ITW Signode: Buy

Recommendation: Buy

B. Krishnakumar

THE domestic market sentiment continues to be swayed by the movement in the Nasdaq Composite Index. The fancy for software stocks has been dented on account of the slowdown in the US and the slew of profit warnings issued by American tech companies. In India, the economic slowdown and the decline in automobile production has kept investors wary of Old Economy stocks in general, and FMCG stocks, in particular.

Given this backdrop, the performance of the corporate sector is unlikely to improve significantly in the near term. In the depressed state of the stock market, it would make sense to take equity exposure in fundamentally sound companies with prominent presence in their respective industries.

ITW Signode is one such company all set to capitalise on a recovery in the economy, as and when it materialises. It has used the recent lean business phase to restructure operations and revamp its product portfolio. The company's overseas parent, ITW Inc., US, has also been a major force behind the restructuring operations. As a result of initiatives taken in the past, the company has improved steadily in bottomline despite a relatively modest topline growth.

In technical collaboration with ITW Inc., US, ITW Signode manufactures steel-strappings that account for major portion of the company's earnings. ITW Signode supplies strapping machines and spares to steel producers. Apart from steel strapping business, it also has a prominent presence in industrial packaging. The company offers packaging solution to steel, pharmaceuticals, consumer durables and other sectors with secondary packaging requirements.

The company derives a significant chunk of its revenues from the packaging business comprising packaging equipment and consumables. These constitute 40-50 per cent of ITW Signode's business. As a diversification move, the company has moved into specialty chemicals market.

The fortunes of the company are linked to the automobile, steel and white goods industries. These industries have seen either a slowdown or a modest growth at best, in recent years. Thus, a relatively flat trend in the company's revenue growth is not surprising.

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For the year ended March 2001, the company's net turnover declined to Rs 168.87 crore from Rs 183.8 crore. However, aided by the cost-control measures and implementation of restructuring activities, post-tax earnings increased about 26 per cent to Rs 18.35 crore from Rs 14.55 crore. On the equity base of Rs 22.88 crore, per share earnings work out to Rs 8.02.

The decision to re-orient the product mix by shifting to higher value-added products has been the key factor behind the improvement in profitability. Moreover, ITW Signode has decided to offer exclusive service to the top 20 per cent of its clientele. The remaining clients would be taken care of by its distributors.

In the meantime, ITW Signode has also shifted its focus towards exports. In the previous fiscal, exports accounted for about 11-12 per cent of the turnover. Its exports are targeted at other ITW affiliates. It is possible that the Indian arm could be used as a major sourcing base in the future. ITW Signode is actively tapping its parent's product portfolio.

The company is well-positioned to expand its product range and offer customised solutions. ITW Signode has also entered into long-term tie-ups with top companies for offering onsite turn-key services. Tata Steel and Saint-Gobain are few top companies using ITW's services.

ITW Signode could see a steady growth in earnings over a relatively longer time frame. Investors willing to wait for at least a year could consider exposures in the ITW Signode stock.