BHAVIKK SHAH's BLOG: MAYUR UNIQUOTERS LTD: JACKETING YOUR PORTFOLIO !!!

Scrip Code: 522249 / MAYURUNIQ

CMP: Rs. 424.15; Market Cap: Rs. 1,962.86 Cr; 52 Week High/Low: Rs. 515.00 / Rs. 378.40. Total Shares: 4,62,77,600 shares; Promoters : 2,82,84,916 shares – 61.12 %; Total Public holding : 1,79,92,684 shares – 38.88 %; Book Value: Rs. 48.56; Face Value: Rs. 5.00; EPS: Rs. 15.20; Dividend: 61.00 %; P/E: 27.98 times; Ind. P/E: 28.94; EV/EBITDA: 17.24.

Total Debt: Rs. 44.82 Cr; Enterprise Value: Rs. 1,987.19 Cr.

MAYUR UNIQUOTERS LIMITED: Mayur Uniquoters Limited was founded in 1992 and is based in Jaipur, India. Mayur Uniquoters Limited manufactures and sells coated textile fabrics in India. The company’s products include artificial leather, synthetic leather, and PVC vinyl. Its products are used in footwear, furnishings, automotive OEM, automotive replacement, and automotive exports markets. The company sells products directly to OEMs, as well as to other manufacturers and wholesalers. It also exports its products to the Middle East, Cyprus, the United Kingdom, Russia, Sri Lanka, Nepal, the United Arab Emirates, Mexico, Italy, and the United States. The company had declared splits in face value of its shares from Rs. 10 to Rs. 5 in July 2013 and gave bonus of 1:1 in June 2012 and again 1:1 bonus in February 2014. Mayur Uniquoters Ltd has an installed capacity of 400,000 Linear Meters per month & it has a full range of machinery to full-fill Printing, Embossing, Lacquering, Sue ding and laminating needs. The company possesses fully equipped Physical, Chemical and Product Development Laboratories capable of testing nearly all the properties of Artificial Leather for different segments and applications. Company also manufactures and exports PVC Vinyl also referred to as Artificial Leather or Synthetic Leather; they are also termed as PVC Leather Cloth, PU/PVC Leather Cloth. The company has its own inline testing lab, physical testing lab, raw material testing lab, Colour testing lab and product development lab. Company carters to major automobile brands in India to name the few are BMW, General Motors, Daimler, Maruti Suzuki, Tata Motors, Honda, Ford, Hyundai, Nissan, LML. Mayur Uniquoters Ltd is locally compared with Superhouse Ltd, Lawreshwar Polymers Ltd, Super Tannery ltd, Super House Ltd, Crew BOS products Ltd, Mideast India Ltd, Mirza International Ltd, Fenoplast ltd, Zenith Exports Ltd, Mayur Leather Products Ltd, Relaxo Footware ltd, Jasch Industries, Responsive Industries, Fenoplast, Prabhat Industries, Polynova, Manish Vinyl and Veekay Polycoat globally compared with Daiichi Kasei Company Ltd of Japan, Chanco International Group Ltd of Hong Kong.

Investment Rationale:

Mayur Uniquoters Ltd. (MUL), the largest manufacturer of artificial leather and PVC Vinyl in India and was established by Mr. Poddar in 1994. Mayur Uniquoters is a market leader with installed capacity of 2.5 million linear meters per month. Mayur Uniquoters Limited was incorporated in 1992 and is based in Jaipur, India. Mayur Uniquoters Limited manufactures and sells coated textile fabrics in India. The company’s products include artificial leather, synthetic leather, and PVC vinyl. Its products are used in footwear, furnishings, automotive OEM, automotive replacement, and automotive exports markets. The company sells products directly to OEMs, as well as to other manufacturers and wholesalers. It also exports its products to the Middle East, Cyprus, the United Kingdom, Russia, Sri Lanka, Nepal, the United Arab Emirates, Mexico, Italy, and the United States. Artifical leathers are economical and are in demand more due to inherent negatives of natural leather such as being derived from animal sources, tanneries causing pollution and most importantly due to its high cost, Synthetic Leather has become a better economical alternate to natural leather and Mayur Uniquoters sees an increasing trend of replacing natural leather with synthetic leather in various industries. Mayur Uniquoters is India’s largest organised polyvinyl chloride (PVC) based synthetic-artificial leather-maker, with an annual installed capacity of 36.6 linear mn metres. The company’s products are used in footwear, automobile, furnishing and lifestyle products. Around half of its revenue comes from footwear followed by high-margin auto OEMs which is around 39 %. India’s present synthetic leather industry size is around Rs. 45 to 50 billion and is expected to double in the next five years on the back of increasing demand form automotive, expansion of furniture-interior furnishing industry and lastly, rising consumption and purchasing power of consumers. Of the 160 coating lines operating in India, 60 are in the organised sector and remaining in unorganised. The industry is non-cyclical in nature and proxy on India’s consumption growth story. As a substitute for leather which is 70 % cheaper, PVC or Synthetic leather applications are vast and are rapidly replacing leather in many industries. Due to its diversified presence across industries, Mayur will play a dominant role being the largest organised player in synthetic leather industry’s expansion. The potential to scale up a footwear business is less as organised makers which are around 30 % source around 60 % of their needs from unorganised PVC leather suppliers and 70% of unorganised footwear makers rely on unorganised supplies due to cost factor. As the footwear business is mainly a volume play with lower realisations, Mayur is focusing more on the automobile and furnishing segments, where realisations are high with limited competition. It is also entering B2C furnishing with a pan India distribution network. Mayur being India’s only player, among Asia’s few, to enter the US auto OEM market for seating fabric and supply for the last four years. Its four-year ties with Chrysler and Ford earned the status of a dependable fabric supplier. Mayur plans to leverage this experience with GM, Mercedes among others. To strengthen its US presence, Mayur has set up a warehouse in Mexico and formed a fully-owned subsidiary in the US. That export OEM will clock in revenue CAGR of 25 % during FY15-18e. Due to the absence of credible suppliers, India imports 5mn metres of polyurethane (PU) every year from China where the concerns like quality, consistency, reliability exist. Mayur has raised funds to set up the largest PU capacity in India of Rs. 700 to 800mn. Two PU coating lines of 300,000 metres each will be on stream by FY18 and the company expects to clock revenue of Rs. 1 billion in the first year of operation. Mayur, being a well-known PVC supplier, will capture a larger share of the unorganised and imported PU market. Around half of the PVC or synthetic leather produced in India is consumed by the footwear industry for use in the upper part and inner sole. Major customers for the industry are Bata India, Liberty Shoes, Relaxo Footwear, VKS Footwear, Paragon, Lunar Footwear and Action. Mayur caters to more than 50 % of the requirements of Bata, VKC and Paragon. As many unorganised players to meet the demands of organised footwear makers, it is mainly volume play with realisations being moderate. The second-largest client with around 30 % for PVC-synthetic leather is the automobile industry, with applications in seat cover, head-arm rest, door panel pad, sun visors, roof pad, steering, gear cover and dash board. The requirement of PVC or synthetic leather varies 3-7 meters depending on the automobile models. The third-largest requirement comes from the furnishing and lifestyle industry and includes sofa-makers, jacket, hand bags, apparel-garments, and luggage and sports goods. PVC-synthetic leather appears and feels like natural leather and is rapidly finding replacement in many industries. As a cheap substitute of leather almost 70 % cheaper, its applications are limitless. This industry is a perfect competitive market with many players and no entry barriers; however, the challenge is to achieve scale and remain financially sound. A new player can enter the footwear or furnishing market where realisations are lower, but it will take years to penetrate the auto OEM market, where quality, timeliness and consistency are utmost priority. Mayur hence enjoys Economic Moat (A competitive advantage that one company has over the other companies in the same industry – by Warren Buffett) expanding moats which is a very strong sign of a future Multi-bagger stock. The broader industry is not cyclical and is driven by the underlying consumption growth story. Mayur also supplies to footwear makers where the given average realisation is of Rs. 225 to 250 per metres, Mayur supplies PVC/synthetic fabric to automakers such as Maruti Suzuki, Tata Motors, Isuzu, Mahindra & Mahindra, GM India, Ford India, Hero Honda and HMSI, with an average realisation of Rs. 166 per metre. Buyers’ willingness to pay a premium for better interiors prompted domestic OEMs to use better quality PVC/synthetic fabric. Mayur recently finalised a higher price point of Rs. 350 per metre with M&M, Ford India and GM India. Its global presence has earned clients like Ford India and GM India. Going forward, Mayur should be able to leverage this by adding more clientele and supplies to export OEMs (for seat-making) give a realisation of Rs. 450-480 per metre. Higher revenue contribution from automobile and other segments is expected to be higher, going forward. Recently, Mayur has raised funds from West Bridge to set up a Polyurethane (PU) plant in Dodsar (Jaipur) and has acquired more than half of the land needed. As PU is technology-driven, to make the process smooth and world class, the company will hire a team of technicians from China. Currently, it is solving water related issues (usage of waste water), as certain regions in Rajasthan come under the “dark zone” where it is illegal to use underground water. The issue is expected to be resolved in two to three months and the project would need 12-15 months to start post approvals, by 4QFY17. Going forward, Mayur plans to manufacture chemicals domestically, which are being imported and used by domestic players. The company expects Rs. 1.5bn revenue in the first year of operation, with two coating lines of 300,000 metres per month each and an estimated investment of Rs. 700 to 800 million. With an additional cost of 20 % to 25 %, PU scores over PVC in terms of better quality and finishing and wider applications. PU trades at a premium of 20 to 25 % to PVC fabric, with average realisation of more than Rs. 250 per metres. World over, PU is widely used due to its flexibility in usage, applications and further processing like to make fire retardant fabrics, water proof, denim fabric and many more variations which would be difficult with a PVC fabric. India’s PU market is 80 % unorganised. Mayur being a credible player in the PVC segment shall significantly influence the market dynamics.

Outlook and Valuation:

Mayur Uniquoters Limited manufactures and sells coated textile fabrics in India. The company’s products include artificial leather, synthetic leather, and PVC vinyl. Its products are used in footwear, furnishings, automotive OEM, automotive replacement, and automotive exports markets. The company sells products directly to OEMs, as well as to other manufacturers and wholesalers. India annually consumes around 17mn per meters of PU, of which 5mn per metres are imported mainly from China. World over, the split between PU or PVC is 80 % to 20 %, while in India it is reverse. India’s per capita PU consumption is 300gms, while China’s is 2kgs. Under-penetration exists in both demand and supply side mainly due to inefficient infrastructure, non-availability of trained human resources, lack of product awareness and fluctuating raw material prices. Mayur is the market leader in India’s PVC synthetic leather industry and also caters to US auto OEMs – a market which no other domestic company has been able to penetrate. With increased penetration of organised players in the synthetic leather user industries, Mayur Uniquoters will stand to gain from its ability to deliver quality products consistently in an otherwise fragmented market. Given Mayur’s strong balance sheet, consistent quality and foray into polyurethane (PU), Mayur has its potential to scale up operations. There are not many listed companies which have a similar business as Mayur Uniquoters. However, its closest peer set would be footwear-related and auto ancillary companies. Footwear segment contributes 54 % to Mayur Uniquoters Ltd’s total revenues on the back of big clientele. The company’s clientele include Bata, Paragon, Liberty, Action, VKC group and Relaxo. The current market size of Indian footwear industry is estimated at Rs. 30,000 Cr to Rs. 35,000 Cr. The industry witnessed a CAGR of 18 % over FY08-12, which in turn led to growth in Mayur Uniquoters Ltd’s footwear segment. India is the world’s second-largest footwear maker after China. India produces more than 2.5 billion pairs of footwear per annum which is 12 % of global footware production and 70 % of this market are unorganised. Organised players like Bata, Relaxo, Liberty, VKC, Paragon, Lunar and Action on an average have 35 % to 40 % of their PVC/synthetic leather requirement met by organised players like Mayur and the rest by unorganised players. However, Mayur has limited scope to scale up as 60 % to 65 % of organised players’ demand is met from unorganised PVC or Synthetic leather makers at highly competitive rates. Also, 70 % of the unorganised footwear makers may not afford to source from Mayur due to lesser credit days and or pricing premium over others. 70-75% of the footwear makers are situated in northern India, and the company’s 70% (of footwear segment) supply goes to southern India. This reflects in Mayur’s revenue from the footwear segment; volumes were flat and realisation declined and we expect this trend to continue going forward. India’s average per capita footwear consumption is at 2.5 footwear pair’s p.a, which is much lower than the average per capita consumption of 5.0 pair’s in the developed countries. Thus, there is scope for improvement, which in turn offers big opportunity for players such as Mayur Uniquoters Ltd to cater to this growing market. Mayur can clock in revenue CAGR of 22 % during FY15-18e on the back of increasing demand and faster replacement of PVC/synthetic leather, shifting focus to high margin automobile and furnishing segments from footwear, well positioned to penetrate deeper among US auto OEMs and lastly expansion into polyurethane (PU) by setting up India’s largest capacity in Rajasthan. The premium valuation is justified looking at the valuation of its peers like the average PE of its peers is 29.4 for FY16E & 22.70 for FY17E whereas Mayur is trading at 26.02 for FY16E and at 21.64 for FY17E with average revenue CAGR for FY15 to 17E of its peers at 18 % and average PAT CAGR of 36 % where Mayur can have revenue CAGR for the FY15 to FY17E at 19 % and PAT CAGR of 22 %. Mayur Uniquoters offers a superior ROCE and ROE. It has reported an average of 61 % of RoCE since FY11 and will continue to generate healthy ROE, making it an attractive business to look at. Going forward, it is expected that the quality of ROE to remain in excess of 30 % with stable operating margins and minimal addition in leverage. Company will witness strong operating cash flows with no incremental huge capex; the Debt to Equity ratio is expected to be reduced further and company’s Operating cash flows are expected to remain strong on the back of robust sales and efficient working capital management. At the CMP of Rs. 424.15, the stock is trading at its all-time high P/E of 26.02x FY16E, 21.64x FY17E. The Company can post EPS of Rs. 16.30 for FY16E & Rs. 19.60 for FY17E. Given the attractive valuations with the pan India presence, robust growth prospects, one can buy this stock with expectations that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	469.60	506.30	564.60	660.50
NET PROFIT (₹ Cr)	57.80	62.50	75.60	90.50
EPS (₹)	12.50	13.50	16.30	19.60
PE (x)	33.20	30.80	25.40	21.20
P/BV (x)	11.90	6.80	5.70	4.80
EV/EBITDA (x)	20.40	19.60	15.90	13.20
ROE (%)	41.40	28.20	24.40	24.60
ROCE (%)	34.40	22.80	20.80	21.90

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