Mallcom India - Safety Equipment manufacturer

I was looking for ideas that would fit in with the maturing and growth of the indian manufacturing sector and came across this West Bengal based safety equipment manufacturer.

On the business front , the company is one of the few manufacturers of safety equipment in India. They have renewed their branded entity and started focusing on the India operations much more. More engagements with local businesses etc through exhibitions which has translated into higher sales growth locally (yoy growth 100%). I think that with the make in india and export focus, the safety compliance of manufacturing houses will go up significantly. Mallcom being one of the most reputed businesses focused purely on safety equipment will benefit if they get their act together and start penetrating deeper into existing customers and also acquire new ones.

In my view if the management is honest, this could be a good stock to hold for the next few years.

CMP - Rs.150 ; Market Cap - Rs.90 crores; Debt ~20 Cr - Coming down significantly due to better cash flow management
FY 2014-15 Sales - Rs.250 crores (growth of ~ 20%) , Net Profit ~ 5 Cr

Cash generated from Operations in FY15 - Rs.15 Cr, Cash generated last year after working capital changes - 28 Cr

Capital Employed - Fixed assets - 43 Crores + Net Current Assets - Rs.4 Crores ~ Rs.47 Crores. Maintenance capex is negligible is what I could understand.

Domestic sales are growing at 100% this year and 9M EPS is Rs.11 so far - check the latest quarterly results. Last quarter of last year there was a loss - need to investigate if this was one time or related to seasonality. Sales growth is muted this year but still positive growth in profit as they are improving their product mix. Safety gloves are ~50% of their turnover at the moment.

It would be nice to hear contra views and any information on the safety equipment market from people working in the manufacturing sector.

Risks - Overseas sales are falling possibly due to downtrend in manufacturing abroad/ competition

Disclosure : Invested at current levels.

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3M india is the leader in the Industry. Safety field requires wide variety of accessories. For each product there is local supplier. In the same way each product has foreign competitor. Most of the Trade houses will market Foreign products only. So, we generally buy whatever the product readily available i.e also immediately after comparing the price, we buy that product. So there is no guarantee we have to buy the product from Mallcom only.

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Thanks for your response @hemavanteru . As you have hands on experience would like to know :

Is there any issue with Mallcom products/service?
Is the safety equipment awareness / adoption growing in the manufacturing industry?

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Not heard at all about mallcom products, when there is no marketing how products get familiarised. (I have worked in Mangalore, Delhi, Mumbai, kanyakumari/ Kudankulam presently in hyderabad.)

Safety awareness is now growing in construction field only ( Mostly major user due to safety equipment will get worn out /damaged very fast.) Usage of safety equipment is enforced only in major construction companies like L&T, HCC, NPCIL etc., not small players.

this is my two cents.

Results decent
Topline almost flat ( they had indicated discontinuing low margin products)
Consolidated EPS of Rs.15 for FY 2015-16 ( growth of ~40%)
Dividend of Rs.2
CMP ~ 170

This company doesn’t have any moat.

Mallcom faces competition with international players which have operations in India. These international players make industry-specific as well as more precision & sophisticated patented products. On the other hand, Mallcom is mostly into basic commodity types products like shoes and gloves. Basic products can be easily imported from China. In fact, Mallcom must have also done that because its trading sales for similar products increased, which it could have manufactured in-house. Just a random search on Alibaba gives many results for basic PPE like gloves & shoes.

It operates in a highly competitive landscape. In such a scenario, it is not possible to have a pricing power. This can be seen in Company’s financials also. Its gross margin is down from 23.3% in FY12 to 20.3% in FY17. Was 16% and 18% in FY15 and FY16.

Despite reduction in gross margin, it has shown improvement in EBITDA margins. It is up from 6.9% in FY12 to 9% in FY17. Similarly, PAT margin has also improved from 2.7% in FY12 to 4% in FY17. It is a low-margin business. Probably operating leverage is at play, but that cannot continue for a longer period of time. I believe that PAT margin will stabilise at 3.5%-4.5% range.

I don’t really think, it can grow revenue more than 10% CAGR for next 3-5 years, because its products are too basic. It will have to enter into some niche protective gear.

This is not a kind of company where one can just forget and let the management compound your money. One can only play short-term mispriced bets here.

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Remuneration is very reasonable and management doesn’t look hungry for money.

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Debtor days are in control, company is able to recover dues within credit period

Inventory turnover is declining for some time, It is mainly because company reduced trading turnover & increased manufacturing goods turnover, so nothing to worry

Net fixed asset turnover is good and I expect it to improve further

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OPM & NPM are improving from some years, it is mainly due to product mix and shifting of trading business to manufacturing, so I think current margins are sustainable.

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D/E ratio expected to reduce further (In case no immediate big capex plan) due to healthy and improving SSGR even after giving dividends.

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Domestic sales increasing at fast pace

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Export incentives are significant part of revenue, but are reducing YoY.( request experts to guide on this)

Flag : Significant purchase of goods, services & job work from related parties
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Sale of goods to associate party suddenly rise in 2019, is it genuine or to show growth in the listed entity? Expert opinion needed, plz guide.

Company has good growth potential, as safety awareness is increasing

Product usage is repetitive in nature & company is able to get repeat orders from same customers, at the same time it is penetrating deeper in domestic market.

Company faces strong competition from domestic & international players, but due to some advantages like full product portfolio it is able to get on domestic competitors and it is selling good quality products at very competitive rates in international market gives it an edge.

So I expect top line to grow at the range of 8-12% YoY and bottom line 15-25% for next several years.

Disclosure: Not invested but looking forward to invest in near future

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AR 19 - Weighted avg monthly salary - INR 6806.00
Is it inline with industry standard?
Is it in compliance with minimum wages gov. rules?

Company declared a decent result.
PROS

  1. Operation commenced at Ahmedabad plant in FY22. With regular orders being shipped to Europe productivity and shipments expected to improve further in FY23.
  2. Phase -1 of Ghatakpukur plant expected to be inaugurated on 1st July 22 as per Q4 ppt., however no announcement till date.
  3. Increased receivables in FY 22 due to high turnover during last two months of the quarters.
    The signing of FTA agreements in Australia and UAE has opened up these markets and the company is expecting breakthrough with new contracts being signed in current FY in these geographies and is targetting the UK and Canada and expansion in USA subsequently.
  4. ISO certified one stop solution and one of the largest exporters of PPE.
  5. 90% repeat orders shows good quality and reliability.

Cons

  1. Extended cash conversion cycle, increased receivables.
  2. Low free float, 92% held by promoters and one individual.
  3. 41% revenue from export to Europe, likely recession in EU can affect revenue over 1-2 years.
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Have done deep dive in this company, studied ARs since 2015, last 2 available concalls & did some scuttle butt.

Key points from scuttle butt:

1. Domestic market : Good upcoming Brand, participating aggressively in all exhibitions. Have edge with CE certifications of key items.

2. Exports : 70% market is still with China, minor shift shall also help Indian players. Market is largely unorganized number of small players.

3. Safety shoes: Market shifting from traditional safety shoes to Lifestyle Safety shoes. Large organised players also eyeing this space. R&D shall be crucial. Bata Industrials loosing market share due to poor R&D.

My study of ARs raised 2 red flags, namely : Employees remuneration & concentrated holding with one investor (Jay Kumar Daga). Have written to management 5 days ago, sent reminders & called compliance officer as well, awaiting their reply.

Reproducing my queries, hereunder for mutual learning:

Dear Team Mallcom,

Let me introduce myself, i am an individual investor, recently learned about your company. Having taken a tracking position, i would like to invest more. Before i commit considerable capital, seek your response to following 3 main queries:

1. Employee Remuneration :

 Basic data from Annual Report 2021-22 :
 a) Total expenses on Salaries, Wages & Bonus          : 1323.43 Lakhs INR (src page 78)
 b) Remuneration paid to KMPs                                    :     87.71 Lakhs INR (src page 81)
 c) Means remuneration paid to non KMP employees  : 1235.71 (a-b)
 d) Total employees (permanent + contractual)             : 2890 (src page 22) - 4 KMPs = 2886
 f) Employees under Gratuity                                         : 328 v/s 372 last FY (src page 80)
 g) Average basic salary for employees in gratuity         : 8844

Concerns:
1.  Company is paying too low salaries to its employees. Based on the above data annual payout per employee is Rs. 42,817 (c/d).
2.  Number of employees under the gratuity scheme is too low compared to total employees. 
3.  Number of employees under the gratuity scheme has reduced by 12% in 1 year , which is too high for a growing company. 
4. Average salary of employees under Gratuity is close to minimum wages. 
5. Data of employees under Gratuity is same under Consolidated & Standalone report, indicating lack of experience & expertise in subsidiaries.  

Questions:
1. Is the company ensuring compliance to minimum wages to its employees as defined by Office of Labor commissioner, Govt of West Bengal wide Memo                   No. 108/Stat /2RW /9/2022 /LCS /JLC
 2. Is the company verifying compliance of its labor provider to its contractual employees w.r.t. above referred requirements ?
 3. What is the break up of Permanent & Contractual employees out of 2890 ?
 4. What is the average monthly salary of a permanent blue collar employee ?
 5. Have you booked workmen compensation under some other head as well under expense statements ?
 6. Why has experience & expertise been consolidated in a Standalone entity, with no employee >5 years experience in subsidies ?

2. Largest Individual Investor:

  Basic data (src. available annual reports)
   - One individual NRI investor Mr. Jay Kumar Daga is holding 18.42% equity under public shareholding.
   - Mr. Daga has done gradual dilution in his ownership from 22.44 % in 2015

  Questions:
  1. Is Mr Daga related to Mallcom's Promoter family ? please cover both friends & family part here. 
  2. Is Mallcom's management aware about any relationship of Mr. Daga with M/S AB Holdings ?

3. Availability of Annual reports : Since the company was listed on Calcutta & Delhi stock exchanges prior to 2016, earlier annual reports are not available on public forum. Hence request you to please share annual reports from 2006-07 to 2013-14.

Thanks for your patience in going through the queries & looking forward to your response. Am available in case of any clarity required on above referred queries.

Wishing you all the best for the growth of the company.

Kind Regards
Charanjeev Singh

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Hi Charanjeev, this is a very useful analysis. I also checked with few dealers, their brand has a strong recall in India (30-35% of their revenue).

But i completely agree that their employee costs look too low, wondering if this increases, it can take away 2-3% of the margins they make.

Did you get any reply from the management just wanted to check.

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Hi Harshitt

Yes got the reply yesterday only, reproducing below:

Dear Mr. Kohli,

With reference to your earlier mail regarding queries which you raised, please find below**(Highlighted points)** the clarifications for the same.Hope this will resolve all your queries.

1. Employee Remuneration :

Basic data from Annual Report 2021-22 :

a) Total expenses on Salaries, Wages & Bonus : 1323.43 Lakhs INR (src page 78)

b) Remuneration paid to KMPs : 87.71 Lakhs INR (src page 81)

c) Means remuneration paid to non KMP employees : 1235.71 (a-b)

d) Total employees (permanent + contractual) : 2890 (src page 22) - 4 KMPs = 2886

f) Employees under Gratuity : 328 v/s 372 last FY (src page 80)

g) Average basic salary for employees in gratuity : 8844

Concerns:

  1. Company is paying too low salaries to its employees. Based on the above data annual payout per employee is Rs. 42,817 (c/d).

Mallcom: Please appreciate the company do employ on direct and contract basis and the total no. of people engaged is in the range of 2890, whereas the total employees on payroll as reported on page 29 of Annual Report is 570. For a total employee cost of Rs.1175.70 Lac, average salaries per employee comes to Rs.2.06 Lac / Annum.

  1. Number of employees under the gratuity scheme is too low

compared to total employees.

Mallcom: As mentioned above the total no. of permanent employees are 570 and no. of employees 328 is comparable with the total no. of permanent employees.

  1. Number of employees under the gratuity scheme has reduced by 12% in 1 year , which is too high for a growing company.

Mallcom: A total no. of 44 employees moved out of the gratuity coverage out of total 372

nos. i.e. 12%. We would like to see that employee’s continuity improves over the period.

  1. Average salary of employees under Gratuity is close to minimum

wages.

Mallcom: Average salary under gratuity is referred to Basic Salary for the purpose of gratuity calculation, which is almost 40% of the total salary as per Industy standards.

  1. Data of employees under Gratuity is same under Consolidated &

Standalone report, indicating lack of experience & expertise in

subsidiaries.

Mallcom: There is a proper integration in Managerial work for the company and its subsidiaries [Mallcom, MVSFT & BEST SAFETY] all units within FSEZ and is managed therefore by common team with long experience in overlooking SEZ operations. These employees continue to remain at the payroll of the MIL.

Also, One of the subsidiary i.e. MSPL has started its operations during the second half of FY 21-22 and therefore will not have any gratuity liability.

Questions:

  1. Is the company ensuring compliance to minimum wages to its employees as defined by Office of Labor commissioner, Govt of West Bengal wide Memo No. 108/Stat /2RW /9/2022 /LCS /JLC

Mallcom: Yes All employees under Mallcom in West Bengal has minimum wages compliance as per its latest circular.

  1. Is the company verifying compliance of its labor provider to its contractual employees w.r.t. above referred requirements ?

Mallcom: Yes, all of our labor contractors are govt. registered and duly authorized by the local authorities to operate and are under contractual obligation to comply with all the labour laws including payment of minimum wages to contractual employees and the compliance thereof is verified by us.

  1. What is the break up of Permanent & Contractual employees out of 2890 ?

Mallcom : We have 570 permanent employees and rest are under contractual basis as on year ending March 2022.

  1. What is the average monthly salary of a permanent blue collar employee ?

Mallcom :Average Monthly Salary of a Permanent Blue Collar employee is Rs.13K/ Month.

  1. Have you booked workmen compensation under some other head as well under expense statements ?

Mallcom : Yes, the employees benefit expenses refers to payment to permanent employees only. The total wages payment to both permanent & contractor employees will be around Rs.60 Cr. [Including fabrication/Processing& Labor charges booked under Manufacturing & other operational expenses] and average cost per employee therefore will be about Rs.2.07 Lac per annum.

  1. Why has experience & expertise been consolidated in a Standalone entity, with no employee >5 years experience in subsidies ?

Mallcom : Please appreciate that Mallcom is a flagship company engaged in business for last 40 yeras. All business growth and expansion therefore originates from the parent company. Both 100%subsidiaries having units in Falta SEZ had been acquired for capacity expansion within the same zone, where Mallcom already had existing operational units. Being at same place, these units are being managed by same team with significant experience in PPE gained working in Mallcom.

2. Largest Individual Investor:

Basic data (src. available annual reports)

- One individual NRI investor Mr. Jay Kumar Daga is holding 18.42% equity under public shareholding.

  • Mr. Daga has done gradual dilution in his ownership from 22.44 % in 2015

Questions:

  1. Is Mr Daga related to Mallcom’s Promoter family ? please cover both friends & family part here.

  2. Is Mallcom’s management aware about any relationship of Mr. Daga with M/S AB Holdings ?

Mallcom: No, Mr. Jay Daga is not the part of Mallcom’s Promoter family. Mr. Daga,
acquired the stake in company almost 11 years back from our outgoing foreign
collaborators and is known to us as an investor in PPE domain .

Yes, we are aware that Mr. Jay Daga is associated with M/s AB Holdings and the
association with AB Holding as stake holder in Mallcom safety is purely on brining
business on board for Mallcom Safety .

3. Availability of Annual reports : Since the company was listed on Calcutta & Delhi stock exchanges prior to 2016, earlier annual reports are not available on public forum. Hence request you to please share annual reports from 2006-07 to 2013-14.

Mallcom: Noted the requirement. Do let us know your mailing address, where hard copies of Annual Report can be sent as per your requirement.

We really appreciate your interest in the company and look forward to your association with a fast growing & professionally managed entity engaged in a unique product category i.e. PPE from India. Thanks for your patience and co-operation.

Regards,

Anushree Biswas

Company Secretary

P: +91 33 4016 1050

E: anushree.biswas@mallcom.in | W:www.mallcom.in

Mallcom (India) Limited

EN-12, Sector 5, Salt Lake, Kolkata 700091, WB, India

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My take
1. Employee remuneration issue : I don’t see compliance issue, company should have done better job by documenting right in their ARs.
2. Largest Individual Shareholder: This shall remain a overhang, more so since he is diluting equity too.

Recently learnt through scuttle butt:

  1. Company has internal target to take Domestic & Export mix to 50:50 by end of FY25. Since domestic is all Branded, gives edge against unorganized players.
  2. Karam is giving them aggressive push back in Helmets category.

Overall : interesting business to observe

Disc : Have tracking position, may add more on dips.

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the no of employees which are non contractual for different locations is as below…it does show a ramp up at gujarat facility.

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would say good set of nos from mallcom. highest ever quarterly revenue and improved margins. still feel that co is conservative and should push for more aggressive growth.