Competition is organized and unorganized. Organized players include Pearl Polymers, Chemco, Sunrise containers, Amcor, Rexam and a few others. The next biggest competitor for Manjushree is Sunrise with a capacity of 50000 MT.
Currently, Manjushree Is the largest players in SE Asia in PET and Preforms with 85000 MT.
Is the growth sustainable? If you look at their customers’, you see Coke, Pepsi, Bisleri, Kingfisher, Diagoe, FMCG packaging, Ayurvedic etc. - most, if not all, are heavily consumption based. A good way to think about this is - if you think Coke, Pepsi and FMCG (not saying Kingfisher, as its a recent client) will keep growing, Manjushree will also grow. In fact, it would be good for investors if they just stop adding capacities for a year or two, as that would allow them to deleverage their B/S and consolidate. So far, it looks like a mad rush year-on-year.
What drove this growth? I think we just need to go back to their customers’ list to get an obvious answer. Increasing list of customers in a similar consumption-led domain of course also contributes and will continue to contribute to growht.
The latest facility that they have put up is supposed to have a very high degree of automation and is likely to reduce manpower costs and improve efficiencies. How this plays out in the net profit margins needs to be seen in the coming quarters/years.
For me the key concern is the need to continuously add capacity - as you have rightly pointed Kiran. At this moment we are not seeing adequate free cash flow to support these capex additions. So there is some degree of risk in the leverage that they are taking. This for me is a point to be constantly monitored in this stock.
While this is a high growth business - it should not be at the cost of ruining their balance sheet.
Company B is one from the Valuepickr long term portfolio.
FY
2009
2010
2011
2012
2013
CAGR
Capacity(MT)
25968
30867
48432
65496
77212
31%
Sales
192.39
288.83
410.78
582.69
825.36
44%
PAT
14
27.72
32.84
39.5
60.61
44%
Asset Turns
(Sa/A)
2.18
2.96
3.29
3.29
3.64
14%
Leverage
(A/E)
1.68
1.35
1.30
1.37
1.27
-7%
NPM
(P/Sa)
7.28
9.60
7.99
6.78
7.34
0%
RoE
15.32
26.68
24.98
23.97
28.81
17%
So while company B has achieved superior asset turns with continued de-leveraging, resulting in continued RoE improvement, the RoE improvement for Manjushree has been at the cost of further leveraging with deteriorating Asset turns and NPM.
Hence, company A( MT) does not seems to be a well poised long term investment candidate given the hazards that come in handy with high debt.
Another significant aspect as pointed by Seth Klarman in MOS, is cash flows dominated by depreciation (57% of cash flows for MT) are not free cash flow per say as these assets had to be replenished in the future.
Bottom line, despite the high growth this doesn't seem to a be an investment candidate. Would love to hear some contrary views on this.
I can introduce a Company C called Page Industries, which beats every one aspect of Company B. But why are we investing in Company B than Page? The simple and straightforward answer is Price (or the valuation) at which we are getting the business.
If Manjushree was on the lines of a Astral/Mayur quoting at 15-25 P/E, then what you say makes total sense. The thesis in Manjushree is precisely a lot of undervaluation (when I started the research anyway) which can be realized pretty quickly. In that sense, in valuepickr’s parlance, it is an opportunistic bet rather than long term investment candidate. (An interesting aspect though is - look at Manjushree’s returns over the past 3 and 5 yr timeframe - 3 yr CAGR is 27%, 5 yr CAGR is 65% and they have only got stronger with more sticky clients, more clients, and higher capacities - every bit of our threshold being beaten comfortably).
Let’s not get into wonderful business, fair price Buffettisms. I think most of that in the Indian context is known only on hindsight. A 65% CAGR/27% CAGR is a proof of that.
The precise reason for not mentioning company B’s name is that we do not want to compare apples with oranges. The name of the company is immaterial here.
What I tried to highlight was that similar capacity/sales growth was achieved in other instances along with an improving balance sheet.
The short term opportunistic bet bit is pretty clear from your crisp analysis and one could well play for that, but given the deteriorating balance sheet the moot question is can this be considered as a longer term bet ? If Yes why so ? I would very much like to hear some views on that front.
In my case - I am invested since 75-80 levels - so was more of an undervaluation play at that time. Ofcourse I realise the risks of timing the exits in such stocks (which is so hard to do).
Its also helpful to read disconfirming evidence as it helps temper one’s optimism for stocks already in one’s portfolio.
Manjushree is a simple business to understand. Kiran has captured the basics well. It can fit in as an Opportunistic bet from time to time, as both Kiran and Rudra mention.
Few things to keep in mind
a) Fortunes are closely tied to Coke/Pepsi doing well - which means prolonged scorching summers. For tracking purposes - this is the only variable to track
b) Q4 & Q1 are the best quarters - and that provides the “timing” window for opportunistic bets
Q3 will be weak, so one can expect better undervaluation opportunities down the line. They might go slow on additional capex this year - as last year’s strong capex addition bet misfired - with prolonged Monsoons and weak sales by both Coke and Pepsi.
My sense is they may add new significant capacity only in Q3FY15 (despite the media announcements) - in a bid to give respite/consolidate the leveraged BS and shore up margins a bit.
[quote="Prudent_Invest_, post:147, topic:3811533"]
> Consider two companies over the last 5 years,
>
> Company A is Manjushree
>
> 13%
>
> Company B is one from the Valuepickr long term portfolio.
>
> 17%
>
> So while company B has achieved superior asset turns with continued de-leveraging, resulting in continued RoE improvement, the RoE improvement for Manjushree has been at the cost of further leveraging with deteriorating Asset turns and NPM.
>
> Hence, company A( MT) does not seems to be a well poised long term investment candidate given the hazards that come in handy with high debt.
>
> Another significant aspect as pointed by Seth Klarman in MOS, is cash flows dominated by depreciation (57% of cash flows for MT) are not free cash flow per say as these assets had to be replenished in the future.
>
> Bottom line, despite the high growth this doesn't seem to a be an investment candidate. Would love to hear some contrary views on this.
[/quote]
FY
2009
2010
2011
2012
2013
CAGR
Capacity(MT)
21740
29210
36650
48505
71075
34%
Sales
119
160
242
361
437
38%
PAT
7.49
10.57
14.79
20.5
24.14
34%
Asset Turns
(Sa/As)
1.61
1.44
1.67
1.86
1.52
-1%
Leverage
(As/Eq)
1.38
1.63
2.05
2.3
2.59
17%
NPM
(Pr/Sa)
6.31
6.60
6.12
5.68
5.52
-3%
RoE
13.26
16.53
19.71
22.5
21.58
FY
2009
2010
2011
2012
2013
CAGR
Capacity(MT)
25968
30867
48432
65496
77212
31%
Sales
192.39
288.83
410.78
582.69
825.36
44%
PAT
14
27.72
32.84
39.5
60.61
44%
Asset Turns
(Sa/A)
2.18
2.96
3.29
3.29
3.64
14%
Leverage
(A/E)
1.68
1.35
1.30
1.37
1.27
-7%
NPM
(P/Sa)
7.28
9.60
7.99
6.78
7.34
0%
RoE
15.32
26.68
24.98
23.97
28.81
Business like MT is like invest more and generate more so as long as RoIC is north of debt value it should be ok. Such companies take debt->increase capacity->higher volume so higher sales. Few other levers are pricing power, operational control via good technology etc but i dount they make any meaning in case of MT. It would be good to analyze MT for following if you have spreadsheet handy:
1) YoY RoIC trend
2) Realization trend - Sales/Volume
3) Napkin calculation:
FY13 Capacity - 71015
FY18 Capacity [worst case extrapolation] - X MT
FY18 Margin [worst case extrapolation] - 5-6%
Above can give FY18 NP to see how PEx looks like. Once some realistic calaculation is available then we can track it YoY. I am no expert in thisdomain so would like to know how realistic is to acheive a capacity of X MT after 5 years? Is demand sustainable?
Manjushree is not a secular investment bet. It operates in a very very difficult industry. A look at the financials of main competition will illustrate the point much better - that Rudra and others have made out. Manjushree has scaled nicely and put a distance between itself and competition. It’s safe to say at the scale Manjushree operates now and its entrenched relationships with its major clients (who are helpful), it will be difficult for competition to catch up or any new competition to crop up and be of significant threat.
The other good part is - usually there isn’t a demand problem in this industry. Container demand mirrors the FMCG 13-15% kind of growths while PET preforms grow at the rate Coke and Pepsi grows which is usually 30% upwards. In recent years Coke and Pepsi have grown the fastest in India.
However current valuations - do not justify any excitement for me. There are better bets around.Having said that, there may come a time when you may get it cheaper ~5-6x.
That’s the time to ride this business. This is not a candidate for 5 year buy-n-hold as Rudra has brought out succinctly.
I am still following Manjushree Technopack (for study purpose)
Currently AY14 results are out.
As I understood from comments mentioned by experts in earlier posts, following three parameters are quite important
a. Sales growth – As its mainly volume game, top line should keep on increasing.
b. Debt to Equity ratio – Company always needs to expand manufacturingcapacityto stay in business. Company is raising debt to fund its expansion
c. Net profit margin – Is company getting affected by raw material prices? Is newmachinerydoing some cost saving?
Manjushree Technopack results show
Sales growth (YoY) = 20.02%
D/E ratio = 1.7 [(Long term borrowings + Short term borrowings)/Share holder’s fund] (Experts please comment if its correct way to calculate this?)
Net profit margin = 6.02
Looking at this, its still the same story.
Few good signs which I observed
)+ Company has setup offices outside India to focus on exports
)+ Promoters are buying shares
)+ PE has crossed limit of 10 and currently it is 12.52. CMP is Rs. 243.95
)+ ‘Dolly Khanna’ has purchased 1.02% of total shares.
We are saying that Manjushree Technopack can not be long term investment because company always needs to do expansion.
One question comes to my mind.
Isn’t it the same case for any other successful FMCG company? But still we consider them good long term investment if they are available at good valuation.
( For e.g. Maggie volume demand is always increasing in India. So Nestle has to keep on increasing its manufacturing capacity. Still Nestle India is considered as good long term investment)
Is there a chance for any of the multinational companies like pepsi or coke buying a stake or taking over manjushree? If so, what will be the valuation then?
Capital allocation depends your conviction.
