This is our second installment of our Infra Infusion. In this part we will be adding Indian Hume Pipes to our Long Term Portfolio.
Indian Hume Pipes (IHP) is a lesser known company which specializes in executing turnkey projects related to sewage systems, drainage and water supply projects. Indian Hume pipes also manufactures steel pipes and concrete pipes. And it is the only company which manufactures sports rifles in the country. Apart from this they also manufacture railway sleeper coaches (though this is small).
Though the major revenue is through its infrastructure business, its in-house building of raw materials (like steel pipes, concrete pipes etc) has proven to be cost effective. Sale of steel/concrete pipes provides a reasonable source of income.
Indian Hume pipes also operates for foreign clients, and has executed orders from Nepal, SriLanka, Burma, Iraq etc.
IHP has association with most of the state government and local bodies. On top of that it executes turnkey projects of central government related to hydro electric power generation etc. It also works along with private companies in designing and executing the projects associated with sewerage and water supply. Its association with private companies include L&T, NCC, HCC, Tata Power, GMR, SEW etc.
Why Indian Hume Pipes?
This company stands to take advantage in the current scenario mainly because of the government pushing the rural development and also the urban area expanding, the need for drainage and water supply is increasing.
Even in rural areas the demand for cleaner drinking water and efficient drainage system is on the rise. IHPs niche operating field gives it an extra advantage. And also its long standing association with most of the state governments and also with central government might add up to its advantage.
Increase spending by central government might in Infra sector might help IHP. Also the smart city project once start shaping, IHP might be playing a vital role in it.
The smaller project size helps IHP in reducing the time frame for revenue realization. IHP has more of small size projects than a single large project. Also with lower interest rates on loans, IHP is going to get an extra advantage.
- Increase in steel prices: With government imposing Minimum import price, IHP has not been able to take complete advantage of the cheaper global pricing of steel.
- Cement prices: Cement price form the core of construction companies. Increase in cement prices might cut down the EBITDA margin for IHP.
Revenue and Profit :
The lower top line growth in 2016 was mainly due to drop in work orders for FY16. But considering the period 2012 to 2015, the revenue has doubled and the profits almost increased by 4 times. Indian Hume Pipes have been maintaining an EBITDA margin greater than 10%, Which is better than industry average of 7-8%.
Numbers in Rs. Cr.
Work orders have been steadily increasing. Though the project sizes are smaller, but the volume of works have been higher. At the end of FY16 the order book size is more the 3 times what it was six years ago. The order book has grown at a CAGR of 20.5%.
(Numbers in Rs. cr.)
EPS sensitivity to the profits is very high. Roughly for every Rs 3.5 crore increase in the profits, EPS move up by Rs 1. Post 2012 Indian Hume pipes has seen a constant growth. The drop in EPS for 2016 was mainly due to lower top line growth.
Debt and Finance Costs:
IHP has been increasingly using borrowings to fund its operations. As the revenue from work orders increased, debt financing has also increased. Similarly the finance costs has also seen a proportionate growth. With the lending rates coming down, IHP is set to gain an advantage.
The stock is currently trading at a trailing P/E of 32. It’s an expensive infra stock, but lower finance costs and a strong order should help growth going forward. We think the company benefits from the higher spend by the government, which will attempt to offset the slowing private spending due to the cash crunch. This looks like a good candidate for a long term purchase.
We will add this over three months: Dec 2016, and two more in Jan and Feb 2017.
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