June 5, 2016

Analysis: National Fittings Limited

www.drvijaymalik.com has a dedicated section for investment & stock specific queries of readers: “Ask Your Queries”. Overtime, readers have asked queries about multiple stocks in this section. Answers to these queries, have been done post preliminary analysis of the stocks under consideration. Such analysis has been found helpful by readers.

Q&A Series is an attempt to summarize & share with all the readers, the key questions and their answers, which have featured on “Ask Your Queries” section. Primary aim of this new feature is to share the knowledge with all the readers of the website.

The current section of this series, “Q&A” covers: National Fittings Limited (erstwhile Interfit Techno Products Limited), an Indian manufacturer of piping components.

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National Fittings Limited

Reader’s Query:


National Fittings Limited is an export oriented company and an ISO 9001 certified manufacturer of quality piping components to various industries covering a range of fittings and ball valves in stainless and carbon steels and grooved couplings and fittings from SG iron castings.

Company Products:
  1. Grooved pipe fittings
  2. Screwed pipe fittings
  3. Valves

As per the annual report for FY2015: 
“Company is expanding into other markets and increasing its presence in the domestic market substantially. Present share of sales of 10% in the domestic market will increase to 25% to 30% in the coming years.”

Valuation Analysis



No.
Ratio
Value
1
P/E ratio
10.55
2
P/E to Growth ratio (PEG ratio)
0.74
3
Earnings Yield (EY)
16.29
4
P/B ratio
3.08
5
Price to Sales ratio (P/S ratio)
1.21
6
Dividend Yield (DY)
1.33

  • Here PE ratio is slight more than the checklist. However, all the other ratios are good and come within the checklist criteria and pass test of valuation analysis.


Financial Analysis



No.
Ratio
Value
1
Sales growth
24.66
2
Profitability(NPM)
11.09%
3
Tax payout
For last three years, it is more than 30%
4
Interest coverage
10.49
5
Debt to Equity ratio
0.32
6
Current ratio
5.18
7
Cash flow (CFO)
Is Positive from last 7 years

  • National Fittings Limited is growing at a decent sales growth of 24.66% over last 10 years with a very good net profit margin that justify that co. has good financial strength.
  • From the year 2013, National Fittings Limited is regularly paying out tax with more than 30% that glimpse about last three years management quality. Before 2013 co. did not paid tax.
  • National Fittings Limited has a good interest coverage 8 times in recent years that also means that company has sufficient interest coverage to paying out its interest.
  • National Fittings Limited’s current assets are good (5 times of current liabilities in the recent year) to take care of its current liabilities. That suggests National Fittings Limited’s strong position.

For more detail refer below tables of financial analysis ratio.

Tax Payout:


₹ Crores/10 million
2009
2010
2011
2012
2013
2014
2015
Profit before tax (A)
0.02
2.79
2.16
2.3
3.36
5.59
8.3
Tax paid (B)
-0.07
-0.04
-
-0.03
2.03
2.23
2.8
Tax rate (B/A)
-3.5%
-1%
0%
-1%
60%
40%
34%

Interest Coverage:


₹ Crores/10 million
2009
2010
2011
2012
2013
2014
2015
Operating profit (A)
0.57
2.13
2.73
2.79
4.22
6.34
9.57
Interest expense (B)
0.42
0.59
0.48
0.65
0.65
0.64
1.07
Interest coverage (A/B)
1.36
3.61
5.69
4.29
6.49
9.91
8.94

Current Ratio:


₹ Crores/10 million
2011
2012
2013
2014
2015
Current Assets (CA)
10.34
12.02
12.71
18.05
22.2
Current Liabilities (CL)
2.05
2.68
1.53
5.03
4.39
Current Ratio (CA/CL)
5.04
4.49
8.31
3.59
5.06


Operating Performance Analysis


  • National Fittings Limited is growing at decent sales growth of 24.66% in last 10 years with good NPM of 8 to 10% since 2010. In year 2013 NPM is 4%, it might be due to tax paid around 60% in the year 2013.
  • Inventory turnover ratio is fluctuating from 2010 but positive thing is that National Fittings Limited is maintaining its level of not below 6. Declining of inventory turnover ratio is becoming a major question for a company. I want your view for that.
  • Debtors days are also not stable it is fluctuating and in the range of 15 to 20 days.
  • Net fixed assets turnover (NFAT) ratio is increasing since 2012 since there is also variation in figures compare to 2010 and 2011.

Overall, the three ratios are fluctuating and doing well in recent years. I want your view on these ratios.

Debt to equity is less than one from the last five year. It means that National Fittings Limited is maintaining its debt level. That also suggests company’s financial soundness.

After 2009, it is been continually generating positive cash flow from its operation. In year 2015 CFF is (-2.69) cr. Here, ₹2.00 crore is the repayment of preferential shares of 200,000 units. That means National Fittings Limited is paying out its debt.


For more detail refer below tables:

₹ Crores/10 million
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
CAGR
2011-15
Sales (A)
6.81
7.6
5.2
8.08
33.41
26.09
28.51
31.22
36.74
49.53
24.66%
Operating profit (B)
0.79
0.51
0.29
0.57
2.13
2.73
2.79
4.22
6.34
9.57
35.05%
Operating profit margin (B/A)
12%
7%
6%
7%
6%
10%
10%
14%
17%
19%

Net profit after tax (C)
0.17
-0.02
0.01
0.09
2.83
2.16
2.32
1.33
3.36
5.5
14.21%
Net profit margin (C/A)
2%
0%
0%
1%
8%
8%
8%
4%
9%
11%













Debtor days




15.62
25.88
20.36
16.84
18.18
17.61

Inventory Turnover ratio




8.37
6.46
6
7.81
6.75
9.93

Net fixed assets




3.17
4.27
6.55
6.29
6.12
5.1

NFAT ratio




10.54
6.11
4.35
4.96
6.00
9.71

  

Debt to Equity Ratio:


₹ Crores/10 million
2011
2012
2013
2014
2015
Total Debt (D)
2.03
3.04
3.31
3.1
4.81
Total Equity (E)
10.53
12.85
14.17
16.03
18.2
D/E
0.19
0.24
0.23
0.19
0.26

Cash-flow:


₹ Crores/10 million
2009
2010
2011
2012
2013
2014
2015
 Cash from Operating Activity
-3.5
1.05
2.11
2.59
3.57
5.42
3.83
 Cash from Investing Activity
-0.01
-0.43
-1.31
-2.63
-0.26
-0.21
0.4
 Cash from Financing Activity
3.51
-0.62
-0.31
0.36
-1.19
-2.35
-2.69
 Net Cash Flow
-
-
0.49
0.32
2.12
2.86
1.54
Cash & Eq. at the end of year


0.55
0.87
2.99
5.85
7.39
  


Management Analysis




Mr. A. V. Palaniswamy is the managing director and the promoter of National Fittings Limited with a qualification of BE and more than 40 years of experience.

Salary of promoter is increasing as an increasing in sales but here one negative point is in the year 2013, net profit decreased, but still the management increased promoter’s salary.

Salary of Promoter:


Year
2011
2012
2013
2014
2015
Sales (₹ Crores/10 million)
26.09
28.51
31.22
36.74
49.53
Net Profit (₹ Crores/10 million)
2.16
2.32
1.33
3.36
5.5
Remuneration of Promoter (in lacs)
576,000
846,000
975,000
1,300,000


National Fittings Limited had 500,000 preference share. Out of these, the company redeemed 200,000 in financial year 2014 and now it has considered the option of redeeming 300,000 non-convertible non-cumulative redeemable preference shares of ₹300 lacs, which was approved by board at their meeting on 29.05.2015. This is a positive sign that National Fittings Limited is reducing its debt.

National Fittings Limited is providing dividend since 2014, current dividend payout ratio is 15.09%. National Fittings Limited is now paying out dividend every year.

Promoters’ holding is 56.45% and foreign promoter holding is around 9%, thus total promoter holding is 65.55% and general public is 25.78.

National Fittings has a statutory due pending in high court that summarized in annual report 2014 which you can see below.

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By referring annual report 2013 I found that claims against company do not acknowledged debt that I attached below. This makes a question on company’s management, however co. already paid reduced amount.

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Peer Comparison:


We can see below that National Fittings Limited is growing at higher sales growth rate than other peer companies with moderate PE ratio. This makes it different than others. National Fittings Limited has only 10% sales in domestic market.

Many of its peer group companies have a sales growth more than 10%, so it has distinct advantage of MOAT or not?

10 years sales growth
Sales CAGR
NPM%
D/E
PE
PEG
National Fittings
24.66
11.1
0.32
10.96
0.77
Srikalahasthi Pipes
15.21
7.66
1.46
6.35
0.84
Gandhi Spcl tubes
6.02
17.19
0
20.01
-1.97
Technocraft steel
12.16
8.86
0.27
9.49
0.48
Surya Roshni
12.23
1.89
1.5
11.47
3.72
Goodluck Steel
17.08
2.6
1.71
6.62
0.58

Creation of Value for Shareholders from the Profits Retained by the Company:


(INR Cr./10 million)
2009-15
Total retained profits of last 10 years (A)
17.59
Total increase in market capitalization in 10 years (B)
69.8
Value created per INR of retained profits (B/A)
3.96

Here, National Fittings Limited has created value of ₹3.96 for every ₹1 of profits retained for investment by it.

Self –Sustainable Growth Rate (SSGR):


₹ Crores/10 million
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Sales
7
8
5
8
33
26
29
31
37
50
Net profit (PAT)
0
0
0
0
3
2
2
1
3
6
NPM
3%
0%
0%
1%
8%
8%
8%
4%
9%
11%
Depreciation
1
0
0
0
0
0
0
1
1
1
Net Block(Net Fixed assets)
4
4
3
3
3
4
7
6
6
5
Depreciation as % of NFA
13%
9%
8%
8%
6%
5%
7%
11%
12%
23%
Net Fixed assets turnover (NFAT)

2
1
3
11
7
5
5
6
9
Dividend Paid
0
0
0
0
0
0
0
0
0.83
0.83
Dividend payout ratio As % of net profit
0%
0%
0%
0%
0%
0%
0%
0%
25%
15%











Dep



0.1
0.1
0.1
0.1
0.1
0.1
0.2
NFAT



2.0
5.0
6.9
7.7
5.7
5.4
6.5
NPM



0.0
0.0
0.1
0.1
0.1
0.1
0.1
DPR



0.0
0.0
0.0
0.0
0.0
0.1
0.1











SSGR



-8%
9%
34%
58%
32%
25%
31%

















10 yrs
7 yrs
5 yrs


Sales growth (%)





24.7
38.0
8.2



We can see that the self-sustainable growth rate (SSGR) of National Fittings Limited is about 25-32%. However, National Fittings Limited has been growing at about 24% over last 10 years. Comparison of past sales growth with SSGR would indicate that it could fund its entire growth by its profits.

Please provide your valuable view about National Fittings Limited.

Thanking You,

Pratik Solanki

Author’s Response

Dear Pratik,

Thanks for writing to me! I appreciate the time & effort put in by you in analyzing National Fittings Limited and sharing your analysis for the benefit of author and readers of www.drvijaymalik.com

Let us first analyse the financial performance of National Fittings Limited over last 10 years (FY2006-15).



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National Fittings Limited has been growing its sales consistently at an excellent pace of about 25% year on year since last 10 years (FY2006-15). It is important to note that this sales growth has been accompanied by improving profitability.

Operating profit margins (OPM) of National Fittings Limited has been improving from 6-7% in FY2006-07 to about 19-20% in FY2015 and FY2016. Similarly, net profit margins (NPM) have also been improving from net loss in FY2007 to the NPM of 10-11% in FY2015 and further 14% in FY2016.

Sales growth with improving profitability margins is a good sign for any investment opportunity.


National Fittings Limited has been paying taxes at 33-34% rate in FY2015 and FY2016, which is equal to the standard corporate tax rate in India. Though the tax rate have been fluctuating widely in past, however, now it seems to have stabilized. This is another good sign.

Over the years, National Fittings Limited has been reflecting improved operating efficiency.

Net fixed assets turnover (NFAT) has been improving from 1.43 in FY2008 to 8.83 in FY2015. Inventory turnover ratio of National Fittings Limited has improved from 1 in FY2008 to 9 in FY2015. Improving asset and inventory turnover indicate that National Fittings Limited is able to use its capital more efficiently and generate higher sales from same level of assets.

Receivables days of National Fittings Limited have improved from 81 days in FY2008 to 16 days in FY2015. Improvement in receivables days indicates that the company has been able to collect the money from its customers faster, indicating its growing influence in the market. 

This seems plausible when seen with the fact that about 90% sales of National Fittings Limited are exports, which are mostly backed by letter of credit (LC). LCs help in early realization of receivables for the exporters. Improved collection practices lead to lower working capital finance requirements and thereby lower interest costs and improved profitability.


National Fittings Limited has PAT for last 10 years (FY2006-15) of ₹18 cr. whereas the CFO over the similar period is ₹17 cr. PAT has nearly been converted into CFO. There does not seem to be much concern on this parameter.

As rightly mentioned by you, Self-Sustainable Growth Rate (SSGR) of National Fittings Limited is about 25-30%. As mentioned in the article on Self-Sustainable Growth Rate, SSGR does not factor in working capital changes. However, we can estimate whether funds are being tied up in working capital by comparing cPAT with cCFO.


Analysis of SSGR indicates that if National Fittings Limited can manage its working capital management and operating efficiency properly, then it can grow continuously at about 25-30% growth rate without creating additional debt burden on the balance sheet.


As National Fittings Limited has been growing at a rate of 25%, it has been able to manage its growth story without leveraging its balance sheet. At March 31, 2015, National Fittings Limited has short term debt of about ₹4.8 cr. on its books, which consists of export packing credit, letter of credit and demand loan against fixed deposits, which are essentially working capital facilities required for day to day operations of a company.

These findings of SSGR get re-affirmed when an investor analyses the cash flow from operations (CFO) of National Fittings Limited with its capital expenditure (Capex) requirements over last 10 years (FY2006-15).

During FY2006-15, National Fittings Limited realized total CFO of ₹17 cr. and out of it National Fittings Limited to spend ₹5 cr. into capital expenditure, thereby releasing free cash flow (FCF) of ₹12 cr. as surplus for shareholders.

This data indicates that National Fittings Limited is a good example of efficient capital utilization. Despite meeting its entire capex requirements, National Fittings was able to generate FCF of ₹12 cr. out of which it distributed ₹2 cr. as dividend to shareholders (excluding dividend distribution tax).

The peer comparison data provided by you, also indicates that National Fittings Limited is better placed than many of its peers.


The ability of National Fittings Limited to grow its sales with limited capex from its CFO and generating good amount of free cash flow (FCF) indicates that the company has a good advantageous business model.

The investors would agree that a company which generates good amount of free cash flow (FCF) post meeting entire capex requirement from its operating cash flow (CFO) would not need any debt or equity dilution. The same is true for National Fittings Limited; it is almost a debt free company with no history of equity raising over last 10 years. All the debt of National Fittings Limited is short term working capital debt.

In FY2015 annual report, National Fittings Limited has sought shareholders’ permission to borrow up to ₹20 cr. It seems that the company is planning to go for capital expenditure in near future.

With good sales performance and improved profitability margins, National Fittings Limited has started paying dividend to its shareholders since FY2014. Company has been increasing its dividend payout with increasing profits. In FY2016, National Fittings Limited has declared dividends of ₹3 per share against ₹1 per share in each of FY2014 and FY2015. It amounts to sharing the fruits of growth with shareholders. This is a good sign in any investment opportunity.

Share market too seems to have recognized it. The market capitalization of the National Fittings Limited has increased by ₹70 cr. against retained earnings of ₹16 cr. over last 10 years (FY2006-15). Management has created a value of ₹4.36 for the shareholders from every ₹1 of earnings retained & not distributed to shareholders.

National Fittings Limited is currently available at a P/E ratio of about 9.9, which offers some margin of safety in the purchase price, as described by Benjamin Graham in his book The Intelligent Investor.




I have been advising readers and investors that they should analyse the management of any company in great depth before they take any final investment decision about any company. Management assessment is critical as in the past, investors have noticed that even if a company has very good business, however, if the management is not minority shareholders friendly, then it is highly unlikely that retail shareholders would be able to benefit from the growth of the investee company.

The case of Gujarat Automotive Gears Limited discussed in the following article is very pertinent for investors:


I appreciate that you have analysed multiple aspects of management assessment including salary of promoters and dividend history.
  • The declared salary of promoters as per the annual report of FY2015, which is about ₹200,000 per month for FY2016 seems reasonable when seen in light of the net profits of the company being about ₹7.4 cr. in FY2016
  • National Fittings Limited has been paying dividend out of its free cash flows, which is another good sign for any investment opportunity.

However, there are certain concerns, which get highlighted when an investor reads the annual report for FY2015 for National Fittings Limited:

A) Composition of board of directors:


As per the FY2015 annual report, National Fittings Limited has 4 directors:

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The report mentions that out of total 4 directors, National Fittings Limited has 2 independent directors, including Mr. M. Loganathan. 

However, when we see the details of directorship of different promoter entities, associate entities and related entities of National Fittings Limited (at corporate database Zauba Corp.), we see that Mr. M. Loganathan is a director in almost all of these entities. It is to be noted that these associate entities are private limited companies and do not require independent directors on their board.

1. Holding company of National Fittings Limited: Interfeit India Limited:

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2. Entities where promoter & MD Mr. Palaniswamy is a director:

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i. Merit Industries Limited:

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ii. Sema Impex Private Limited:

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iii. Haitima India Private Limited:

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The directorship details of the above companies, as referred from corporate database: Zauba Corp. indicate that Mr. Loganathan shares very deep relationship with promoters of National Fittings Limited. Mr. Loganathan is director on almost all the private entities of promoters of National Fittings Limited, which as per law do not require independent directors on board.

Therefore, it seems that even though Mr. Loganathan might be fulfilling all the legal requirements for being classified as an independent director as per Companies Act 2013, he is very close to promoters and might not be a true independent director in spirit.

The woman director, Mrs. Panath Anitha is an old time employee of National Fittings Limited. As per annual report of FY2015, she joined National Fittings Limited 20 years back and has been working with the company ever since.

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This analysis indicates that the board composition of National Fittings Limited might be meeting all the criteria as per Companies Act 2013, however, in spirit, it seems that at least 3 out of 4 directors (75%) are very close to the promoter group.

B) Related party transactions:


In FY2015 annual report, National Fittings Limited, has disclosed that it has entered into multiple transactions related to sale/purchase of good and leasing of property with the promoter owned entities:

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National Fittings Limited has indicated in its risk management policy in FY2015 annual report that it has entered into these contracts with promoter entities to ensure supply of components at competitive prices:

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The directorship pattern of these promoter owned companies shared above, indicates that the people who are running these related entities are the same who are in the board of directors of National Fittings Limited. It means that these promoter owned entities do not have anything new in terms of skill sets than what is already present with National Fittings Limited.

This essentially means that the business of sourcing, which is outsourced to holding company Interfit India Limited, could have been avoided. Moreover, the profits of Interfit India Limited, if any, are effectively, transfer of funds from National Fittings Limited to Interfit India Limited.

The value of raw material purchased by National Fittings Limited from Interfit India Limited is ₹19.86 cr. If we consider that Interfit India Limited would have made a margin of 10% on this transaction, then the cost of this transaction, which is borne by shareholders of National Fittings Limited is about ₹2 cr. (10% of ₹19.86 cr.).

C) Loans & advances to related parties:


FY2015 annual report of National Fittings Limited discloses that it has given advances of about ₹2.7 cr. to its related parties:

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Also it needs to be noted that in the related party section of the annual report, National Fittings Limited has not shown any interest amount receivables from these related parties. It means that these loans & advances, which are given by National Fittings Limited to these entities are interest free in nature.

Interest free advances is another mean of transferring economic benefit from the shareholders of National Fittings Limited to other related parties at the cost of minority shareholders.

You may read more about the role of related party transactions in the following article:


The statutory dues of ₹2.84 lac, which is disputed by the company and the case is pending at High Court, is a normal finding that investors would find in many companies. It is quite common that companies and the income tax assessing officers differ in their assessment of tax liability and such cases are escalated to higher forums.

In any situation, the amount of dispute, ₹2.84 lac, is a small amount, which the company has already paid under protest. Therefore, it seems that this dispute might not have any incremental monetary impact on the company.

Overall, National Fittings Limited appears to be a company growing at a fast pace, with improving profitability margins & operating efficiency. It has been able to meet its capex requirements from its cash flow from operations and able to generate free cash flows. National Fittings Limited has a very healthy SSGR, which can ensure that it can keep on growing without needing debt to fund its growth, if it can manage its working capital efficiently.

The Company’s management, which seems shareholder friendly at the first instance, has certain issues related to composition of independent oversight on management, business transactions with and loans & advances to the promoter entities. An investor should pay attention to these management issues and convince herself about the shareholder friendliness of the company management.

These are my views about National Fittings Limited. However, you should do your own analysis before taking any investment related decision about National Fittings Limited.

You may use the following steps to analyse the company: "How to do Detailed Analysis of a Company"

Additionally, the investor should keep track of the future performance of the company for signs of improvement or worsening as part of their monitoring exercise. She may use the steps explained in the following article for monitoring stocks in her portfolio.


Hope it helps!

Regards,


P.S:



DISCLAIMER


The views and opinions expressed or implied herein are my own and do not reflect those of my employer, who shall not be liable for any action that may result as a consequence of my views and opinions.

Registration Status with SEBI:


I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:


Currently, I do not own stocks of any of the companies discussed above.