ITW Signode: Buy

Recommendation: Buy

Krishnan Thiagarajan

Aided by the restructuring exercise, reshuffling of product portfolio and retirement of debt, the company has managed to post a steady improvement in performance in recent months.

ITW Signode is a subsidiary of ITW Inc., of the US. It makes steel-strappings which accounts for major portion of the company's earnings.

The company supplies strapping machines and spares to steel producers. Apart from the income from the sale of machines, the company derives a sizeable portion of revenues from the sale of spares and services. The fortunes of this division hinges on the performance of the steel sector.

Apart from steel strapping business, the company also has a prominent presence in industrial packaging division. ITW Signode offers packaging solution to various industries such as pharmaceuticals, consumer durables and other sectors which have secondary packaging requirement.

Given this backdrop, the company's fortunes hinge on the steel output and industrial production. The sluggishness in the steel sector coupled with the slowdown in economic growth had earlier affected the company's performance. However, the pick-up in the steel output and recovery in the industrial activity have had a positive impact on the company's performance in the recent quarters.

In the meantime, ITW Signode reoriented its product mix and concentrated on higher value-added products. It has also initiated measures to reduce bad debts by reducing its client base and concentrating on its top-rung clientele base.

This coupled with the retirement of debt has led to a sharp growth in performance in recent quarters. For the six months ended September 2000, the company's turnover increased 8 per cent to Rs 82.96 crore and the post-tax 22 per cent to Rs 7.83 crore.

With the industrial and economic growth showing signs of a slowdown, the company is not likely to see any significant growth in earnings in the near term. The impact of the same is visible in the performance for the quarter-ended December 2000.

The turnover during this period declined 12 per cent to Rs 46.56 crore, while the post-tax earnings remained almost flat at around the Rs 4.48-crore mark.

Though the sluggishness in the industrial sector is a worrying factor, the company now appears to be in a position to weather the lacklustre business prospects. The flow of income from the sale of spares and services, coupled with the steady trend in steel production, would help the company remain afloat even amidst the not so conducive business environment.

While the near-term performance may not improve in a hurry, the long-term prospects appears positive. Investors could contemplate exposures in ITW Signode at the current price level.