Mayur Uniquoters

Background

Mayur Uniquoters, a PU and PVC synthetic leather (artificial leather) manufacturer, was established in 1992 by S.K. Poddar, an industry veteran trader in PVC Leather line.

It has 3 manufacturing facilities at Jaipur with an installed capacity of about 1.4 million linear meters/month, from where the company manufactures a wide range of premium products for Footwear, Apparel, Luggage, Furniture, Leather Goods, Upholstery and Automotive Industries.

Chemicals (~64%), Knitted Fabrics (~16%), Other fabrics (~14%), Release paper (~6% which is reusable) are the main raw materials.


Main Products/Segments

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

Exports (~20% of Sales in FY2011) is spread among above segments.


Main Markets/Customers

Automotive OEM exports have begun in FY11 to Chrysler and Ford. Other international OEMs like GM, BMW, Toyota, and Mercedes have put Mayur Uniquoters on the approved vendor list, and orders are awaited.

Major customers in India include Bata, Liberty and Action in Footwear and Maruti, Tata Motors, GM in Automotive segments.

Opportunity size

Synthetic Leather production in India is estimated at ~2000 Cr annually. Add to this another 700 Cr Chinese Imports coming into India annually (which has been coming down in share over the years). Unorganised sector accounts for roughly 50% of the market.  And balance 50% is catered to by some 15 players in the organized sector. Of these 5-6 are bigger players, the rest are much smaller players. On the Auto OEM exports front, each of the 6-7 big OEMs like GM, Ford, Toyota, Daimler, BMW, Chrysler have synthetic leather buys in excess of 500-600 Cr each year for developed markets like Europe and US, that adds another 3000-4000 Cr annual market. [Source: Company]

As per the company, Mayur Uniquoters has an annual market size of 4000-5000 Cr opportunity before it.

Competition

Competition in domestic market comes from Jasch Industries, Fenoplast, Royal Vinyl Cushions and Polynova. Mayur caters only to the organised players in the market and is thus less vulnerable to competitive pressures from unorganised sector and cheap Chinese imports.

It faces strong competition in International Auto OEM markets, where it aims to scale up significantly in the next 2-3 years. Mayur Uniquoters has unfurled a new Vision statement in 2011.

” To be a preferred supplier of Artificial Leather to the leading Automotive OEMs in the world “


Bullish Viewpoints

  • High Profitability and Returns – This is a rare small company consistently growing Free Cash Flow/Sales (FY10 FCF/Sales 11.59%). And then you couple this with a consistently increasing RoE and RoCE (FY10 RoE ~38%, RoCE ~57%). A company with a high RoE and high Free Cash Flow combination is said to be in a sweet spot. While high RoE tells us its a company that can earn a high return on its shareholders money, high Free Cash Flow enables us to separate it out as a business that is a net producer of Capital – from a business that is a net user of Capital – one that spends more than it brings in. This Profitability analysis throws more light on how this company is showing consistently good all round improvement.
  • Big Opportunity size – A 4000-5000 Cr annual market size is the scale of the opportunity before Mayur Uniquoters. Given its Profitability, strong Balance Sheet, Free Cash Flows and dominant competitive position, Mayur Uniquoters is in a strong position to scale up and address the Opportunities before it.
  • Focus on Margins – Mayur Uniquoters operates in a very competitive market but has consciously chosen to concentrate on segments that need to be more quality conscious such as Footwear, Automotive (upholstery), and Furnishings, ensuring better margins for the company. They have been slowly trying to exit low-margin segments/customers and even whole markets (UAE, e.g.). Economics of scale have kicked in with fixed costs getting spread over increasing volumes. Also product mix has been changing for the better with higher value added products leading to better realisations.
  • Automotive OEM exports driver for quality growth – As per the company the margins are  2-3x in OEM exports. It is steadily becoming a focus area for the company in its bid to improve margins. They are targeting the US market, and specifically Germany in Europe. Since FY11 start when they made a breakthrough in Chrysler & Ford, Exports have now grown to 48 Cr, or almost 3x in a single year.  As per the company, US alone has a demand for 2.5 million meters/month. The company has guided for a 55% growth in Exports for FY12 on the back of new capacity coming on-stream slowly.
  • Backward Integration – Knitted fabrics constitute ~16% of raw materials – an ingredient where consistency in quality is key to finished product quality. In order to retain a degree of control over consistency in meeting export quality requirements, the company is planning on investing Rs. 15-18 Cr in a knitting facility that will produce 800K meters/month.
  • Capacity expansion – 35,000 sq.mt land has been acquired. Land Conversion is completed and environmental clearances have been received. The knitting facility will be started here. New capacities are being added ~0.5 million linear meters/month at existing facilities, taking total capacity upto ~1.9 million linear meters/month by Q2FY12
  • Automotive Replacement market is promising – According to the company during last automotive crisis, it got good business from the replacement market which helped it avert any significant impact of auto sector cyclicality.  With so many vehicles coming out every year and the need to replace the upholstery once in ~3-4 years, the company is of the view that replacement market in India could surpass the OEM market within 2 to 3 years.
  • Good dividend paying track record – Mayur Uniquoters has been a consistent dividend payer. The dividends have also been steadily rising consistent with earnings growth. This Profitability Snapshotshows 5yr DPS CAGR at ~64% – big achievement for a small company.

Bearish Viewpoints

  • Hugely competitive and fragmented market – Lot of low-quality synthetic leather is being dumped into India by Chinese manufacturers. The synthetic leather industry has been following up with the government for levying anti-dumping duty.
  • Capacity expansion not keeping pace – The company is in the process of adding fresh capacities by installing another coating line by Q2 FY12 that will take capacities to 1.9 million linear meters/month (up from 1.4 million linear meters/month). However this additional capacity will only become fully available by Q2FY13. Company has deliberately been slow in adding capacities and admittedly this is now hurting the company’s immediate growth prospects. The company has guided for ~25% growth in Sales for FY12, after stupendous 44% and 48% Sales growths registered in the last 2 years.
  • Sustainability of Margins – FY10 profitability was a stupendous achievement for the company. Operating Profit Margin (OPM) had remained between 10-11% till FY09, but saw a big jump to over 16% in FY10.  Net Profit Margin (NPM) also hovered between 4-6%, but climbed steeply to ~10% in FY10. Will the high OPM & NPM margins be sustainable? To its credit the company has sustained both operating and net margins at these levels in FY11.
  • Raw material price volatility – The company’s performance may be sensitive to raw material price volatility as raw materials constitute 70%-80% of Net Sales . The common size P&L statement shows the last 5 years have seen raw material costs hovering between 73% to 79% of sales.  The company maintains it has no bargaining power with its much bigger suppliers. But it tracks price changes meticulously and keeps its major customers informed and thus is able to pass on raw material price increases to most of its quality-conscious customers.
  • The company has been penalised by SEBI vide its order dated 11 Feb 2009 for violating SAST regulations. The company maintains that while SAST regulation violations were committed on 3 occasions in 1997, 1998 and 2002 unknowingly when the company promoters redistributed ownership within the family (but did not announce an open offer for the same as required by SAST), they did not gain anything from this nor did it cause any loss to investors. Considering that SAST regulation violation carries a maximum penalty of 5 lakhs, the order for Rs.50,000 penalty seems to acknowledge this. The violations came to light when the company made one open offer to acquire 10 lakh shares in May 2006 to regularlise the past transactions. Roughly 4 lakh shares were finally offered even though offer price Rs. 44 was higher than prevailing market price of Rs. 36.

Barriers to entry

  • Customer relationships  – strong lock-ins exist with major customers. For e.g. its supplies nearly 75% of Bata’s requirements.
  • Long approval time – Its not easy to break into supply relationships and get on approved vendor lists with the majors. As an example, it took Mayur 3-4 years of running after International Automotive OEMS before they got on to the approved vendor list recently.
  • Economies of scale – The nearest competitor has only about half the installed capacity at 0.7 million linear meters/month.
  • Large variety of products  – Mayur Uniquoter has developed nearly 400 different varieties of synthetic leather to offer for diverse requirements, while the nearest competitor can offer only about 50 varieties.

Interesting Viewpoints

  • Many leading Automotive OEMs like GM, BMW, Daimler now have Mayur Uniquoters on their approved vendor list. Orders received from Ford & Chrysler, and the company has started supplies in FY11 and scaled this up significantly.As per the company the margins are 2-3x in OEM exports. Ford, Toyota and GM relationships will be leveraged as Mayur puts up additional capacity. But again they will be going slow in first stabilising the processes for optimum efficiency and quality. It will take a full year, till Q2FY13, before they stabilise and run the new coating line continuously on 24 hour, 3 shifts basis.
  • Other than Mayur Uniquoters, no Indian synthetic leather manufacturer has been able to penetrate the International automotive OEM market. There are only 2 players from Asia in this market and that includes Mayur Uniquoters. There is a Canadian manufacturer who has set up plants in China who is another big player. A US based player shut down recently. It’s not a very crowded market, as per the company!
  • Ability to pass on Price increases – Interestingly a factor that has worked for Mayur Uniquoters in the last few years is the gradually increasing input prices, which in its industry they have generally been been able to pass on with a time lag. (a 5%-10% increase in our products make a difference of hardly 1%-2% in the end product price, as per the company)
  • Induction of Professional Management into the company is a significant & bold step by the company. Mr Ramdas Acharya Sr VP (Technical) and Dr. V K Khanna Sr VP (Operations) have joined the company recently. Mr Khannna brings over 30 years of experience in Quality control. Mr Acharya brings over 30 years rich experience in R&D and Production in synthetic leather and related business for automotive OEMs in the US

Disclosure(s)

Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years


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