I am adding Decrease in Inventory to the raw material consumed. Perhaps that might be the difference.
If they add Rs 60 Cr to Debt then interest cost should double from Rs 5 Cr to Rs 10 Cr (Assuming till Q1 they did not incur any additional debt over FY2010 end).
If the interest cost is approx. 12 % and ROCE approx 13-14 % (as per FY10 numbers)then they will hardly add any value to shareholders by incuring debt. Only way they can add value is by increasing ROCE. In my opinion they must maintain the high operarting margins of Q1 FY11 to maintain a substantial difference between Interest cost and ROCE.
If they can maintain the high operating margins of Q1 FY11 then they should be in a position to deliver an EPS of 12 despite high interest cost and would be a buy even at current levels.
Okay. finished goods increase/decrease is causing the different pictures- and quite divergent ones too. Can I try to understand this better with your help?
But whatās the correct representation -is that tobe included always in RM/Sales??
I am an accounting novice, so going by simple logic, my take is as follows:
-Finished goods are inventory, and will translate to sales probably in the next qr. if I include it in raw materials for this quarter (this raw material has not contributed to any Sales), isnt the RM/Sales picture skewed? not including it also may give a wrong picture if the inventory is huge for e.g. Also Finished goods how are they valued - looks improbable that they are valued at RM levels??
Just like you i do not have much idea about accounting.
Normally i would expect finished good inventory to include the cost of raw material gone inside it + its proportion of machinery cost + its proportion of labor cost + plus its proportion of Depreciation.
So ideally speaking it is not purely Raw Material consumed. But raw material consumed is 70 % of total expenditure for Manjushree technopack. Hence i just assumed all of decrease in finished good to be because of Raw Material. We can take an approximation that 70 % of finished good was because of RM and rest due to other cost. If we do this then you are right. Raw Material cost as proportion of sales is 1.5-2 % down as proportion of sales. Expenditure excluding RM is also down 2 %.
Thanks YSB. I think we have a reasonable handle on how to deal with this. That 70% approximation was important because that itself can cause some difference of 3-4%- and thats not negligible if we are trying to understand any trends - and draw conclusions on future operating performance.
What does this above data set tell me:
1). The company has improved on every paramater of operating data. SG&A, Employee cost, power & fuel -economies of scale
2). RM/Sales has been really going down as expected. there is a huge change (the range of decrease is between 4-10%).for me that is certainly something to sit up & take notice
3.**So operating margin expansion is a result primarily of the change in Product mix (more jobworks).**It is my contention that in future too Operating margin expansion/sustainability will be driven by this product mix having more & more of Preforms(RM/Sales going down). not because of increasing capex. their per unit realisations have actually come down
4). When the Management said in AGM of it will tough to maintain margins where they are, they referred to increasing Depreciation & Interest costs because of increased capex. They meant sustaining Net margins at 9% plus.
My evaluation of performance in future quarters is that they will probably easily maintain operating margin levels; net margins may drop marginally because of higher depreciation & higher finance costs.
About company delivering eps of around 12 for FY 11, if that happens so then there might not be too much upsides because these packaging companies are never valued at more than 8-9 times except in bubble phases when everything takes off. A good example of an even better placed company is parekh aluminex which has a fantastic market and likely to do around 45 or more eps for fy 11 and still languishing at around 320 levels.
And for Manjushree, three more quarters to go out of which two are expected to be lacklustre. So fresh buying I think should be staggered. Risk reward is dodgy at this price. There might be some short term momentum pops because of the froth seen here due to big projections made by investors and experts alike, but I feel the cream has been squeezed out of it.
I agree with you on all points except the last one (to which i partially agree). Management said that it may not be able to maintin 9 % net margin. My only doubt is whether they are playing down their capabilities. At Rs 84 and Rs 12 EPS the stock is not cheap by historical standards. Small caps with a market cap of less than Rs 200 Cr find it difficult to get PE in excess of 10.I think normally, as Hitesh said,small cap get a PE band of 5 - 10.At PE of 5 risk reward ratio was highly skewed. At current PE of approx 7 it is no longer that highly skewed and considering that small cap have high volatility i think risk reward ratio is even. Big AMC (Rs 10,000 Cr plusasset size)would not like to buy this. If they put Rs 10 Cr in it they will end up owning 8-10 % of firm, would still be 0.1 % of their fund size)and it will become a liquidity issue for them to get out of this stock. I dont think the average daily float of this stock is 10 % of its market cap (though i havenot checked). Unless a lot of mutual fund and a lot of money chases the stocks the valuations are difficult to maintin at high levels. Hence the PE ratio is likely to remain in higher single or at maximum low double digit ( i can be wrongā¦just trying to apply some common sense).
Coming back to operating margin, we should really try to ask managementor get a hing of the nature of costs (fixed and variable) under each significant head (apart from Raw Material costwhich is not in thier control). So we should try to figure out the increase inPower, Employee, SGA costs etcrelative to increase in sales. If these costs are relatively fixed then there is room for further expansion of operating margins.
We should alsogetthe sense of Job work vs complete productiondata. If managementgives a hint of increasing job work proportion then again there could be a case of OM expansion.
And then finally track the raw material cost (which i think is crudederivative).Fall in RM prices by even 1 % makes a lot ofdifference to operating margins.
Some of above thoughts are same as you mentioned but just make discussion a bit more vibrant.
My reasoning about Manjushree from here on is pretty simple.
1). Manjushree given its standing, balance sheet and growth profile was grossly undervalued at 5-6x earnings. Some of its well known peers like Pearl Polymers were quoting at double that, even with much worse returns & profitability, and poor balance sheets.
2). We reasoned Manjushree should get a 9xEPS rating sooner than later. Its TTM earnings are now 9.72 and is already quoting at 8.7x.
3). This has happened primarily I think on the excitement generated on its excellent 1QFY11 results. Q1 & Q4 are traditionally the best qrs fro MAnjushree while Q2 & Q3 are dull.
4). Since it has run up so fast, disappointment with Q2 performance is likely and corrections might be in store. These may be opportunities to accumulate more, as a 35% CAGR growth at 9x valuations still will provide some upsides.
5). I have booked partial profits. This is not a buy-and-hold stock for me. The valuation re-rating kick having happened, with a RoCE of 15% at best, and plenty of execution/operational risks with larger capex/debt in pipeline, it becomes a pass for any fresh investment.
6). Having said that, if there are big corrections on say consecutive Q2 & Q3 disappointment (vs undue/overhyped expectations), I will not hesitate to get in again. I believe this is a focused Management which has the self-confidence to do things differently in a very difficult industry, and has had a good track record.
Yes, I agree, in near term and because of our entry from lower levels, the stock looks valued but the moment we extend our investment horizon to say 1 yr+, Manjushree again has a lot of potential. It will again be a good buy on corrections.
I was reading the chairmanās speech given at the AGM (posted in BSE announcement section) and was impressed. The mgmt is highly focussed and is confident of 30%+ CAGR for next few years!!
My thinking is similar to Donaldās in this case. I have taken partial profits and intend to get in back if there is a drop. If I get it around 60-65. As Ayush, I also remain convinced about the business for the medium term. The only thing I do not know is the debt situation and how it will play out.
Thanks Siddharth. Manjushree dominates the South market PET packaging requirements and is also Cokeās largest PET preforms supplier, so this is significant. The timeframes for these factory investment seemed pretty vagueā¦Rs.250 cr investment upto 2013. another Rs. 300 Cr from 2013-15!
Will refer this to Manjushree Mangement for comment, on my visist tentatively scheduled next week.
The managementās penchant for frequent capacity expansion seems to be unnerving. They will have to resort to debt or equity dilution for that bcos cash generation is low for this one. I have totally booked out from this one. Best idea to play this stock would be to play it according to strong and weak quarters. I expect the next two quarters to be lacklustre and they might provide good entry points. I think something around 60, which was the earlier top might be a good level for re entry. Currently the levels seem far fetched but stranger things do happen in markets.
For those with longer term view of 1 yr and say upto 3 years, this could provide good returns. Biggest profit here was made once there was PE rerating which seems to be complete here. Now onwards, buying on bad news would make sense.
I am currently focussing on another of my favorites Patels Airtemp which still looks likely to be rerated. Available at around 6 PE with ROCE in excess of 40 for last 4-5 years, very low debt and conservative management, I think this stock is next in line for some serious re rating. here also sep and march quarters are usually good ones and hence next few months could be interesting. Would like views of other friends.
Your concern is legit. This is also the main point I want to raise with management when I meet them next week.
My personal opinion is that the Management has shown great restraint so far in balancing growth with Balance sheet robustnessā¦in the face of tempting, mouth-watering opportunities. The demand is very robust & they have such strength in their customer relationships with the majors, that had they the capacities, they could have sold 3x what they are doing nowā¦they have always told me that they want to consolidate each timeā¦but the demand is running far away from what they are able to put up in a year.
This next leap from a 200 Cr+ company to a 500 Cr company will be tough. It will need leveraging the balance sheet much moreā¦like you said cash generation is not that greatā¦so the risk/reward situation gets skewed. The cream was in re-rating, I agree with you.
I also agree entirely with you that there will be disappointment in Q2 for those gung-ho on the stock.Incessant and prolonged rains have dampened sales Link: http://economictimes.indiatimes.com/news/news-by-industry/cons-products/fmcg/Coke-and-Pepsi-see-dip-in-demand-as-heavy-rains-hit-impulse-buying/articleshow/6596263.cms for beverage majors Coca-Cola and PepsiCo. Sales of both firms a that were growing at a healthy 20-25% over the past eight-ten quarters a are down to poor single digits now.Company-owned and franchisee-owned plants of both beverage companies in pockets of North India, especially UP, Delhi and Rajasthan, are running below capacity now, and several production lines in these plants have been stopped altogether since the past two-three weeks.
Manjushree may not be that badly effected, as its share in the North market is less; however overall Q2 numbers will be poorer.
Please wait for an update by end of month, on both aspects.
These capacity expansions remind me of the massive capex undertaken by steel companies during harshad mehta era when things like jindal steel etc were flying quite high and planning expansions as if demand is never going to stop.
Of course things might be a bit different, but here the company depends a lot on the sales of other companies to achieve growth. And as you mention any slackening in momentum of soft drinks companies would dampen manjushreeās prospects.
Donāt know if you have referred to theAGM notes of Sep 2010. This explains the phased spend on Capex viz 60 Cr in FY11 and 80 Cr in FY12; Perhaps you are reacting to the overall figure of 200 Cr (that was announced for 3 years).
Given that the company sets a 30-35% CAGR topline target in line with the industry growth, it needs to invest in higher capacities every year. Also remember jobwork eats up most of the capacity - it doesnāt lead to higher topline but higher operating margins. Most of the expansion till now was in Preforms (jobworks). Container capacity has moved from 4000, 6000 to 7000 MTPA in 3 yrs while preforms has moved from 5000, 15000, to 22000 MTPA in the same number of years. Its high time Container capacity was expanded -if I remember correctly, there was no space in existing premises fro Container business excpansion. teh new premises may allow that.
Capex in FY10 was 44 Cr, and 33 Cr in FY09 vs 15 Cr in FY08. Given this background 60 Cr in FY11 and 80 Cr in FY12 does not seem like throwing caution to the winds! It still seems a calibrated enough move -consider that new expansions will be at new premises -land & building costs will be included in these figures, I guess.
Will confirm some of this in the Management meeting.
Thanks Donald for the good work of interacting with the management.
For a company with a market cap of around 115 crores, the company certainly seems to be having big plans. I still feel we need to monitor a 3-4 quarters before taking a long term call on this one. The argument against this could be that by that time, the stock price could have run up a lot.
I feel there are other better opportunities for stock picking. Nothing wrong with Manjushree or its plans but I feel a company which requires continuous capex for sustaining its growth is not a great stock to invest in especially when it is around its all time highs. If there are any big corrections in this stock, this would remain in my radar. But at this price I find that there are other better options. I find ABC Bearings at current price much more attractive.
This is not the time for fresh investments in Manjushree - I agree entirely. One should look to re-enter this stock on significant corrections, only.
However the company and its prospects are good. Management is pursuing growth in a calculated way- there was a perception that Mgmt is throwing caution to the winds -that needs to be corrected. And yes it is still a very small company and typical risks associated with such small companies exist.
Exchange Notification on Oct1,2010: Manjushree Technopack Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on October 07, 2010, to consider Filling of Casual Vacancy caused by resignation of existing Auditor as per Sec.224(6) of Companies Act, 1956.
I am wondering if there is something wrong with the accounting in this company. Two auditors resigning within a space of one year raises the alarm bells in my mind.
Donald, if you get a chance to talk to the management, would you ask them why their auditors keep running away so frequently!!!
I had asked about the Auditors in the meeting on 28 Sep. I was told that current auditors were a stop-gap arrangement- that they had already identified a bigger firm, who will be replacing the current auditor.
I will write to them to confirm if this is what they alluded to in our meeting.
