Report Date

November 23, 2006

Company Name

Garware Wall Ropes (GWRL)

Price / Recommendation

Rs. 62.45

BUY

Sector

Ropes

Investment Rationale
 

Ø    GWRL, one of largest manufacturers of Synthetic Cordages, Fishnets and Sports Nets in India, enjoys near monopoly (~ 80% market share) in domestic market.
 

Ø    Company has emerged as leading manufacturer and supplier of Geosynthetics in India.  Going forward, Geosynthetics will have immense potential both in terms of turnover and profitability in wake of boom in infrastructure and construction sector. Consequently, GWRL expects to double geosynthetic sales every year for next 2-3 years (sales of Rs.25 crore in FY2006).
 

Ø    As far as fishing net business is concerned, global thrust is GWRL’s topmost priorities. Export of fishing nets are expected to grow @ 20-25% every year on back of innovative product introduction, new client acquisition and deeper client penetration.  

Ø      It has forayed into more value added products. Introduction of new technology will help company grow profitably. 

Ø    Thus, GWRL is targeting sales of Rs 500 crore by FY 2009 (Rs 265 crore in FY 2006) translating into CAGR of ~ 25%. With improved profitability, bottomline will grow at faster rate.

Investment Concerns
 

Ø    Rising RM prices mainly polymers whose price depends on international crude oil put pressure on profitability margins
 

Ø    Fishing is saturated business in domestic market.  Global market too is contracting due to environmental reasons.  

Recommendation 

Ø    At CMP, share is trading at 6.69 times estimated FY 2007 EPS of Rs. 9.33 and 3.86 times FY 2008 EPS of Rs. 16.16 on enhanced equity (post warrant conversion) of Rs. 23.7 crore

Ø    Promoters are enhancing their stake by issuing 27.46 lakh warrants @ Rs. 66.50 aggregating Rs. 25 crore, signifying full confidence in exciting future ahead. Considering excellent outlook, we recommend to “BUY” at CMP.

One Year Target Price

Rs. 100/-

Market Capitalisation

Rs.125 crore

52–week range

Rs.36-Rs.69

Shares in issue (mio.)

19.96

BSE Ticker

509557

NSE Ticker

GARWALLROP

BSE Sensex

13706.53

Shareholding Pattern on Sep. 2006

%

Promoters

41.35

FIIs

0.00

MFs / UTI

0.01

Banks / FIs

13.78

Others

44.86

Price Performance (%)

1M

6M

12M

Absolute

-2%

32%

33%

Relative to BSE Sensex

-11%

5%

-26%

Relative Performance (Chart)

Year ended March

2005 A

2006 A

% Inc.

2007 E

% Inc.

2008 E

% Inc.

Net Sales

224.67

261.06

16.2%

326.33

25.0%

407.91

25.0%

EBITDA

26.23

30.96

18.1%

41.88

35.3%

60.43

44.3%

EBITDA (%)

11.0%

11.3%

12.3%

14.3%

Interest Expenses / (Income)

5.20

7.25

39.4%

7.64

5.4%

6.61

-13.6%

Depreciation

8.00

8.58

7.3%

9.51

10.8%

10.44

9.8%

P.B.T.

13.02

15.13

16.2%

24.73

63.5%

43.38

75.4%

Net Profit

13.26

14.86

12.1%

22.12

48.9%

38.32

73.2%

Equity Capital (Rs 10/-)

19.96

19.96

20.71

21.71

EPS on year-end equity (Rs)

6.64

7.44

12.1%

10.68

43.5%

17.65

65.2%

EPS on Enhanced Eq. (Rs)

6.64

7.44

12.1%

9.33

25.4%

16.16

73.2%

Book Value (Rs)

63.44

68.37

76.51

90.77

RONW (%)

10.8%

11.3%

14.9%

21.4%

ROCE (%)

14.3%

14.8%

18.2%

24.2%

P/E (x)

9.40

8.39

6.69

3.86

 About Garware Wall Ropes

 Ø       GWRL is one of largest manufacturers and exporters of Synthetic Cordages, Fishnets and Sports Nets and polypropylene multi-filament yarn.   

Ø       Geosynthetics division of GWRL was established in 1998 and within a short span has emerged as a leading manufacturer of geosynthetics in India.  Its products find application in diverse areas like coastal protection, river training, landfills, soil and rock stabilisation, ground improvement, land reclamation, roads & rail trackbed stabilisation etc.

 Ø       Revenue break up for FY 2006

Segment                                                                  % of sales                                                                         Rs. Crore

 Fishing Net                                                                 65%                                                       Domestic – 75        Exports   - 100         

(Domestic + Exports)

 Industrial & Sport Nets                                               25%                                                                                     65

 GeoSynthetic                                                                10%                                                                                    25 

Total                                                                              100%                                                                                 265 

 Investment Rationale

Ø       Geosynthetics presents a mind boggling potential opportunity put forth by high growth trend in infrastructure and construction sector.  Company has required resources to offer complete solutions to problems in diverse areas like coastal protection, river training, landfills, soil and rock stabilisation, ground improvement, land reclamation, roads, rail track bed stabilisation etc.  In some areas like landfills, company is fully equipped to execute projects on turnkey basis. Usage of technical textiles materials in the industries across the globe is growing substantially, offering lucrative business opportunity.  GWRL expects to double Geosynthetic sales every year for next 2-3 years. Thus substantially higher contribution is expected from this business in future.   
 

Ø     Company enjoys a near monopoly in domestic fishing net market by virtue of its strong dealer network and marketing wide range of high quality products to a loyal customer base.
 

Ø     However, with saturation of domestic market, company has made export growth one of its topmost priorities.  Company has developed and introduced several innovative new products, which have been well received by fishing industry in US, Europe and Australia.   Presently, it exports to fifty countries over the globe and has local representatives in USA, EU, Australia and Africa. Exports are expected to grow @ 20-25% every year on back of innovative product introduction, new client acquisition and client penetration.
 

Ø       GWRL has launched a number of value added products in FY 2006.  Previously, GWRL was in nets, now it has moved to Netlogs.  Introduction of new technology will help company grow profitably.
 

Ø       During September ended 2006, Net sales increased by 14.8% to Rs.75.2 crore (Rs.65.5 crore). OPM declined only marginally to 12.9% (13.2%) despite oil price increase.  This is because value added products help in arbitrating increase in oil prices.  PAT grew @ 25.2% to Rs.5.78 crore (Rs.4.62 crore). H2 FY2006 is expected to be better than H1 FY2006 since export season starts in Q3 and Q4.
 

Ø       Thus, GWRL is targeting sales of Rs 500 crore by FY 2009 (Rs 265 crore in FY 2006) translating into CAGR of ~ 25%. With improved profitability, bottomline will grow at faster rate.

 Investment Concerns

 Ø      Rising RM prices – mainly polymers whose price depends on international crude oil, put pressure on margins.   However, in domestic market company is able to pass on price increase to customer while in global markets too new products launched are price proof products. 

Ø      Domestic fishing market has saturated while globally fishing business is contracting due to environmental concerns as fishing stocks are depleting.  However, GWRL hopes to drive growth thru innovative product launches.  Moreover, greater thrust on geosynthetics will help to mitigate risks in fishing business.

Disclosures

The author may have held / hold the above-mentioned securities in their personal accounts or on behalf of the clients. The information contained has been obtained from sources believed to be reliable. While taking utmost care in making the report, the authors or the company does not take responsibility for the consequences of the report. All investment and information and opinion are subject to change without notice. The investment recommendations may not be suitable to all the investors.