Packing It In

Often, though a company makes profits continuously, its scrip price remains at rock bottom levels. At the other extreme a company makes average profits but receives a high discounting on the market. This is typical of a market which has its own peculiar perception of various companies and their management.

ITW Signode, manufacturer of industrial packaging, does not fall into the above two categories. It is a company that has done quite well in the past and its performance has been appropriately rewarded on the bourses.

However, there have been developments in the past few months that make us believe that the company could deserve a second look or a new discounting - assuming of course that certain proposed changes come through. And, there are many.

First, Illinois Tool Works Inc of USA, the company's foreign partner, has decided to raise its stake in the Indian affiliate from 29.24 per cent to 51 per cent. In April this year ITW Signode's management had passed a resolution to the effect.

To a seasoned investor the market's reaction to such a development is fairly predictable. Almost always the share price moves up. It is assumed, not incorrectly, that a foreign owner has the deep pockets to sustain operations and open up markets.

In the case of ITW Signode that assumption appears to be more than correct. ITW Inc is a Fortune 300, $ 5 billion company with more than 10,000 products, and 365 decentralized operating units in 34 countries the world over. Among other things the group manufactures fasteners, plastic and metal components, industrial fluids and adhesives, systems and consumables for consumer and industrial packaging.

The other expected changes will come as a fallout of the change in ownership. The hike in stake is to come about as a result of a preferential allotment of shares, at a price of Rs 86 per share. This will increases its equity to around Rs 22 crore.

The Rs 60 crore or so garnered through this route will be used to fund the expansion plans over the next five years or so. In the short term the company plans to retire some of the high cost debt that it has accumulated; the industry works on high working capital and so in the last one year, as a result of the liquidity crunch, ITW Signode's interest costs had gone up more than the usual.

But this will work out to be a comparatively small investment compared to what the company has planned for the long term. Moreover, working capital costs will probably go up again once the planned new operations commence. At the moment the company is unwilling to spell out details. " We decided says a company source " Only two months ago to hike ITW Inc's stake. It is much to early to give detailed information of what our plans are since some are in the process of being formulated ". However, a broad policy structure is beginning to emerge.

The message from the parent MNC is clear: By the year 2000, ITW India is to become a Rs 1,000 crore company with a product portfolio that is many times what it is today. In the process the company will create almost single-handed a new market in the country. When ITW Signode commenced operations in 1983 the concept of industrial packaging was almost non-existent. Today, the company has almost no competitors in the organised sector for all its product categories, save for a Calcutta based manufacturer of steel strappings, Modi Steel.

As of date the company has 45 products in its portfolio. The business plan is to introduce around 1800 new products in the Indian market, through technology transfers from the US parent. These products will be manufactured in India.

Of course it is much too easy to talk about introducing new products, as many MNCs have already learnt in India. There is no reason to believe that things happen because company executives say they will. But it is interesting to note that some South India based market sources fell that marketing is one of the strengths of ITW Signode. " They have" says a Madras based equity analyst " always had the reputation for aggressive marketing. In the last one and a half year they have increased their country wide sales offices from six to 35. And they have the experience in this business which should count for something".

That only time will tell. But on a different tack, ITW Signode has also consolidated business operations by unifying its earlier 17 factories near Hyderabad, into 3 units. Earlier, ITW Signode's policy was to focus on individual business units which were consciously structured on small scales.

Now it wants to consolidate and at the same time coordinating so many plants while expanding capacity would be well nigh impossible. Company sources say that this step may not impact very much on profitability, but will enable the organisation to improve its logistics considerably and prepare for the future. According to the annual report, the company spent around Rs 3.5 crore on rent, insurance and communication expenses.

ITW Signode is also trying to expand its capacity and reach. The company is setting up units in East an West India to cater to business opportunities in those regions. The unit at Silvassa went on stream in 1995, at an investment of around Rs 6-7 crore. The Haldia unit is still under construction. The company's steel strapping capacity is around 15000 tonnes per annum. These two units, as the Hyderabad plant, will also be used to manufacture the new product categories.

While the Rs 188 crore turnover company is in the process of attempting the transformation from a medium size player into a big league there are still some caveats. The operation income of the company has grown by around 26 per cent CAGR in the past five years and OPM has been steady at around 20 per cent. But the high working capital requirements mean that NPM tends to remain at 6 per cent. Debt ( see table on company financial) will probably remain high; and as the company tries to expand and introduce new products costs will probably keep increasing. In the past ITW Signode has consistently gone in for rights issues to keep funding its requirements. Three issues were made in the previous five years.

Also, the Other Income component is huge, almost 20 per cent of sales. This may be seen from the accompanying table. However, the OI comes from servicing facilities that ITW Signode offers to clients. The company also offers turnkey projects and operates at customer sites charging on a piece rate basis. So it is not really a 'negative' factor as it is for most companies with similar Other Income components.

Also, a substantial portion of its turnover comes from the steel industry which at the moment is in bad shape. There are expected to be huge additions in this sector, some 30 million tonnes per annum in 2000 as compared to 20 million tonnes per annum l;ast year. But in the short term growth will be sluggish. In the first half of the current financial year, the company is not expected to show much increase over the corresponding period in the previous year.

For the full year ended December 1996, ITW Signode has increased turnover by 22 per cent, PBT by 17 per cent and PAT by 26 per cent. Net sales are at Rs. 161.80 crores, other income of Rs. 27.01 crores and a post-tax profit of Rs. 11.88 crores, yielding an EPS of Rs. 7.50 on an equity of Rs. 15.83 crores with reserves amounting to Rs. 51.76 crores. Earlier it had projected a sales of Rs. 246.06 crores and a post-tax profit of Rs. 21.33 crores for 1995-96.

The scrip is changing hands at around Rs 85.50 on the bourses. Some market sources say that the stock appears to be an interesting long term play.

The investor can certainly do well to take a closer look at this company.