Prabhudas Lilladher
Shaily Engineering (Accumulate)
CMP: ₹911.45
Target: ₹1,103.2
We initiate coverage on Shaily Engineering Plastics (SHEP) with an ‘Accumulate' rating and a price target of ₹1,103 (21x FY20E EPS). SHEP is a leading supplier of high performance engineering polymers based precision components.
We are positive on SHEP’s prospects due to 1) deeper penetration in existing plastic line (with its home furnishing customer’s India entry); 2) ramp-up in machine utilisation of CRC plant; and 3) foray into a new product line, enabling it to inch closer to its revenue target of $100 million by FY20E. The company has about 85 per cent visibility for achieving this target.
Muted H1FY19 performance was due to lower than expected topline growth on back of labour shortage and power issues. Employee costs also increased by 28 per cent due to senior level recruitments for the new carbon steel plant. Hence EBITDA grew by just 8.9 per cent and profits by 6.9 per cent. EBITDAM declined 120 bps to 16.2 per cent. Both power and labour issues have now been addressed and once revenues from the new plant accrue, employee costs as a percentage of sales will normalise.
We expect revenues and profits to grow by 29.3 per cent and 33.6 per cent CAGR to ₹687.8 crore and ₹57 crore, respectively in FY21E. Despite a healthy dividend payout (26.1 per cent in FY18) and ongoing capex cycle, a disciplined working capital cycle and higher machine utilisation will lead to healthy free cash generation.