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Showing posts with label research report. Show all posts
Showing posts with label research report. Show all posts

Thursday, May 25, 2023

Value Pick - Technocraft Industries - ROI of 50% in 2 Months

Dear Member,

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 Report
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.


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)

Technocraft Industries Operating Margin
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)

Technocraft Industries Assets
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.

Technocraft Industries Revenue & Profits

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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