Mallcom India - Safety Equipment manufacturer

Stock Opportunities Untested - but worth a good look
#1

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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#2

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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#3

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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#4

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.

#5

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

#6

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.

#7

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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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#8

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