This post is the culmination of tireless research put forward by Rohit Krishnan towards uncovering the potential behind the company. In the same vein, this post is also an attempt to ensure intellectual honesty on our end, encourage free and frank discussion on the company and to improve the efficiency of our Indian markets by disseminating information.
An Enquiry into National Fittings – Coupling with Free Growth.
Disclosure: The authors are long.
Meditations 
Thanks Soham and Rohit for giving a perspective on a company which is very difficult to study. Annual report for the company is also out recently. I have some questions in association with your research of the company:
1. There are many European players (certified) also which are exporting grooved pipe fittings to Middle-east market. How National Fitting is poised against them w.r.t. pricing and quality.
2. In your analysis you have mentioned “The Chinese operators like MECH, LEDE and 100Tons lack a proper grooving machine” -> what does it mean? Does these Chinese product are somewhat inferior in comparison to National Fitting?
3. In the recent annual report company raised a threat from Chinese lower price products (sort of dumping if there is a slowdown in there home market). How significant is this threat according to you?
4. In the annual report they have also raised a risk of slowdown in middle east markets due to oil price crashing further. Whats your take on this as company is primarily in export to these markets currently?
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Hi Brijesh,
Thanks for penning down your thoughts. I dont know about Rohit, but if there is one thing I will admit right away is I dont have all the answers, I dont know everything.
Having said that- let me put my thoughts down:
1. I didnt come across many names in European markets except Viking. The value proposition in favour of National Fittings is cheaper but equally safe and certified products.
To that extent, I dont see any difference between European manufacturers and National Fittings except price.
Victaulic is the only leader in the market- with a very strong brand name in its favour and a strong R&D division. It is essentially now a materials engineering company.
2. I talked with a local distributor and he mentioned the following points. The Chinese guys lack a dedicated grooving machine on their own- which puts a natural bottleneck on their ability to meet large orders in short time. Additionally, any local demand will depend on easy availability from a logistical point of view( for example DMRC will seek the order to delivery time to be as low as possible). In Middle East markets this doesnt matter as much- as the high end construction will rather go for Victaulic than the Chinese guys. Hence for NATFIT the competitor #1 is Victaulic rather than Chinese.
3.Important but I cant extrapolate much here. Things are not frozen in business. There is nothing to say that Indian government may not impose an anti dumping duty. Perhaps it might not affect at all- if NATFIT shows increased growth in external markets (remember a major chunk of its revenues is still export driven). Can’t comment much.
4. A slowdown will also be terrible for the company. Is it possible? If I think only in terms of first level thinking (falling oil > falling state revenues > falling expenditure) then it seems plausible. But what if I say, a lower budget will lead them to compromise from Victaulic to National Fittings- a cheaper alternative.
But yes, overall its difficult to predict. That is the reason why the valuations are a safety net. Heads-I win, Tails-I dont lose much!
Hope it helps!
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Hi Brijesh,
Rohit here.
Valid set of questions. I don’t have much to add beyond what Soham, already pointed out.
On your European point- there are couple of other players such as Rapidrop, Viking and 1-2 more. But all of these are costlier than NF.
Amongst the cheaper alternatives from China etc NF is better placed because of these certifications. So if one has to go for quality at cheap prices, then perhaps NF is the answer.
On your Oil drop. It certainly is a risk, but when we were working on this, I spoke to folks in Middle East and I found that there is a waiting for NF’s products. At that time, Oil was pretty much at these levels.
There are few positive things in the AR , such as :
1) Improving power situation
2) Domestic market is growing. (There is only 1 Indian manufacturer of grooved fittings at the moment)
3) New product introduction which they expect to contribute decently to ther revenue.
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Thanks Rohit for your inputs. It was indeed a pleasure working with you.
Well you worked and I bragged. This partnership can go places- I say…
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Their related party transaction are too high (half their sales) as per AR_2015. They have group companies in similar activity. They seems to be getting paid/collecting rental income from unlisted entities.Why can’t they consolidate all the business under listed entity? Arms length transaction with RPT means unlisted company will be making margins too. I don’t see any reason why this business can’t be carried through listed entity. This way promoter’s interest will be aligned with minority stockholders. If all this is merged and they collect same remuneration as today under 1 umbrella then their compensation won’t look low? Economically it makes no difference to minority or promoter just the corporate form/structure will change. So saying “overall salary is low” is naive.
Their Chennai based auditor don’t audit any other listed company.
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@west_canal : Pertinent points.
For one I would like to shed some light here on RPT. Do note, this is not a defence of the company but merely an attempt at sharing the correct perspective.
The parties to the RPT with National Fittings are the true manufacturer of the hull, casing etc of the grooved pipe fittings. My conversation with the management has revealed that once the semi finished products enter the site, it takes anywhere between 3-4 hours to produce the finished goods. Which is why you see a high inventory turnover.
And it will remain at 50%.
Regarding simplification of the corporate structure you have a valid point there. However, there are instances when such a situation persists, one of the stock market darlings in textile right now has a similar structure. You can’t beat the underlying economics of the business- however you can to a certain extent slice and dice it . Not an ideal situation, mind you. To a huge extent this is what is happening in case of NATFIT . By keeping the bulk of manufacturing off the listed business shareholders are being party to a business with superior economics.
And the high pay package is being paid off the book of the unlisted companies which are not, the subsidiary of the main line business.
NATFIT is not a great business. Not because of its management or other things but because of the enormous amount of extraneous risks it is subjected to. However when I first published it, the broad market valuations were frothy and this was the only area where you dont have to pay through your nose to buy an “option”.
I bought it at 72, when markets were at 8800 levels. After such a great carnage(and rightly deserved), it has barely lost 4% of its value. By the time we stabilise I am expecting another 4%. So a pretty interesting option it turned out for me – “heads I win, tails I dont lose much”.
But now with the midcap sector correcting, there should be better opportunities available.
I repeat: this was not a defence of the company, but an attempt to explore the same situation with a different lens.
Regards,
Soham
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