Rajasthan. The very mention of this word tends to stir up images of palaces soaked in grandeur, exquisite handicrafts and melodious folk songs. Little wonder, the state has become one of India's major tourist attractions. Our recent visit to the state though had nothing to do with tourism. We had called upon a small company on the outskirts of the state's capital city Jaipur and were hoping to check out its operations. Now, Rajasthan may boast of several tourism hotspots but is not exactly known for some cutting edge industries. Thus, we went ahead with our plant visit with fairly muted expectations. What we saw however left us deeply impressed.
The company we are talking about is Mayur Uniquoters Ltd (Mayur). One of the biggest things working in the company's favour is that it belongs to an industry which is witnessing some strong tailwinds at the moment. It is India's largest manufacturer of artificial or what is more commonly known as synthetic leather. Of course, given a chance, everyone would like to own things made of natural leather. However, it is indeed logical to state that supply of natural leather cannot be increased at will. It is constrained by laws of Mother Nature. In view of this, mankind's ever growing demand came to be met by synthetic leather. This growth was further bolstered by technological advances that helped synthetic leather to very closely resemble natural leather in touch and feel. In fact, as things stand today, it is virtually impossible for a lay person to detect the difference between the two forms of leather. Thus, we will not be surprised if going forward, synthetic leather makes further inroads into applications dominated by natural leather.
At the forefront of this change, is likely to be Mayur Uniquoters Ltd, our Hidden Treasure for this month. The company started its operations in the year 1994. Led by its charismatic Chairman, Mr Poddar, the company has gone from strength to strength in recent years. To put things in perspective, the company has managed to grow its topline and bottomline by 26% and 36% respectively over the last 8 years on a CAGR (Compounded annual growth rate) basis. It should be worth adding that the impressive growth in bottomline has come about without any increase in the debt to equity ratio of the company. As a matter of fact, the ratio has actually come down from 0.4 times in FY03 to just 0.1 times in FY11.
Considering the strong historical numbers, you would be forgiven to assume that the company's best days are behind it. However, nothing could be further from the truth. If anything, we believe that the best is yet to come. So far, the company's growth has mostly been domestic market driven. However, it is now laying greater thrust on exports. And the efforts have begun to bear fruit. Recently, the company broke into the exclusive circle of suppliers to automotive OEMs (Original Equipment Manufacturers) in Europe and the US. And this should play an important role in helping grow exports at a strong pace. Besides, given that few approvals have been received, it won't be long before other auto majors too start queuing up. Also, growth in domestic markets remains as strong as ever. Another thing that enthuses us is the company's focus on value addition. The management is very clear that it does not want growth for the sake of it. It also wants to preserve the profitability of the company and wants to become irreplaceable for all its customers.
Thus, in view of its strong growth prospects and efforts towards enhancing profitability, the stock is well placed to double your money over the next 4-5 years. Considering that the company also pays out decent dividends, the actual returns could turn out to be even higher. Please ensure that your buy price does not exceed Rs 420 per share mark.
Investment Rationale
Huge client base bodes well for the company: Mayur supplies synthetic leather to both domestic as well as overseas clients. Synthetic leather is used in footwear, automobile seats, purses, garments, furniture, sports goods etc. Mayur derives 50% of its revenues from footwear industry. Apart from this, this company also helps cater to the booming auto industry (both OEMs as well as the aftermarket segments) through the sale of synthetic leather for automobile seats. It has got a marquee set of clients such as Bata, Liberty, Action, Hero Honda, Honda Motors, Eicher Motors, M&M, Ford, and Chrysler. It also supplies synthetic leather to different industries for manufacturing of products like garments, furniture, sports goods etc. The diversified client portfolio ensures that the company generates strong revenues.
Focus on product development: Mayur enjoys a good brand name not only in the domestic markets but also in the international market. Recently, the company broke into the exclusive circle of suppliers to automotive OEMs in Europe and the US. The company has started supplying to US auto majors such as Ford, Chrysler and GM. In Germany, Mercedes Benz has already approved its products. The company is in the process of getting approval from BMW for its products. Mayur has maintained one of the highest standards in the industry. Besides, given that few approvals have been received, it won't be long before other auto majors too start queuing up. These things should play an important role in helping the company grow its exports at a strong pace in the coming years.
Safety moat: In the business of sythetic leather, there is not enough product differentiation. However, existing long relationships with the marquee set of clients such as Bata, Liberty, Action, Hero Honda, Honda Motors, Eicher Motors, M&M do establish an entry barrier for the competitors. The clients do not prefer to change its vendors due to long process of approvals and quality checks. Also, big clients always look for a vendor who can deliver large orders in timely manner. Mayur gets an edge here over its competitors due to its existing large capacity. Other big players in this industry are Fenoplast Hyderabad, Polynova Industries, Manish Vinyl etc. Even the second largest player in this industry is just half the size of Mayur (in terms of capacity). We believe that the scale of operations provide the margin of safety to the company against untoward competition.
Strong Balance Sheet and shareholder friendly: In the last 5 years, Mayur's debt to equity has averaged at around 0.29 times. As a matter of fact, the ratio has actually come down from 0.64 times in FY06 to just 0.13 times in FY11. It has managed most of the capex through its internal accruals for the last 3-4 years. The other important aspect that we would like to highlight is the way the company has used its cash. It has not ploughed away money in wasteful acquisitions or unnecessary aggressive capacity expansion. Instead, it has constantly rewarded its shareholders by paying them a healthy dividend.
Backward Integration: Fabric and PVC/PU are the major components for manufacturing of synthetic leather. Chemicals like PU, PVC, etc form nearly 60% of total input cost. This is followed by fabric which forms nearly 15% of total input cost. Mayur is integrating backward into manufacturing of synthetic fabric. This would help the company to get fabric of good quality on time. It would also support production of high quality products. The backward integration into fabric would help yield better results for the company in the years to come.
Investment Concerns
Slowdown in overall economy may dent performance: The fate of Mayur is largely linked to the economic growth. Any slowdown and recessionary pressures can result in slower growth for auto industry. In addition to this, it is important to remember that a large part of Mayur's revenues are derived from the sale of synthetic leathers to Footwear Industry. The growth in this industry depends on the growth in the income level of the people. A negative sentiment in the overall economy would impact the industry adversely and would lead to a lower off take in demand. This in turn would have an adverse impact on the company.
Oil price volatility: In the recent past, spiraling crude prices has pushed up the costs of polyvinyl chloride (PVC) and polyurethane (PU). These form a large part of the raw material expenses. The company is able to pass through most of the increases in price in recent time. However, during tough times, it has to bear the impact on margins due to the inability to pass on costs fully. As per the management, both higher price of crude as well as the volatility in prices impact margins. With the economic as well as political instability seen in the global scenario, oil prices have been extremely volatile in recent times. Such high crude oil prices and volatility would bring margins under pressure in the near term.
Difficult to maintain higher pricing: Mayur is the market leader in the synthetic leather business. It certainly enjoys good reputation among big clients for its quality products and timely delivery. These clients do not change vendors for just sake of small price differentiation. However, there are no major differentiating factors in case of products itself. As a result, if at any point of time the price difference between the different players becomes marked, then there is a risk that the customers would shift away from Mayur if the company does not lower the prices. However, it is important to note that the management of the company is confident of maintaining premium of 5-8% for its products over its competitors'.
Rupee depreciation: The company imports about 70% of its raw material (around 50% of total sales) while 80% of sales are in domestic market at present. In the case of rupee depreciation against dollar, material costs would go up as a percentage of sales. This would not bode well for the company. We are no experts at predicting currency nit it is important to note that the Indian rupee has been quite volatile against the US dollar over the past few years. In 2007, rupee touched a high of nearly 38.5 against the dollar but after that is started depreciating and hit a low of nearly 51 in March 2009. Since then, the rupee has again appreciated by around 12%.
The company does not enter into any hedging contracts. As a result any adverse currency movement may impact the company's results.
Risky small caps: It is important to note that small caps are inherently more risky as compared to the blue-chip or mid cap stocks. That is the reason we do not recommend small caps to those having a low risk profile. Even for investors having an appetite for slightly more risk, it is advisable to invest not more than 15% of one's portfolio in small-cap stocks. This means that a single small-cap stock should not form more than 2-3% of your portfolio. The reason for this is that small-caps tend to react very sharply to market movements.
Background
Mayur started operations in 1994. The company engages in the production and selling of synthetic/artificial leather. The company is located near Jaipur, Rajasthan. It is the market leader in the field of leather coating. It coats/laminates various kinds of fabrics with PU/PVC to make synthetic leather. The company is also involved in printing, embossing, lacquering, sueding etc on artificial leather to fulfill various demands of its clients. Synthetic leather is used in footwear, automobile seats, purses, garments, furniture, sports goods etc. Therefore the fortunes of the coating business are determined by the growth and development of overall economy.
The company started its operation with one coating line with production of just 0.2 million linear meters for the full year. Now the company has three coating line with an installed capacity of 1.4 million linear meters per month which is fully utilized. The company has completed the installation work of the 4th coating line which is expected to start production from August, 2011. This will increase the capacity, further, to 1.9 million linear meters per month.
Mayur supplies synthetic leather to both domestic as well as overseas clients. It has an elite set of clients such as Bata, Liberty, Action, Hero Honda, Honda Motors, Eicher Motors, M&M, Ford, and Chrysler. The company is engaged in the process of its product approval by Auto OEMs like BMW, General Motors etc. Apart from Auto OEMs, the exports to the countries like United Arab Emirates, Saudi Arabia, UK, Russia, Italy, Sri Lanka, and Bangladesh. Exports currently contribute around 20% of the total sales.
Over the past five years (FY06-FY11), the company has grown its sales at a compounded average growth rate of 34%. During the same period, net profits have grown by 58% annually. The company has maintained average operating margins at around 13.3% over this period. As a matter of fact, the company was able to expand its operating margins from 9.5% for FY07 to 16.1% for FY11. This was due to the fact that the company depends on the prices of raw materials like PVC/PU, produced from crude oil derivatives. When the prices of oil spiral upwards, the company is able to pass on the increase in costs to its customers. However, when oil prices cool off, the company received the benefit due to a lag in decreasing the price to the customers. As a result, margins increased at these levels. Going forward, we believe that the margins will stabilize around 13.5%.
Industry Prospects
The synthetic leather industry in India is very fragmented with around 60% of total revenues in the sector are generated by unorganized players. Therefore the level of rivalry amongst competitors is high. Synthetic leather is used in footwear, automobile seats, purses, garments, furniture, sports goods etc. Therefore the fortunes of the coating business are determined by the growth and development of overall economy.
Mayur derives 50% of its revenues from footwear industry. Therefore, growth of the company very much depends on this industry. The footwear industry in India is largely in hands of small and unorganized players. The industry size is estimated at Rs 70 bn in value terms. The industry has been growing at 10-12% per annum. Bata is the largest player with around 10% volume share and around 60% market-share in the organized segment. The company supplies synthetic leather to all major players in the footwear industry including Bata.
Another major segment for the company is auto industry from where the company generates 35% of its total sales. This sector has seen spectacular growth rates in recent times. Demand of synthetic leather from this sector depends on the general economic and industrial conditions prevailing in the country. Demand of synthetic leather is also generated from the replacement market for automobile seats.
Key management personnel
Mr. Suresh Kumar Poddar (63 years) B.Sc.(Science Graduate), is the Chairman and Managing Director of the Company. He promoted Mayur Uniquoters Limited in 1992. He has a vast experience in the field of PVC leather line. Under his leadership, the company witnessed a great success and now it is a market leader in the field of leader coating.
Mr. Manav Poddar (36 years), B.Com (Hons.), Commerce Graduate, is an Executive Director on the Board of the company. He is the son of Mr. Suresh Kumar Poddar, Chairman and Managing Director and the Chief Financial Officer of the company. He has been occupied several positions in sales and marketing with Mayur Uniquoters Limited since 2002. He has a rich experience of general management, production and marketing.
Mr. Arun Kumar Bagaria (38 years), B.Com (Hons.) and MBA from University of Strathclyde Graduate Business School, UK, is an Excutive Director on the Board of Mayur. He is son-in-law of Mr. Suresh Kumar Poddar. He has 11 year of experience in trading business. He has been working with the company for last four years. He was also instrumental in forming a Joint Venture Company with Hong Kong based Company
Valuations
The stock of Mayur is currently trading at Rs 340. This implies a multiple of 7 times its trailing 12-months earnings. Based on our FY15 earnings estimates, the valuation stands at 5.1 times. This makes the stock attractively valued for long term investors. Given the company's strong balance sheet and good growth opportunities, we believe these valuations provide a good entry point for long-term investors. From the current levels, one can reasonably expect the stock to double over the next 4-5 years. We thus recommend you to 'Buy' the stock at the current prices or lower. Our target for the stock is Rs 750 from a 2-3 years perspective. Please ensure that your buy price does not exceed Rs 420 per share mark.
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