Great thread and lot of good discussion.
The thread on Manjushree Technopack would be a good reference point to understand this business and nuances in greater details. I will highlight certain pointers in couple of posts from that thread.
a) Manjushree is majorly into manufacturing PET bottles and Preforms (small test tube like plastic tubes, which can be later blown into full sized bottles)
b) They have marquee customers list - Coke, Pepsi, Bisleri, recently Diageo, Kingfisher and other FMCG companies.
c) They have a capacity of 85000 MTPA. Last year, it was around 71000 MTPA. Next year, they have indicated it would be 100,000 MTPA
d) Their major RM is a derivative of crude oil. Hence, it comes with all the oil and forex related risks.
Observations:
They have to keep adding capacity to generate additional revenues and profits.
There has not been even 1 year in the middle where they have consolidated.
Hence, if you look at it, their OMs have been consistently increasing and have sustained about 20% levels in the recent past because of the decisive shift in product mix into preforms.
However, with the increased demand on preforms, Manjushree had to continuously set up capacities - and with loans - which did not help the NPMs. Even though OPMs increased and have sustained about 20%, NPMs have not moved an inch beyond 6.5%-7% even though the capacities have gone 4x (and 5x shortly).
Manjushree is not a secular investment bet. It operates in a very very difficult industry. A look at the financials of main competition will illustrate the point much better. Manjushree has scaled nicely and put a distance between itself and competition. It’s safe to say at the scale Manjushree operates now and its entrenched relationships with its major clients (who are helpful) , it will be difficult for competition to catch up or any new competition to crop up and be of significant threat.
The other good part is - usually there isn’t a demand problem in this industry. Container demand mirrors the FMCG 13-15% kind of growths while PET preforms grow at the rate Coke and Pepsi grows which is usually 30% upwards. In recent years Coke and Pepsi have grown the fastest in India.
However current valuations - do not justify any excitement for me . There are better bets around.Having said that, there may come a time when you may get it cheaper ~5-6x.
That’s the time to ride this business. This is not a candidate for 5 year buy-n-hold.
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