Astral Poly Technik

Company Background

 

Astral Poly Technik (APL) has its production facilities at Gujarat and Himachal Pradesh to manufacture plumbing systems from ½” to 8” diameter. Main products include Chlorinated PVC (CPVC) pipes and fittings for hot and cold water plumbing systems, CPVC industrial piping system for transportation of hazardous and highly corrosive chemicals, and lead free PVC systems for cold water application.

APL was the first licensee of Lubrizol (formerly B. F. Goodrich), USA to manufacture and market CPVC (patent protected) piping and plumbing system in India in 1999. APL entered into a techno-financial joint venture with Specialty Process LLC of USA, which provided the required technical expertise for manufacturing CPVC pipes and fittings for home and industrial applications. Specialty Process LLC, USA has 15.xx% ownership in APL. APL claims to be the only Licensee of Lubrizol in India and neighbouring countries for the use of the trademarks ‘‘BlazeMaster” (since 2006), “FlowGuard” (1998) and “Corzan” (1998).

APL introduced a new product range in lead free PVC pressure pipes and fittings in 2004, again a first in india. With the concept of providing a one-stop source for all plastic piping systems, APL also began trading in products such as CPVC and PVC fittings, flanges and valves from Spears (USA), solvent cements (adhesive solutions) for joining pipes and fittings from IPSC (USA), underground specialty fittings from Hunter (U.K) and CPVC and PVC plastic pipes of a larger diameter from Harvell Inc. (USA).

APL has ISO 9001:2000 certification for manufacture and supply of CPVC and PVC pipes and fittings for plumbing systems and industrial piping system. Astral is the only company in India whose CPVC products are approved by Nations Sanitary foundation (NSF) USA. Astral recently received ISI approval for its CPVC products in the country.

APL’s manufacturing facility at Barotiwal-Solan District (H.P) enjoys tax benefits/ concessions, relating to duties of Sales Tax, Excise and Income Tax. Overall tax rate for the company in FY2010 was 16.90%. These benefits are expected to continue till FY15.

 


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 FY06 FY07 FY08 FY09 FY10
Sales Turnover (Rs. Cr.) 58.19 101.70 144.53 205.25 304.52
Sales Growth Year on Year 79.47 40.71 42.30 50.15
3yr Average Sales Growth 54.16 44.39
3yr Sales CAGR 58.91 41.50 46.17
5yr Average Sales growth 53.16
5yr Sales CAGR 52.41
Profit After Tax (PAT) (Rs. Cr.) 4.02 9.11 17.07 14.19 28.03
Adjusted EPS 1.79 4.05 7.59 6.31 12.47
EPS Growth Year on Year 126.62 87.38 -16.87 97.53
3yr Average EPS growth 65.71 56.01
3yr EPS CAGR 106.06 24.81 28.14
5yr Average EPS growth 73.66
5yr EPS CAGR 62.50

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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 FY06 FY07 FY08 FY09 FY10
Operating Profit Margin 13.76 14.10 15.23 11.54 14.45
Net Profit Margin 7.47 9.44 12.57 7.34 9.66
Fixed Asset Turnover 2.35 3.13 3.30 2.45 3.30
Asset Turnover 1.70 1.05 1.21 1.47 1.83
Return on Assets 12.68 9.90 15.24 10.77 17.68
Financial Leverage 2.29 1.36 1.40 1.42 1.34
Return on Equity 29.03 13.48 21.37 15.30 23.73
Return on Capital Employed 20.60 13.75 19.74 16.36 24.33
Debtor Days 64.54 76.92 88.42 77.96 84.82
Inventory Days 115.01 96.49 99.96 117.11 112.53
Cash from Operating Activities (Rs. Cr.)
Operating Cash Flow to Sales
Capital Expenditure 11.85 28.91 32.74 17.73
Free Cash Flow
Free Cash Flow to Sales
Equity Dividend (Rs. Cr.) 0.00 0.00 1.13 1.12 2.25
Dividend per share 0.00 0.00 0.50 0.50 1.00
Adjusted DPS 0.00 0.00 0.50 0.50 1.00
Dividend Growth Year on Year -0.88 100.89
3yr DPS CAGR 41.11
5yr DPS CAGR
Dividend Payout 0.00 0.00 6.62 7.89 8.03

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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 FY06 FY07 FY08 FY09 FY10
Common Size Sales 100.00 100.00 100.00 100.00 100.00
Common Size Raw Material 58.70 72.79 67.41 75.46 73.34
Common Size Power & Fuel 1.92 1.97 2.04 2.41 2.44
Common Size Employee Cost 4.28 3.54 3.69 3.18 2.84
Common Size COGS 62.50 76.11 71.22 79.89 77.94
Gross Profit Margin 37.50 23.89 28.78 20.11 22.06
Common Size Depreciation 2.55 2.28 2.40 3.20 2.96
Common Size Interest Cost 2.34 1.95 1.98 2.75 1.67
Common Size SG&A 28.21 15.62 16.71 15.80 12.09
Operating Profit Margin 13.76 14.10 15.23 11.54 14.45

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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 FY06 FY07 FY08 FY09 FY10
Financial Leverage 2.29 1.36 1.40 1.42 1.34
Debt to Assets 0.51 0.27 0.29 0.30 0.25
Debt to Equity 1.18 0.36 0.40 0.42 0.34
Interest Coverage 4.93 6.73 8.22 4.06 7.97
Interest Cost to Total Debt 7.73 7.68 8.37 13.60 11.98
Current Ratio 2.11 3.42 3.74 2.09 1.96
Quick Ratio 1.15 2.59 2.63 1.16 1.14
Cash to Assets 3.91 39.86 23.11 1.66 2.38

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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.

Vinati Organics

Company Background

Vinati Organics Limited was promoted by first generation entrepreneur Vinod Saraf in 1989 to manufacture specialty organic chemicals. Vinati is a niche player but has already achieved global recognition and size.

  • Iso Butyl Benzene (IBB) – the primary raw material for the popular painkiller Ibuprofen. It is the largest manufacturer with a 14,000 TPA manufacturing facility and has ~ 60% global market share
  • ATBS (2-Acrylamido 2-methylpropaneargest manufasulfonic Acid) – It is the 2nd largest manufacturer with a 12,000 TPA capacity and a 25% global market share. Vinati has broken into the exclusive club of ATBS manufacturers. There are only three other manufacturers of ATBS globally viz. Lubrizol (USA) ~14000 TPA, Toagosei (Japan) ~8000 TPA and a Chinese company with small capacity of ~2000 TPA.

Domestic market for its products is small, the Company exports bulk of its products to USA, Europe, Australia, Middle East and China. Export contribution in FY 2010 is ~75%. In FY 2010 IBB contributed 54%, ATBS contributed 44% while Others contribute 2% of the Sales mix. Contribution from ATBS has been steadily growing over the years and in 1Q FY 2011 ATBS has already overtaken IBB, contributing ~57% to the Sales mix.

Main customer segments:

  • IBB – is the primary raw material for the popular painkiller Ibuprofen – supplied directly to Ibuprofen manufacturers like BASF (largest Ibuprofen manufacturer), Shashun Chemicals, Biocause (China) the other large scale Ibuprofen manufacturers.
  • ATBS, Na-ATBS and other derivatives that the Company makes are specialty monomers having wide applications mainly in acrylic fibre manufacturing, adhesives, and personal care products. These are supplied to polymer manufacturers who then sell the polymers to users through their distribution channels. Direct sales of ATBS are only to acrylic fiber industry.
  • Some of the key clients are BASF, AkzoNobel, Ciba, Perrigo, Rohm & Haas, Clariant, NALCO, Shasun Chemicals

As per the company, New Applications like Enhanced Oil Recovery & Water Treatment hold substantial potential for growth of ATBS and global demand is expected to go up 2-3 fold.


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 FY06 FY07 FY08 FY09 FY10
Sales Turnover (Rs. Cr.) 65.20 90.46 161.36 203.47 238.44
Sales Growth Year on Year 43.07 78.34 30.19 21.65
3yr Average Sales Growth 50.53 43.39
3yr Sales CAGR 59.73 52.37 25.85
5yr Average Sales growth 43.31
5yr Sales CAGR 41.78
Profit After Tax (PAT) (Rs. Cr.) 1.95 3.51 15.20 25.13 40.04
Adjusted EPS 0.40 0.71 3.08 5.09 8.11
EPS Growth Year on Year 80.00 333.05 65.33 59.33
3yr Average EPS growth 159.46 152.57
3yr EPS CAGR 179.19 167.57 62.30
5yr Average EPS growth 134.43
5yr EPS CAGR 112.87

Vinati Organics has made rapid progress over the last 5 years. The 5yr CAGR growth record is impressive- Sales have grown at over 40% annually, while EPS has grown at an astonishing 112%. What is behind this impressive growth?

Sources of Growth

Vinati Organic’s story has been primarily an export-led growth with strategic capacity build-up in carefully chosen product niches. Capacity so far has been expanded judiciously in tandem with market success and demand growth.

  • IBB was the key growth driver initially – may be muted from here on

In FY06 Vinati’s IBB capacity was 10,000 TPA which was increased to 14000 TPA by FY08. In FY07 it had signed up a long term 5yr deal (till 2011) with BASF that required BASF (the largest Ibuprofen manufacturer) to source majority of its IBB requirements from Vinati. As per the company monthly selling price of IBB is adjusted based on monthly world prices of key raw materials and USD/INR exchange rate, thus minimizing the Company’s risk exposure. By FY2008, Vinati was manufacturing 60% of the global IBB requirements. IBB is a mature product and worldwide growth is now projected at 3-5%. Since FY08, there has been no expansion in IBB capacity.

  • Growth kicker from ATBS

Vinati is one among 3 players worldwide to have access to ATBS manufacturing technology (protected by patents) and it is the 2nd largest manufacturer with 12000 TPA capacity. ATBS capacity in FY06 was 3000 TPA, which was expanded to 5000 TPA in FY08 and further enhanced to 10000 TPA by FY09. Current expansion announced to 18000 TPA, to be completed by May 2011, will make it the largest manufacturer in the world. ATBS capacity had trebled in last 5 yrs, and by FY12 slated to go up 6x in seven years! As per the company ATBS contracts have a quarterly pass-on of key raw material and USD/INR exchange rate exposure. Currently ATBS contributes 57% to the Sales mix.

  • Backward Integration/by-products/power co-generation

In FY10, Vinati has also completed a backward integration project for one key ingredient of ATBS, Isobutylene (IB) with a installed capacity of 12000 MT. This project was completed in June 2010 and will start contributing to the bottomline in FY11 as this finds captive use and import replacement demand in IB domestic market . Keeping in mind the increased energy consumption arising because of new facilities and expanded capacities, Vinati decided to setup a captive 6MW co-generation plant. The 6MW co-generation plant (coal based) is expected to be operational by end of FY11. Besides, a Diacetone Acrylamide (DAAM) plant of 1,000 MT capacity is being commissioned and a lot of capacity expansions are on the anvil: expanding the capacity of ATBS plant from 10,000 MT to 18,000 MT; of TBA plant from 300 MT to 900 MT; of ATFE capacity from 1,000 MT to 3,500 MT. Majority of the expansion program is to be completed by FY11 and would require an approximate capex of Rs. 120 Cr, as announced by the company.

  • Frenetic pace of expansion – cause for some concern

Annual Report FY2010 had announced a capital expenditure outlay of 77 Cr. But this has been been enhanced now to 120 Cr, as announced earlier and re-iterated in this August 2010 Analyst Meet . This will be funded through a mix of debt and internal accruals as announced by the company. Admittedly as per this conference call, the company is already operating at 90-95% ATBS capacity, but the frenetic pace of expansion carries significant execution and market risks. Company’s current debt burden is ~60 Crs. If these plans have to be funded, the company may have to take on sizeable debt exposure as cash flow accruals are around ~30 Crs. Debt/Equity levels may climb higher to 1.5 or so.


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 FY06 FY07 FY08 FY09 FY10
Operating Profit Margin 10.11 10.14 17.30 17.38 22.74
Net Profit Margin 3.40 4.28 10.39 13.19 17.28
Fixed Asset Turnover 1.56 2.28 3.58 4.26 2.91
Asset Turnover 1.15 1.48 1.90 1.64 1.43
Return on Assets 3.91 6.31 19.75 21.69 24.67
Financial Leverage 1.82 1.86 1.80 1.79 1.64
Return on Equity 7.14 11.74 35.63 38.72 40.37
Return on Capital Employed 8.43 13.49 34.32 30.36 34.63
Debtor Days 84.39 87.64 55.05 53.50 56.49
Inventory Days 68.39 48.95 42.00 32.87 43.37
Cash from Operating Activities (Rs. Cr.)
Operating Cash Flow to Sales
Capital Expenditure 3.25 17.07 39.61 34.80
Free Cash Flow
Free Cash Flow to Sales
Equity Dividend (Rs. Cr.) 0.66 0.79 1.97 2.47 4.94
Dividend per share 0.20 0.24 0.40 0.50 1.00
Adjusted DPS 0.13 0.16 0.40 0.50 1.00
Dividend Growth Year on Year 19.70 149.37 25.38 100.00
3yr DPS CAGR 72.77 76.82 58.35
5yr DPS CAGR 65.40
Dividend Payout 33.85 22.51 12.96 9.83 12.34

 

Vinati Organics 5yr profitabilty snapshot looks impressive. However, 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 steadily improved year on year to reach ~23% in FY10 from just about 10% in FY06. In FY10, operating margins have seen a big jump by over 5%. This is on the back of an unusually good year for IBB (20-25% margins). This will probably be hard to sustain in FY11 as IBB margins (usually 15-20%) have started to get hit because of increased supply from new competitors like IOL with a 6000 TPA IBB capacity. The falling margins may be compensated by somewhat higher margins (usually 20-25%) enjoyed by ATBS, its increasing contribution to sales mix, and the backward integration benefits from IB.

The Net Profit Margin (NPM) record is better, showing a steady climb form 3.4% to over 17% in FY10. This is on the back of a steadily reducing interest burden and debtors and inventory levels. Its great to see debtor days coming down from ~84 days in FY06 to ~56 days in FY10. Similarly Inventory days have come down from ~68 days in FY06 to ~43 days in FY10. This is good working capital management and confirms the Management focus on operational efficiency. Net margins may lower a bit from current levels in FY11 due to higher depreciation and interest costs incurred in the year consequent with the pressure on Operating margins.

Although Asset Turnover has declined gradually over the last 3 years due to rapid capacity expansions, the rising net profit margins have ensured that Return on Assets (RoA) climbed from ~4% in FY06 to over 24% in FY10. 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 ~7% to over 40% by FY10. 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 8% in FY06 to over 34% in FY10.

Although cash flows has improved substantially from FY06 levels, the company does not have a good a record on Operating Cash flows which has mostly lagged behind Net profits, even if increasing over the years. The company is also far from recording any Free Cash Flow (FCF) as business growth has necessitated continuous capacity expansion. It needs to be noted that Capital Expenditure (Capex) of some 120 Cr is slated for FY11 on several expansion projects. This is roughly 3x the capital expenditure incurred in earlier years, and carries execution risks and much higher debt exposure.

Dividend payments have been steadily rising to register a 5yr DPS CAGR of over 65%. Vinati Organics is a good dividend payer with a consistent track record – infact dividend per share doubled in FY10 over FY09.


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 FY06 FY07 FY08 FY09 FY10
Common Size Sales 100.00 100.00 100.00 100.00 100.00
Common Size Raw Material 66.40 66.58 65.76 63.70 59.52
Common Size Power & Fuel 3.33 3.91 3.68 3.99 5.18
Common Size Employee Cost 7.22 6.17 4.24 4.64 4.96
Common Size COGS 73.43 74.61 71.97 70.29 68.60
Gross Profit Margin 26.57 25.39 28.03 29.71 31.40
Common Size Depreciation 4.15 3.30 2.00 1.71 2.13
Common Size Interest Cost 2.16 2.40 2.23 1.73 1.91
Common Size SG&A 13.51 14.61 12.01 12.04 10.87
Operating Profit Margin 10.11 10.14 17.30 17.38 22.74

Raw material as a percentage of Sales has been coming down over the years with good reductions in FY09 & FY10 which has helped boost Operating Margins. The company claims its long term contracts terms allow it to pass on raw material price escalations to the customers after a time lag. For IBB it can resort to monthly price revisions, whereas for ATBS it can pass on revisions after a quarter.

Power and fuel costs had ranged from 3-4%, but has risen sharply in FY10 to over 5%. The company seems to be seized of this as it has announced plans to set up a 6MW co-generation plant. Interest and Depreciation costs played within a 2% range for last 3 years or so. This is due to see a jump up in FY11.

Selling & General Administration overhead costs have seen a gradual declining trend from ~14% to about 11% in FY10. This is a good trend as the company is able to probably leverage its existing customer relationships and has better visibility in its market.

The increased depreciation & interest costs in FY11 may be a bit of a dampner to the overall picture. However the record points to a focused management that seems to be knowing & running its business well. It has made significant improvements in managing overhead costs. The raw material price revision clauses protect it from big surprises and it has initiated steps to bring power & fuel costs back in line.


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 FY06 FY07 FY08 FY09 FY10
Financial Leverage 1.82 1.86 1.80 1.79 1.64
Debt to Assets 0.45 0.46 0.45 0.44 0.39
Debt to Equity 0.82 0.86 0.80 0.79 0.64
Interest Coverage 3.39 3.81 8.10 10.69 12.72
Interest Cost to Total Debt 5.51 7.67 9.51 6.46 7.00
Current Ratio 2.12 2.26 2.54 2.79 3.60
Quick Ratio 1.47 1.72 1.87 2.11 2.59
Cash to Assets 2.77 1.58 1.78 1.63 1.10

 

Vinati Organics financial health over the last 5 years presents a decent picture.

Debt to Equity has been decreasing gradually over the years from 0.82x in FY06 to 0.64x in FY10. Financial Leverage and Debt to Assets mirror the same trends. Interest Coverage has been steadily rising over the years from ~3x in FY06 to ~12x 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 position has however been declining and is pretty thin at ~1% of assets in FY10.

Overall it emerges that Vinati Organics has a decent balance sheet and is in a comfortable situation, on the financial front. It should be able to leverage its balance sheet to part finance its aggressive capital expenditure plans in FY11. This is the first time in last 6 years that Debt to Equity may shoot up over 1x and may touch ~1.5x. How well it executes its plans and its ability to manage the higher debt-exposure, remains to be seen.

Manjushree Technopack

Company Background

Founded in 1977 by technocrats, Manjushree started as a small umbrella manufacturing unit in Guwahati, Assam. In 1984 it forayed into manufacturing of Plastic Flexible packaging and came up with its IPO in 1995 to diversify into PET bottles manufacturing with a unit in Bangalore.

Today it has carved out its own niche in the PET bottling industry. It boasts of a marquee client list the likes of Coca Cola, Pepsico, Bisleri, P&G, GSK, Nestle, Cadbury and Unilever and has emerged as the supplier of choice. With two manufacturing units in Bangalore, installed capacity in FY10 is ~30,000 metric tonnes.

Main product lines include PET jars and bottles, PET preforms, PP and Multilayer containers.


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 FY06 FY07 FY08 FY09 FY10
Sales Turnover (Rs. Cr.) 65.32 79.97 85.18 118.79 160.05
Sales Growth Year on Year 25.55 4.80 43.21 41.13
3yr Average Sales Growth 24.52 29.71
3yr Sales CAGR 14.71 22.51 42.16
5yr Average Sales growth 28.67
5yr Sales CAGR 27.70
Profit After Tax (PAT) (Rs. Cr.) 1.37 2.83 4.40 7.49 10.57
Adjusted EPS 1.01 2.09 3.25 5.53 7.80
EPS Growth Year on Year 106.57 55.48 70.23 41.12
3yr Average EPS growth 77.42 55.61
3yr EPS CAGR 79.21 62.69 54.99
5yr Average EPS growth 68.35
5yr EPS CAGR 66.66

Manjushree Technopack has made steady progress over last 5 years. Sales have grown at ~25 percent CAGR while EPS on an adjusted basis has grown at over 60 percent CAGR.

Sources of Growth

1. Carbonated Soft Drinks (CSD) market is growing at over 30 percent CAGR. For Coke and Pepsi India has emerged as the fastest growing market in FY09 with both announcing huge investment plans. Coca Cola says its $250 Mn India investment plan is on track while Pepsico India had announced a Rs 1,000-crore investment for 2009.

2. Product Mix has shifted in favour of PET Pre-forms which bring in enormous efficiencies in storage and transportation (1/5x fully blown shapes) and benefit both the packaging company and the beverage manufacturer. All major beverage manufacturers have installed Pre-form blowing machines at their bottling plants.

Manjushree was early to spot this trend and has now emerged as the largest organised player in PET Pre-forms. Huge capacity expansion from ~9000 MT in FY2008 to ~21000 MT in FY09 to ~30000 MT in FY10. For a company of its size, this is pretty aggressive expansion but seems to have paid off, as it has quietly become a dominant player in its niche, becoming Coke’s largest PET supplier.


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 FY06 FY07 FY08 FY09 FY10
Operating Profit Margin 12.28 12.48 16.08 16.43 18.94
Net Profit Margin 2.44 4.02 5.97 7.09 7.09
Fixed Asset Turnover 3.10 3.43 2.33 1.82 1.62
Asset Turnover 1.71 2.29 1.10 1.19 1.07
Return on Assets 4.19 9.20 6.59 8.43 7.58
Financial Leverage 2.82 2.21 1.25 1.49 2.04
Return on Equity 11.82 20.30 8.22 12.60 15.44
Return on Capital Employed 10.89 19.79 13.11 14.51 13.60
Debtor Days 57.58 48.50 69.79 54.82 65.93
Inventory Days 58.21 45.63 80.58 76.77 64.42
Cash from Operating Activities (Rs. Cr.)
Operating Cash Flow to Sales
Capital Expenditure 5.19 14.46 31.22 43.83
Free Cash Flow
Free Cash Flow to Sales
Equity Dividend (Rs. Cr.) 0.48 0.48 0.49 1.35 1.36
Dividend per share 1.14 1.14 0.36 1.00 1.00
Adjusted DPS 0.35 0.35 0.36 1.00 1.00
Dividend Growth Year on Year 0.00 2.08 175.51 0.74
3yr DPS CAGR 1.04 67.71 66.60
5yr DPS CAGR 29.74
Dividend Payout 35.04 16.96 11.14 18.02 12.87

 

Over the last few years Manjushree has shown steady improvements on Net Margin front going upto over 7 percent in FY09. Operating margins have similarly climbed upto over 16 percent. These are pretty decent numbers for the highly competitive Plastics Packaging industry.

The record on Return on Equity and Return on Capital Employed at ~13 percent and 15 percent may seem nothing to write home about. But compare these over the industry and one can see these are again industry-beating returns and margins.

The company’s performance on Debtor days and Inventory days over the years has shown a gradual improvement and speaks well of management focus on operational efficiency.

Manjushree has a good track record on Dividend payment. It has been regularly paying dividends and current Dividend Payout ratio stands at ~21 percent. The company has been increasing dividends in tune with profitability and 5 year dividend CAGR is at a healthy ~35 percent.

Overall Manjushree appears to be a well-run company in a highly competitive industry.

 


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 FY06 FY07 FY08 FY09 FY10
Common Size Sales 100.00 100.00 100.00 100.00 100.00
Common Size Raw Material 54.34 57.76 54.31 53.93 54.84
Common Size Power & Fuel 6.66 5.26 5.83 5.73 8.10
Common Size Employee Cost 3.96 4.43 6.08 5.86 5.60
Common Size COGS 77.09 77.08 72.92 72.89 76.37
Gross Profit Margin 22.91 22.92 27.08 27.11 23.63
Common Size Depreciation 6.03 3.91 4.56 4.68 6.54
Common Size Interest Cost 2.55 2.46 2.70 1.36 2.27
Common Size SG&A 11.42 9.68 13.52 11.43 11.02
Operating Profit Margin 12.28 12.48 16.08 16.43 18.94

While on most parameters there is gradual improvement, Cost of Goods Sold (COGS) shows good improvement coming down to to about 74 percent from 77 percent in FY05. Operating margins are sustaining at over 16 percent for last 2 years showing a big uptick from ~12 percent levels 3 years back.

Manjushree Technopack seems to be getting better at managing its operations as it scales up.


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 FY06 FY07 FY08 FY09 FY10
Financial Leverage 2.82 2.21 1.25 1.49 2.04
Debt to Assets 0.65 0.55 0.20 0.33 0.51
Debt to Equity 1.82 1.21 0.25 0.49 1.04
Interest Coverage 2.49 3.52 4.40 8.96 5.59
Interest Cost to Total Debt 6.78 10.28 15.02 4.89 4.78
Current Ratio 4.29 1.84 5.60 4.80 3.68
Quick Ratio 2.82 1.36 4.07 2.89 2.63
Cash to Assets 1.96 8.71 13.86 0.50 5.69

In its bid for growth Manjushree seems to have used Financial Leverage judiciously to its advantage, in the last 5 years or so. From a relatively high financial leverage (Assets/Equity) of 2.79 in FY05, Manjushree has brought this down to more conservative levels of 1.49 in FY09. It is when we see financial leverage ratios of 4, 5, or more that companies start to get really risky.

Manjushree has maintained comfortable levels of Interest Coverage. FY09 figure stands at a comfortable ~9x Interest expense. In fact Interest Coverage figures have grown 3 times in the last 5 years, steadily climbing year on year from about 2.5x levels in FY05. This points to a steadily improving financial health condition. Debt to Equity at 0.49 in FY09, is also at comfortable levels after hovering on the higher side in FY05 and FY06.

Manjushree has been maintaining healthy liquidity levels more or less consistently. FY09 Current Ratio at 4.8x and Quick Ratio at ~3x, indicate that Manjushree can always raise enough cash, if it had to say, pay off its liabilities all at once. However such high levels of Current Ratio might also suggest Manjushree Management is retaining too much cash on hand and is not perhaps putting that to the best use.