MMP Industries - SME to NSE

rishit.05 · October 7, 2020, 8:46am

What they do
MMP Industries Limited is engaged in manufacturing of aluminium products at locations at and close to Nagpur in the state of Maharashtra. It is basically a converter & processor of aluminium towards value added products.
The aluminium product range includes pyro and flake aluminium powders, atomised aluminium powders (AAP), aluminium pastes, aluminium conductors (all aluminium, alloy aluminium and aluminium steel reinforced).
The company has recently moved out from the SME platform and is now listed on the NSE

Product Uses
Aluminium powders (pyro, flake and atomised) are used in many industrial sectors like construction (AAC Blocks) and mining (aluminised slurry explosives), agriculture (pesticides), defence (ammunition), fire crackers, railways (thermit portions) etc. aluminium pastes are used in automotive, decorative and industrial paints. Aluminium Conductors are consumed by the power sector for laying of overhead transmission lines.
The principal user segment in India for aluminium continues to be the electrical and electronics sector followed by the automotive and transportation, building, construction, packaging, consumer durables, industrial and other applications including defence.
Aluminium powder made by the Company is also used as fumigant in warehouses where grains are stored. With all government warehousing overflowing with grains, demand for this product is expected to double in 2-3 years specially with the favourable monsoon in the current year

Associate Companies / Joint Venture Companies .
The Company has a joint venture with Toyo Aluminium K.K. of Japan for the manufacturing of special grades of aluminium paste in a new company - Toyal MMP India Private Limited (TMI) (company holds 26% equity). Star Circlips & Engineering Limited is an associate Company engaged in the manufacture of circlips, retaining rings, washers, shims and formed components mainly used in auto and auto component industries (company holds 26.06% equity).

Export
MMP primarily exports its products to three main regions in the world. These are Europe, Africa and the Middle East. The Company’s products are now expected to be sold in Japan through it’s newly formed JV company, TMI.

Opportunities
Demand for aluminium is expected to pick up as the scenario improves for user industries like power, infrastructure, coal mining and transportation. The Company will also have access to various global Toyo marketing channels, which will help both the Aluminium powder and paste business. Since the Company produces certain powders not in the range of it’s JV partner Toyo Aluminium KK, this is an opportunity to open business potential in Japan through TMI.
Negotiations are also currently on for sale of powders in Europe but remunerative pricing is still an unresolved issue. However, once aluminium price volatility stabilizes the Company expects business to materialize. With the installation of special machinery and process development assistance from the JV partner, the Company will produce special fractions of powders for bulk usage in space applications and specialized defence applications. With the curtailment of supplies from China and ASEAN the Company is bullish in the development and growth of aluminium foil domestic and export markets. There is a big movement for hygienic food packing and enhanced production of API and bulk drugs which will be in line with ‘Aatma Nirbhar Bharat’. Aluminium foil market is expected to be strong with the additional benefits of reduced imports.

Clients
Siporex, HIL, Ultratech (for AAC Blocks), UPL & Excel industries (for aluminium phosphides), Solar industries & gulf oil (for explosives), Coal India to name a few. They claim to have rarely ever lost clients and thus have very old relationships with all.

What I like

RM prices are passed on almost immediately, i.e. 10-15 days.
26% JV with Toyal (Japan) - commenced in Feb 2018. It is the only tie-up that Toyal has worldwide. This capacity is in excess of its capacity in china, japan & usa put together. This JV might also help MMP market its own products through Toyals worldwide distribution
It is the market leader in its niche categories = 60% in explosives, 70% in AAC Blocks, 70% in pesticides
There is evident value migration from traditional bricks to AAC Blocks
Barrier to entry = As per the company itself - Entry barrier is our industry is underestimated - People put up capacities but realize they don’t get customers. Our strength is that we work very closely with ours clients to customize, provide variety, quality and service, hence providing a very specific and cost effective overall solution. Competition is primarily from unorganized players

Financials

Future Plans / Prospects: 2020 Annual Report
(A) Atomized And Pyro & Flake Powders = After the start of operations in end of April 2020. Unit I (Bhandara) reached full capacity utilization during the month of May 2020 and is expected to operate at full capacity for the rest of the year. Commercial operations of the Umred powder plant facility began in October’2019. Due to prevailing COVID-19 situation Unit II (Umred) was temporarily shut down in March 2020. Looking at the present market condition and positive signs of demand pickup, Company estimates that the Unit II may restart its operation by the beginning of August, 2020 (subject to COV1D issue not further deteriorating). We expect that this capacity will also be fully utilized by Q-4 of FY 2020-21.
(B) Aluminium Foils = The Aluminium Foil project is at an advance stage of implementation inspite of the difficulties of the current adverse situation. Your Company expects to begin production of both bare foil and converted foil during Q-4 FY 2020-21 or earlier. In view of many audits and approvals before bulk supplies can begin, your Company will utilize a small % of capacity during FY 2020-21 and 50-60% during FY 2021-22. This can be scaled-up faster, subject to pharma customers speeding up approvals keeping in view the very buoyant market conditions prevailing today (Chinese and ASEAN region imports are reducing).
(C) Aluminium Conductors = As reported last year, Aerial Bunched Cables (ABC) project is nearing completion. The Company envisages a moderate continuing growth in the Aluminium conductor and cable sector. Trial production is expected to commence during August-September 2020. This will enable improved capacity utilization, enhance value addition and diversify the product portfolio.

Risks

Company is bit of an unknown entity. We don’t have a track record of its past performance across business cycles
It’s subsidiary, Star Circlips (26% holding) makes auto fasteners, the performance of which is impacted due to the auto slowdown, and which may continue to not perform for a while
Normal risks associated with a company of this size

Other

Promoter holding is at 73.5%.
Son & daughter in law are both into the business.
Old bridge’s Kenneth Andrade has a decent stake in the company
The company is debt free
IPO money has been used to put up capacity which should come on stream very soon.

Valuations
Current Market Cap = 200cr.
Profits last year were at 23cr and new capacity will be coming in very soon
Average 5 Year ROE’s = 19%
Average 5 Year ROCE = 22% +

IPO Interview

View Invited
Disclosure: Invested

Rafi_Syed · October 8, 2020, 12:05am

RHP

Crisil Rating

kalpesh4430 · October 9, 2020, 10:12am

Source please.

I think it is cyclical business as its raw material is commodity, at this moment Al industry has low demand/idle capacity so selling raw material at low rates, as the economy goes to up cycle, Al prices will increase so it will impact OPM of company.

this is what CRISIL has to say,

CRISIL Sep 26, 2019
*** Vulnerability to volatility in raw material prices:**
Prices of raw materials such as aluminium ingots and foils, which account for nearly 75% of sales, are volatile and governed by demand-supply dynamics. The company may be able to pass on increase in input prices partially and with a time lag, leading to volatility in operating margin.

We need to study at least 10 year financial data of company/competitors before making any investment decision.

rishit.05 · October 9, 2020, 3:38pm

Hi Kalpesh

10-15 days passing of prices was from a conference I attended, where the management was present. In any case, you can look at the video I have linked above (Jump to 1:08:30). In fact, he has mentioned in the video that the RM cost is passed on in 5 days itself
They work on a ‘metal + cost basis’ which pretty much insulates it from the volatility in raw material prices
In my opinion ‘converters’ in general are good businesses to be in. Combine a diversified set of customers (in terms of industries) and it provides some sort of operating stability, which is evident from their stable margins. I have also invested in GAEL (Gujarat Ambuja Exports) which is a converter of maize. I find these businesses to be similar in some ways
Also note that the company is catering to some sunrise sectors: Take AAC blocks for example. The industry itself is growing at 15%, since there is evident value migration from traditional bricks which are not only bad for the environment but also functionally inferior. They have a 70% market share here and for many, are the sole suppliers. Also take the case of Al foil, its penetration is rapidly increasing, given the ban in plastic.
Their diversity combined with some rapidly growing industries, may enable decent growth even in an otherwise slowing economy and may help in somewhat reducing cyclicality.
To your point about 10 year financials, while valid, I see enough evolving evidence that makes the company interesting. Take the tie up with Toyo, it has the worlds largest capacity for Al. The only tie up they have done in the world is with this tiny company. Stamp of approval - maybe? Also the lack of operating history may be reflected and adjusted in your allocation

kalpesh4430 · October 11, 2020, 6:31am

Thanks for the reply,
I have gone through the entire video, this man seems to be honest.
and he did say that they are able to pass on raw material price movements in short duration.

But still I have some doubts,

even if company pass on raw material price change, company would do high turnover when Al prices are high and low when Al prices are low, so we should not confuse high turnover with volumes, this somehow still make company cyclical in terms of turnover & earnings.
financial position of company is good, and they could have easily go for borrowing instead of going for IPO, why would anyone choose high cost money instead of low cost borrowing?
and making company public brings with it whole lot of regulations, why would anyone go for all this trouble when they have stable cash-flows, good balance sheet and can easily get loan from bank?
AAC blocks is a fast growing hot industry at the moment, looking at other people earning nice, many people will try to setup this business. many will also try to setup raw material for AAC blocks, is there any high entry barrier technology involved in this? or others can setup easily? if no entry barrier in technology involved, as Peter Lynch says industry will grow in volumes but no player can earn decent profits…

rishit.05 · October 11, 2020, 7:34am

So to try and answer your questions

Yes in any cost+ business model, the turnover will fluctuate depending on Al prices. The trackable would be increase in volumes. And as long as volumes are increasing, the earnings would increase in proportion right? Did not understand your point on why operating earnings would be cyclical? Take the example of Vinati Organics (since it is also follows a cost + business model). The turnover fluctuates but profits more or less have an uptrend. Also, getting large companies to agree to do a cost+ with a tiny company, is quite a unique feat in itself, in my understanding. It normally happens when the competitive environment is low or if the product/service offering is uncommon
It makes sense for small companies to get listed for multiple reasons, besides raising funds. Especially when you do international tie ups or exports, the fact that you are listed, massively adds to your street cred. It’s a near term price to pay. But in a sense, this is one of the main benefits of the SME exchange being set up too. But you need to do this for other businesses to take you seriously, when you are an unknown entity. At least, this is my take on it
I have made this mistake in the past, where I am looking for well-established moats in micro caps. But in 99.9% of the cases, they don’t exist. Like hypothetically, a Tata or Reliance can enter any business and set up more capacity than the established players right. Also to me the way these things play out is that first the market potential is established by a couple of players. At this time, there is high sales growth, the profits are concentrated within and the early players get a free run for the risk they took. Once the trend is well known, new capacity is being constantly added, the demand is still overshooting supply and the market size is known to be large & business ROE’s are much higher than the cost of capital, then the new serious players get attracted. You could re-analyze the situation at that time, if and when it happens

dn2017 · January 4, 2021, 10:44pm

Excellent points Rishit. Thanks for sharing.

dn2017 · February 19, 2021, 6:41am

MMP Industries on the cusp of great growth:

Solid Q3 result
Capex done
Low / zero debt
New product lines starting - foil business
Strong profit making subsidiaries can lead to future unlocking of value

Disclosure, deeply invested

Ashusharma · April 27, 2021, 12:15pm

In my view, this company has not much pricing power, its margins are around 11% only in view of it catering to sunrise segment. Its OPMs should be high. Its cash flow also shows it is unable to convert profit into cash. Its inventory turnover is also slowing down even though is still good. Regular profits but dividend yield is 0%.

Disc: Not invested, I am not an expert and these are my views only.

HarendraSingh22 · April 27, 2021, 1:37pm

@rishit.05 What is the co’s contribution in the JV with Toyo?
Have they transferred their Paste capacity to the JV?

I looked at

and hence have the above question
What exactly is the arrangement between MMP and Toyo for the JV?

raku · April 27, 2021, 1:42pm

one has to look at a bigger picture here

my bet is head i win tails i dont lose much

The margins will remain low due to the business model and the size ,It trades at a forward pe of 10 to 12 without the capex kicking in .Capex has almost doubled the fixed asset(source screener). If the roce remains the same you can look at a forward pe of 6 to 7 .

I am happy with the company not paying divdends for the better future (using funds to reduce debts and capex funded by internal accurals and share proceeds ).Plus the promoter is the one who will benefit the most if it was to giver divdens as holding is close to 75% which is also increasing QonQ which is a very big green flag for me .

@rishit.05 i know it will be hard for you to give an estimate ,you think company can maintain same ROCE figures going forward ?

raku · April 27, 2021, 4:35pm

Deeper look in the annual reports show that the management is not minority shareholder friendly ,for me biggest thing i look when investing in micro cap is management actions towards minority shareholders.

close to 1.7 cr has been given to directors close family relatives, while the director himself draws a salary of 1.2 cr amounting to almost 15 % of the net profits.

Disc:holding a very small position will decide after quarter results or will sell if see a small rally.

rishit.05 · April 29, 2021, 7:48am

Think it would be better to have detailed discussions after the quarter or maybe a couple of quarters. We need data on the new Capex. The next 1-3 quarters will be make or break quarters (at least for me). New capex with new product lines, would mean we are currently in the zone of unknown-unknowable’s. Tough to answer questions on ROCE etc, cause we don’t know the product profile and market potential of each of their new products. Also with regards to salaries, we have to see if on a larger base it gets rationalized (the % of NP comes down). IMO dividends make more sense, once the business achieves a somewhat steady state and not when it has enough avenues of growth.

rishit.05 · June 23, 2021, 11:46am

Very good results
Revenue up 21%, EBITDA up 32% Q on Q

Things to note:

The new capacity (Alumiuim Foil), while it has come in has actually lowered the profit instead of adding to it, due to high fixed costs. This should change once utilization picks up. Expect next quarter to be a washout but after that things should significantly look up. Its plant is one of the few integrated plants in India and the product enjoys an anti-dumping duty benefit
The main business of Aluminium powder has reached 100% utilization, hence the good results. Capacity will be added here in the coming year. Good tailwinds here as is evident from the growth of their customers like HIL, Siporex etc, especially on AAC blocks
The Al conductors & cables will pick up with the pick up in electric infrastructure in the country
Star Circlips (associate) = It has gained Market share in many countries, and the next year will be its first year of supply in Japan
Toyal MMP (associate) = Just started business in the US. High double-digit growth expected

Overall, good results + the impact of the new capacity on the numbers will be seen in a couple of quarters

https://archives.nseindia.com/corporate/OutcomeBM23062021_23062021164517.pdf

Apurva_Dubey · June 23, 2022, 10:31am

For those tracking: any thesis on the recent sharp decline in stock price despite outstanding results.

Disc.: not invested

shajis · June 23, 2022, 4:49pm

I had the same question about the sharp fall in last few days. Is it due to possible inventory losses in the current qtr. The AL prices have corrected sharply in the current qtr.

Apurva_Dubey · November 22, 2022, 4:34pm

Any thesis on poor results. Is it the commodity cycle cyclicality? Any commentary from management? Tge recent investor presentation was totally drab.

Disc.: not invested but tracking

Aditya_Kasera · April 22, 2023, 5:16pm

Market structure can be
Perfect competition market
Oligopoly/duopoly market
Monopoly market

It very difficult to find accurate info about pricing power, no of competitors and purchasing power of buyer within an industry

So, how can an analyst sitting on a desk figure out the industry structure?

Return on capital employed is one of the metric which tells about industry structure and a firms standing in the industry.

If market/industry structure is conducive then only individual firms can earn abnormal return for a sustained period of time

Abnormal returns attract competition. Competition rages cost war to gain market share.
Hence, diluting ROCE of the dominant player.

This scenario can be avoided, if an individual firm has characteristics which makes it difficult for new entrant to enter the market (barrier to entry).

MMP industries currently has three business segments

Aluminium powder
Aluminium foil
Aluminium conductor

Aluminium powder is the business where Mmp industry is earning abnormal rate of return

We can see that aluminium powder is consistently generating roce above 24%
Whereas business with poor industry structure generating sub par ROCE.

Company is generating consistent cash flows.

Aluminium powder business generates high ROCE, cashflow and is growing rapidly.

Reason for rapid growth is
Aluminium powder is used for manufacturing AAC blocks
AAC block is replacing red bricks

listed players manufacturing AAC block
Big bloc construction (contract manufactures from Ambuja)
HIL
Jk Lakshmi cement
Ultra tech
Shree cement

Unlisted player like magiccrete

Recently big bloc commercialised a new aac block plant other players are also planning more capex

https://www.financialexpress.com/opinion/no-bricks-in-the-wall/1557150/

Shyam metallic and sarda energy are producing fly ash bricks

Need to dig further, whether red brick industry is being disrupted (it seems to be true)?
Which will be more beneficial aac block or fly ash brick.

Now the ugly part

Capital allocation of promoter seems to be dodgy
Using cash flows of aluminium powder business to enter into highly commoditised industry of aluminium foil makes no sense.
JV with Toyal group (selling same product)

Next part of analysis is to meet up with big developers to-

confirm disruptions for red brick
Out of aac block and fly ash brick which one is preferable

Meet/ask aac block manufacturers about Mmp industries competitive advantage

Disclosure: invested in MMP industries.