National Fittings Limited is a manufacturer of Quality Piping components to various industries. It manufactures a complete range of fittings and ball valves in stainless and carbon steels and grooved couplings and fittings from SG Iron Castings.

Shares of National Fittings trade solely on BSE and is not listed on NSE. It operates in Castings & Forgings sector in the Manufacturing Industry. The share price as on the date of the report is 231.8 and the company has a  market cap of Rs.1928.6 million.

Interfit India Limited is the sole holding company with 56.45% (out of 8,320,000 shares) equaling 4,697,010 shares. A.V. Palaniswamy, Managing Director of the company is the next significant holder with 756,472 shares (9.09%). The stock float, which is the number of shares actually available for trading, is 2,866,518.

Key stock statistics

Fundamental value (Face value Rs 10) 83.2
Current market price* 247
Shares outstanding (Mn) 8.32
Market cap (Rs Mn) 2055.04
Enterprise value (Rs Mn)
52-week range (Rs) (H/L) 284.95/60
P/E on EPS estimate (FY11E)
Beta
Free float (%) 34.45%
Average daily volumes

Investment Summary

Business Description & Analysis

National Fittings is an export oriented manufacturer, whose main products are:

Main Products  % to Total company turnover
1 Stainless Steel Pipe Fittings 6.60
2 S G Cast Fittings 93.38
  • Revenue & Expense drivers:

The company gets nearly 83% of its revenues from Middle East and the rest from the domestic market (India). Company is considering venturing into new markets like Africa, Iran and Australia, where there is a large presence of Chinese products. With the slowdown in Chinese economy, Chinese companies are increasingly entering the export markets like Middle East, Africa and India. This would pose a serious threat to the revenues of National Fittings since Chinese products are widely preferred to other countries products, which might result in loss of sales.

The Middle East economy has strengthened in the Q3 on the back of accommodative monetary policies in most countries in the region, more stable financial and exchange rate markets, a slight increase in oil prices and a stronger crude production. It has been decided in the recently concluded OPEC Conference to “implement a new production target of 32.5mb/d, in order to accelerate the ongoing draw down of the stock overhang and bring the oil market rebalancing forward”. The strengthening of its economy means a higher probability of increased revenues for National Fittings. Also, the company claims to they have a “comfortable back order position”.

EBITDA margin has increased from 17.6% in FY13 to 21.6% in FY15, with total operating expenses increasing at a CAGR of 10.6% over the 3 years. In the same time, revenues have increased  at a CAGR of 12.41%.

  • New Developments: 

Company has developed the fittings for 2” and under pipe sizes and will be the second company in the world to produce and market in Ductile Iron. Products for joining 2” and under pipe sizes have been approved by the testing agencies and will start production during the financial year 2016-2017.  Grooved products are being re-designed to reduce material content and minimize processing periods.

Management & Governance Analysis

A) Senior management’s history with the firm

As per annual report, National Fittings has 5 Board of directors with 2 of them being Independent.

Board of Directors   Designation
A.V. Palaniswamy M.D
M. Loganathan Non-Executive Independent Director
R. Alagar Non-Executive Independent Director
A. Panath Anitha Wholetime Director
J Govindarajan Additional Director

A.V. Palaniswamy has been the M.D from September 1994 while Independent Director M.Loganathan was appointed in December 1994 and R.Alagar in August 2005. J Govindarajan was appointed as Additional Director in August 2016 while .

Other entities where A.V. Palaniswamy acts as Director (Image source: zaubacorp)

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Interfit Techno Products Ltd is the holding company of National Fittings Limited.

i. Haitima (India) Private Limited – Directors

Name  Designation  Date of Appointment 
A V Palaniswamy Director Sep 30, 2006
M Loganathan Director Mar 24, 2001

ii. Merit Industries Limited

Name  Designation  Date of Appointment
A V Palaniswamy Director Aug 14, 2014
M Loganathan Wholetime Director Apr 01, 1997

iii. Sema Impex Private Limited

Name  Designation  Date of Appointment
A V Palaniswamy Director Spe 30, 2006
M Loganathan Director Mar 12, 2001

It seems M Loganathan share a very deep relationship with A V Palaniswamy, Promoter & MD. Add to it – Wholetime Director A. Panath Anitha has over 20 years of senior management experience in the Foundry & Assembly operations of the company, and the Board of Directors doesn’t look as independent as one would like. A review of the composition of the company’s board of directors shows it is not sufficiently independent.

B) Record of capital allocation

C) Compensation, incentive plans & levels of stock ownership

D) Succession plan for senior management, if any

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Industry Overview & Competitive Positioning

Industry is plagued with high competition and hence limited bargaining power. NFL faces severe competition from Chinese companies which are entering export markets due to slowdown in Chinese economy and are offering their products at a cheaper price. The cost of acquiring the raw materials for the production is quite high for the industry. However, with the establishment of dedicated facilities through associate companies, NFL expects the production cost to be lower in the coming months. This should help them in staying competitive.

Valuation Analysis

Financial Analysis

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Operating revenues for National Fittings Ltd. grew at a CAGR of 21.25% in the past decade (FY2007-16) from INR 76 million to INR 521 million. Over the past 6 years, it grew at 14.87%. Slowdown in Middle East and invasion of Chinese products into export markets reduced the growth in FY16.

COGS as a % of revenues has considerably reduced from 59.7% of operating revenues in Fy11 to 29.85% in FY16. The Industry is labor intensive and needs highly skilled labor. As discussed in the annual statement, NFL is finding it difficult to get highly skilled labor locally.

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As a result, 60% of the workforce is from neighbouring states  and the company faces risk of migrating workforce in face of new opportunities in these states. SGA & other Operating expenses as % of revenues has reduced from 29.82% in FY11 to 23.36% in FY16. It has been stable for the last 2 yrs.

Net Income has increased from Rs 21.6 Mn in FY11 to Rs 73.9 Mn in FY16 at a CAGR of 27.89%. Increasing revenues and decreasing COGS as a % of revenues shows that company is able to make the best use of its raw materials. at a decent price Increasing revenues and decreasing expenses shows that company is able to ni

Net Income margin has increased from 8.29% of its revenues from FY11 to 14.15% of its revenues in FY16. In FY13, NFL paid a 60.5% tax, amounting to Rs 20.38 mn, on its EBT. This has considerably reduced the Net Income for the year. The tax rate over the past 3 years has become stable at 35%.

 Efficiency Ratios Mar-11  Mar-12  Mar-13  Mar-14  Mar-15 Mar-16
Days of Receivables 26.0 20.4 16.8 18.2 17.6 18.0
Days of Inventory 94.6 98.5 81.9 97.5 64.7 84.1
Days of Payables 38.1 31.5 14.5 36.5 17.0 27.2
Asset Turnover 1.79 1.80 1.73 1.70 1.92 1.76

Investment Risks

Major Investment risks include the emergence of cheap Chinese products in the export markets of India and Middle East.

Slowdown in the Middle East economy where most of the NFL revenues comes from.

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