We are pleased to inform you that our Value Pick stock - Technocraft Industries Ltd (BSE Code: 532804, NSE Code:TIIL) which we recommended on 19 March 2023 at Rs. 1165 has achieved its target price of Rs. 1750 in just 2 months.
Technocraft Industries stock made its all time high of Rs. 1779.35 recently and closed at Rs. 1753 today giving absolute returns of 50% to our Value Picks members in period of 2 months. We have not suggested any profit booking in the stock to our members, as we expected the company to perform well in coming quarters. Technocraft Industries will report its March quarter results on 29 May 2023.
Below is the report of Technocraft Industries Ltd released by our team as Value Pick stock on 19 March 2023, the report was shared with all our Value Picks members.
1.
Company Background:
Technocraft
Industries was established by two IIT Graduate brothers as a partnership firm
in 1972 which later converted to a private company in 1991. Technocraft
Industries India Limited was initially focused on manufacturing high precision
and sophisticated Drum Closures products for domestic markets but later the
focus shifted to exports. The company was recognized as an export house by the
government of India in 1979 and that’s when the company started establishing
its subsidiaries in USA and Europe to cater the local market. In the year 1994,
the company started expanding the product portfolio by acquiring Maharashtra
Steel Tubes Ltd which was into manufacturing of Steel Pipes. Steel Pipes were
hugely imported in Europe and to cater the opportunity, the company opened an
office in United Kingdom at that time. Following the path of diversification,
the company entered into manufacturing of cotton yarn in 1997. The yarn
division was focused on manufacturing and export of 100% cotton ring spun yarn
and was accorded a 100% EOU status.
Today,
the company operates its business activities broadly in 3 divisions:
- Drum Closures
- Scaffolding & Formwork
- Textiles (Cotton Yarn &
Garments)
i)
Drum Closures - The
company is one of the leading manufacturers of Drum Closures worldwide and has
established a worldwide market share of around 36% excluding China. The company
is reputed globally for its quality and range of products it offers for drum
closures. The company supplies drum closures to most leading drum and drum part
manufacturers in the world including - B-POL, Drum Parts Inc, Mauser
Group worldwide, Schutz Group worldwide and August Berger
Metallwarent Gmbh. The ultimate end-user industries predominantly include oil
and gas, packaging, chemicals, and food and beverages.
ii)
Scaffolding & Formwork -
Next big division of the company is Scaffolding and Formwork. Scaffolding is a
temporary structure used to support people and material in the construction
industries, real estate and any other large structures. It is usually a modular
system of metal pipes or tubes, although it can be from other materials also. Formwork
is the term given to either temporary or permanent molds into which concrete or
similar materials are poured. This segment earns around 70% of it’s revenue
from the overseas market. Scaffolding division is the second highest profit
generator for the company, next to only drum closures.
iii)
Textiles (Cotton Yarn & Garments) - The company has a State-of-the-art cotton yarn spinning
mill equipped with fully automatic sophisticated technology from Germany,
Switzerland, Japan and Spain near Mumbai. The plant is producing 30000 kgs of
yarn per day on 61000 spindles installed and exporting to markets like South
East Asia, China, Far East, Africa, Europe and Latin American countries.
Technocraft
industries also deals in Fabric and Garments production. This division is
moving towards a turnaround resulting from structural changes undertaken
by the company to improve operating efficiencies. Being part of a diverse
group, the Company has access to the latest trends in the European markets,
thus enabling it to offer high quality products and latest fashions with Indian
prices in a very short lead-time. As a result of this, 56% of total garments
produced is exported to European, Asian and Latin American market.
Certifications:
The
company is equipped with various certificates obtained for various divisions
which ensures quality of products. Following are listed to name a few:
- IS/ISO 9001:2015 Certificate
of Pipe division
- EN 1090-2:2018 Welding
certificate for Steel products
- EN 1090-3:2019 Welding
certificate for Aluminum products
- EN ISO 3834-2:2006 Welding
certificate for Metallic materials
- TechEuro-II props certified
as per EN 1065:1998
- TechEuro-III props certified
as per EN 1065:1998
- Certificate of Approval for
Japanese Industrial Standards
- TUV Austria OHSAS 18001:2007
certificate for Garment division
- TUV Austria EN ISO 9001:2015
certificate for Garment division
- TUV Austria EN ISO
14001:2015 certificate for Garment division
- OEKO-TEX Standard 100
certificate for Garment division
Management
Profile:
Mr.
Sharad Kumar Saraf (Chairman cum Managing Director) - Mr. Sharad Kumar Saraf
holds a degree in Electronics Engineering from IIT Bombay, graduated in 1969.
Before founding the company, Mr. Sharad underwent one year industrial training
in Germany in 1970 and returned to form Technocraft. Mr. Sharad has held
various positions in different public organizations like Federation of
Indian Export Organisations (FIEO), Confederation of Exporting Units
(CEU), Indo-Romanian Chamber of Commerce, The Council of EU
Chambers of Commerce in India etc.
Mr. Sudarshan
Kumar Saraf (Co-Chairman cum Managing Director) - Mr. Sudarshan too is a
IIT Bombay graduate holding a degree in Mechanical Engineering is responsible
for directing all the engineering operations of the group. He was conferred the
distinguished service award for the year 1999 by the Institute of Technology,
Bombay. He pioneered the development of interval thread rolling process and
built tools which were introduced in America which enabled the customer to save
on labor cost and gain better yield.
Mr. Naveen
Kumar Saraf (Director and CEO) - Mr. Naveen holds a degree from
University of Manchester in Mechanical Engineering. He led the diversification
of group into value added scaffolding and formwork which now holds a valuation
of USD 80 million by the firm. He envisioned the diversification into engineering
services outsourcing segment which is run through a subsidiary and employs more
than 500 engineers in India, USA, Canada, UK and Germany. He is an active
member of Young Presidents organization (YPO) and The Indus Entrepreneurs
(TIE).
Mr. Ashish
Kumar Saraf (Director) - Mr. Ashish Kumar Saraf holds a bachelor degree
in commerce from University of Mumbai and a Masters in Textile Technology
degree from Manchester University. He also completed a course on Cotton
Management from Rhodes Institute, Memphis, USA.
2. Recent
Developments / Market Outlook: (as on 19 March 2023)
i)
Technocraft Industries Board of Directors approved the Buyback Proposal
The
Board of Directors of the company at its meeting on November 14, 2022, has
inter-alia approved the proposal of Buyback.
The proposal to buyback not exceeding 15,00,000 (Fifty
Fifteen Lakh) equity shares of face value of Rs. 10 of the Company
(representing 6.13% of the total number of equity shares in the paid-up share
capital of the Company) at a price of ~1000 (Rupees One Thousand Only) per
equity share payable in cash for an aggregate consideration not exceeding 150
Cr (Rupees One Hundred Fifty Crore Only). The buyback opened on 1 February 2023
and closed on 14 February 2023.
In
accordance with the provisions of Regulation 24(iv) of the Buyback Regulations,
the equity shares bought back by the company during the tendering period were
extinguished. Post extinguishment of 15,00,000 equity shares of the company, the
total number of shares were reduced from 2,44,61,687 (Prior to the Buyback - as
of the Record Date, being December 30, 2022) to 2,29,61,687.
ii)
Global Steel Drums market is expected to grow at CAGR of 4.5%
The
global steel drums market is expected to hit USD 22.5 billion by 2029,
expanding at a CAGR of 4.8% from 2022 to 2029. Increasing global trade and
investment in efficient transport are expected to support the market growth in
the forecasted period. Increasing global demand for food supplies and pharmaceutical
segment produce is expected to take a major share in transport. With more
demand for drums, closure’s demand will follow. Each drum requires one set of
closure and may require gaskets and clamps for better fitting which are also
produced by the company. With a variety of drum closures range according to the
needs of the customer, the company is expected to strengthen its hold of the
market.
iii) Global Scaffolding market is
expected to grow at a CAGR of 6.3%
Global
scaffolding market is expected to grow at a CAGR of approximately 6.3% from
2020 to 2027. Increasing FDI in construction in the Asia Pacific region and
supportive government regulations and policies are driving the scaffolding
market. The Indian government in its annual budget emphasized majorly on
capital expenditure and development of infrastructure around the country. This
construction will induce the demand for scaffolding and formwork division
produce.
iv) The Indian Textile & Apparel
Exports has a 4% share of the Global Trade
The
Indian textile market is expected to be worth more than USD 209 billion by
2029. For perspective, the market stood at USD 152 billion in 2021.
India is the world’s largest producer of cotton. Estimated production
stood at 362.18 lakh bales during cotton season 2021-22. Production for next crop year is expected to be
around the same volume as it was in preceding crop year. Domestic consumption for the 2021-22 cotton season is estimated to be
at 338 lakh bales. Cotton production in India is projected to reach 7.2 million
tonnes (~43 million bales of 170 kg each) by 2030, driven by increasing demand
from consumers. Also, export of textiles grew by a healthy rate of 9%.
Hence the demand, revenue and profits are expected to grow in future.
The
government has targets of raising the share of the manufacturing industry in
Gross Domestic Product up to 25% by 2025. The introduction of PLI schemes is a
way to push towards the goal. Currently, the sector contributes about 14.43% in
2021. The Indian manufacturing sector is steadily moving toward more automated
and process-driven manufacturing, which is projected to improve efficiency and
enhance productivity. Also, the push towards “Make in India” is expected to
help the government achieve or reach close to the target.
3. Financial Performance: (as on 19 March 2023)
i) Quarterly Results Analysis: Quarterly consolidated revenue and consolidated
profits of the company are showing impressive results. The company managed to
increase its quarterly revenue for the period ending June 2022 by 33% compared
to last year and by 8% in September 2022. Although quarterly revenue for the
period ending December 2022 dipped compared to same period last year, the
company managed to improve profit by 33% mainly due to improved operating
profit margins. The chart shows the improvement in operating margin over the
quarters
In Dec’23 quarter, while the Drum Closure business
saw pressure on the profit margin due to increased cost of materials, ocean
freights and other inflationary impact on consumables & services along with
pressure on demand, the Scaffolding business performance witnessed substantial
improvement. The company is observing strong demand for its product and as a
result there is substantial increase in Revenue and Margins.
The Textile segment of the company
observed pressure on revenue as well as on margins due to increased cost of raw
material (Cotton) & reduced price of finished product (Yarn)
ii) Balance
Sheet Analysis: During the year, the company reduced its long term borrowings in order to
reduce the interest costs and instead shifted towards more short term loans. On
analyzing further, we can observe the nature of short-term loans are majorly in
the nature of Packing Credit. Packing Credit is a short-term loan facility
which a manufacturer can use to fulfil orders. This loan can be used to acquire
raw materials required for a particular shipment and paid back when the amount
is received from the customer, hence these are generally without security.
As illustrated in the
chart above, there is a consistent increase in value of assets held by the
company. Both fixed and current assets are following the same trend. The
company has slightly improved debtor days and inventory days indicating
efficient use of funds.
4. Investment Rationale: (as on 19 March 2023)
i)
Technocraft Industries has designed and developed the next generation
technology for manufacturing of drum closures. It also manufactures all its
gaskets and clamps and offers a full range of drum closure products to its
clients. With patented technology, there has been substantial reduction in
manufacturing costs, improvement in quality and this has helped the company to
become the second largest global manufacturer of steel drum closures.
Technocraft Industries is the second largest manufacturer of steel Drum
Closures and continues to enjoy a worldwide market share of about 36%
(excluding China). The company produces a wide variety of closures and related
equipment ranging from fully automatic flange insertion systems to cap-sealing
tools. The company caters to all leading steel drum manufacturing companies of
the world.
ii) Technocraft
Industries is also a leading Indian manufacturer and distributor of
scaffoldings and formwork systems. The company has been supplying scaffoldings
to global markets for over 20 years. Despite the volatile nature of
construction and allied activities, the Scaffolding & Formwork (S&F)
market is thriving in India and is expected to see brighter times ahead. With
the demand rising in the wake of ongoing and future projects, S&F
manufacturers are keeping pace with the construction industry. The company has
strategically located state-of-the-art manufacturing facilities with installed
capacities of 40,000 MT and 25,000 MT in India and China, respectively. The
company is positioned as an end-to-end solution provider owing to its
well-integrated manufacturing capability. The company supplies its products to
a diversified set of end markets including oil & gas, power, refineries,
petrochemical, infrastructure and commercial construction.
iii) Looking at
the Indian government’s focus on rapid infrastructural development across the
country by constructing railways, roads, bridges, dams, airports, power plants
and many more, construction is expected to grow at a fast pace. Contractors
have started adapting newer technologies, faster systems, advanced concrete
techniques and better and established management tools. Engineered formwork
systems are built out of prefabricated modules with a metal frame - usually of
steel or aluminium - and covered on the application (concrete) side with
material having the wanted surface structure (steel, aluminium, plastic,
timber, etc)
iv) The company
has entered into manufacturing of sophisticated engineered formwork systems for
building, construction and infrastructure projects in India. The company has
state-of-the-art manufacturing plants in India and is well placed to play a
larger role in the construction growth in India and overseas, with a network of
offices at Mumbai and overseas. The company’s
product ‘Mach One’ is a very lightweight Formwork system made of high quality aluminium
extrusion with admirable strength to take on the site conditions. Mach One aluminium
forms are best suited for construction of residential units and mass housing
projects. As per industry reports, 80% of the total cost of scaffolding is
attributed towards labor cost that is involved in loading and unloading and
erection and dismantling of scaffolding. With Mach One, the company has made
this cost more efficient by making the entire system lighter without
compromising on the required strength.
v) The company has
a yarn division having consolidated capacity of around 87,000 spindles. The company
produces a variety of products ranging from NE 20 to NE 40, carded and combed
varieties of cotton yarn. The spinning mill is equipped with world-class Swiss,
Japanese, German, Spanish equipment.
Currently, the company exports around 55% of garment products mainly in
Europe, Asia, Latin American countries etc. This company has made significant
structural changes in this division like grey cotton yarn operations are now
based in Amravati which is cotton growing area and has cost effective
operations and has shown substantial improvements in revenue as well as
profits. In Murbad, the company now produces only value- added high margin
products like melange yarn and fabric. These are also generating substantially
better revenue and profit. Overall, this division has now been re-engineered
and all loss making products and locations has been plugged by the company.
vi) Technosoft
Engineering Projects Limited is a subsidiary of the company. It is a global
technology services company offering broad-based engineering, designing and IT
services using a variety of client-partnership models for delivery. Technosoft
Engineering Projects client base spans various industry verticals including
heavy machinery, automotive, aerospace, manufacturing, oil & gas,
high-tech, telecom, healthcare and financial services. The company’s client
base is widely spread globally including many clients from US, Canada, UK and
Germany. This subsidiary has a strong team of over 300 engineers and designers
located worldwide. Its engineers and designers are equipped with
state-of-the-art hardware and software tools, including tools for 3-D modeling,
Finite Element Analysis and process simulation.
vii) The consolidated revenue of the company is
consistently increasing over the years and the same trend is followed by the
profits. As illustrated in the charts below, revenue has reached around 2000 crore
in FY22 and is expected to surpass even that in FY23. The consolidated profit
is also expected to grow with expected turnaround in the textile division. With
improved operating profit margins in last few years, profit jump looks higher
than the revenue.
viii) Infrastructure
projects have taken pace globally after a slowdown during the pandemic period.
Infrastructure industry growth will induce the demand for scaffolding and
formworks. The innovative scaff shelter product recently introduced by the
company which erects temporary labor shelters within a few hours will be in
demand with new projects. The company claims to set up an on-site facility for
100 workers in 7 days with its scaff shelter facility. The scaffolding and
formwork made by the company is considered to be a premium product due to its
quality. In recent years, the market has seen a shift towards premium and more
reliable products, especially in long term projects. Hence, the company has an
advantageous position with a reputation of being a manufacturer of high-quality
products.
ix) Technocraft Industries is upgrading and
expanding its capacity in the textile division. As mentioned earlier in the
report, the company has implemented structural changes in the textile division
to improve operating efficiency. The company expects a turnaround in this
segment in future and if turned profitable, it will bring big boost towards
margins and overall profitability of the company. Moreover, through the textiles
business the company has diversified its business operations by reducing its
dependence on other divisions.
x) Technocraft Industries has a strong track
record, the company has achieved sales CAGR of 15%, profit CAGR of 21% with ROE
of 16% over the last 5 years. At current price of Rs. 1165, the company is
available at price to book value of 1.94 and is commanding PE multiple of 9.4
on trailing 12 months basis. The company has
improved debtor days, inventory days and creditor days in FY22. These ratios
indicate better utilization of funds and efficiency in operations. Moreover,
current ratio over 2 times, interest coverage ratio over 16 times and
comfortable debt to equity of 0.34 times indicates fundamental strength of the
company.
xi) Post completion of buyback, the promoters
shareholding in the company is at 74.61 percent. As on Dec’22, institution
shareholding in the company is 4.79 percent, out of which alternate investment
funds hold 4.02 percent stake (Aequitas Equity Scheme holds 1.05 percent and
Abakkus Emerging Opportunities fund hold 2.97 percent) and foreign portfolio
investors hold 0.77 percent stake in the company.
5. Key
Concerns & Risks: (as on 19 March 2023)
i) Global recession concerns:
As per the world bank, economies around the world will be facing challenging
times in the coming period. The world bank predicts the US economy to grow by
only 0.5% and Europe market growth to remain flat or zero. The company’s
majority revenue is earned by exports and US and Europe are considered to be
their largest markets. Slowdown in these economies is going to affect
Technocraft’s performance.
ii) Weakening of INR: Indian rupee has touched an all time
low against US Dollar in October 2022. 70% of the revenue of Technocraft comes
from export sales and the US Dollar is considered to be the predominant
currency in global trade. This weakening of INR can impact the operating
margins of the company in large competitive markets.
iii) Loss in Fabric segment:
The company has been
constantly reporting losses in Fabric segment. Garment industry is considered
to be one of the most populous industries in the world and this is affecting
the overall profitability and overall operating margins of the company.
Although the company has almost halved the losses in FY22 compared to FY21 with
increased turnover by 64% in the same period, the losses are expected to widen
in FY23 based on the limited segment wise information provided by the company
in December quarter results.
6. Saral
Gyan Recommendation: (as on 19 March 2023)
The
company focus is to grow its position in each of its core businesses which is
Drum Closures, Scaffolding, Engineering & designing Services and Textiles.
The company sees the Drum Closure division growing at a robust pace and is one
of its core focus areas. The company is working strongly and increasing the
sales and profitability in China which is one of the main growing markets for
Drum Closures division. Scaffolding business is also expected to do well
considering Government initiatives such as RERA, Affordable housing, Smart
Cities etc. which is expected to bring a transformational shift and boost
growth of the Indian real estate industry. The company believes that this division has strong future prospects due to
anticipated growth in infrastructure and affordable housing construction demand
in India as well as globally. Moreover, the company has implemented
structural changes in the textile division to improve operating efficiency. The
company expects a turnaround in this segment in future and if turned
profitable, it will bring a big boost towards margins and overall profitability
of the company.
Considering
consistent increase in profits and margins in the past with significant
increase in net worth of the company (net worth as at 31 March 2016 was Rs. 553
crores which has substantially increased to Rs. 1330 crores as at 31 March
2022), planned capacity expansions in the textile
division and diversifying into plastic drum closures to drive future growth,
expected volume growth in the scaffolding division with increasing thrust on
infrastructure development and reasonable to attractive valuations of the
company, Saral Gyan team recommends “Buy”
on Technocraft Industries (India) Limited
at a price of Rs. 1164.55 for a target of Rs. 1750 over a period of 12 to 24
months.
Buying Strategy:
- 60% at current market price of 1164.55
- 40% at price range of 900 – 1000 (in case of
correction in stock price)
Portfolio
Allocation: 3% of your equity portfolio.
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