Rajoo Engineers: Multibagger Stock for 2018

December 31, 2017 8 Ankit Shrivastav

Introduction:

Rajoo Engineers is a leading manufacturer and exporter of plastic extrusion machines. Plastic extrusion machines use raw plastic, which is melted and fed into a machine to make it into a continuous profiles, such as plastic pipes, tubes, window frame, plastic frames and sheets. The raw plastic material (which could be pellette, granules or powder) is fed into the system from a hopper. The plastic material goes through a barrel, which is heated and melts the plastic. The melted plastic is then forced into a die, which gives the molten plastic a desired shape. On cooling, the plastic hardens and takes the shape desired.

Company manufactures extrusion plants for blow film extrusion, used in making shopping bags, tubing extrusions used in making PVC pipes, sheet extrusions used in making food packets and other packaging material. Most of these plants are used by small and medium size plastic manufacturers for making various plastic products for daily use.

Revenue Break Up:

Majority of Companys revenue comes from Thermo-plastic Extrusion machines which contributes 60.2% of the total revenue of the company, Post extrusion equipment generates about 19.9% of the total revenue of the company, parts and equipments contribute 17.18% of the revenue while other operating revenue contribute less than 1% of the total revenue of the company. A chart showing detailed revenue breakup of Rajoo Engineers is given below:

Sales:

Rajoo engineers has seen decent growth in sales in the last 5 years. Company has posted 7.22% CAGR growth in sales from Rs. 90.83 crores in 2013 to Rs. 111.38 crores in 2017. Company has also started exporting machines to countries like Thailand, Pakistan, Bangladesh and Vietnam. Increase in exports will boost the revenues of the company in the future. In the domestic market, packaging sector is the major consumer of plastic as it is widely used in various purposes.

Net Profit:

Raju Engineers has seen a six-fold growth in net profit in the past 5 years, a CAGR growth of 30.56%. The profits grew from Rs. 1.69 crores in 2013 to Rs. 6.41 crores in 2017. Because of shift of production base from US and Europe to India and China, Rajoo Engineers will be the biggest beneficiary in the future,as such a shift provides opportunity to domestic market.

Basic EPS:

Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.

Rajoo Engineers has posted good growth in Basic EPS, form Rs. 0.46 per share in 2013, to Rs. 1.1 per share in 2017. The projected growth in plastic processing machinery to be around 10.5%, as company improves its market share, the growth in EPS will improve in the coming future.

Net Profit Margin:

Net Profit margin is the key ratio which is used to compare profitability of two or more companies working in the same sector. Net profit margin is a measure of how much percentage of total sales remains with the company as profit after all the expenses are paid. ?

Rajoo Engineers have been earning higher profit margins every year. While in 2013, the Net Profit Margins of Rajoo Engineers was 1.86%, margins improved significantly and Net Profit Margins of Rajoo Engineers went up to 5.75% in 2017.

ROCE:

ROCE or Return on Capital Employed, is a measure of how efficiently the capital of a company is being used to generate profit. ROCE is expressed in percentage terms. A company with ROCE of 20% means out of every 100 rupees employed as capital, company is able to make a return of rupees 20.

ROCE of Rajoo Engineers has also see significant improvement in the past 5 years from 4.88% ?in 2013 to 14.435 in 2017. With rise in net profit margins and rising demand for plastic products in the future, the ROCE of the company is going to improve.

Debt to Equity:

Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that majority of company is financed by loans and other debt (such as debentures and bonds).

Company has significantly reduced its debt in the past 5 years, from debt that was 4 times the equity, Rajoo engineers has reduced its debt to only 16% of its equity. In the next one or two years, Rajoo Engineers will be a completely debt free company.

Dividend/Share:

Dividend per share is the amount of dividends a shareholder receives on per share basis. Dividend per share includes all the interim dividends paid during the financial year as well as the final dividend paid at the end of the financial year. Dividend per share is calculated by dividing total dividends paid during the year from total number of shares outstanding.

Although Rajoo Engineers is a small cap stock and requires capital to grow its business, the dividend history of the company has still been impressive. Rajoo Engineers paid a dividend of Rs. 0.14 per share in 2013, which grew up to Rs.0.25 per share in 2017.

Future Expansion Plans of Rajoo Engineers:

Rajoo Engineers has started exporting its machine to other emerging markets such as Thailand, Malaysia, Vietnam, Bangladesh and Sri lanka. This will boost companys profits in the coming future. Company has also entered in collaboration with Hosokawa Alpine, company formed out of joint venture between a Japanese and a German company. The company will help Rajoo Engineers in developing better technological understanding and provide ?world class blow films system.

Since packaging sector is one of the major consumers of plastic, company is looking to cater to this sector. However, demand in sectors such as construction, automobile, is growing at 13% per annum, and the company is working towards developing better products to tap such markets.

SWOT analysis of Rajoo Engineers:

Strength:

Company is among few players in organized segment engaged in manufacturing of plastic extrusion machines.

A collaboration with Hosokawa Alpine will improve product quality, which will help in developing better, more economical products for customers while improving the quality of service.

Company has started shipping its products overseas to other emerging markets.

Weakness:

Business of the company is highly dependent on the demand for manufacturing of plastic products, the machines manufactured by Rajoo Engineers is used mostly by unorganized players. Since most unorganized players are small enterprises and vulnerable to business environment changes, any negative news in the plastics sector will deeply impact the sales of the plastic extrusion machines.

Opportunities:

Shift of production base from Europe and US to emerging markets like China and India provides better opportunity for the company.

Rising demand from packaging industry as well as from other industries such as automobile, construction, agriculture industries, and widespread use of plastic as a substitute for many other material is another great opportunity for Rajoo Engineers.

Projected growth of plastic extrusion machines is 10.3%, which is a high growth industry, which means the industry is growing at a faster rate.

Packaging sector is one of the biggest consumers of plastic. Rising consumption in India leads to higher demand for packaging needs, which leads to faster growth in the plastics sector.

Threat:

Since the plastic sector has deep impact on the environment, the sector operates under strict regulations set by the Governments. Any change in Government policies may impact the business of the company.

Should I invest in Rajoo Engineers at current levels?

Rajoo Engineers has strong fundamentals and a good business that has huge growth potential. The Company is trading at a P/E of 35 while the industry P/E is at 34.42, which makes Rajoo engineers fairly valued at current levels. The stock has given a good rally in the past few months. At these levels, I would recommend investors to invest a small amount in the stock for tracking and add some more if there is a dip in price. Looking at the past growth in companys earnings and future prospects of the sector, I believe the stock price will reach Rs. 70-100 in the next 2-3 years.

Total Comments ( 8 )

  1. Ram says:

    Quick comments :
    1. Net profit growth is inconsistent.
    2. PE ratio is already at around 35, based on the end December 2017 price.
    3. Operating margin of around 10 % does not take you anywhere. This also has not shown any consistent growth to be excited about This is a capital goods industry and you require much better net profit margin to show that you have some unique capabilities as compared to the competition.
    4. The only opportunity which is mentioned is production shifting to India. With China being around this is not going to happen suddenly. At the most, the industry will cater to the domestic market.
    5. Not sure as to how the 70 price target will be reached unless this is purely driven by demand for the security. There is nothing here which extrapolates that the price is achievable purely based on the fundamentals.
    This stock does not display even a single characteristics of having a substantial moat and multibagger classification s too early for this stock.

    • Ankit Shrivastav says:

      Hello Ram,

      Thanks for the comment,

      I was really glad to see that you put so much time and effort in not just reading the analysis, but also looking at it from an analytical view and asked the question most investors seldom ask their analysts and advisers. We need more aware investors like you. Now, lets understand and analyze each point mentioned by you.

      1. Net Profit growth inconsistent.

      If you look at the past 5 years of net profit growth, the only year when there was a drop in net profit was 2016, when profit fell from 5.24 crore in 2015 to 4.58 crores. Other than these, every year, the net profit growth has been consistent.

      2. PE ratio around 35.

      Agreed, and that is why it was recommended to buy only a small quantity for tracking purpose and watch for the drop in price. Any dip in price presents a good buying opportunity especially for long term investment. I cannot say how deep the correction will be, but as Peter Lynch says, “Everyone has the brain power to make money in the stock market, not everyone has the stomach”. Its all about your risk appetite.

      3. Operating margin of around 10% does not take you anywhere. This also has not shown any consistent growth to be excited about This is a capital goods industry and you require much better net profit margin to show that you have some unique capabilities as compared to the competition.

      As long as the margins are above prevailing interest rates, there is nothing to be worried about, as it shows that company is earning higher profit margins needed to pay interest on its debt. Secondly, one of the peers, with business model closest to Rajoo Engineers is Lakshmi Machine Works, which manufactures machines for textile companies. It has posted amazing performance in the past and is working at operating profit margins around 10%-11%. Rajoo Engineers has posted good growth in operating profit margins in the past 5 years from 4.87% in 2013, to 11.08% in 2017. Any expansion in operating profit margins will definitely be reflected in higher profitability and appreciation in stock price.

      4.The only opportunity which is mentioned is production shifting to India. With China being around this is not going to happen suddenly. At the most, the industry will cater to the domestic market.

      The consumption of plastic in various industries is is growing at 13% p.a., the growth of plastic processing machines is projected to be 10.3%. Most of the plastic manufacturing machines that are imported from China are injection molding machines, which are not manufactured by Rajoo Engineers. Secondly, keeping in mind its competitors in mind, Rajoo Engineers has done collaboration with Hosokawa Alpine fro its blow films machine. This collaboration will help company make better products at competitive price.

      5. Not sure as to how the 70 price target will be reached unless this is purely driven by demand for the security. There is nothing here which extrapolates that the price is achievable purely based on the fundamentals.
      This stock does not display even a single characteristics of having a substantial moat and multibagger classification s too early for this stock.

      If we look at the past 5 years of EPS growth of Rajoo Engineers, it has seen a growth of 38% CAGR. Assuming the EPS of the company grows at a conservative 20% CAGR in the future, after 3 years company’s EPS will be 2.33 per share (including Dividend reinvestment, assuming all the dividends received by an investor will be reinvested in the company). Assuming that after 3 years the stock trades at a PE of 32, Multiplying EPS with PE, we get a stock price of Rs.74.6, close to what I have projected.

      Hope it was helpful for you.

      if you have any queries, you can mail me at info@infimoney.com

      Thank You

      Regards.
      Ankit Shrivastav

  2. Atul says:

    It was a great call….reached 50 in no time …

  3. Amit Kumar says:

    Typo error in SWOT analysis…
    all recent recommendations are firing on all cylinders…
    thanks …

    • Ankit Shrivastav says:

      Thanks for pointing out Amit. Will try to fix the error, and yes Rajoo Engineers is on fire right now. I recommended the stock on Rs. 35 per share, trading at Rs. 58 per share currently.

  4. Ashish Ranjan says:

    Hi, it has once again come down to 38, should one enter fresh?

    • Ankit Shrivastav says:

      Hi Ashish,
      Thank You for the comment

      The reason why Rajoo engineers has seen this decline is because Hosakawa Alpine, a German Extruder manufacturer has ended its alliance with the company. The alliance took place back in 2010, when both the companies agreed to collaborate and share technology to produce better quality products and enter new, under-penetrated market like Nigeria, Ghana, Kenya, Tanzania etc.

      What impact will it have on the performance of the company is still to be seen, however, Rajoo Engineers has posted good set of numbers in 2018 with increase in sales from Rs.109 crores in March 2017 to Rs.149 crores in March 2018. Similarly, Profit of the company went up from Rs. 6.41 crores in March 2017 to Rs. 12.46 crores in March 2018.
      Company’s operating cash flows have also improved, from approx Rs. 5 crores in 2013 to Rs.13 crores in 2017.

      Looking at the fundamentals, company looks promising, at this point, trading at a P/E of 19, company is slightly expensive compared to its past growth which is 17% CAGR.

      A good investment from a long term view but just wait for some correction to buy.

      Hope this was helpful