Guys,
I think we risk losing objectivity in Mayur. Success is a heady thing, and it goes to the head quickly:). I would have liked to puncture the generally euphoric outlook on Mayur with a few hard facts, but I am restraining myself.
I think all of us would gain more, if we try to go back to questioning mode. I would like nothing better, than to be proved wrong. So let’s take a HARD look, first:
1). Mayur as a business has tremendous metrics, sure. It has had a great textbook track record, unlike any other small cap perhaps. Agreed. BUT that is past, what makes us so sure in the next 2-3 years this exemplary record is repeatable??
2). One of the ways to probe this aspect, (courtesy PAT Dorsey) is to examine the Sources of Growth and the Quality of the Growth. (We have provided only abridged pointers; to really become practiced at this aspect, you need to buy the book and devour the way he dissects these 2 important aspects, and …more)
3). How many of the Mayur bulls (currently:)) can quote us back a figure - how much of Mayur’s growth in FY11 and FY12 has been due to Volume Growth, and how much due to Price-Increase growth, including Forex movements? (Clue - look for this vital data in Management Q&A). And what is responsible for the figures in Q1FY13?
4). What makes us so certain that this is repeatable in FY13? What is the extent of Volume growth possible in FY13? and a fair picture of price-led growth? Only then we can comment on the likely picture, right?
5). What percentage of revenues comes from Domestic? And form Exports? Where will the next phase of growth in Mayur come from, Domestic or Exports?
6). If a significant chunk of growth has to come from Domestic - what will it cost the company? margins??
7). If a significantly larger chunk has to come from Exports - what will it cost the company? Who will it really be supplying to? Certainly not the OEMs? Why not the OEMs? It will be supplying to then some seat assemblers for the OEMS? who are these guys? And whom will Mayur be competing against? Are these competitors much bigger than Mayur? Is it reasoanable to assume Mayur will have to meet the terms of the Seat Assemblers to gain a bigger market share there? Is there some replacement sales? What percentage? Better margins there??
8). By when will the company be really ready to significantly increase Exports? Is there a different/higher quality standard that the company has to meet for Exports? What has been the record so far? Why have they not been able to enhance export contributions significantly so far. Can they really do much before the Knitting Unit comes up? When will the Knitting Unit come up? Are there additional challenges in managing heavy Exports - take Forex for example?
Let’s not base our views on Hope! Let’s base it on hard facts.
Can I expect the young turks to do some fact-finding and answer these tough, but logical questions - for your own good. If your CONVICTION goes up, after you have answered these, great! I will be happy for you and for me. And happy to learn from you.
Re-rating is a dream not worth pursuing. If it comes along, its a BONUS. But one does not need to invest hoping for a re-rating when the stock is clearly at life-time highs. If the company continues to grow at 25-30% for next 2-3 years - that’s it, you will again have a 2x in hand from here without re-rating needing to kick in, if current valuations sustain. But can it sustain 12x trailing levels that it is quoting at, or 4.75x Book?? Are we sure, this will hold, Why?
On the other hand can it do a 25%-30% CAGR from here easily? is that a given for the next 2-3-5-10 years? Some folks justify their rosy picture ahead saying - the size of the market for Mayur is Huge - Global seat-cover market, global furniture market, global shoe upper market!!!
Can you say with any conviction that Mayur’s competitive position (from here) is such that it can easily extract market share from the existing global leaders? **Really? **Can you answer why? Have you even looked at who those competitors are, and what their strengths are vis-a-vis Mayur?
The real positive that Mayur has, is its asset-light business model. It has very high asset turns, particulary fixed asset turns. 8x, if I remember correctly. In Mayur’s case, Asset Turns is the real Source of Profitability for these excellent RoE/RoCE metrics, wannabe D-I-Y analysts you gotta buy the PAT Dorsey book). I am not sure Mayur can extract same levels of asset turns any more from the new capex coming in. This will need some examining by us. The first coating line is a 14 year old fully depreciated assembly line. It has been kept operational by timely maintenance & incremental improvements to sub-assemblies. The second coating line is also possibly fully depreciated.
The new Capex for sure is more advanced technology, at higher costs? Can someone collate earlier capex vs Capacity and the recent figures? I am sure Mayur can make sure these also have an extended run. But it will be some time before they can extract similar asset turns?
Enough food for thought?
I am a believer in Mayur. But I am not in love with Mayur. When you take Capital Allocation very very seriously, it is easier to find the (hidden) warts and take a hard look - because you will always be on the lookout for someone else that can compound at a better rate with higher visibility and higher conviction.
I think Astral and Kaveri Seed are certainly scoring better on that front, right now. Even a GRP may if you consider the undervaluation vs conviction multiple. Surprised, yup - we should always keep challenging our top bets - to separate the real worthies from the pretenders. The undervaluation score is also very very important. In my book undervaluation weightage is 40% and conviction is 60%, but in Hitesh & Ayush’s case Its exactly the reverse!!! So Astral for them is not so alluring, but GRP for sure is, and so is Kaveri Seed. Do you want to pay some heed to the guys with the well-honed Market Edge??
**I intend to take a very very hard look, with all your help. **So let’s get cracking!
If you ask a Hitesh, he will easily tell you Mayur is no more his favourite pick, no more his highest allocation. He does not do so much thinking through - he just knows:) And he will also tell you with enough clarity the reasons why, in his own way, but that will not be enough to make you get out of your Mayur infatuation:), to be able to do an objective job on an as-is basis.
I am hoping my set of hard questions may force some objectivity back in the discussion. there are more by the way:)
Where are the skeptics???
-Donald
