Mayur Uniquoters ~ Market Leader in Indian Synthetic Leather Market

Stock Opportunities Not-so-Hidden Gems
646

Ran a few numbers at current scale of business and valuations - at CMP, stock appears to be discounting a below average growth rate of 6-8% over a 7 year horizon. The stock appears to be at a stage where a rather pessimistic scenario is being priced in for a business of this quality and economics. Another 7-8% lower and I will start adding considerably, at CMP I have started to nibble.

This one ran away too much soon in 2013 and I was not able to add a considerable position, given how this is playing out my patience may finally pay off. Not expecting the business to do anything great over the next 12 months though

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647

If GST implemented in spirit, this could add a trigger as they have not been able to make an entry into north India market due to unorganized players. On new plants , nothing expected for next 12 months. I am slowly accumulating every 2-3 months with a view to take allocation to 4-5% in next 12-18 months given it stays at similar valuations either by price movement or EPS movement

648

Please share the workout, if possible as I would like to know and learn the details about it. I am reading “Accounting for Value by Stephen Penman” and used a short term forecast model as suggested in the book. The model shows that market anticipates long term growth rate(g) of ~ 12%…Projected Book Value and EPS numbers for FY 18 and FY19…Assumed an EPS growth rate of 13.5% and hurdle rate (return rate an investor would like to earn) of 15%.

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649

I ain’t the best guy to learn financial modelling from :slight_smile: I usually go with a investment horizon + (4-5 year) reverse DCF and try to infer what is being baked into the current price. Don’t have the model on this machine, will send it to you over the weekend.

Some basic assumptions -

Blended cost of capital at 14.5%
Capex of 150 Cr over FY18 and FY19
Enough Capex over the next years to keep the asset turns within the broad 3 - 3.5X range
Incremental working capital at 0.35 X Sales
Exit multiple at 20 TTM is something I believe this business will trade at during normal market conditions here on (of course if this comes down to 15 then implied growth would be higher). I was initially guilty of being too frugal on this and hence most stories would appear fairly priced to me - I have realized over a period of time that when the rest of the model is conservative, there is no point in being too conservative here as well. Obviously this is optimized for my world view and my thought process (hence most analysts would disagree with me on this)

I like to make a detailed DCF model and then reverse engineer the basic assumptions while keeping most operating parameters within the broad historical range unless I believe the future will be drastically different from the present on operating efficiency.

For these inputs my workings tell me that a 6-8% growth over the period should keep the current price fair. The key thing here to note is that other than FY18 and FY19 I believe this will be a positive FCF company that will build up cash

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650

From FY16-17 Annual report -

The market forecast and trend shows Polyurethane (PU) Synthetic leather will experience the highest growth in the next 10 years. These PU based synthetic leathers use less plasticizer and polymer that is inherently softer than other synthetic leathers that have greater market appeal in many segments. These Products are less likely to fade and crack when exposed to sun light and colder atmospheric condition. At the same time, synthetic leather is advantageous over pure leather in terms of strength, also driving its demand. Hence, these PU based-leathers tend to be higher-quality than competing products, stimulating demand in both the automotive and clothing industry, despite the higher price tag.

The increasing demand by Indian populace to put a ban on slaughtering animals for the production of pure leather is forcing the governments to put in place rigid regulations with respect to the use of leather and other animal products. This step will cause a decline in the natural leather industry, which in turn is working in favor of the growth of the synthetic leather market. North America is a significant market for synthetic leather, though is witnessing a moderate growth rate due to the growing concerns regarding killing animals which is reducing the demand for pure leather, and increasing the demand for synthetic leather.

651

synthetic leather is definately the future but i have a concern with mayur whenever they start the pu plant will they be able to compete with china as there are a lot of pu manufacturers in china. will they be able to compete with the low cost pu which china supplies?

652

I was following this thread for some time and got more interested after I saw price performance in last three months. Recently I started looking at numbers, and have following observations:

Sales growth tapering: 5Yr CAGR 6%, last three years -2%
PAT growth, same fate: 16.6% and 10.6% respectively
Margins have improved though: OPM 20% (FY15) to 27% (FY17).
More concerns are on working capital: Inventory days again in 40’s while debtor days in 90+ almost double in terms of number of days in last couple of years!
Finally, RoE reduced to 20%+ from 40%+ levels.

Just looking at above performance, price stagnation and correction can be understood, but IS this a true picture? Has the Company lost its mojo?
Would like to hear from boarders here to understand “beyond the numbers” picture. Thanks!

Disc: not invested, but interested :wink:

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653

Good results esp sales growth after a very long time:

http://www.bseindia.com/xml-data/corpfiling/AttachLive/9b7a4a08-0007-4efd-9acd-a2d0315dc236.pdf

Tailwinds from GST (shift from unorganised) and leather (shift due to ban and overall structural shift towards artificial leather) can likely intensify further.

Rgds
RR
Invested

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654

Revenue growth still less than 10%. And based on this EPS performance also its trading at relatively high multiple vs. growth.

655

8-9% sales growth in the GST quarter is pretty good esp when seen in the backdrop of a company struggling to grow for last 2-3 yrs.

The nature of the biz (high OPM, return ratios, sticky sales) can sustain high multiple and sales growth if sustained can expand the same as the inherent strengths of the biz still appear intact.

PS: Div doubled.

Rgds
RR

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656

Will you say the same for Ambika Cotton ??
Commitment bias ??

If growth made the P/E, then Asian paints and pidilite will be trading at 15 times not 50.
See the larger opportunity in footwear and auto.

657

Firstly not aware of what commitment bias means. Good if you could enlighten.

Secondly, agree with opportunity size and ideally good to see signs when company starts converting the opportunity into numbers.

For factual comparison:

  • Ambika is running with 100% capacity and still giving growth; so utilization is not a problem here; On other hand mayur has over 30% idle capacity which it is struggling to utilize
  • Both are stuck on plant approvals so on equal footing here
  • Ambika is trading at 10x on cash EPS basis while Mayur at 20x (despite Ambika share price doubled in last 1.5 yrs and mayur correcting by almost 20-25%)!!
  • FCF yield for Ambika is ~10% while for Mayur is ~3-4%
  • Auto industry undergoing disruption so Mayur will have to workout with new clients in future while yarn is not undergoing any such disruption

Now its up to you to how to allocate.

PS: I have tracking position for Mayur but for now not convinced to add more and my mind can change in future and also can sell Ambika if it doesn’t meet expectations!!

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658

Don’t think by any means Ambika’s valuation attractiveness by cash flow , growth and management visibility could be compared with Mayur considering current state of business and valuation . This is my personal view n could be wrong . However, I believe going forward , if GST implemented in spirit and religious political ambitions (not commenting it is right or wrong but purely from investment impact ) result in promotion of artificial leather, both will benefit Mayur. Disc : Holding both Ambika and Mayur (slowly accumulating Mayur)

659

One more reason that they need to sort out is the successor planning , the rift between father and son, is not good for minority shareholders.Until it gets cleared the stock might be under pressure, its my personal view.

660

Q1FY18 Conference Call Highlights (my notes - may contain errors/mistakes)

Financials:
YoY growth in revenue 8.54%; EBITDA 4.9%; PBT 4.1%; PAT 4.35%
Added 6 new customers. Auto OEM export growth 20%. Footwear sales de-growth 3% YoY and increase of 22% QoQ.

PU Plant and market overview:
Full payment made for the land, Govt. has given nod to start construction.
Evaluated 3 suppliers in China for machinery, Mr Poddar visited China in the month of March.
Delivery time of machine is quite low as compared to plant construction lead time. Machine will be ordered six months in advance. Total planned capacity 1M meters (2 lines). Start with first line – 0.5M meters. PU process is divided into wet and dry process. Keeping in mind variety of the product, it is better to have both lines ready. Total 15-18 months for first line – start contributing from Q4FY19. And another 6 months for second line.
No need to have an environmental clearance as land is taken from Govt. Need to apply for Pollution clearance – as a routine practice.
Total capex planned 80-100 CR. The Machinery TUF (Textile Upgradation Fund) subsidy will be funded via Debt and the rest all from internal accruals. Around 20% debt.
PU realization compared to PVC - Less thick material initially – prices will be cheap, later it will become better.
Total demand of PU in India - Aesthetics more closer to Leather. The only disadvantage is a shorter life span of PU as compared to PVC. It disintegrate very fast if quality is not maintained. No official figure for PU consumption in India. Estimates demand of 5M Meters per month, more than 1 Cr meters imported every month as of now. Expect full production 1-1.5 years from first line. Who is using PU in India? Agra is the biggest market, application in Sports Shoe , Ladies footwear
Two factors:

  1. Fashion item – difficult to maintain inventory
  2. Manufacturers do not trust quality from Chinese suppliers
    PU can disintegrate very fast. There is a slight overlap between PVC and PU, might be a shift of few percentage points. We see both will complement each other.

Automotive business is based on programs, business increases when get requirements from new programs. FY19 – new programs – European customers
European customer new program:
Discussions are ongoing with Mercedes. If this deal happens, it can be a big increase to exports. The first audit happened in March. The second audit is planned in 3rd week Nov. The Design pattern is provided by them. We have invested money in rollers. We hope to close the deal by Jan end next year.

Other details:
After GST implementation – seeing continuous requirements from footwear market. Utlization 85% of capacity. Pricing remains same. Little softening of raw material prices. We are considering PVC business increase from increase in programs from US, European and Domestic customers. Treat PU business growth as a bonus. Difficult to maintain 25%+ margins, might see a slight reduction – stable margins. PU business – expenditure/depreciation in initial year

Revenue forecast 10-12 % growth in FY18.
Breakup of Sales
Export 36%; Domestic 64% - Auto OEM 8%, Auto replacement 14%, Footwear 38%.
Continue to see Footwear 38-42% of sales. Expect growth in footwear business. Volume de-growth for footwear 4.5% decrease YoY, 20% increase QoQ.
Lot of growth in other segments – Auto domestic and international. Next leg of growth – AUTO. Exclusive showroom in Delhi, Wholesale dealers in U.P., Bangalore, Chennai. Capacity utilization 85%.
2.5M meters from 5 lines. 3M meters from 6 lines. Can never be a Tier 1 supplier to OEMs. Always either a Tier 2 or Tier 3 supplier to them. Total 10 Cr debt level (LT+WC). Cost of raw material – higher for export business.
No pressure on margins / pricing. Capacity utilization 64.63 M meters as compared to 59.26 in Q1FY17. Realisations in export market better than domestic market.
Cash on Balance sheet 140 Cr this quarter.
Balance sheet – WC increasing. Earlier supplying to a warehousing agency, now own warehouse maintaining inventory. Improvement in margins as not paying commission to warehousing agency

Mysore Plant:
There is a change in land. Another 2 months to get land title. Plant will be for four lines. On an average 0.5-0.6 M meters / month PVC line capacity. Expect to be ready by March 2019.

Disclosure: Not invested, tracking the story.
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661

I don’t understand the obsession of taking TUFS loan although they are sitting on cash raised from QIP as well as ongoing cash generation.

Capex: 80-100 Cr
Current investments as per annual report: 118 Cr
Cash on balance sheet: 22 Cr
Debt: only 5 Cr.
Operating cashflow per year: ~ 70 Cr.

They can do entire capex through internal accruals.

662

What I understand is one has to pay a very nominal interest of 4 to 5% for
tufs based loans.So probably u can park your investment in a better return
giving investment instead of using it for capex.This must be their thought
process behind the same.

663

Huge turnover today in Mayur shares. More than 16% of outstanding shares traded. Seems like Manav has offloaded his entire stake of about 16%. Should get the disclosures soon.

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664

Westbridge sold its stake to L&T and Kotak small cap funds. Block deal.

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665

Yes… seems that Westbridge , Jwalamukhi sold to Kotak MF and L&T MF.