Nitco Limited (NSEI:NITCO), a INR₹6.06B small-cap, operates in the building product industry, which is relatively sensitive to changes in the business cycle. Capital goods analysts are forecasting for the entire industry, a strong double-digit growth of 17.57% in the upcoming year , and a whopping growth of 31.87% over the next couple of years. This rate is larger than the growth rate of the Indian stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether Nitco is lagging or leading in the industry. See our latest analysis for Nitco
What’s the catalyst for Nitco’s sector growth?
The building products sector seems to be mainly in the mature life cycle. Companies appear highly competitive with each other and consolidation seems to be a common theme. There are plenty of emerging trends to deal with across the board including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the previous year, the industry endured negative growth of -3.60%, underperforming the Indian market growth of 12.80%. Nitco lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means Nitco may be trading cheaper than its peers.
Is Nitco and the sector relatively cheap?
Building products companies are typically trading at a PE of 25x, relatively similar to the rest of the Indian stock market PE of 27x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 13.26% compared to the market’s 9.83%, potentially illustrative of past tailwinds. Since Nitco’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Nitco’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Nitco recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Nitco as part of your portfolio. However, if you’re relatively concentrated in building products, you may want to value Nitco based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If Nitco has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the building products industry. Before you make a decision on the stock, take a look at Nitco’s cash flows and assess whether the stock is trading at a fair price.