Doors that can open to profits

Don't scoff at this metal door fabrication company. Shakti Met-Dor supplies customised doors for use in IT, telecom, pharma and residential applications. And there’s a lot of growth in store.

Mudar Patherya | Print Edition: January 10, 2008

Mudar Patherya

There is always an indescribable magic in buying a stock with an equity of Rs 2.75 crore (Rs 10 paid up value) at a modest price because when earnings do the rope trick, then no one can predict what could happen to the market cap.

This is my principal argument for Shakti Met-Dor, a Hyderabad-based company that fabricates metal doors. The first investor reaction is to stay away from companies dealing in pedestrian stuff, from companies that we have never heard of and companies with a penny stock-like structure that can go the penny stock way. Dig shallow. Shakti Met-Dor surprises. Here is why:

• Its steel doors (commercial and industrial applications) are fabricated and customised. In other words, it has non-commodity realisations.

• Its principal focus was on fire doors but once it had got architect approval, it extended to other kinds of doors used in IT, telecom, pharmaceutical and high-end residential applications

• It fabricates metal doors but they look wooden, a fair reconciliation between utility and aesthetics

• It graduated beyond door delivery to ironmongery and installation, extending product delivery to service

The robustness of the business model is reflected in its balance sheet for 2006-7. Average capital employed of Rs 30 crore and earnings before interest, depreciation, taxes and amortisation (EBIDTA) of Rs 17.5 crore clearly indicates profitability.

Interest cover at a luxurious 42 times and a debt-equity ratio of 0.22 indicates that the next round of asset creation will be debt-driven, enhancing shareholder value. Besides, a 34% tax rate indicates credibility of the reported numbers Shakti’s immediate numbers continue to be compelling.

• Turnover between Rs 15.68 crore and Rs 17.10 crore in four quarters prior to the last one; Shakti reported Rs 19.34 crore in the July-September quarter, signaling a breakout

• EBIDTA peaked at Rs 5.22 crore corresponding to a margin of 27%; net profit was Rs 3.23 crore for the last quarter, indicating an annualised earning per share of Rs 48 if the company can sustain the pace Sustain the pace? Shakti might accelerate it for the following reasons. The company is enhancing its installed capacity from 60,000 units per annum (annual report 2006-7) to 2,00,000 units from June 2008.

Production was nearly 45,000 units in 2006-7; the estimate for the current fiscal is 80,000 units and 1,00,000 units for 2008-9.

If Shakti reports a turnover of Rs 100 crore in the current fiscal, an EBIDTA of around Rs 27 crore sounds realistic. Predicting interest and depreciation can be tricky considering that the company is in the midst of an expansion and you don’t know what proportion of the project cost will be allocated when but even if you are liberal with the expenses, my envelope scribble indicates Rs 24.50 crore pretax profit and Rs 16 crore post-tax.

Tax: full rate. That’s an EPS of nearly Rs 60 for the current year and don’t forget there is growth this year, next year and the year after that as well.

By Mudar Patherya, Patherya heads Trisys, an annual reports consultancy. He can be reached at mudar@trisyscom.com

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