Mayur Uniquoters ~ Market Leader in Indian Synthetic Leather Market

Stock Opportunities Not-so-Hidden Gems
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PE is a function of many factors, some of which (just some) are related to the overall market sentiment, size of the company, size of the industry, reputation of the industry, reputation of promoters, quality of balance sheet … the list goes on.

Whether Mayur should get a higher multiple, who knows? I would think so. What is the magic number, is anybody’s guess. In a raging bull market, stocks like these can get to dizzying PEs, and in the throes of a bear market can really plummet to mid single digits. At 12-15, in my personal opinion, we are probably close to comfort level for a business of this size. Beyond that, we are pushing it. Below 10, is definitely an opportunity to accumulate.

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Consider the base case, Mayur being a manufacturing company ( typically B2B companies have poor visibility unless commanding an outstanding order book like L&T which enables them to have higher visibility and hence a high P/E) will command far lesser visibility as compared to typical B2C companies be a Cera/Astral/Kajaria with high visibility.

Refer Donald’s discussion on the quality of business and scarcity premium(price an outright buyer will be willing to pay to acquire, depends a lot on the quality of business)

Hence, I will not recommend Mayur as an immediate candidate for P/E re-rating. Having said that, as long as earnings growth continues this one should continue to be a compounding machine - and should be looked into like that only - not a stock that would double overnight.

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Rudra, Are you sure that you are not confusing between association and causality? There is no cause-effect relationship between PE and B2C/B2B. Re-look at your thesis once more. The relation of B2C is what are you probably thinking of is mostly in FMCG sector.

Lets look at some good/great companies who are in the B2B space who have had fairly high PEs over an extended period of time (even in bear markets) - CRISIL, Siemens, ABB, Alstom, MMTC, Linde (erstwhile BOC)…

Similarly, if you look at some B2C sectors - cement, sugar, textiles have had historically been low PE ones.

So, net net, there is no causal relation between B2C/B2B and PE… But, that does not mean that Mayur will get high PEs tomorrow. It is a small company, not very well known, ownership is limited etc etc…

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I would agree with Rudra here (though there are exceptions), to elaborate my understanding on what Rudra said:

1). One over-riding nature of B2B business is the ability (at least in theory) of the customer to replace the vendor, if a sufficient cost/benefit is presented. This translates into unpredictability of earnings over a longer period for the vendor, which market often handles by assigning a lower PE.

Take the case of Mayur as an example, it can walk upto a client like Auto/shoe manufacturers, present it’s ware,show it’s manufacturing capability, prompt delivery record to other customer’s, lower price (sometimes),prove it’s quality by taking a few smaller orders/samples and lure it’s customer into business partnership. This relation/business will surely last, but only till another Mayur-of-Future walks in and does the same to this Mayur. For investor’s there will be a time lag between “when this actually happens on the ground” vs “when werealizeit”.

From the examples that you provided for B2B enjoying high PE, many of them are businesses which enjoyed monopoly for a period of time (I can say that about Crisil for sure & ABB if i remember correctly). Also there are exceptions of other nature like companies which provide very mission critical hence not replaceable etc. etc…

2). Now consider the nature of “most” consumer facing business. It takes longer (not impossible of course) for a rival to walk into a customer’s mind and win his business.

Because to do that, first the challenger has to find ways to reach the B2C consumer, for which the challenger has to spend wads of money (way more than his opponent) over a long period of time. Also when the B2C product has some characteristic of “habit forming” it’s get’s even more difficult to replace it. Charlie Munger’s quote on Wrigley vs Glotz’s chewing gum come’s to my mind on this:

Well, I know that Wrigley is a satisfactory product, whereas I don’t know anything about Glotz’s. So if one is 40 cents and the other is 30 cents, am I going to take something I don’t know and put it in my mouthâwhich is a pretty personal place, after allâfor a lousy dime?

Higher predictability of future earning’s for B2Cincumbentcompanies arising from these factor’s is handled by market’s by assigning a higher PE.

Take the example of ITC’s foray into FMCG business. For 10 long years they have been trying to break into some products in B2C categories which have old & established players and still losing money on it. I learn that even Nestle took 5-8 years to break even in it’s now famous Maggi product when it first introduced it in India when no other competing products existed.

Of course there are exceptions here too, like the examples you gave all are givenlower PE because they are all commodities, where it was difficult to differentiate between product of company A & B.

So, yes we can modify the generalisation a bit. But overall i agree with what Rudra said.

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Mayur concall details-

13th nov 10:30AM onwards,

conference dial-in nos.-+91 22 6629 0314 and+91 22 3065 0114

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http://www.bseindia.com/xml-data/corpfiling/AttachLive/Mayur_Uniquoters_Ltd_121113_Rst.pdf

TOPLINE growth from 96 cr to 115 Cr & net profit growth from 11 cr to 12.5 CR Yon Y.

Interim div of Rs 1.25 per share

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Concall updated.

http://www.researchbytes.com/Conference-Calls-transcript-Mayur-Uniquote-13-Nov-2013-M0213.htm

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Suresh Kumar Poddar, CMD of the company addressed the call.

Highlights of the call by Capital Mkt:

Mayur is one of the largest manufacturers of synthetic leather in India with an installed capacity of 1.85 million linear meter per month.

The production during FY 13 was 18.5 million linear meters as against 15.7 million linear meters in the previous year.

Mayur is also in the process of installing the fifth coating line which is expected to be commissioned by Jan 2014. The said line will be totally dedicated to meet the escalating export demand. This will add another capacity of 600,000 linear meters per month.

Capacity in FY 2014 will be 2.45 million linear meters and by 2014-end it will be 3.00 million linear meters. Planned 6thline will take the company's capacity to 3 million linear meters.

FY 2014 should sell 230 lakh linear meters. In FY 2015 it should be 280 linear meters and FY 2016 it should be 330 lakh linear meters

The biggest advantage with backward integration would be availability of good quality knitted fabric which is the basic raw material for the production of synthetic leather. This would support production of high quality products, thereby reducing rejections and increasing margins.

The company hopes to increase realization per meter from Rs 206 to Rs 210. The company expects realization to grow to Rs 217-218 in FY 2015.

Curently footwear realisation is Rs 2501, Export OEM realization is Rs 450, general Export realization is Rs 200, Replacement market and OEM is Rs 130.

Raw Material price has increased tremendously and the company passes this to the customers with a time lag.

Mayur is currently exporting to Ford (USA) and Chrysler (USA), which has led to exponential growth in the export segment. Exports stood at Rs 49 crore in the first 6 months of FY 2014.

Mayur has been gearing itself since last couple of years to take advantage of the increasing demand of synthetic leather. It has created large-scale capacities with backward integration, adopted modern technologies, widened its product range and created a flexible setup to quickly adapt its products to the changing customer needs. Its integration and scale of operation enables the company to produce high quality products at most competitive prices in the lowest lead times. It has a well diversified customer base and has become a reliable sourcing partner for its customers.

The company caters to all large manufacturers in automotives including Honda, Maruti, M&M, Tata, Eicher Motors and global OEMs, Ford (USA) and Chrysler (USA).The automotive segment is the second largest contributor to revenues after the footwear industry. The company is focusing on high margin export and replacement market.

The company is also wellplaced in the replacement markets and the efforts to increase sales from this market will be visible in FY 2014.

The company is confident of sales growth by 22-25% for the next 2-3 years.

The market sentiment is not encouraging. To increase sales the company is looking at new markets and new geographies.

The company's market share in US is less than 5%.

The company is seeing good demand for its products. In October it worked in its factory for 29 days.

Capex remaining for 5thline is Rs 3-4 crore.Capex still to spend for the 6thline is Rs 15 crore. The company has already purchased land and machinery, which has been paid for.

Once all lines production starts, the company sees sales growing to Rs 800 crore in next 3 years.

Mayur supplies synthetic leather to both domestic as well as overseas clients. Synthetic leather is used in industries such as footwear, automobile seats, furnishings, sports goods, ladies' bags, and a number of fashion accessories.

The company is facing no problem for raw material availability. It will not face any problems in future also as domestic producers are adding enough capacity. So the company will not face any raw material problem for its increased capacity also.

Raw material cost is 72-73% of sales.

R&D expenses as a % to sales is about 1%.

Export is 22% and rest from domestic.

The company plans to have exports of 25% in next 3 years.

Auto EOM sales in India is only 6%. So slack auto sales will not impact company much as it sells to 7-8 different segments.

The company derives more than 50% of its revenue from the organized footwear industry serving marquee clients such as Bata, Action, Liberty, Relaxo, lancer, Paragon and VKC Group.

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Good update hemant, thanks!

Can you take a re look at the realization figures mentioned above, I think it’s not very clear.

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Adding some more info:

the growth will come from all the segments including footwear, OEM export, General export, furnishing and Replacement market.

They are able to cater to 70-100% demand of the south majors in footwear like VKC, paragon, Lunar etc but not able to meet the demand from north majors like action liberty, relaxo etc. Once the capacity expands they can increase the share from current 10-15% and can meet majority of their requirement.

They are currently catering to 2-3% of the global demand and there is huge scope for growth.

6th line will cost 15 crores and the plant & machinery is imported at 35% cost from a bankrupt company. So No TUFF available here. The entire proceeds could be met by internal accruals.

So a total of 18- 20 crores remaining for capex. By Dec 14 the planned capacity would increase to more than 3 million from 1.85. the new line will add 10% more productivity(didnt mean what it is) since it is state of the art and most advanced systems.

For the first time after several quarters, i was finding Mr.Poddar to be confident and very aggressive.

To a query whether they would acquire any Indian company to expand the capacity, it was stated that none of the company met the quality standards which mayur has set and it is better to import machinery and set up than to acquire.

Very bright years ahead for mayur uniquoters!!!

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Thanks Hemant and Krishna for a crisp summary of concall. I feel that, though, result on the face of it may look mediocre, a slightly deeper analysis and concall explanations on increase in “other expenses” do suggest that on operational level the company has produced yet another excellent performance. Barring some one off expenses, forex losses, bottom line number would have been far more impressive. So, as explained on concall, around 1 crore of other expenses are one time expenses and 40 lakhs on forex losses are also considered under other expenses. 1.35 crore forex loss which emanates from buyer’s credit M2M loss is booked under finance cost. Also, differed tax (expense) has increased significantly from 12-15 lakhs to 60 lakhs. All put together, around 3 -3.2 crore of additional gain pre tax (and post tax around 2-2.2 crore) would have added to bottom line, in absence of these factors. Naturally, this would have resulted in NP increase of 25-30% from Q2, FY13.

Again taking cue from concall, 3 years forward, management is expecting sales of 800-900 crores. Let’s say 850 crores. Current NPM is around 11%, and let’s assume that in next 3 years average NPM is 10%. This will mean, NP of 85 crores. If we apply P/E of 13 on TTM (A reasonable estimate for a company growing consistently @ 20-25% CAGR having excellent economic matrix) market cap can be around 1100 crore. This will mean 20% compounded returns with very limited down side ( assuming that management will continue to meet if not exceed its own estimates/guidance as it has happened in the past) while keeping upside from margin improvement/PE re-rating intact.

So, I feel that, overall the results look encouraging and any steep fall in price may provide an interesting opportunity to buy.

Thanks & Regards,

Dhwanil Desai

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The management is very categorical n confident on 3 important criteria of their business in the concall

  1. Pricing Power- They are able to pass on entire cost on a/c of rise in RM .Recent price increase was done last qtr & in the next qtr the realisation will increase to rs 217 per m from 210 in this qtr. Speaks volume abt pricing power of the co

2)Opportunity Size)- Its Huge both in India & exports. In exports as per the concall they have tapped only 2-3 % market in USA where realisation can be as high as Rs 450 per sq m .A distributor appointed in US has been very successful in increasing exports. Chrysler is very happy with quality of Mayur products & it seems entire capacity of 5th line of 6 lac meter will cater to exports.A distributor is being appointed in Europe as well.Efforts being made to increase exports in Africa & ME too.

3)Execution- The management has walked the talk .They have exceeded all expectation so far in the last 5 year period.Refurbishing old depreciated lines which act as new is resulted in high ROCE.This is again emphasized by acquisition of 6 th line at throwaway price of 3-4 crores from a bankrupt Italian co which they will make spanking new by Sep 14. So capcaity will increase to 30 lac meter by Sep- Dec 14.Management is also on the lookout for further lands to further expand .

4)**Sticky Clients **Most of Mayur clients are spread over 7-8 sectors & no risk of top heavy concentration is there as no sinle client is more than 5% of turnover.

5)MoatQuality,Scalability,Variety in designs,capacity,backward integration into knitted fabrics,long drawn approval process for OEMs in exports & In India acts as a big moat for the co

Management was sounding very confident of 20-25% growth but they have a track record of under promise n over delivery.What could be the EPS estimate for March 15 which could be the bumper year for the co?

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http://www.firstpost.com/business/turnaround-kerala-footwear-industry-is-now-a-rs-700-cr-sector-1252713.html

Its all thanks to handholding Mayur has done for good keral footwear manufacturers like VKC & Paragon that Kerala is now an established center for footwear manufacturing.

Good news & more assured growth for Mayur Uni.

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I did some rough calculation using FY-13 Year ending data:

Capacity - 17.81 M-Lin-Mtr

Sales - 380 Cr

Sales realization - 21 Cr/M-Lin-Mtr

NP - 43.63 Cr

Margin - 11%

Now here comes the future model for next 5 years:

Growth rate - 30%

NP after 5 yrs@30% )- 162 Cr

Sales with margin of 10% - 1620 Cr

Estimated capacity assuming realization of 21 Cr/M-Lin-Mtr stay constant - 77M-Lin-Mtr

So we have to see what are the challanges for MUL to expand the capacity by 4+ times. It seems to me that MUL could be able to reach here. If it continue to find new markets [demand] and grow the capacity YoY while maintaining the other parameters [margin, realization etc] constant then its a sure winner. Any surprise on improving the paramters like margin, per unit realization etc. would be a bonus and accelerate the growth rate.

View welcome w/o any bias.

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Just noticed that in past five years capacity has increased 2.2 times while NP has increased 8 times. Reason is simple, sales realization in 2008 was 11.25 Cr/M-Lin-Mtr and it has just doubled in FY13.

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Dear Friends,

I am convinced that Mayur Uniquoters has a fantastic business model. I am also convinced that there is no-one to touch Mayur from competition angle in the path that Mayur intends to take. However, I wanted comments on whether one can go ahead and buy this stock at 15 times earnings? I find this a little expensive as there is little room for re-rating?

Opinions awaited!

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Hi Abhishek,

Do you have any point that makes you feel there is room for re-rating? Just having P/E does not mean overvalued or correction may happen.

Regards,

Sunil

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Hi Abhishek, In my very limited experience, I think Mayur is fairly priced at the moment. No doubts that it is an excellent business but current valuations are slightly on the higher side. I made a big mistake of selling Mayur at 225 (adjusted). I will wait for a better entry point.

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Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.-Peter Lynch
**Iss stock mein Jaan ha

**

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PFB my views:

A. Quantitative valuation

  1. FY13 Pre-tax earning - 71 Cr and MCAP today is 10 times of it. So if you think as owner and buy the entire company then it takes 10 years to recover the investment if earning stayed constant. While if growth rate is say modest 10% till eternity then MUL is valued at 710 Cr hence its fairly valued. Lower you buy safer you are if a very long term investor.

2)If RoE& payout is maintained at 40% and 20% then growthrate could be 32% so EPS will grow to 20.15x1.3 = 26. HY14 EPS is 11 so if all assumptions [5th LINE running] are penned out well then FY14 EPS should be somewhat 24-26 so MUL is valued at PE of 13-14 which looks on higher side historically.

B. Qualitative Valuation

There are very few small caps who are showing such consistant high RoEs. Its only possible if business has some moat. High RoE is coming w/o use of any significant leverage which a strong plus. Since RoE = EPS/BV and for MUL BV is increasing due to continuous need of capacity so as long as EPS growth is far ahead of BV i.e. incremental RoE investors should be fine.

In past 5 years WC was 12 Cr and NP was 6 Cr and now WC in FY13 is 52 Cr while NP has zoomed to 43 Cr - a great improvement!

As long as incremental capacity is happening and sales improving couled withstable or growing margin will kepp the RoE stable or incremental YoY. If thistrend is sustained then MUL would be darling ofall or vice versa.

So at CMP it looks historically expensive buy market prices the stock forward. It seems investors are optimistic hence gradual rerating is happening. MUL may command higher PE in next 2-3 years if all above assumptions come true or else it would be de-rated back to median PE.