Mayur Uniquoters ~ Market Leader in Indian Synthetic Leather Market

Stock Opportunities Not-so-Hidden Gems
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Capex

FY06 FY07 FY08 FY09 FY10

OpCFlow 2.55 2.6 9.03 10.19 21.59

Capex 2.98 1.39 3.57 6.42 2.72

FCF -0.43 1.21 5.46 3.77 18.87

Sales 62.3771.7 97.81123.13 176.15

FCF/Sales -0.69% 1.69% 5.58% 3.06% 10.71%

RoE 14.75% 13.61% 21.12% 20.93% 38.57%

RoCE 17.76% 17.01% 27.64% 29.20% 57.21%

This is a rare small company consistently growing Free Cash Flow/Sales. Anything over 10% FCF/Sales for a manufacturingcompany of its size is a great record. And then you couple this consistently increasing RoE/RoCE. This company has reached asweet spot!

But operating at 83% capacity (1.2 Cr linear meters capacity). Asset turnover has shot up to 3.55 from 1.99 5 years back.As per company, Investment in process improvement -5-6 Cr will result in some 20-21% increased capacity for FY11. So there isspace to do a 35-40% hike in production which should be adequate for Fy11. process improvements completed in unit1, ongoingin Unit2,Unit3 will be completed by Oct/Nov??

Capex for FY11 -6 Cr? for process improvement

One manufacturing line (unit) ~8-10 cr?? -however set up time 12-18 months??

Operating efficiencies

FY06 FY07 FY08 FY09 FY10

Sales 100 100 100 100 100

Raw Mt 75.45 78.84 77.63 74.15 72.96

Power 1.18 1.24 1.1 1.14 0.93

Employe 3.45 4.11 3.44 3.37 3.11

Deprec 2.67 2.29 1.54 1.38 1.32

Interes 2.17 1.81 1.3 1.13 0.81

SG&A 10.01 10.32 8.66 11.17 8.41

OPM 11.42 9.51 11.18 10.39 16.13

Again there is all round imporovement. the company is getting more efficient as it is growing. Mayur Uni belonmgs to aprocess industry. They have been regularly employing consultants in a bid to improve process efficiency. For example, Thechangeover time for a Raw material roll was brought doen to 90 secs from an earlier 40 mins!! Online embossing technologyfor example reduced 1 whole process from the chain and brought huge savings in power for the company!

It shows a Management focus on improving operational efficiencies.

Appointed Mr. Priyavadan Raval (65 years)as Technical Director at the Board Meeting held on June 17, 2008.He has been partof several top notch Companies in the likes of Hindustan Unilever (India), Cipatex (Brazil) and Samsons Group of Companies.(India). He has carried out improvements in the manufacturing operations by benchmarking against International Standards andnegotiating Joint Ventures in earlier comapnies.

Exports drive

Exports have increased by 35.49% from Rs.12.34 Cr in FY09 to Rs.16.72 Cr in FY10. Exports ~10% of Sales.In the current year company expects exports to increase substantially in view of our successful supplier evaluation andproduct approval by leading Auto OEM of the world. Export orders are at 3x margins of local orders.

Backward integration is for maintaining consistency in a key input material -Knitting fabric -aimed at export orders.Backward integration knitting fabric -15 cr (FD in bank); Land acquired 24 Acres?, waiting for regulatory clearances

Approvals from BMW, Mercedes, Ford, GM, Chrysler -Ford GM Chrysler are exisiting clients?

Export orders form majors expected soon. FY11 can be serviced from 20% capacity increase+ 17% available capacity.Will set up a new unit to cater to exports. takes 12-18 months. So full benefits can be seen in FY12, Fy13

Does EOU status give any benefits other than Income Tax? like Customs, excise dusty exemptions??

Customers

Constant engagement with customers on new technology/features and focus on receivables management.Receivables have consistently come down form 96 days to 57 days. 96.63 92.60 82.52 68.41 56.79

Bata -75% supplied by Mayur Uniquoters

Dividends

DPS 1 1.5 1.92 3.53 5.01

Adj DPS 0.92 1.39 1.85 3.53 5.01

gth YoY 50 33.33 91.00 41.88

3yrCAGR 41.42 59.58 64.62

5yrCAGR 52.58

Payout 19.16 28.3 19.57 31.52 16.71

for a small company this is a very good dividend paying record

Negatives

1). Written of 34 lakhs (16 lakhs last year) as bad debt. Made provision of 49 lakhs for debtors considered doubtful>6months. Total debtors 25 cr. Bad debts +provisions ~3.3% of total debts

2). Promoters issued warrants 8,00,000 to themselves in 2007.

3). Interest & Finance cost/Total Debt -30% in FY10? (1.34/4.41)

how can it be so high; they get Department of Technology Funds too at cheaper rates?? Even FY09 was some 16.56%;Total debt came down from 7.85 crto 4.41 cr. might have repaid at the end of year?? Had they not repaid, the figure would be17% which is still high??

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Does anyone have any of it’s Annual Reports. Their website has a broken link to their 2008 AR.

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https://acrobat.com/#d=0AzIwLfZlt9zAx7ZrXyi7w

Created a shared workspace for uploading hard to find ARs. You should have recd an invitation. AR2010 uploaded

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The last year has been very good for the auto industry in India. That is probably rubbing off on this company’s prospects. Is it not? The question is how the company will perform once the industry slows down?

Also, who are Mayur’s competitors in India? Any listed companies that we can look at and compare?

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Mayur concentrates on 3 segments. Footwear (55%), Auto (25%), Furnishing (10%). Others bring up the balance 10%

Margins are higher in the Exports segment (10% of Sales) which is included in above segmentation. Automotive exports have begun only this FY to GM & Chrysler as approvals have come only 3-4 months back. BMW,Mercedesand Ford Approvals are also in , but orders are awaited.

The interesting thing to note is that they got an entry into international OEM majors only when their markets had slowed down…in 2009…after running around after them for 3-4 years, as per the company. They also did well in FY2009 when Auto was in recession in India…from the replacement market. According to them Replacement market in Automotive will soon exceed OEM. According to the company cyclicality does not impact them much.

Competitors includeJash Industries (85% in automotive) Northern India. Leather Cloth (Export), Manish Vinyl, Fem Plast of Hyderabad (80% automotive). Only listed player is Royal Cushion Vinyl Ltd, Baroda a loss making concern (not sure if it is still listed)…couldn’t see latest 1QFY10 results

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I think there is some problem with the interest cost numbers. The cash flow statement mentions the interest charges as 5.4 lacs. The P&L puts it at 133.95 lacs. Not sure if they are referring to the same thing or am I misinterpreting.

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I had seen some anamoly in reported figures for Interest Expense/finance charges in the P&L and Cash Flow statements. In P&L they club all interest, bank charges and some other charges, while Cash Flow from Financing will show only the Interest expense.

1). Interest Expenses are shown in item C. Cash Flow from Financing activities (pg 77) as 59.77 lakhs. The “Interest” charge shown in A. Cash flow from Operating is Net

2). Schedule S of P&L (pg 64) shows the break-up of Finance expenses. Interest expense adds up to 59.77 lakhs. Bank Charges and other Charges make up the rest of 133.95 lakhs of Finance Expenses

What intrigues me is Bank charges + Other charges (34.69+36.13) is almost 71 lakhs, higher than the Interest costs. Not sure if this usually is the case. What are these other charges (finance from promoter group?, etc.)?

I always look at a metric “Interest & Finance Expense”/Total debt to get an idea of the cost of Capital for the company. This showed up very high for the company ~30%, which led me to look at these expenses more closely. (Debt is 4.4 cr vs 7.8 cr FY09, they might have reduced the debt at the fag year end, which results in this higher figure)

Not sure if every company incurs Finance charges (other than interest charges) which are this high!

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Mayur Uniquoters appears inMotley Fool small cap foolish 8 screen(noticed Aug 24 2010)

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Mayur Uniquoters also appears in this ValuePickr small company low PEG screen(noticed Aug 24, 2010)

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The Annual Report was pretty sketchy and as i had just 1 years couldn’t get much qualitative insight but here are some concerns:

1). The interest cost being high relative to Total debt in FY2010 is a concern to me, it means Mgmt is using more debt and smartly paying it off by year end and it artificially leads to better ROCE. Although this has been the case only for last year rather than a regularity so maybe its okay.Still confused on the MGmt while they have delivered good numbers, they have also been involved in controversy. Also as promoter holding is high and almost close to 75% that rules out share repurchase possibilities and mgmt may be more inclined towards special dividends(which is not necessarily great because of DDT).

2). I also believe they are too dependent on a few big customers and if really as you say they are ahead of the competition why do they have so few customers in India. Auto ancillary companies generally have a larger client base which is why i prefer these stocks over Auto stocks.

3). While the margins have improved recently , it has been both due to efficiencies increasing and raw material prices softening. The margins are highly dependent on Raw material prices which is almost 75% on average. I also doubt if they can pass on the costs to the customers who are going to squeeze them hard. So its more like a commodity company where its efficiency & economies of scale are narrow moats.

4). Another question rather than a negative is what are the advantages and price difference of synthetic leather over normal leather ?? Also what are potential alternatives to synthetic leather?? As Mayur is totally dependent on Synthetic Leather, we need to ensure that it is here to stay. So what are potential problems with synthetic leather which may turn companies away from using it.

Overall i feel it is a good business but i am not yet convinced it is excellent or enjoys much of a Competitive edge. I have put it on my watch list and would consider it on declines as valuations are not compelling enough(remember its at its cyclical high).

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1). Interests costs are not high. as explained in an earlier post in this thread. Bank charges & Other charges together are making finance costs high. We need to understand what these “Other charges” are,since the charges are this high only in FY10, as you said it may be okay. But nevertheless its a valid query.

2.They have some 160 high-value clients.Customer list as mentioned at a stock forum.

Mayurs Uniqoter’s Footwear clients again an impressive array of names.
Bata India Limited
Mirza Tanners Limited-Red Tape
Rojar Exports
Paragon-Libra
Leather Craft
Khadim
Liberty Shoes Ltd
Tej Shoe Tech
Super House Leathers-Allen Cooper
Tata International
Hike Shoes-Tracer
Dawar Exports
Gupta Overseas
Super Tannery
Ponds

Mayur Uniquoters Automotive OEM Clients.Virtually they are covering the entire brass of of Indian Auto majors.
Maruti Udyog Limited
Tata Motors
Honda Scooters & Motorcycles India Ltd.
HMT Tractors
Hero Motors
Escorts â Yamaha
Honda SIEL Car India Ltd.
Mahindra & Mahindra
Swaraj Mazda Limited
Punjab Tractors Limited
LML Limited
Sutlej Motors Limited
Railway Coach Factory, Kapurthala
Hero Cycles
Sonalika Tractors
General Motors

3). Company claims they are able to pass on some of the price rises to customers. They track price volatility and keep customers informed…only 3-4 customers have walked away from Mayur. this may be true as they are the niche leaders by far.

4). A reference to Price difference between synthetic & normal leather I found as below

42" Panaa (Width)
Price per Mtr.

Leatherite (syn. leather) 200 INR
Real Leather1200 INR

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Hey I spent a couple of hours penning this down, but enjoyed every bit of it. What a company, again!

Please give a frank feedback -not so much on the company)- but on the effectiveness of the stock analysis module at ValuePickr - does it help separate the wheat from the chaff??

My bottomline - this company is propelled to greater heights by Management excellence! The industry may not be that good, but this company will continue to do well.

Valuation wise though - I feel the stock has run up too much. There will be much better entry points if we wait patiently.

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Hi

Good analysis. But here are my follow-up queries

1). Basically, i’m not clear that this company has any great advantage to grow its earnings at a CAGR of say 30-35% over the next 3-4 years.

2). It will have to dilute which will significantly change the capital return ratios which presently look attractive (this is my feel looking at the business but contradiction is that company’s payout is fairly high at20% so not sure what’s the management’s thought process). It makes one thinkwhether pay-out issobecause promoters’ stake ishigh at 75% or so, and they may still end up diluting for capex.

3.Valuation is notcomforting. What we are seeingare the past results that have been good, but then results have been fantastic even for the larger autos like M&M or Tata Motors, and both quote at nearly singledigit forward PE. So, why not as well be with a leader. Please don’t mistake me but Imean what’s the investment argument for such unknown companies at this level.

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let me answer in the reverse order

Investment argument is not for entering at these levels, for sure.

Valuations - has run up quite fast and we should get opportunities to enter at lower levels. This company is not a proxy for auto sales…55% of sales come from footwear, and roughly 25% from auto. Footwear sales will be more stable.

Dilution will not be necessary probably as the company has high cash component and healthy cash flows. capex requirements known are 15 cr for backwardintegrationinto knitting fabric plant will be met out of Cash. Further capex of 8-10 crs will be needed for capacity expansion which can be easily met out of Operating cash flows.

Company may not grow at 35% CAGR. Capex needed for FY12 growth have not even been announced. comissioning time is 12-18 months. Its likely to do 25% CAGR on a sustained basis on the back of rising exports. they may resort to substituting some local sales in favour of high margin export sales (reportedly 2-3x margins).

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Hi,

1. I looked at gross block additions over the years.Look at below trend, i don't think any meaningful capex has been undertaken in last 5 years.
Gross Block (Rs. Cr.) 24.79 25.74 32.40 35.26 37.75
Capital Work in Progress (Rs. Cr.) 0.48 0.76 0.10 0.43 0.25
If theydoubled or significantly increased their capacity, withthisexpenditure, that's great. But i havedoubts on thatsincesame expenditure included land acquisition too - those must have been some measures of debottlenecking or streamlining for higher capacity utilisation & process improvements, rather than significant installed capacity additions. And i already shared mythoughts on future dilutionthere.However, if this same kind of capital trend is the way forward, it's FCF will be more than sufficient.
2. All the healthy ratios are coming from a small base in last few years, that's why i expressed reservation on sustaining 30% CAGR from hereon with amoderate business.
3. Dependence on US OEMs which is their hopefor expanding margins, will need to be toned down. There are renewed fears of a double dip whichcould impactauto majors and in turn their suppliers.
4. Currently, footwear contributes 55% with Bata as its mainstay. In that sense, i'm wrong inlooking at Mayuras an auto-ancillary. Footwear segment will remain steady in the medium term, giving 15-20% growth.

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1. Hmm! can there be a positive side to this? why can't a small company keep growing at ~30% without heavy capital expenditure? incremental capex to Sales (last yr capex to Sales this yr) is always within some 5% for this company! for all we know this might be an asset-light business! Anything less than 5% RoA is considered asset-heavy; anything more than 20% RoA is considered asset-light (advertising, software, etc.)!

what's Mayur Uniquoter record over last 5 years

Return on Assets 8.98 8.75 15.40 16.46 34.91
Its certainly got to asset-light category!! Isn't that astonishing?

Is there something wrong in the data here? something cooked up?? or does the answer lie in continuous process-efficiency, de-bottlenecking exercises contributing to say a 20% excess capacity every year?/ what exactly is the secret??

I decided to ask this question to Mr Nagabrahma who had visited Mayur Uniquoters and spent over 9 hours talking to Directors and plant visit, etc.... Lets see if we can get the answers from him/ Management

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continuing with Arindam’s questions:

2). Yes. small base caveats introduced in Mayur Uniquoters stock analysis

3). dependence on US OEMs -lets watch the next few quarters. we will knwo if the expected orders fructify or not.

4). Footwear stabilising auto cycles; the management has mentioned even the size of auto replacement market ensures demand stability for them; they did not suffer in 2008-

donald

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Hi donald,

Among all the companies listed in our discussion namely vinati, manjushree, guj reclaim, I think the most outperformance will be shown by Mayur even from current prices. Reason being that they will need very little debt/equity dilution to increase sales and profits for next 3-5 quarters.

For FY 11, they can easily do turnover of around 200 crores and with NPM of around 10%, they could do around 20 crores net profits.

So we are looking at something like 38-40 eps for FY 11 and that leaves lot of upsides for the stock even from current levels.

About export demand, even if it doesnt rise too much, the domestic demand is likely to be quite strong if one looks at the numbers posted by the footwear companies and auto companies.

regards

hitesh.

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Hitesh,

I know your passionate belief in Mayur Uniquoters. What you outlined is an optimistic scenario.Let me outline a more conservative scenario.

Mayur did 164 cr net sales FY10. At a conservative 25% growth, they should do 200-205 Cr sales I agree. Sustaining NPM at 10% will be a tough act. Remember NPM jumped from 5.27 to 9.85 in one year. I am more inclined to believe margins may stabilise at ~9% since the management is focused on process efficiencies, going after export sales of higher margins, exiting low margin business,etc.

If I take 9% then, PAT stands at ~18.45 Cr translating to a EPS of ~34 (18.45/0.54). Taking the current 8x PE rating ~272.

The stock seems to have lost some steam in this week correcting to 230 from a high of 289. Todays correction is over 6%? Any newsflow?

It will be good to track quarterly performance and the export orders from BMW, Mercedes, etc. fructifying -to check if the scenario is improving.To me it seems fairly priced at the moment. Not any great margin of safety. Sub 200 levels will be another matter.

Rgds,

Donald

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Hi,

1). 24.79 | 25.74 | 32.40 | 35.26 | 37.75

| 0.48 | 0.76 | 0.10 | 0.43 | 0.25 If theydoubled

withthisexpenditure, that’s great. They have indeed added two more units as mentioned by Donald which tripled their capacity.

But i havedoubts on thatsincesame

they have bought one more land piece which is bigger than the current one. So, please include this land acqusition cost also in the gross block additions.

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Those additions - That has been the case with them for the last 4 to 5 years. During the current year, they are increasing the process speed by investing 4 to 5 crores and capacity is expected to go up by 22%.

mythoughts on future dilutionthere. They do not have thoughts/plans to do the equity dilution. Infact if the SEBI allows them, they would like to increase their share upto 80%

However,

Absolutely right. Their money management and planning is superb.

2).

amoderate business.True as is the case with most of the small cap companies. While the turnover may be + oro - 5% here and there, but their focus is PAT or EPS

3).

hopefor whichcould impactauto

By outsourcing these requirement, OEMs want to bring down their cost. Infact, four years back when Mayur wanted to supply, they did not even talk to them. Thanks to the financial meltdown two years back, they were given opportunity to talk about themselves and show their products. Now they are in the final stages of this negotiation with most of these OEMs and hopefully they should good order during the current year.

4).

inlooking at Mayuras Mayur is in B2B segment. Naturally it depends on its customers for its future growth. Few good things about this company is that it has customers from different sectors, has been supplying niche quality product & charging them more accordingly, tapping export opportunities and replacement market. The way new 4 wheelers are getting sold, management confirmed that within 2 or 3 years, the replacement market may outbid the OEM sales.

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**Major trigger would be Govt. banning importing Syn. leather from China. If that happens, that will be additional bonus.
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