Stock Review: TINPLATE Company of India (TCIL)

 

Current valuations give the country's largest producer and supplier of tin mill products a distinct edge. But margin may make things difficult

 

TINPLATE Company of India (TCIL) is the country's largest producer and supplier of tin mill products, which are used in the metal packaging industry. Part of the Tata Group, TCIL was one of the pioneers in the tinplate packaging industry in India and currently, corners 35-40% of the domestic market share. Growth in the packaging sector is closely linked to the processed foods and beverage industry, which is expected to grow at 18-20% in 2011. TCIL, being a key player in the metal-packaging industry, is well-placed to take advantage of this growth. At current valuations, TCIL offers a good investment opportunity to investors wanting to cash in on India's consumption story.

BUSINESS:

TCIL manufactures electrolytic tinplates, tin-free steel sheets, and full hard cold rolled sheets (FHCR) used for metal packaging. TCIL has an installed capacity of 380,000 tonnes per annum and is running at around 60% of its total capacity. The company has set up an additional cold-rolling mill which will help feed its tinning lines and bring about better economies of scale. Tinplate is one of the most eco-friendly packaging materials as it is 100% biodegradable. It adheres to international standards in its durability and aesthetic features.

GROWTH DRIVERS:

Rising disposable income with India's middle-class, leading to higher demand for processed foods and beverages and in turn, packaging material, is one of the primary growth drivers for the company. The 65,000-crore packaging industry in India has been growing at 10% annually over the past couple of years, and metal packaging accounts for 8-10% of this industry. TCIL, which currently has one cold rolling mill, is in the process of setting up a second which will ensure better economies of scale and enhance overall margins.

FINANCIALS:

In the October-December quarter, TCIL's sales declined 19% year-on-year, while its operating margin fell 200 basis points weighed down by rising input cost amid spike in global commodities prices. The company procures its key raw materials — HR coils and tin — from third parties subjecting itself to price fluctuations. Higher input cost has been a concern for TCIL over the past few quarters as the rise in price of its finished products has not been in line with 70%
rise in tin prices and 15% rise in HRC prices during the third quarter.Over the past five years, the company's sales have grown 11%, compounded annually. It has given a return on capital of 22.55 and return on equity of 30%. It has steadily generated cash from operations and has a debt-equity ratio of 0.79. At 60, the stock trades at a 12-month trailing price earnings ratio of 10.3, and is fairly valued. Since the company is closely linked to the fast-moving consumer goods industry, there is huge potential for further earnings growth.

CONCERNS:

The company's operating profit margin has been under pressure for the past four quarters due to its inability to pass on the increase in raw material costs to buyers. There is little visibility on how TCIL will tackle this issue in the near term.