FINAL CUT: The company has many things going in its favour – Industry tailwinds, diversified product portfolio, market leadership, capex, new product launches but there’s also intense competition and raw material volatility which are major risks, making it a commodity business, albeit a very well run one.
The main thing to monitor is OPERATING MARGIN SUSTAINIBILITY. Can the company maintain 9%+ operating margins? Only 4 quarters of high margins have been there. Will this continue or revert back to mean? The reason for increase in operating margins was increasing sales of XLPE Compounds, can this sustain? How’s the competitive scenario shaping up in that segment? Management doesn’t do concalls, so information about this is not present.
Valuations (DCF) – at 10% CAGR sales growth for next 4 years with 10% EBITDA margins and 10x EV/EBIT ending multiple, target price comes at 292 (40% upside)
But if margins are 9% then upside is 28% only, and at 8% margins upside is 14% only. So clearly operating margins are the main drivers of future performance.
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