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ITW: Improving fundamentals

Mar 9, 2001

ITW Signode India Limited is one of India's largest industrial packaging solutions company. The company was mired in losses till FY99. Since then it has turned around. It reported profits of Rs 146 m in FY00. In the first nine months of FY01, ITW has shown a 13% growth in its bottomline YoY to Rs 123 m. This improvement in performance comes on the back of several cost cutting measures employed by the company's management. The company trimmed its workforce from 1,305 to 978 employees in FY00. As a result employee costs were down to 13% of sales compared to 15% of sales in the previous year. The company has further streamlined its employee strength in FY01.

Particulars 3QFY00 3QFY01 Change 9m FY00 9m FY01 Change
Net Sales 528 466 -11.8% 1,384 1,391 0.5%
Other Income 15 22 50.3% 23 39 73.9%
Total Expenditure 474 414 -12.6% 1,222 1,221 -0.1%
Operating profit 54 52 -4.3% 162 171 5.4%
Operating profit margin 10.2% 11.1% 11.7% 12.3%
Interest 5 0 25 0
Depreciation 19 12 -35.8% 51 36 -29.3%
Profit/(Loss) before tax 45 62 37.6% 109 174 59.0%
Provision for Taxation 0 17 0 51
Net Profit/(Loss) 45 45 -0.2% 109 123 12.7%
Net profit margin 8.5% 9.6% 7.9% 8.8%
No. of shares outstanding (m) 22.9 22.9 22.9 22.9
Reserves excluding revaluation reserves 758 918 758 918
Earning per share (Rs) * 7.8 7.8 6.4 7.2
*annualised
Current P/e ratio 6.8

The company's interest burden came down siginficantly on the back of its 'zero debt' status achieved during FY00. ITW's profit before tax was up a significant 59% in the nine month period ended December 2000. Its net profit got deflated because of higher taxes.

The company's brand building drive helped it earn better margins compared to FY99. The company is trimming its direct customer focus and passing it on to its dealer network. Its already reduced its direct customers to 600 from over 3000 in FY98. ITW is looking to brings its direct customers down to about 200-250 in a year's time.

Going forward the company will focus on steel to metal strap conversion in non-ferrous metals and introduce recyclable products. The company hopes improve its profitability through these measures.

Despite its superlative performance, concerns remain over the company's high exposure to the metals segment (40% contribution to turnover in FY00), and its dependence on its US-based parent ITW Inc., which bailed it out from its financial mess in the last couple of years.

At the current stock price of Rs 49 the stock trades at a P/e multiple of 6.8 times its annualised nine month FY01 earnings. Given the company's focus and improving balance sheet, the valuation is likely to see a re-rating.

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