Stock Review: Responsive Industries

 

Plastics player Responsive Industries has reported impressive growth in the past few quarters. The momentum is expected to continue given its strong position in the segment and its plans for capacity expansion.

PVC products, including flooring and automotive upholstery, account for more than 80% of the company's standalone revenue, while the rest comes from FMCG and pharma packaging and transparent sheets. Its subsidiary Axiom, which focuses on synthetic ropes used in fishing, oil rigs, and shipping cargo, accounts for 40% of consolidated sales.

Responsive is in the process of increasing its PVC flooring capacity three-fold and artificial leather by two times. It has installed 60% of the total planned capacity; the rest will be finished by September. The capex of . 510 crore is funded through a promoter equity of . 76 crore and debt of . 340 crore taken at a rate of LIBOR + 4.56%. The remaining will be funded through internal accruals.

With increased capacity, Responsive will be able to increase its share in the $15-billion PVC flooring global market due to India's cost competitiveness plus high entry barrier for local players due to closely guarded technology knowhow.
Though the size of the artificial leather segment is not available due to the higher participation of unorganised players, Responsive's current capacity utilisation of 90% reflects a high demand scenario. Also, the products for which the capacity is expanded, enjoy high margin, which should more than compensate for the increased interest cost and 3% equity dilution.

Its PVC flooring segment caters to retail, railways, hospital and various other verticals, while Mercedes Benz, Tata motors, Bajaj auto, Volvo and the likes are the clients of its automotive upholstery business. A well-diversified product portfolio and global presence make Responsive a low-risk company. On the flip side, rising petroleum prices may cause some worry since the cost of intermediates derived from crude oil account for nearly 80% of its revenue. In FY10, its consolidated revenue increased two-folds to . 840 crore and net profit by 67% to . 66.7 crore. Considering a 30% growth in earnings for FY11, the company is trading at a price-earning multiple of 28.