MOLD TEK PACKAGING---dividend plus growth


(Chintan) #41

Mold Tek Packaging - Expect 10% topline growth with Ebitda margin of 15% for FY16, FY17 growth pegged at 20% - Concall Update

Mold-Tec Packging – Company is into molded rigid plastic packing industry which supplies to major lubricants, paints and edible oil manufacturers. 

Industry outlook – Currently, Demand from Paint industry is almost Rs 1000-1100crs of which 50% demand is from Asian Paints in organized sector while Lube Oil demand is in the range of Rs 400-500cr. Apart from organized market, Unorganised market demand is in the range of Rs 350-400crs. Recently, Edible Oil mfgs is also started using rigid packaging in which company is into. Based on initial estimates, the size would be around Rs 1000cr of which company intends to capture 10% share in coming 15-18 months.

In Mould Labeling (IML) Decorated containers – Company offers IML containers and is only company in India with its own in-house process. Company has filed the process patent to Indian Patent Office which has been accepted there, certificate to come in next 2yrs. Currently, most of its existing clients are shifting to IML containers. Asian Paints which is their biggest client is apprehensive as it will make them dependent on the company for the container supply and is not keen to fully shift to IML as of now. Company reported IML sales of Rs 95cr (33% of total revenue) vs Rs 61cr yoy. 

QIP Issue – Company recently raised Rs 55cr at price of Rs 220/sh by issuing 25 lakh shares. DSP Blackrock MF, SBI MF, Principal MF, Amundi Funds and Canara Robeco MF are among the investors subscribed to the QIP issue. No plans for raising any equity for next 12-18 months.

Guidance – Company’s growth is primarily driven by Lubricants, Paints and Edible Oil companies, of which, Lubes and Paints industry are currently facing some headwinds while company’s recent entry into edible oil segment is showing significant traction. Company is expanding its edible oil molding capacity by 8000tpa which will get operational in phased manner over FY16. Full benefit to accrue in FY17. Company expect volume growth for FY16e at 10% and FY17e at 20%. Realization are linked with input prices so assuming the current RM prices, management see slight improvement in Ebitda margin to 15% vs 14.25% reported in Fy15.

Capacity – Company has current capacity of 22500tpa and is planning to expand it to 32500tpa by next year end. Current utilization is at 70%. Management indicated that the segment is such that it cannot operate at the nameplate capacity.

Capex – Company is currently expending its Edible oil molding capacity by 8000tpa at three locations with combined capex of Rs 45cr of which company already have spent Rs 14cr during the year. Company also plans to setup its first overseas plant at RAK (Saudi Arabia) with capacity of 3000tpa at total outlay of Rs 10-12cr. Company has deferred its two plants – Vizag (for Asian Paints) and Gwalior (for Akzo Nobel) – due to deferment by the clients by a year or two. Company don’t intent to invest any money this fiscal there. 

Debt – As of Mar’15, total debt stands at Rs 15cr (Rs 10cr LT debt). Networth at Rs 116cr. Management guided that working cap bound to increase to Rs 40cr by year end and expect Avg Debt to be at Rs 25cr range only.

(Aksh) #42

@csheth3650,

Could u pls share the source of this concall? Thanks.


(Ravi Duggirala) #43

Its available on www.reseachbytes.com


(Aksh) #44

Ahhan…so they are on RB now…grt! Thanks Ravi, completely missed it.


(Chintan) #45

@cool_aksh
its a personal note, i attended the call…tought to share with the group…


(NMB) #46

Yes, even I attended the concall. They are doing very well considering faltering demand outlook for their clients like Asian Paints. They are diversifying and de risking every quarter by entering new sectors. They also have entered the PICKLE packaging industry and see decent opportunity there.

Yes, they should grow 20% in 2015-16 but thats meaningless.

The real growth will come 2016-17 onwards when their 4 big factories come on stream (specially the Vizag factory for Asian paints).

Good dividends and debt free status gives me great comfort.

Cheers
Neil


(vijay) #47

Started looking into this company today. Here are my notes from listening to the last 2 conf calls on researchbytes:

Summary - This looks like a value migration story which will start reflecting in an year’s time.

Promoter:
Sounds like an honest man. No rosy picture painting. No hmm, haa etc…was prompt in answering all the questions
Hands-on promoter. Knows operational and financial details of his company very well
Not very sophisticated guy. I like such guys more than the polished ones as I find such guys more grounded and street smart

Industry:
Paint/lube container organized: 150k tonn (2:1), unorganized : 25%
Mold Tek has around 30% market share
Paint industry which is the main customer is stagnating. Asian paints plant in Vizak pushed by 2-3 years and Supply for Akzo Nobel in Gwalior is delayed by an year

Sectors:
Tonnage Current - IML Paint/Lube - 25%, Non-IML Paint/Lube - 70%, 3-4% IML FMCG
Tonnage Next year - IML Paint/Lube - 30%, Non-IML Paint/Lube - 55%, IML FMCG - 14-15%

Customers:
Never lost any customers!
Addition - 3
10 new clients from different segments will be added before June 2015 - Conagra, Alana, Adani Wilmar etc for square containers
Asian paints contribute 26% of revenues.There is a dedicated plant at Satara

Product differentiation:
Square share containers. Patent filed. Patent likely in the next 2 years. However, the rights will be with the company till likely patent awarding
Response from square containers has beaten expectations set during QIP
5 litre mould has huge potential
IML is highly resource efficient as most of the man power work is taken up by robots

Pricing:
Oil/lube is dependent on raw material. However, IML FMCG (oil) is mostly independent as there is no competition at the prices Mold Tek offer

Capex:
Total 60 Cr - 15 Cr Hyd, Sharjah - 10-17 Cr, Approx 15 Cr for Gwalior and Vizak
Satara and Daman are existing plants
Sharjah (RAK) and Hyd current year; Gwalior and Vizak next year
Sharjah will be ready for commercial production by Mar-Apr 2016

Capacity and addition:
Current capacity: 22k tonn, Addition: 10k
65% utilization. In injection moulding, more than 80% utilization is not possible
Addition : 10-12k ton - Existing - 3-4k, Sharjah - 3k, Gwalior/Vizak - 2.5k. So, 40% increase
Gwalior for Akzo Nobel, Vizak for Asian paints. Gwalior will open up opportunities in North India
All the plants will be used for edible oil also
Topline growth is correlated to crude prices as prices get passed on. However, raw material decrease has huge impact on pricing.

IML impact on margins:

26% of tonnage of IML adds 31% to EBIDTA. So, IML is going to be the profit driver going forward. In 2015, IML share is around 30%. In the next 3 years, it will go to 70%

Edible oil (IML) will provide 30-35 Cr sales next year. Next year IML will be around 40-45%

Growth:
Fy16 will be 10-15% topline growth. However, Fy17 will be a great year (25%) as Sharjah, Gwalior and probably Vizak capacity will come on stream
Doubling tonnage in the next 3 years. If raw material is 100 Rs, they can do 600 Cr from th current 300 Cr in the next 3 years
EBIDTA to grow by 100 bps next year

Debt:
Majority of it is working capital
Post Capex, it will come back to the existing levels. Long term will be almost zero by then. Repaying 7 Cr per year of long term debt

Disclosure : Not invested yet


(Aman Vij) #48

Great work I’ll add one more category that is Risks

  1. Promoters although have again stated concentrating on this business but their mood in the past has been whimsical. They initially ignored this after first few years to concentrate on the Technology business and now that has taken the 2nd seat
  2. Although they have been able to ramp up capacity in last few years and have been talking about the IML being their differentiated technology, there is hardly any pricing power being a B2B business. But the good thing is they have finally started their own product category/market like square edible oil containers which if done more often can lead to margin expansion
  3. Client concentration is still there as Asian Paints account for 50% of their sales and they have been most hesitant to move to IML containers which are high margin business and will give Mold tek the supplier power(which AP don’t want)

Last 2 years have been good and next few years are expected to be good specially FY17 with additional capacities kicking in but with slowdown in Paints industry and hardly any growth in Lube industry would like to see how they move up the value chain by focusing more on high margin FMCG category and now the Edible oil containers

The more I read about it the more it appears like a granules type business which hasn’t yet started the process of moving up the value chain. May be 2017 will be Mold tek’s year

Disclaimer: Invested


(vijay) #49

Rokrdude…thanks for bringing in the risk perspective. Some thoughts in line:
1 I hope the promoters are serious and focussed on Mold Tek packaging
2 I felt that the traditional client sector which was paint and lubes will provide only baseline sales going forward. The incremental sales in future will start coming from FMCG/ Edible oil and other allied food segments (ice creams etc) where adoption of IML products and new offerings of Mold Tek is higher. What needs to be seen is how fast, big and profitable this new growth opportunity will turn out to be
3 This will be taken care of itself as company starts getting traction form non-paint and non-lube sectors**

Regarding pricing power, I doubt if any B2B player has any. What is important is can there be a 20%+ topline growth with expanding margins and ROCEs for the next 5 years. Now we know this is not happening in fy16. But in case it happens after that, then we might get Mayur Uniquoters kind of appreciation here.

Vijay


(NMB) #50

Great discussion. All valid points on growth outlook and risks.

Just want to add that I have spoken to the company and their competitors and this IML is here to stay. Most FMCG companies are shifting to it. They market should grow 15% p.a. going forward.

As for Moldtek, they are doing exceedingly well. Only thing is that FY16 is meaningless…they may clock 15-18% EPS growth but the fun will start from FY17 when topline is supposed to rise 20%+.

Holding since 72 levels…with a very long term view.

*Ps - Have a look at SHAILY ENGINEERING…another good company. More advanced and focused compared to Moldy.


(Gurjot) #51

Hi All,

Been tracking the conversation on Mold Tek which got me interested to dig deeper. Listened to the Q4 earnings call today and the guidance for FY 16 is 10-12% revenue growth, Q1 may be even worse. As you all have covered FY17 is where the real game starts.

Recently, I have also been reading a lot from Ian Cassel’s blog (he’s a micro cap, <= 2000 cr / $300 m, investor in the US) and trying to imbibe some of his investing approaches apart from talking to the management (which I’m not ready for yet but is very important for investing in microcaps).

So I’m trying to look at this from a long/ultra long term approach (5-15) years. Does it have the potential to be a 5-10x? As it is, I’m not going to get all in in one scoop but average up as the performance keeps unraveling.

My concerns as per the management call :-

  1. Paints sector not growing more than 7-8%
  2. Overall lubes sector growth is negative 2-3% as management pointed out oils are becoming better in terms of mileage dilevered
  3. Q1-Q2 FY 16 - how weak will it be? Even though raw materials prices have firmed up but they’ve only reached last year’s levels. Management guidance didn’t seem positive at all for FY16. As Ian Cassel says, the best managements under promise and over deliver. May be you guys can guide me how to take the guidance here.

Valuation seems fair/undervalued compared to peers. But I’ll probably wait for Q1 to pass (thinking it might be available at 150 or might go to 220 and come back to 180 odd…timing the market is not the best thing to do but I’m confident Q1 results would have some sort of a negative impact…how much…not sure but I’ll go with my gut for now.

I can probably and I know I’ll probably get good returns in 3-4 years, but I’m looking for great and I’m ready to wait for my pitch (as Ian says).

Looking for some guidance from you guys on the long/very long term outlook.

PS: My aim is to not regret later for reasons we know now. (example :- tepid growth in both paints and lubes)
Lots of unforeseen events happen and that is acceptable. Just want to make sure, that after factoring in all variables this still seems a very good business to own!


(Aman Vij) #52

Pretty good set of questions. I have been thinking on similar lines for last few months. So here is my take.

Concern 1. Slowdown in paint industry is a temporary phenomena and should pick up once economy picks up.actually Asian paints deferment of their proposed plant could have been a major cause of concern but the demand for edible oil containers should make up for it

Concern 2 According to me Lube industry will continue to degrow so nothing can be done about it

Concern 3 See for a b2b company you can not see directly at sales growth figures as they move with crude price. Even though the capacity/output had grown at a much higher rate this year there was hardly any growth in revenue but margins expanded and that is the thing to keep tracking.

Regarding waiting for while to enter my observation is that the markets always discount the news much faster than people expect. This in no way means you should take the entry now. For me the biggest thing to look out for is how they create/strengthen new product categories like square edible oil containers and whether they are able to maintain/improve on their margins by pushing their so called moat (IML technology).

Biggest risk for microcaps like this is the market volatility as even 1 average result can led to further derating and this can go down further with low volumes as it has done from 260 odd levels


(NMB) #53

Hey buddy,

The revenue isnt growing because its linked with raw material cost. So when Raw material falls, the value of their goods sold falls.

You need to see volumes and margins here and both have been growing.

Also, you are correct that the economy is sluggish and paints sector is slowing but Moldtek is a small company with a new product with is gaining traction…so even if the market doesnt grow…they continue to add new clients and increase their market share as more and more cos are shifting to IML technology. So if we put things in perspective, its going to increase volumes and revenues even if its sector doesnt grow as they will increase mkt share like the past few quarters.

Cheers
Neil


(jainaj) #54

Guys forgive my ignorance, but IML technology which is USP as written in above threads - can’t be copied? Other players will come and destroy super margins if any. As pat dorsey says cool piece of technology can’t be a moat. Please clarify.


(vivekchoraria) #55

Hi guys,

just had a word with the marketing head of the company. They seem very bullish on the growth prospects of their new areas. they are also looking to tie up with PVR to supply popcorn containers and also soft drinks sippers. Thats a huge market according to them. Apart from this, the square containers should also start contributing meaningfully. But Q1 will be a blip as they faced certain delays in their projects. they might do only a 2-3 percent volume growth. in q1 but from q3 onwards, nos should start improving.

another interesting point to note is that higher rm prices actually lead to higher absolute profits for them as the margin which remains the same is calculated on a higher topline. would love to know your views on this.


(vijay) #56

Vivek -

another interesting point to note is that higher rm prices actually lead to higher absolute profits for them as the margin which remains the same is calculated on a higher topline. would love to know your views on this.

This means that they have little pricing power. Also, it suggests that they are unaffected by either upward or downward crude oil price movements.

For me the key considerations is:

  • Can the incremental revenues expected from newer products - IML, Square shaped containers & newer customer segments - FMCG etc be good enough to make significant impact to the topline and bottomline in the next 2-3 years

For me, I have still not been able to build convition.

Vijay


(NMB) #57

Oh the PVR development is great intel. Thanks for sharing. I am a bit annoyed with the fall in stock price from 260 to 166. But I continue to believe in the company…profit growth is good and they have retired a lot of debt with the QIP proceeds.

Lets hope they increase EPS atleast 18%+ in FY16. I will be pleased with that.

FY17 EPS growth target can be an easy 25-33%.

Cheers
Neil


(Gurjot) #58

Thanks @Rokrdude and @neil991 for your comments.

@neil991 - Noticed your comment from March which says holding since 94 levels and a week back saying holding since 72 levels. Inconsistency?

Using Stephen Penman’s book on Accounting for Value, did some calculations using company’s FY15 number
Based on his Net Operating Assets and Net Debt formula, even if Mold Tek grows at 0%, can expect returns of 13.2% over the next 1 year
Assuming growth rate of 10% for 1 year - can expect returns of 18.12%

Not sure about the validity of his formulas, but his book firmly talks about being conservative / not paying too much for growth and anchoring all our calculations on what we know now (current earnings numbers), with as little speculation as possible. Definitely find it safer to only predict 1 year into the future.

Using Buffet’s EV/EBIT calculation (even removed DA to be more conservative) - gives a multiple of 7.52 at current price. Definitely not a multiple where you’re overpaying for a fast growing (?) company with a honest management.

Disclosure - Invested and got in today with my 1st tranche and looking to add in 2 more tranches. Will wait for Q1 results to take a better call. This is not a buy/sell recommendation and my views may be biased.


(NMB) #59

Great observations. Yeah, try having many demat accounts for yourself and clients and you will also not remember the exact buy rates of your stock portfolio which has 18 stocks.


(Gurjot) #60

@neil991

Defense accepted :stuck_out_tongue:

Here’s another one on integrity - Are your clients getting the same advice as your comments here? I was a wealth manager in a Private Bank and I certainly know how work used to be done there!!!

Btw, you seem like a person I should be in contact with more often - access to management, doing scuttle-butts, and you seem extremely bullish about some of these businesses Mold Tek, KTIL, etc :smile:

PS: Mold Tek has made a smart move over the last week! Waiting for Q1 to be bad, it falling and me loading some more!