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


Mayur Uniquoters Management Q&A: Jun, 2011

Management Q&A

1.     MAYUR UNIQUOTERS HAS MADE RAPID PROGRESS OVER LAST 5 YEARS. SALES HAVE GROWN AT A CAGR OF ALMOST 40% TO TOUCH 270 CR WHILE EPS HAS GROWN AT AN AMAZING 75% CAGR. CONGRATULATIONS!

Kindly share with us this journey and the key factors responsible for such an impressive growth performance. What have been the main drivers of this growth?

You need to understand that Synthetic or Artificial Leather today is everywhere – quality has improved tremendously in the last few years – in design, texture, colour matching, tensile strength, abrasion tolerance, etc. Daily use products like footwear, ladies bags, furnishings, upholstery, and automotive seats are using artificial leather predominantly. You will be surprised to know that 90% of leather used in footwear and furnishings today is artificial leather. Even in Leather products – say a leather sofa -the main seating area & backseat is pure leather, the sides and bottoms use matching colour artificial leather. In leather shoes you may see inners and sockings using artificial leather. Genuine Leather has become prohibitively costly. The synthetic leather industry has been helped by market forces at work!
There are 3 or 4 main contributing factors.
Firstly economics of scale have kicked in with our fixed costs getting spread over increasing volumes. Secondly product mix has been changing for the better with higher value added products leading to better realisations. The third factor that has worked for us in the last few years is the gradually increasing input prices, which in our industry we 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)
Delivering consistent quality, ability to scale up in tune with customer demands while maintaining solid financial discipline has helped us leverage on our best customer relationships. Today the business/customer is very savvy, appreciative of their best vendors and the marriage is usually very strong, as they cannot afford to expose their production lines to inconsistent quality. Is it in any wonder that bulk of the business goes to their best vendors? Our nearest competitor does roughly about 50% of our business levels.
We have also done lot of market development work especially in Southern market. This has included right from introducing the customer to new product design & innovations to helping them with sourcing the right technology (machines) and raw material partners.

2.     IF THE GROWTH TRAJECTORY HAS BEEN AMAZING, THE QUALITY OF THE GROWTH ACHIEVED IN WHAT MUST BE A DIFFICULT INDUSTRY, HAS MADE EVERYONE SIT UP AND TAKE NOTICE. THERE HAS BEEN A MAJOR SHIFT IN THE QUALITY OF EARNINGS OVER THE LAST 2-3 YEARS. WORKING CAPITAL/SALES AT 14-15% IS ALMOST HALVED FROM EARLIER LEVELS. OPM (16%) AND NPM (10%) HAVE JUMPED UP BY 5-6% IN THE LAST 2 YEARS AND SEEM TO HAVE STABILIZED AT THESE LEVELS.

This is not just economics of scale at work. Mayur Uniquoters has clearly shifted gears and is operating at a different level today. Kindly share the key changes that have happened over the last 2-3 years in the company. What changes have you effected in your business model to bring about this focus on improvement in operational efficiency?

I would again say the factors cited above are responsible. Also new product development and innovations have helped us move up the value chain with better price realisations. We have also consciously been moving the customer/segment mix and volumes towards higher margin segments like automotive replacement market and automotive exports.

3.    SALES GROWTH VS PRODUCTION GROWTH. WHILE PRODUCTION IN FY11 HAS GROWN BY ~18%, SALES HAVE GROWN ALMOST 3X BY ~53%.

This is an exceptional performance, which needs to be properly understood. You have mentioned higher input cost, better price realisation, value additions as factors. Kindly elaborate on the extent of contribution from each of these factors.

Well last year was another extraordinary year. Higher input costs to the extent of 18-20% is what we mainly benefited from to see such an order of Sales performance. If we see similar escalation again this year, I am not sure all our customer segments can absorb another such steep hike in rapid succession. Volume off-takes and Margins could well be effected.
This year so far it has been okay but this is a key risk and we have to see how the situation develops for the rest of the year. We are hopeful that the situation will moderate soon.

4.     PRODUCT SEGMENTS AND CONTRIBUTIONS

Kindly give us an idea of the revenue contribution & margins from major product segments. Which segments are expected to drive growth in next 2-3 years, where is the company’s focus and why?

There are 5-6 main segments. Footwear, Furnishings, Automotive OEM, Automotive replacement market, and Automotive Exports. We are trying to open up a new segment in Automotive OEM Exports Replacement market.
The philosophy of the company has been to achieve growth more from new segments that allow us to leverage our consistent quality, ability to innovate and demonstrate better value-addition to our customers, and get better realisations. In doing this we also are spreading the risk across segments. Eventually we are trying to see that no segment has more than 25% revenue contribution. Margins are more or less the same across most segments.
All segments are growing well and the potential is good. Automotive OEM exports and Automotive exports replacement market will see increasing focus. But this will take time – We have slowly leveraged on the Chrysler relationship which has grown multifold. Quality requirements are stringent and rejections carry the risk of considerable penalties.

5.     CUSTOMER SEGMENTS

Kindly share with us the quality of business and the level of business with your major customers. How much do your top 3 customers contribute to revenues? Is there any single customer contributing more than 10% of Sales?

The 80:20 rule applies to us, as in most businesses. 20% of our customers get us 80% of the business. No single customer accounts for more than 4-5% of our revenues.

6.     EXPORT SEGMENT HAS ALMOST TRIPLED FROM ~17 CR IN FY10 TO OVER 48 CR IN FY11. YOU WERE ALREADY SUPPLYING TO FORD & CHRYSLER. THE COMPANY IS EXPECTING TO START SUPPLYING TO GM & TOYOTA. BMW & MERCEDES APPROVAL PROCESS IS ON.

Kindly share with us your successes and plans on the exports front. What will it mean to have GM as a customer? What is the scale of opportunity with a customer like GM? Do you enjoy superior margins there?

As I mentioned Chrysler relationship is growing stronger. They have increasing confidence in us. Two new programs with Chrysler will start later this year. They have again called us to US to discuss participation in another new program. They are very happy with the quality we have been able to consistently deliver. 80% of current OEM exports are to Chrysler and 20% to Ford.
Ford, Toyota. GM relationships will be leveraged as we put up additional capacity. But again we will be going slow in first stabilising the processes for optimum efficiency and quality. It will take us a full year before we stabilise and run the new coating line continuously on 24 hour 3 shifts basis.

The vision of the company now states “to be a preferred supplier of artificial leather to the leading automotive OEMS in the world”. So has the focus decisively changed towards automotive exports? What is the kind of growth that is expected from automotive exports segment?

Each of these 6-7 big automotive OEMs have annual artificial leather buys in excess of 500-600 Crs today in the developed markets like US and Europe. Our estimates tell us that this is a 3000-4000 Cr market across US & Europe.
We should be able to get 500 Cr -1000 Cr business from automotive OEM exports and Exports replacement market eventually. But this is a slow climb, it takes 2 years of constant engagement to break in for these majors to even entertain us. We also need to strengthen the organisation to scale up to meet the challenges thrown up by these opportunities in front of us.

What will be the effect on the product mix as footwear segment used to contribute some 55% of sales and was a significant counter against cyclicality of auto sector?

As mentioned before we would like revenue contributions to be no more than 25% eventually from any segment. Risks get spread across segments – not just auto sector cyclicality. And as mentioned before automotive replacement market is big and is getting bigger by the day as new vehicles get added every year. In the next few years the replacement market will be much bigger than the OEM market. If you recall in the FY09 auto recession we were not really affected.

7.    SALES & MARKETING SETUP & PROCESSES FOR DIFFERENT SEGMENTS. EXPORT AGENTS

Kindly explain your sales and marketing processes & set-up for the different segments.

We have Agents in developed markets on retainer basis for the automotive OEM exports. Even  in India we work through Agents for some major OEMs like Mercedez Benz.

For the Auto OEM segment, once product approval is received from say GM, who places the order on Mayur Uniquoters – GM, or their Car Seats vendor/assembler? Who do you supply to? How is price negotiation done and by whom?

Once an OEM like Chrysler selects us for a Program (say a new model), it instructs its leading automotive seat vendors to procure from Mayur Uniquoters. The price baseline is fixed by Chrysler. The seat vendor then contacts us and places orders. Some negotiation around the baseline is inevitable.

8.   INDUCTING PROFESSIONALS IN SENIOR MANAGEMENT CAPACITY. MR. RAMDAS U ACHARYA SENIOR VP (TECHNICAL) AND DR. V K KHANNA SENIOR VP (OPERATIONS).

This is a very welcome step. Kindly comment on the significance.  Should we take this as a signal of the confidence Management has in the scalability of this business?

Definitely Yes. A couple of years back we would not have been able to even afford to have such experienced professionals on board. 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.

They are critical cogs in our plans to build scalabilty in the organization teams/processes to be able to address major opportunities before us. If we have to meet stringent export market norms with any consistency, our Operations and Quality processes need to be strengthened. Similarly R&D efforts will need significant  bolstering to offer new product development and innovations for attracting new business from customers.

Given Mr Ramdas Acharya’s extensive experience with different product lines for auto OEMs in developed markets, is there hint of product diversifications in the coming future, or settting up JVs for the same?

[ValuePickr: Sorry we missed asking this directly in the informal discussion flow. Mr Acharya is recruited directly from the US market after pursuing for 3 years we were told. His rich experience in Automotive OEM synthetic leather market and contacts with industry players will be very useful for opening up new opportunities – Automotive exports replacement market could be one such initiative, we were given to understand. Mr S K Poddar categorically told us that within 2 years the company would like to be in a situation where most of the day-to-day operations are run by professional management and the Owner-Management (Mr S K Poddar, his son Manav Poddar, and son-in-law Arun Poddar) devote only 10% of their time in day-to-day operations and are free to spend their time on strategic areas.]

9.   THE PU/PVC SYNTHETIC LEATHER MARKET. THE SIZE OF THE OPPORTUNITY BEFORE MAYUR UNIQUOTERS.

What is the size of the current market being addressed? Where do you see the company 5 years from today? What are the major challenges to reach there?

Let’s look at the Indian market first. Our internal estimates show current synthetic leather production in India caters to roughly ~2000 Cr. Another 700 Cr is met by way of Chinese Imports. 50% of the market probably is catered to by the unorganized sector. 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. Our nearest competitor has less than 50% of our capacity.

About the automotive OEM export market we talked at length before. We reckon that US and European synthetic leather market together is worth not less than 3000-4000 Cr annually.

We should definitely double our Sales in next 5 years!

[ValuePickr: Management likes to talk very conservative. Mr S K Poddar was quoted in this Dec 2010 CNBC interview of doing Rs.48-49 EPS in FY12. They achieved that (Rs. 46 EPS) in FY11 itself. When reminded of this by us, Mr S K Poddar laughed and said we believe in under-promising! Today we have a much greater responsibility as more people like you and analysts have started talking to us regularly. Let our performance do the talking for us!]

10.   PU/PVC SYNTHETIC LEATHER MARKET WOULD SEEM TO BE A LOW-BARRIER-TO-ENTRY MARKET. BUT YOUR DOMINANT PERFORMANCE SEEMS TO BE TELLING A DIFFERENT STORY.

What is the level of competition you face today both domestically and in exports. Who are these players? Would you continue to enjoy a sustainable competitive edge, and why?

Domestically as I mentioned there are about 5-6 bigger players in the organized sector. The customers in the organized sector also like to deal with these bigger players for reasons as mentioned before. Jasch Industries, Polynova, Royal Cushion Vinyl, Fenoplast are some of these players. Our nearest competitor has roughly ~50% of our capacity.

Other than Mayur Uniquoters, no Indian synthetic leather manufacturer has been able to penetrate automotive OEM export 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!

If Mayur Uniquoters is a leading vendor with major customers today, it is for a reason. A certain financial strength and stability is needed to be able to invest in supplying bulk order quantities. Backed up by consistent quality and the ability and willingness to engage customers with new product ideas and innovations. We have developed more than 500 product varieties and are continuously adding to this. Our capacity utilization rates are the highest in the industry. While we derive roughly 4.5-4.75 linear lakh meters/month from one coating line I would hazard a guess that most others are not deriving more than 3-3.5 lakh linear meters/month. We invest continuously in machine and process upgradation. A small example – a leather roll changeover that used to take 45 minutes earlier, today takes less than 5 minutes! 

11.   CAPITAL EXPENDITURE. GROSS BLOCK ADDITIONS IN LAST 5 YEARS IS ~25 CR, BULK OF IT SOME 10 CR ADDED IN FY11. CAPITAL WORK IN PROGRESS WAS SOME 3CR. IN THE SAME TIME SALES HAVE INCREASED BY ~200 CR.

No wonder Fixed Asset Turnover has doubled form 4x to ~8x in last 5 years. Again maximum improvements have come in last 2 years.

As mentioned before, one thing you need to appreciate is that Sales growth has not been led by volume growth as much as by better price realizations (value additions and higher input prices). Having said that, once a coating line stabilizes, our utilization is very high – at 100% levels -24 hours, 3 shifts a day.

This looks almost like an asset-light business model? What’s going on? Is this sustainable ~8x fixed asset turnover for a manufacturing business?

You should also recognize that some our assets are very well depreciated. The first coating line is almost 15 years old and still going strong. The good part is much of the parts can be periodically replaced/upgraded and we have been doing that. Once this 4th coating line starts, we will be able to shut off this 1st line for a few days and carry out some upgrades. Please take into account with new investments of some 50 Crs being made over the next 3 years, these figures may/will temper down.

Please share the company’s philosophy, processes, and how you have gone about implementing such extraordinary productivity and efficiency improvements.

Well the answer to that is our Hunger. And the Ambition. Who sets the benchmarks here? We set them –right? There are no cut off –figures! We are a process industry. Seemingly small but continual investments in processes upgradation is a Mantra with us. If you ask me, if I were to grade us where we are today from where we would like to be I would say we are operating at 60% efficiency!
 

[ValuePickr: Mr VK Khanna and Ramdas Acharya had also joined us by now. Mr Khanna chipped in saying while CMD’s assessment is at 60% , my own assessment is that we are at 40% today!! There is a lot to do and achieve. We are hoping that the next plant that we are coming up with will be a quantum jump over our efforts today. Next time when you visit we would like to showcase to you a world-class facility. Let’s see.]

12.   BACKWARD INTEGRATION.  KNITTED FABRICS UNIT INCURRING 15-18 CR CAPEX

Has this been completed? Is this only for captive use for the exports segment or for generating additional sales as well? What kind of capex will be required going forward?

The land has been acquired. Unfortunately it has taken us 9 months to get the land converted for Industrial use. Construction has started now.

This investment in knitted fabrics is necessitated because of the quality issues being faced by us especially for export markets. We wanted to have this key raw material under our control. Initially much of this will be for captive use, but we also see increasing possibilities of opening up a new market segment for us!

Knitted fabrics has much wider ranging applications than synthetic leather. This market in India alone is a 50,000 Cr annual market! That will bring its own challenges, but show me a business today that does not have intense competition. There are no easy lunches. We are quite sure if there is an opportunity, we will find our own way, albeit gradually.

How much was the expense incurred in Knitted fabrics RM as a percentage of Sales? What will be the contribution towards margin expansion, if any, on account of this?

[ValuePickr: Sorry we missed asking this directly in the informal discussion flow. Will get this answered for you, soon]

13.   RAW MATERIALS – CHEMICALS, KNITTED FABRICS, OTHER FABRICS

RM constitutes some 70-75% of Sales. Kindly explain how the company manages raw material price volatility risks. Are you able to pass on price increases? What is the process with auto OEMs? How often have you resorted to price increases in FY11? What is the outlook for FY12?

Our suppliers are some of the biggest players in the world. They set the prices based on the demand equation and crude situation. We are completely dependent and vulnerable to RM price hikes. The good part though is that we are generally able to pass on the price hikes to our customers. For some of them we have regular price escalation clauses in the agreements. While for some of them we need to go back and negotiate. As mentioned before in our industry we are usually 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).

If it is a gradual hike, usually price increases have worked for us in enabling higher sales. But as mentioned before I am not sure if we see another 18-20% hike in input prices again this year on the back of last year, something has to snap – not all our customers can absorb/pass on such steep hikes!

14.    FOREX RISKS. YOUR RM IMPORTS WERE ROUGHLY 69 CR WHILE EXPORTS CONTRIBUTED ROUGHLY ~48 CR IN FY11.

This picture may substantially change with rising exports in FY12. Will the natural hedge between imports & exports be maintained? What are the measures the company is taking to mitigate risks on this front?

The natural hedge works for us. At the moment we do not see an issue here.

Disclosure(s)

Nagabrahma: More than 5% of Portfolio in the Company; Holding for more than 1 year;
Nitin Jagtap: No Holdings in the Company; ;
Manish Kulkarni: No Holdings in the Company; ;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 6 months;

Mayur Uniquoters

Company 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 1.2 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. 

 

Mayur Uniquoters concentrates mainly on 3 segments. Footwear (55%), Auto (25%), Furnishing (10%). Others bring up the balance 10%. Exports (10% of Sales in FY2010) is spread among above segments. Automotive OEM exports have begun in FY11 to GM & Chrysler. Other international OEMs like BMW, Mercedes and Ford have put Mayur Uniquoters on the approved vendor list, and orders are awaited.

Major customers include Bata, Liberty and Action in Footwear and Maruti, Tata Motors, GM in Automotive segments. Recent breakthroughs include international OEM customers such as Chrysler & GM in US.


Growth Snapshot

We can’t just look at a series of past growth rates and assume that they will predict the future – if investing were that easy, money managers would be paid much less, and this stock analysis would be much shorter. It’s critical to investigate the Sources of a company’s growth.
Variable FY07 FY08 FY09 FY10 FY11
Sales Turnover (Rs. Cr.) 71.70 97.81 123.13 176.15 269.14
Sales Growth Year on Year 36.18 27.50 43.20 50.87
3yr Average Sales Growth 35.62 40.52
3yr Sales CAGR 31.76 35.12 46.99
5yr Average Sales growth 39.44
5yr Sales CAGR 39.17
Profit After Tax (PAT) (Rs. Cr.) 2.65 5.11 6.06 16.22 25.27
Adjusted EPS 4.90 9.45 11.20 29.98 46.71
EPS Growth Year on Year 92.83 18.59 167.66 55.80
3yr Average EPS growth 93.03 80.68
3yr EPS CAGR 51.22 78.16 104.20
5yr Average EPS growth 83.72
5yr EPS CAGR 75.73

 

Mayur Uniquoters has made steady progress over last 5 years. The company has roughly tripled its sales to reach Rs.176 cr in FY10 and EPS has gone up roughly 6x in the same period. Sales have grown at ~30 percent CAGR while EPS on an adjusted basis has grown at over 57 percent CAGR.

Sources of Growth

1. Mayur Uniquoters dominates the PU/PVC Synthetic Leather Market. The customer list straddles all the major footwear brands and major automotive OEMs in India, the main segments the company concentrates on. At 1.2 million meters/month they enjoy some economies of scale, as the nearest competitor has only about half the capacity.

2. Special products for Automotive OEMs in Europe and USA, which satisfies world class quality standards for synthetic leather. Investments in Analytical Labs (for raw material quality inspection) and special plant & machinery enabled them to develop the artificial leather for GM, Chrysler and Ford in USA and Mercedes Benz and BMW in Europe. As per the company, this type of material has been developed for the first time in India, and no other leather cloth company has been able to develop such products.

3. Large variety of products  – Mayur Uniquoters has developed nearly 400 different varieties of synthetic leather to offer for diverse requirements, while the nearest competitor can offer only about 50 varieties.

4. Three main segments contribute to the Sales mix. Footwear (55%), Auto (25%), Furnishing (10%). Others bring up the balance 10%. Exports (10% of Sales in FY2010) is spread among above segments. The company reportedly supplies 75% of Bata India’s requirements. 


Profitability Snapshot

Profitability is the second, and in many ways, the most crucial, part of our Analysis framework. How much profit is the company generating relative to the amount of money invested in the business – the returns? This is the real key to separating a great company from average ones -the higher that return, the more attractive that business. Net profit Margins and comparing cash flow from operations to reported earnings per share are good ways to get a rough idea of the company’s profitability (because cash flow from Operations represents real profits!). But neither account for the amount of capital that’s tied up in the business, and that’s something we cant ignore. We need to know how much economic profit the company is able to generate per dollar/rupee of capital employed because it will have more excess profits to re-invest which will give it an advantage over less-efficient competitors.
Variable FY07 FY08 FY09 FY10 FY11
Operating Profit Margin 9.51 11.18 10.39 16.13 16.05
Net Profit Margin 4.00 5.66 5.27 9.85 10.17
Fixed Asset Turnover 4.16 4.23 5.08 7.12 7.94
Asset Turnover 2.19 2.72 3.13 3.55 3.61
Return on Assets 8.75 15.40 16.46 34.91 36.73
Financial Leverage 1.56 1.37 1.27 1.10 1.13
Return on Equity 13.61 21.12 20.93 38.57 41.42
Return on Capital Employed 17.01 27.64 29.20 57.21 57.20
Debtor Days 92.60 82.52 68.41 56.79 46.39
Inventory Days 61.07 36.20 28.77 28.71 27.86
Cash from Operating Activities (Rs. Cr.)
Operating Cash Flow to Sales
Capital Expenditure 6.11 3.25 2.50 13.93
Free Cash Flow
Free Cash Flow to Sales
Equity Dividend (Rs. Cr.) 0.75 1.00 1.91 2.71 5.42
Dividend per share 1.50 1.92 3.53 5.01 10.02
Adjusted DPS 1.39 1.85 3.53 5.01 10.02
Dividend Growth Year on Year 33.33 91.00 41.88 100.00
3yr DPS CAGR 59.58 64.62 68.45
5yr DPS CAGR 63.96
Dividend Payout 28.30 19.57 31.52 16.71 21.45

This is as pretty a picture as you can find – with a caveat. This achievement is on a very small base, and typical risks associated with small companies of this size, apply. Please see Bearish Viewpoints in our stock story section, for the overall picture.

On the margins front, Operating Profit Margin (OPM) has remained between 10-11% for the most part, in the last 5 years. Only in FY10, operating margins have seen a big jump to over 16%. This is on the back of a ~1% drop in raw material prices, and a big 3% drop in Selling, General & Administrative (SG&A) costs, and other efficiencies achieved on power & fuel costs (as a percentage of Sales, see Common size P&L statement below) in FY10.

The Net Profit Margin (NPM) record is far better, showing a somewhat steadier climb form 4.5% to ~10% in FY10. this is on the back of a steadily reducing interest burden and debtors and inventory levels. Its great to see debtor days consistently coming down from ~96 days in FY06 to ~56 days in FY10. Similarly Inventory days have halved from ~57 days in FY05 to ~28 days in FY10. This is a great record in working capital management for a company as small as Mayur Uniquoters and speaks a lot about the Management focus on operational efficiency.

It is also great to see a steady rise in Asset Turnover – rising from ~2x in FY06 to over 3.55 in FY10. Few manufacturing companies manage such a steady rise – tells me that capacity expansions have been judiciously planned and executed, in tune with rising demand. This coupled with the rising net profit margins have ensured that Return on Assets (RoA) climbed from ~9% in FY06 to over 16% in FY09. In FY10 RoA climbed to ~35% on the back of doubling of net profit margins. We can think of ROA as a measure of efficiency. Companies with high ROAs are better at translating Assets into Profits.

The rising net profit margins and asset turnover (with a gradually declining Financial Leverage) has ensured Return on Equity (RoE) has climbed from ~14% to over 20% till FY09. In FY10 RoE has jumped to ~39% on the back of almost doubling of net profit margins. RoE is a good measure of overall profitability as it measures the efficiency with which a company uses shareholders’ equity. We can think of it as measuring profits per rupee of shareholders’ capital. The Return on Capital employed record is similar going up from 18% in FY06 to ~29% in FY09, before jumping to over 57% in FY10.

The company has an even better track record in steadily increasing Operating Cash flows. Operating Cash flow/Sales more than tripled from ~4% in FY06 to over 13% in FY10. The Free Cash Flow (FCF) record is even better recording almost a 6x increase from ~2% in FY06 to ~12% in FY10. Free Cash flow at over 10% of Sales for a manufacturing company that has grown sales at a ~30% 5yr CAGR is a very rare achievement. It needs to be noted that Capital Expenditure (Capex) of some 15 Cr is slated for FY11 on a backward integration project. Further Capex of another 8-10 Cr will be needed for capacity expansions, sooner than later. If these are not exceeded, the Cash on balance sheet and the healthy cash flows are perhaps adequate to fund the upcoming capex requirements.

And when we find a company with a high RoE and high FCF combination, it is said to be in a sweet spot, and reason to track this company as a potentially excellent business to invest in, but at the right valuation.

Also one must not forget the consistent dividend payment track record. Dividend payments have been steadily rising to register a 5yr DPS CAGR of over 52%. Again a good record for a company of Mayur Uniquoters size.

For Mayur Uniquoters FY10 has been a year of stupendous achievement. We may argue that till FY09 the performance was not exemplary and one may not have taken much notice, it is only FY10 performance that has made us sit up – Will the high OPM & NPM margins be sustainable? The odds are on, to that settling down at slightly lower levels, perhaps.

An objective look back at this profitability analysis tells us that softening raw material prices played only a small part, and it is the operational efficiency improvements on most fronts that has propelled the company to greater heights.


Common size P&L Statement

Can we dig deeper to see what else we can understand about how this company makes money? A good way is to look at the common size profit and loss statement. Common size statements are great tools for evaluating companies because they put every line item in context by looking at each of them as a percentage of Sales.
Variable FY07 FY08 FY09 FY10 FY11
Common Size Sales 100.00 100.00 100.00 100.00 100.00
Common Size Raw Material 78.84 77.63 74.15 72.96 74.13
Common Size Power & Fuel 1.24 1.10 1.14 0.93 0.65
Common Size Employee Cost 4.11 3.44 3.37 3.11 2.50
Common Size COGS 81.90 80.46 77.09 75.85 76.68
Gross Profit Margin 18.10 19.54 22.91 24.15 23.32
Common Size Depreciation 2.29 1.54 1.38 1.32 1.08
Common Size Interest Cost 1.81 1.30 1.13 0.81 0.75
Common Size SG&A 10.32 8.66 11.17 8.41 7.81
Operating Profit Margin 9.51 11.18 10.39 16.13 16.05

This section has got covered mostly in the profitability analysis, as we looked for reasons behind the good performance.

Raw material prices seem to have softened over the last 4 years, when seen as a percentage of Sales. Power and Fuel costs have also come down. As per the Annual Report FY10, online embossing process improvement led to reducing 1 complete process in the chain with significant power savings. Employee productivity seems to be improving over the years as employee costs as a percentage of Sales has been gradually coming down. Selling, General & Administration expenses have also come down as a percentage of Sales.

This common size P&L statement points to a company getting more efficient over the years. We have also seen earlier in the profitability analysis consistent improvement in working capital management as the company has steadily brought down debtor days and inventory days.

is Mayur Uniquoters becoming a more efficient company, as it is growing? The track record of last 5 years certainly points to a strong management focused on improving operational efficiencies.


Financial Health Snapshot

Once we have figured out how fast (and why) a company has grown and how profitable it is, we need to look at its financial health. Even the most beautiful home needs a solid foundation, after all.
Variable FY07 FY08 FY09 FY10 FY11
Financial Leverage 1.56 1.37 1.27 1.10 1.13
Debt to Assets 0.36 0.27 0.21 0.09 0.11
Debt to Equity 0.56 0.37 0.27 0.10 0.13
Interest Coverage 4.29 7.84 8.27 19.84 21.16
Interest Cost to Total Debt 11.10 13.03 16.56 30.39 23.91
Current Ratio 1.88 1.56 1.66 1.82 1.99
Quick Ratio 1.32 1.24 1.34 1.52 1.60
Cash to Assets 3.76 13.29 15.65 42.14 33.19

Mayur Uniquoters Financial Heath track record is the best testimony perhaps, for the company.

Any which way you look at it, this is a great record. Debt to Equity has steadily been decreasing over the years. From 0.64x in FY06 it is practically debt free in FY10 at 0.10x. Financial Leverage and Debt to Assets mirror the same trends. Interest Coverage has been steadily rising over the years from 4x in FY06 to ~20x in FY10, and thus its unlikely that it will run into difficulty in meeting debt liabilities if earnings should fall unexpectedly.

Liquidity measures like Current ratio and Quick ratio are comfortable, showing that the company is able to source enough cash to meet near-term liabilities. Cash to Assets has steadily risen over the years and is at a very high 42% of Assets. The company plans to utilise the cash for the announced backward integration plans of setting up a knitting fabric plant (a key raw material) in FY11. 

The only blip that shows up is a high Finance cost to Total debt of over 30% in FY10. This is a sudden rise on account of high bank charges (~35 lakhs) and other finance charges (36 lakhs) adding to the ~60 lakhs interest cost. It is possible that the Total debt was reduced (4.41 Cr in FY10 from 7.85 Cr in FY09) at the fag end of the year, leading to the higher charges. 

Overall the picture that emerges is, Mayur Uniquoters has a strong clean balance sheet and is in a very comfortable situation, on the financial front. Again the record speaks highly of Management excellence.