Mayur Uniquoters ~ Market Leader in Indian Synthetic Leather Market

Stock Opportunities Not-so-Hidden Gems
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Hi Donald,

I can’t comment on the compounding rate of Mayur vis-a-vis Kaveri/Astral. But I can explain in a simple/crisp manner, why I still have faith in me, and why I can sleep smoothly even after investing 30% of my portfolio (theoretical situation).

Promoter : Mayur is known to have a capable, honest, but conservative promoter, who have 75% state in the company, no share pledging. A down-to-earth CEO, who believe in taking the tough path (at least regarding debt, where they follow the tough approach of getting cheap loan from textile ministry). They have a excellent track record of delivering good growth, and going by past experience, they should be able to do so, provided other environmental variable remain same.

Business : Mayur is a classic example of super-performer in a boring industry. It caters almost equally to auto, footwear, and other consumer segment. Synthetic leather is the way to grow forward, because of regulatory/environment impact normal leather. They have a marque list of client like BMW, GM, Ford, and pretty much all of major Indian footwear industry. It tells a lot about the quality of the product they make. It’s business is partly recession proof because of high percentage of clients are in footwear, and consumer segment. It is a pseudo-play in indian footwear industry. The market size is huge for it. Domestic competition is non-existence, international competition is majorly from Chinese player, majority of which are inferior in quality.

Valuation : With a consistent of ROE/ROCE of 40, a debt free status, at a PE of 12 is a value buy (PEG ratio ~ 0.33). How many companies are present who can match these figure. If PE rerating doesn’t happen for these kind of stock, I don’t know for which kind of stock PE rerating happened.

Recent run-up in its price post-bonus can be attributed to HNIs accumulating huge amount of stock (high volume, high delivery percentage), which again is an excellent news. They can buy such huge amount, thanks to funky indian law of short-term profit reducing via bonus. Otherwise Mayur has been a low-liquidity stock, where big player can’t even think of entering. With 75% with promoter, and another big chunk with HNIs, there are less amount of freely available stock of Mayur, which again is a good positive sign.

With management track record, huge business opportunity before them, cheap valuation, Mayur seems to be one of the best stock to have in one’s portfolio at the moment. I am not sure whether it’s compounding rate will be less than Kaveri (which I know is quoting at around 11, where its historic pe at 20, makes it a compulsive buy) or astral or not.

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Hi Subhash,

Good to see a spirited defense;). One must have Conviction in one’s best ideas.

I am using your answers as an example to illustrate a few points- I hope you won’t mind my posing very BLUNT observations. This is a trait of mine that many senior investors also don’t like - I like to challenge and be challenged, that’s the only way I can learn about my BLIND spots…and grow from where I am today. Eventually they have come to accept this style …they understand I am not trying to undermine anyone…its a quest!

From your answer, I fail to see any OPEN-ness in acknowledging possible downsides. Rather, I detect a certain rigidity. I am not asking anyone to comment on the “knowns” in Mayur. That is why Mayur is where is it today. This is a classic example of staying in love with the stock …

If you/anyone looks closely at the answers you have provided…it becomes apparent that not a single one of the questions posed is answered…just a repeat of arguments about the quality/pedigree of the companyy/management. That is being super complacent…passive…no one with any allocation higher than 5-10%…can afford to be so. If your allocation is around or less than 5%, yes you can be comfortable…

The biggest mistake we as investors are prone to make …assume the PAST will continue. Just why should one feel so sanguine that past performance will continue to be as good. From where is this PEG ratio of 0.33 coming? Are we saying Mayur will grow at 36% plus from here??

If yes indeed one thinks Mayur will grow its earnings at this rate for the next 2-3-5 years, hey that’s good. But shouldn’t one be making double sure that is not HOPE, but grounded in reality. What are the facts telling us?

I would like guys to check the facts and come back on the growth for FY13 first, and maybe for the next 2 years. That would come form Capacities available, utilisation rates. A certain volume growth component and maybe a certain price-increase component. Assumptions have to be conservative, not over the top and in line with historicals on volume growths. And very very conservative on price-increase led growth.

By the way PEG, is a much misused ratio in Valuations. It is best used as a rough thumbrule, not as a definitive Valuation measure. Make sure you have looked at PEG from all angles, read up what Guru’s have already cautioned against. We have tried to point readers to the same in this PEG Ratio brief (Use the Read more links for further pointers).

Another very useful thing I have learnt in the last year about Valuations -pointed to by Mr D. Look at the Value of the business to an outright buyer of the company. How much would one like to pay for primarily a processor-type of business like Mayur (no matter how good the Metrics; ask yourself this question will someone like to pay 3x Sales for Mayur), versus say a Pharma business (think/examine what recent acquisitions have been at, versus a business with significant Intellectual property like a Kaveri.

I certainly gained a huge jump in perspective on Valuations from starting to think like this. This is another Success Pattern thread I have to start:). You may like to think more on these lines and share back your findings.

Cheers

Donald

PS: If we always agree, then one of us is not needed right!!

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Donald, though you have valid points, I dont see any point ofover-analyzing, incase there something drastically wrong happens then take a call. While the going is good stick on.

Every company and every stock will have some holes, you need to have conviction, if you dont I am afraid it will beincrediblydifficult to make outsized returns in the market, your money will never compound. You will move from one idea to another idea make a bit of profit but will never realize the amazing benifits of compounding (this is the only thing which can create extraordinary wealth)

As an example people of made massive wealth in stocks like ITC, HUL etc. by sticking to these stocks for decades, and these stocks have had years in between of problems and low growth.

Sometimes always looking at opportunity cost is not always the greatest idea, my two bits hold on to both Kaveri and mayur, with a longer horizon (there is really nothing wrong with both of them), when you see something drastically wrong happen raise all the flags you want too.

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Interesting discussion on merits/demerits of Mayur.

I think the question boils down to how much one can allocate to Mayur at current price levels.

For me , one thing I have learned over the years is not to overallocate especially in small caps. Hence I dont share subash’s confidence of allocating 30% to Mayur.

Regarding prospects of the company I agree it will continue to grow at a fair clip. I dont want to go into specifics as one needs to go through the FY 12 AR to get a glimpse of the management confidence. In my view FY 13 may be a regular 20% growth for Mayur. Real kicker will start from fy 14 when all expansions and backward integrations will have been finished.

Coming to valuations, there might not be much on the table for someone buying above 400 Rs especially if one compares it to something like Kaveri where I see an upside of 40-50% as a very good probability from current levels. Question is can Mayur go up from these levels by another 40-50%? I would say I am not too sure. So for me opportunity cost is there in keeping a bigger allocation to Mayur. (I will not be totally out of Mayur but allocation would remain at what it is currently)

Coming to biggest plus for Mayur is again the question of “Kitna deti Hai”. Markets will always forgive companies paying high dividends for a quarter or two of lax results bcos with the track record of Mayur in dividend payments, market now seem to be assured that this is a dividend play going ahead. So I guess not too much downsides expect in market meltdowns.

Surprisingly I first bought Mayur bcos at around Rs 100, they were paying a dividend of Rs 4 and I had a feeling then,(I think i wrote it on TED then also) that Mayur can be a great dividend play if it continues to grow. Price appreciation to the extent of 8 times those levels in a period of less than 3 years is something which I had not expected.

Currently if I had to invest fresh money, it would be into kaveri as compared to mayur.

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** Look company. ** start:)).

Hi Donald,

I think you have put up some very pointed questions and most of them are very relevant too in my opinion. I too have Mayur as large portion of my portfolio, however, I am completely with you on the queries that you have raised. I think if I understand it correctly, what you are asking is does Mayur has any durable moat to sustain superior ratios that we have witnessed till now? And all the questions that you have raised, if answered, shall lead us to some direction whether Mayur is just in a sweet spot or has long term durable moat. Frankly, I have struggling to find an answer to this question because whether Mayur trading at P/E of 12-15 make itcheap or fully priced, largely depends on the answer to this question. My personal take is that Mayur still does not have a “durable” moat as of now. How is it different from far larger and technologically more advanced chinese players (anhui Anli (listed), Wanhua, Polytech, Hudau)? Some of these players are far bigger than Mayur and produce quality material as well. So I do not see differentiating factor for Mayur. Yes, if Mayur starts doing sizable business with large number of OEMs (Ford and chrysler have started) and in substantial amount (not just as one of the suppliers but asone of the largest suppliers) than it will get some durable competitive advantage which is hard to replicate for competitors. There will behigh switching costs for OEMs once they have a comfort level with Mayur in terms of quality/price/service matrix.Do I see mayur reaching there? I am not too sure at this point. Till then, one must treat Mayur as business in a sweet spot and accordingly do capital allocation. Regarding GRP/Kaveri Seeds/Astral, I feel you have rightly pointed out that each one of them is slowly building durable moat (may be less for GRPcompared toKaveri and Astral). Probably, if I have to invest today my money Why would I not buy Amara Raja (strong brand + reach + pricing power) at P/E of 12which in my opinion has durable moator Atul Auto (Strong brand and building reach as well) at very reasonable P/E of 6 and jump for Mayur?

I think you have given enough food for thought. I will try to see if I can get some information that may answer some of the questions that you have raised.

Disclosure: I am also currently reading Pat Dorsey’s book so my views can be biased!!! :slight_smile:

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Couldn’t agree more with Hiteshji, a 30% exposure to any stock is really upping your risks. As a rule I don’t like allocating more than 15%- 18% to any one stock in my portfolio. And however good I feel about Mayur, it’s still not reached that league of a mature mid cap, to allocate so much of your portfolio. I have a 15 stock portfolio and for me both Mayur and Kaveri won’t cross 5-8% of my portfolio each.

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Hi Donald,

I didn’t answer your questions, as I didn’t have the answers with me. I don’t have the huge advantage of being at full time investing. Good promoter track record, and huge business opportunity were the reason behind my love with Mayur. I have a huge respect/love for folks who are consistent, conservative, and take the tough route. That made me make the 30% portfolio comment. I agree I am most likely wrong here.

Business moat prospective is the one which was missing from my analysis. Vivekji has the chance to talk with CEO of Mayur and share the details of the talk with me. As per the CEO, the Chinese guys have a slightly better edge as they have pure PU (polyurethene) leather, whereas Mayur make PVC + PU based leather, which is of slightly lower quality. They are trying to resolve it.

Another question to the sceptics of Mayur. Can these chinese players enter indian footwear/fashion accessory market and compete with Mayur. As per my knowledge, mayur is the choice number #1 in indian market, and supply artificial leather to pretty much all of the indian footwear folks.

Question #2, Before Mayur’s entry into US highly lucrative US/EU auto industry, chinese players would be the one who were supplying the artificial leather. Mayur must be the late entrant, and there has to be some pricing power, superior quality of product which make it enter the market.

I think we need to find the answer to these queries to get a better picture of the business moat of Mayur.

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Hi Donald,

While I agree that a lot skepticism and looking at risks and concerns is utmost necessary in new and existing stocks, but at the same time one must not be to skeptic to get down from the journey which has just began.

The market is valuing Mayur at 12 times trailing and not 40 times trailing like Page Industries is because of these concerns and significant absence of brand moat and pricing power. Had those been here, Mayur would have been in every fund's portfolio by now.

Here we are taking a cautiously optimistic bet to the future based on the promoter integrity, long term vision and considerable size of opportunity coupled with superior execution displayed in the past.

Another way I look at this is from the market cap story, taking a broader horizon and ballpark figure, if things indeed go right Mayur can reach sales of ~3000 Cr (25% each coming from each division and Management envisages a 500 Cr-1000 Cr topline from Auto OEMs in the long term) over say 10 years time.

At 3000 Cr topline, at 10% NPM it will correspond to 300 Cr profit and a 14-15 times P/E at that time will lead to 4200-4500 Cr market cap for Mayur. In other words I see a potential 10 bagger from here on over the next 10 years. How much is that for a CAGR, a moderate 26% and 2-3% for dividend yield. So a potential 30% compounder over the next decade.

Of course things can go wrong, and I am not comfortable allocating more than 15-18% of one's portfolio in Mayur. (Even in my brother's portfolio, I plan to decrease Mayur allocation not be reducing Mayur but by adding on to the other names). But the very reason you are getting a 25%+ compounder (potentially) at these low prices is because of those risks.

I truly see a wonderful opportunity ahead in Kaveri Seeds (and that's why taken the position) however I am not so comfortable (yet!) as to why an Astral at 16times trailing is a way better candidate than a Mayur at 12 times trailing. The day I am convinced, may be Astral will also form a significant part of my portfolio.

Coming to Mayur again, I see the following trends of Debtor ratio consistently increasing with higher margins both at Operating and Net profit levels coupled with lowering D/E. Another significant take is Mayur has consistently maintained higher Cash profit margins than adjusted net profit margins. All these point towards the brand moat building (all though these are baby steps at present) in a very very slow and steady fashion.

One may be right or wrong about the future but that is only proved in hindsight, but the decision pointers at present gives me enough confidence to lock-in 15-18% of one's capital in this boring business with a even boring name. :)

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Debt-Equity Ratio (x) 0.45 0.32 0.17 0.08 0.05
Long Term Debt-Equity Ratio (x) 0.24 0.22 0.16 0.08 0.05
Current Ratio (x) 1.32 1.37 1.58 1.65 1.48
Fixed Assets (x) 3.36 3.64 4.83 6.24 6.02
Inventory (x) 12.02 17.35 20.95 22.08 15.24
Debtors (x) 5.26 5.87 7.47 9.41 9.55
Interest Cover Ratio (x) 7.84 8.27 19.84 21.16 26.09
Operating Profit Margin (%) 10.8 10.02 16.33 15.62 15.95
Profit Before Interest And Tax Margin (%) 9.38 8.73 15.09 14.62 14.83
Gross Profit Margin (%) 9.6 8.97 15.57 14.93 15.38
Cash Profit Margin (%) 6.65 6.21 10.45 10.38 10.8
Adjusted Net Profit Margin (%) 5.22 4.92 9.21 9.39 9.68
Return On Capital Employed (%) 28.9 30.72 63.84 70.63 66.46
Return On Net Worth (%) 23.4 22.8 45.68 49.04 45.44

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my comments on some of the points raised in last few posts:

From the discussion it seems that none of us with maximum allocation to Mayur attended the last AGM wherein it was clearly mentioned that profit growth in FY13 will not be much.

Mayur is not trading at 3x sales but only at 1.2x sales.

Plan to set up unit in south india was shelved long ago. Comapny will continue to expand at existing location.

Regarding shifting to Atul Auto, Atul auto is a price taker. In the event of slow growth in its products, if market leader Piaggio with higher margins decide to reduce price to take higher market share, that will imapct Atul Auto’s margins badly.

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Some generic comments from my side; More from a food for thought perspective.You don’t have to agree/disagree with me.

I came on very hard - because the balance in discussions went missing - euphoric, motherhood statements, if you like were prevalent:). I am still a very big fan of Mayur and it is still likely to be no 2 or no 3 in my portfolio, till we find other better opportunities. (Conviction x Undervaluation multiple)

1). Allocation is not only about RISK moderation. if Mayur is at 15% I am happy. No

2). I need to think about theQuality of Businessof Mayur (and how that kind business is likely to be valued ever) by the market; and a potential buyer of the whole business.

3). Mayur is simply not in the top of the league - for all the wonderful metrics, management depth, vision, niche leadership, consistent growth, large opportunity size, promoter interests aligned with shareholders - and these are very big pluses - and one can enjoy a long ride just for these -it is still a processor type of company.

4). Long term valuations will never match that of superior quality business type companies - e.g Brands with pricing power, Pharma or Intellectual Property (IP).

5). So no use comparing with a 40x earnings valuation companies and feeling happy that Mayur is at 12x, so it’s completely safe -Opportunity cost-wise, speaking.

6). Mayur at 5x was a throwaway bargain. Mayur at 12x isn’t a bargain any more. Mayur may not get valued consistently at more than 12x-to 15x ever; or more than 1.5x Sales. 2x Sales will be a rare achievement if we see super results keep coming in and it goes to the next level.

7). Downsides may be protected because of the the super Dividends. I love Mayur for this. Everytime I am able to buy more of Mayur from the Dividends. And that adds to my compounding.

Bottomline. (My personal View)

In my mind there are better quality businesses we are looking at currently, than Mayur. Some of these should increasingly take higher allocations than Mayur. in some the right sort of Undervaluation is also present. In some valuations are not that comfortable. That’s a call I will have to take.

Can we get back to data?

Capacity available/projected?

Volume Growth/Price growth possible?

To my mind, getting a handle on data is not Over-Analysis. Not all have the bandwidth to work on extracting information, as Subash mentioned. Those who can should surely pitch in. It should be our attempt to bring everyone on the same page as far as data/information is concerned - so all can take better-informed investing decisions.

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FY12 FY13(Projections) FY14 (Projections)

Domestic Market Size (Cr) 2700.0 3240(20% up)

export Market Size (Cr) 4000.00 ??

Sales 317 380 (20%)

Mayur’s market Share(%) (Domestic) 9.96 9.72

Foreign 1.28 1.48

Available Production Capacity

(lakh meter/month) 18.5 18.5 24

Utilization/month 13.0/18.5=70% 14.5/18.5=78% (Assuming current 11% growth)

Volume growth (Projection/month) 13.0 14.5

Price Growth 28-11=17 20-11=9

Export/revenue 16 17

Domestic/revenue 84 83

The overall numbers in FY13 are almost identical to those in FY12. Mayur’s Domestic share almost remains at 10% (because industry grew by 20% and mayur also grew by 20%), where as the foreign market share is a mere 1.28% in FY12 to 1.48% in FY13.

ThoughMayur’s sale should be up 20% (projected), what I am not able to appreciate is how to interpret these numbers meaningfully and why sudden change from bullishness to caution.

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Thanks. Will try to punch in some numbers from my side from tomorrow, sometime. Will be on the road.

The caution is for any fresh investment )- Guys started talking about big re-rating possibilities, it can go upto 20x …stuff like that. Those who are holding on from significantly lower levels, its a no-brainer decision to Hold on tight and enjoy the ride.

At the same time, for someone like me who has 28% allocation at cost - its high time to book some profits and bring down the allocation (in value terms) to moderate levels…as compounding from here on, will depend on earnings growth…we have got the re-rating we/Mayur deserved -from 5x to 12x is great…to expect a 20x is actually being blind to the inherent business quality/ or lack thereof. A 15x also will take some doing - on the numbers front (till FY13)…unless there is a secular bull run from here on.

My attempt is always to bring everyone on the same page as my current understanding on any stock/business. Its not a sudden turnaround. the mispricing in Mayur is over (as per me) so bullishness gets moderated considerably. Especially as there are better businesses available at mispriced valuations (again as per me).

Always open to be countered - with facts & figures - and considered opinions.

-Donald

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fresh investment )-

Thanks for this clarification donald.

I am in learning phase and trying to understand what seniors like you can see/interpret from the figures which I am not able to interpret.

Really appreciate your thought process and concern for all.

-Atul

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Hi Donald,

This brings us to a very important discussion, about the inherent nature of the business. What is evident from your posts, that an inherent processing/manufacturing type company can never command superior price-earnings simply because it lacks the inherent business moat/ pricing power.

All the stocks trading at abnormally high multiples be it a Page / Titan / HUL / ITC / GSK command a significant and sustainable brand moat and very strong entry barrier that sustains this moat for a long long time.

Like Prabhakar quoted the Buffet wisdom, if someone is given 10,000 Cr to make sure that a new health drink gains acceptance and considerable market share in the 5-17 age group over the next 5 years, will he be able to do that ? No, not possible. A Horlicks (GSK) or Maggi (Nestle) has this MOAT and everything comes after that or rather derive from that.

So that brings us to this critical question should we trim our focus only on identifying and hence investing in companies which can in the long run develop / sustain a considerable brand moat for a period of time and be able to protect it ?

But in this process should we completely ignore the inherent opportunity to locate and ride with companies in processing/manufacturing/commoditized cyclicals where a typical company can potentially return 10x return on capital over 3 years, even without the aegis of brand moat and strong entry barriers. Is this superiority only assignable to low base effect and being-in-a-sweet-spot ? Cause if we are confident that’s so, it is obviously not repeatable on a higher base and under difficult not-so-sweet scenarios.

Some case studies in this regard will surely help. Ask all to point to ones if you find in the Indian or global context.

ps: If I correctly understand this, this might have a far reaching impact on investments and portfolios going forward.
Let’s not club this with Mayur, let this flow elsewhere as an independent discussion.

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Hi Rudra,

Thanks for bringing this up. As I see it, these companies with Real Moats are rarely to be found in “Mispriced” or Undervalued situations. Except in a secular bear run or, perhaps on account of one-off developments in the company. So we need to be very very patient for well-discovered ones, or have a very very “refined eye” to spot potential moat stocks, before they are fully discovered. Our Capital allocation Framework tries to draw attention to thinking about businesses more clearly.

As I see it, Conviction & Undervaluation (mIspricing) are two important facets in the Investment decision. Till such time there is tremendous mispricing (hence greater margin of safety) and there is high conviction - investment in such an instrument is a no-brainer. In other words, as per our Capital Allocation Framework, if Conviction is High, and Undervaluation is High, allocation should be high. What naturally follows is, if Conviction is High, but Undervaluation is medium, allocations can only be Medium.

In Mayur’s case, Valuations have caught up with its fundamentals (as per me). Undervaluation is now Medium. It can go to “Low” depending on performance from here. There are signs of growth moderation. Management is already talking of that.

However Mayur’s Management is known for Under-promising & Over-Delivery. Those who have interacted with Mayur Management atleast a couple of times are aware of this (welcome) trait. Many of my discerning friends feel that the Company CAN easily do 400 Cr Sales and 40 Cr in Net Profits in FY13. Some bulls are not shy of suggesting a BUY at this stage too. Contrast this with those who interacted for the first-time with Management at this years AGM, they feel fresh investment in Mayur at current prices is ruled out.

The “truth” is somewhere in between! Fresh Investment in Mayur is no more in the no-brainer category. Let’s examine the data more closely, as to what it is telling us.

And we can do follow-up calls with Management, based on our findings.

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Hi,

Great discussions! Haven’t been able to participatecontinuouslydue to huge backlog at my end :frowning: I think Donald has raised a very valid discussion and having attended this year’s AGM, though I was very impressed by the company and increased my exposure post the visit but at the same time I felt that a major growth and improvement in ratios has happened for now.

If one looks at the nos carefully, then a major growth has been due to increase in pricerealizations. Going forward the next major round of increase inrealizationsshould happen by way of export market (where the product sells at twice the domesticrealizations, though the gross margins are same) . And the co hasn’t been able to tear into the likes of BMW & Mercedes on a large scale. So this may take another 1-2 years for meaningful nos to play in.

I would agree with Dhwanil, that there isn’t a great moat as of now. The moat may develop when they are able to scale up on export front and develop relationship with the biggies. The quality is that the co is good, very well managed and has a great set of promoters who are hard working and visionary in their field. I think till then 12-15 PE is a decent valuation for the co.

I would also like to appreciate the detailed work on Rudra on the future prospects. I agree that there is potential but at the same time, like Donald pointed, they would perhaps need a higher quality teamwork and managementbandwidthto deliver the same. Its not a given as of now :wink:

For FY13, I would be happy if the co delivers more than 375-380 Cr turnover and 38-40 Cr of NP.

Ayush

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Was trying to look at the Chinese players in bits and pieces, very few reports are accessible (that too most are in Chinese :

First, the one Dhwanil mentioned Anhui Anli Artificial Leather Co Ltd.

Anhui ANLI Artificial Leather Co.,Ltd. is principally engaged in the manufacture and
distribution of polyurethane (PU) synthetic leather.

As Mayur CEO Mr.Poddar said the Chinese players have a edge as they are into pure PU (polyurethene) leather, whereas Mayur still makes PVC + PU based leather, which is of slightly lower quality.

As a leading domestic enterprise in the polyurethane synthetic leather industry, Anhui
Anli Artificial Leather is most competitive in export and has strong bargaining power ( so we do have some scope of Moat in here too! )

Anhui Anli is one of the** leading enterprise in the domestic PU leather industry** mainly engaged in the R&D, production and sales of PU leather; with 16 yearsâ experience in production of PU leather, it is an enterprise with most innovation ability and international market competitiveness, and its production and marketing scale ranks second in the industry; its products include ecological functional PU leather and ordinary PU leather;** it has over 1400 stable clients**, covering all famous shoe enterprises and some furniture enterprises in China.

The ecological functional PU leather and superfine fiber PU synthetic leather represent
the development direction of the industry. PVC leather still has a strong competitiveness in the low-end market with its low-cost advantage, but its market share will be gradually seized by PU leather; ( BIG THREAT ON THE FUTURE OF MAYUR ?) the ecological functional PU leather will increase rapidly by relying on its good performance and reasonable price with the consumption upgrade; the superfine fiber PU leather will maintain a rapid increase due to the market recognition improvement in the future, but it will take a long time for it to substitute real leather and other types of leather.

In the long term, the demand of natural leather exceeding its supply will become the long trend. Ecological functional PU leather and superfine fiber PU leather are expected to become the mainstream in the market.

December 2011 sales of US$155.64 million ( 3x of Mayur’s sales) Gross margins of 16%, dividend payout of 33%. R&D expense at 4.7% of sales ( IP scope, further moat here).

Days Account Receivable : 20, Days Inventory : 47 ( Too good for a manufacturer, really strong bargaining power of suppliers playing out here >> Moat)

Second company,** Huafon Microfibre** ( Literally SHOCKED at the way these guys have been adding Capex, unbelievable numbers )

Huafon Microfibre, clocked sales of 75mm US$ commanding a market cap of 300mm US$ ( Price/Sales 4x)

Microfiber synthetic leather is the third-generation product of synthetic leather and it is a sunrise product of synthetic leather. In the past several years, the domestic consumption(China) of microfiber leather increased quickly, from the 20 million m2 of 2005 to the 92 million m2 of 2010, with a compound growth of over 35%; during this period, the compound growth of the whole synthetic leather industryâs consumption was only 13.48%, so the growth of microfiber leatherâs consumption was far higher than that of the whole synthetic leather industryâs consumption.

As the microfiber leather enterprise with the greatest capacity in China, Huafon Microfibre will continue to expand its capacity in the following two years. At present, the companyâs domestic market share is around 12% and still has large room for improvement.

In 1H 2012, the two new production lines that the company put into operation released a total capacity of 6.6 million m2 in total, which enlarged production scale and total sales significantly on yoy basis.

In August 2011, the companyâs capacity of microfiber leather (the capacity of microfiber industry refers to the capacity of microfiber base cloth) was 15.6 million m2 / year in total and it had 5 production lines in total.

The company expanded capacity quickly in recent years. At the end of 2010, the companyâs capacity increased by 3 million m2 /year to 9 million m2 / year; in 2011, with two new production lines, the companyâs capacity increased to 15.6 million m2/year; it is predicted that at the end of 2012, the company will add another 4 new production lines with a capacity of 13.2 million m2 / year totaling 28.8 million m2 / year ; it is predicted that in 2013, the company will add another 2 new production lines with a capacity of 7.2 million m2 / year the companyâs total capacity will reach 36 million m2 / year.

Capacity:

**6mn in 2008 **

**9mn in 2010 **

15.6mn in 2011

**28.8 mn in 2012 **

36 mn in 2013

We need the global perspective, specially from these Chinese behemoths, in order to better understand and anticipate the future for Mayur.

If Dhwanil can name the Canadan player, can have a look at their data as well.

**
**

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:)() ** Anhui Ltd. ** Anhui ** and power ** the industry ** 16 yearsa leather, ** leather; clients, ** development industry. **PVC leather **still ** the advantage, ** it substitute ** other types of leather. ** PU leather ** ** become market. ** ** R&D sales ** company,Huafon Microfibre m2 m2 industryas leatheras industryas _ with ** China, Huafon Microfibre will **_ capacity ** companyas domestic 12% ** m2 companyas m2 companyas m2 m2 companyas m2/year; m2 m2 m2 companyas m2

**

**6mn in 2008 **

**9mn in 2010 **

15.6mn in 2011

28.8

36 mn in 2013

Thanks Rudra, thats lot of relevant information.

From this can we say Mayur is at the lower end as far as quality of the synthetic leather is concerned and will take substantial efforts to make substantial inroads to foreign markets.

And one question (probably for management), what is that they are doing with the knowledge that PU leather produced byChinese competitors is betterthe PU+PVC leather produced by them?

Are they considering switching to PU only or microfiber leather ?

if Yes, whats the plan and if not any specific reasons…?

**

219

Excellent work Rudra, you have taken competitor analysis to a new level! Now we have knowledge of the future of the industry and limitations of Mayur.

Cheers

Vinod

220

Excellentinvestigative work, its time for the management to give its answers, considering the fact that it was considered that they were deep into research, and hiring the best in the industry… why arent they investing in a better technology and thus a better product?