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?
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?
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.
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?
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?
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?
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?
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?
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?
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.
[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?
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.
|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|
|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.
|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|
|Return on Assets||8.75||15.40||16.46||34.91||36.73|
|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|
|Cash from Operating Activities (Rs. Cr.)|
|Operating Cash Flow to Sales|
|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|
|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|
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 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.
|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 Cost to Total Debt||11.10||13.03||16.56||30.39||23.91|
|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.