiles – Disposable and surgical apparel, shoulder pads, gloves, etc.

§  Consumer products – Reusable carry bags, vacuum cleaner bags, tea bags, wipes, carpets and bath mats.

A wide range of fibres – both synthetic and natural are used in the production of nonwoven fabrics. The traditional fibres are polyester, polypropylene, cotton, rayon and wool. Hitech fibres like Aramid fibres, Bicomponent fibres, super absorbent fibres, spandex, glass and nano fibres.

Polypropylene nonwoven fabric has been increasingly gaining acceptance and importance in the recent past owing to its superior quality over other nonwoven fabric mainly for manufacturing hygiene products. Polypropylene (fiber and polymer) is the leading raw material used for manufacturing nonwoven fabric in the world. Increasing birth rate, mainly in Asia Pacific, has given rise to consumer disposable products such as baby diapers in the region. This surge in demand for consumer disposable products is expected to remain a key driving factor for the global market.

PP Nonwoven Fabrics have been gaining market penetration for durable applications in geotextile, automotive and construction industries mainly in countries such as China and India. In addition, growing ageing population mainly in the U.S., Western Europe and Japan has spurred demand for adult incontinence products which further is expected to boost the demand for PP Nonwoven Fabrics over next couple of years. However, volatility in raw material prices coupled with stringent regulation imposed on producers on account of growing environmental concerns regarding the production and usage of PP Nonwoven Fabric is expected to remain a key challenge for the industry.

Polypropylene is one of the primary petrochemical used for a variety of applications across numerous end use industries and is obtained via crude oil. In order to overcome these challenges, the industry has shifted its focus towards developing bio-based polypropylene which is expected to serve as a major opportunity for market participants over the next six years

Polypropylene fibres have very good characteristics like hydrophobic, voluminous and thermoplastic. Polyester fibres are used where strength and mechanical properties are of prime importance. Bicomponent fibres are used in thermally bonded nonwoven fabrics and super absorbent fibres are used in hygienic products. 

Anticipating more demand for polypropylene fibres from the growing nonwovens sector, company has doubled and increased its production capacity in June 2012. Currently, Zenith Fibres has an installed capacity of 8,400 tons per annum, which was doubled from 4,200 tons per year.

The use of geo textiles in major infrastructure projects need policy guidelines, regulations and standardization, which makes use of polypropylene fibres mandatory in applications where sturdy and tough fabrics are needed for particular applications in railways, roads, etc.

Polypropylene staple fibres manufactured by Zenith Fibres are suitable for use in nonwoven carded needle felt fabrics. Currently, company is selling 70 - 75 percent of its polypropylene fibres production to the nonwovens sector, while the rest is sold to conventional textile producers.

3. Financial Performance:

Zenith Fibres standalone net profit rises 14.63% in the December 2015 quarter

Net profit of Zenith Fibres rose 14.63% to Rs 1.88 crore in the quarter ended December 2015 as against Rs 1.64 crore during the previous quarter ended December 2014. Sales declined 23.32% to Rs 12.86 crore in the quarter ended December 2015 as against Rs 16.77 crore during the previous quarter ended December 2014.

Zenith Fibres standalone net profit rises 130.51% in the September 2015 quarter

Net profit of Zenith Fibres rose 130.51% to Rs 2.72 crore in the quarter ended September 2015 as against Rs 1.18 crore during the previous quarter ended September 2014. Sales rose 7.17% to Rs 18.38 crore in the quarter ended September 2015 as against Rs 17.15 crore during the previous quarter ended September 2014.

Zenith Fibres has been growing its sales consistently at a moderate pace of about 10-15% with operating profit margins varying from 8-13% and net profit margins between 5-9% over last 10 years.

However during last 2 quarters, company has seen significant improvement in profit margins on back of fall in raw material prices and increase in value added products by the company.

4. Peer Group Comparison:

5. Key Concerns & Risks:

i) Being a commoditised product, polyester follows landed cost parity and consequently, pricing flexibility for companies producing polypropylene fibre is limited.

ii) Stiff competition from fragmented market and established players in textile sector could impact revenue and profitability of the company.

iii) Any major changes in trends with respect to utility of polypropylene staple fibre can have a long term impact on the business of the company.

6. Saral Gyan Recommendation: (as on 13 Mar'16)

i) Man-made fibre industry is well poised for reasonable growth despite slow down in European and certain other markets. Polypropylene (PP) fibre industry was not growing at the same rate as Polyester fibre because many sectors where PP should be used is replaced by Polyester because of lower prices. However, certain novel uses have been found in some sectors where use of PP fibre cannot be replaced and this augurs well for PP fibre industry and hence expected to show similar growth as other fibres.

ii) The general outlook for the industry is good, several sectors have been identified where use of PP fibre will be essential. Besides traditional need in various infrastructure sector its use has started in fabrics used for soil erosion and collection of ashes from power plants.

iii) Zenith Fibres is continuously focusing on improving quality, developing new grades of fibres for certain critical as well as new applications. Management is confident to see increase in demand of its products going forward. As new developments do take their own time to be fully absorbed, we expect steady progress towards new initiatives taken by company.

iv) The company continue to meet international quality standards and product specifications as required by foreign buyers. All repeat orders are being placed by the customers in domestic as well as export markets. With established production base of almost 25 years, company is in a position to maintain production and supply of quality products smoothly with lower cost of production.

v) Zenith Fibres is a debt free company with lean balance sheet. Overall, the financial performance of the company has been good in terms of growth, profitability, return ratios and cash flows from operations in last 5 years. Company has registered sales CAGR of 14.51% and profit CAGR of 13.89% during last 5 years with ROE of 15.57%.

vi) As of Dec’15, promoter’s shareholding in the company is at 50.27% without pledging any shares. Promoters stake in the company was increased marginally from 50.22% to 50.27% in June’15 quarter. FII and DII shareholding is nil in the company.

vii) Management has rewarded shareholders by paying regular dividend since 13 years. For last financial year, company has paid dividend of Rs. 2.50 per share and dividend yield at current market price is 2.42%. Company has been maintaining healthy dividend payout of 19.27% of its profits. With expected increase in revenue and profitability in coming years, we expect dividend payout to gradually increase

viii) As per our estimates, Zenith Fibres can deliver PAT of 8.95 crores for full financial year 2016-17, annualized EPS of Rs 20.25 with forward P/E ratio of 5.1X for FY16-17. Company’s valuation looks attractive with high margin of safety and offer good investment opportunity for long term investors.

ix) On equity of Rs. 4.42 crore, the estimated annualized EPS for FY 16-17 works out to Rs. 20.25 and the Book Value per share is Rs. 89.19. At current market price of Rs. 103.60, stock price to book value is 1.16.

Considering company’s increased focus on developing new grades of Polypropylene fibres for critical and new applications which cannot be replaced by polyester or other man-made fibre, attractive valuations of the company at current levels and debt free status with surplus cash reserves, Saral Gyan team recommends “Buy” on Zenith Fibres Ltd at current market price of Rs. 103.60 for target of Rs. 210 over a period of 12 to 24 months.

Buying Strategy:

• 70% at current market price of 103.60
• 30% at price range of 90 - 95 (in case of correction in stock price in near term)

Portfolio Allocation: 2% of your equity portfolio.

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