Mayur Uniquoters Ltd - Good Set of Numbers; Result Update Q2FY15:: Edelweiss

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On track; Maintain Buy Mayur Uniquoters ::Centrum

On track; Maintain Buy
Mayur Uniquoters (Mayur) reported total operating income of
Rs.982mn (up 9% YoY and 5% QoQ) in 4QFY13. EBIDTA margins for
the quarter came strong at 20.9%, up 141bps YoY and 366bps QoQ.
Driven by strong operating performance, reported PAT stood at
Rs.129mn for the quarter registering a growth of 16% YoY and 26%
QoQ. While demand continues to remain strong, 1HFY14E revenue
growth is likely to remain muted due to capacity constraints.
However, this is likely to be addressed by Nov’13 (new coating line
with a capacity of 7.2mn meters annually will be operational by
then). Management has guided for revenue growth of 15-20% for
FY14E and sounded confident on achieving 20%+ revenue growth
for FY15E vs. 20% YoY in FY13. Focus on high realization export
market continues, reflected from the fact that the share of exports to
overall revenues has inched up to 22% in FY13 vs. 16% in FY12. We
continue to remain positive on the stock and maintain Buy rating
with a revised target of Rs.570.

Mayur Uniquoters Buy Target Price: Rs564 :: Centrum

Mayur Uniquoters

Buy

Target Price: Rs564

CMP: Rs425

Upside: 39%

Market leadership with strong fundamentals

Mayur Uniquoters Limited (Mayur) is India’s largest manufacturer of Synthetic leather with an installed capacity of 23mn metres annually (to reach 30mn by Sept’13). The addressable market size for Mayur is estimated at Rs.60-70bn. Given its profitability, strong balance sheet, free cash flows and dominant competitive position, it is in a strong position to scale up and address the opportunities before it. Mayur has been consistently adding capacities to meet the growing demand of user industries and at the same time has consciously chosen to concentrate on segments that need value addition, ensuring better margins. We initiate coverage on the stock with a Buy and price target of Rs564.

m  Synthetic Leather a Rs.60-70bn opportunity: While the domestic market size is estimated at Rs.35bn, export opportunity is estimated at Rs.30-40bn. Add to this another Rs.7bn of Chinese imports, the total addressable market for Mayur stands at Rs.40-50bn. Mayur is one of the largest players in synthetic leather with annual capacity of 23mn metres.
m  …..Operationally in a very strong position to scale up and address opportunities: Mayur has demonstrated strong and profitable volume growth over the years (Revenue/EBITDA/PAT CAGR of 37%/50%/60% over FY02-FY08) by concentrating on segments that need value addition thereby ensuring better margins. Given the strong cash flows, the company has largely funded its capex through internal accruals delivering healthy return rations (average ROE and ROCE of 37%/50% over FY02-FY08).
m  Diversified client base: Mayur supplies synthetic leather to both domestic and overseas clients. It derives more than 50% of its revenue from the footwear industry serving clients including Bata, Action, Liberty, Relaxo, VKC group (caters 70-80% of its requirements) , Paragon, among others. The company also caters to the auto OEMs (both domestic and global) as well as the replacement market. Mayur caters to all large manufacturers in automotives including Honda, Maruti, M&M, Tata, Eicher Motors and global OEMs, Ford and Chrysler. Mayur largely caters to the organized players who account for more than 90% of its revenues.
m  Export focus to ensure healthy margins: On the auto OEM export front, each of the 5-6 big OEMs, GM, Ford, Toyota, Daimler, BMW and Chrysler buy synthetic leather in excess of Rs.5-6bn each year for the developed market of Europe and US. This combined adds up to Rs.30-40bn of addressable market each year. The company added Ford and Chrysler to its client base in the last 3 years, which led to exponential growth in export revenues from the US.
m  Backward integration to reduce rejections: To improve availability of good quality knitted fabric, Mayur has integrated backward into manufacturing of knitted fabrics. The knitted plant has been operating from Sept’12 but processing is likely to commence in March’13. Backward integration is likely to help reduce the rejection rate and improve the overall margins by 0.75% to 1%.
m  Capacity expansion to meet growing demand: Mayur is putting up a fifth coating line, with a capacity of 0.6mn metres/ month and is likely to commence production from Sept’13). Post expansion, the total capacity will be 2.5mn meters/ month raising the annual capacity to 30mn meters in FY14E from 23mn in FY13.  
m  Valuation: At the CMP of Rs. 425, the stock is currently trading at 9.6x FY14E EPS of Rs.44.3 and 7.9x FY15E EPS of Rs.53.7. We initiate coverage on the stock with Buy rating and a target price of Rs.564 (based on 10.5x FY15E earnings).

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Mayur Uniquoters -Buy on dips: target Rs 465: HDFC Sec

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We had released a Management Interaction Note on Mayur Uniquoters on 31st March 2011 at the then CMP of Rs 249.30 and
had advised investors to buy the scrip at the then CMP and add on dips to Rs 222 and Rs 227 band for targets of Rs 280 and
Rs 308 in 1 - 2 quarters. The stock had achieved our first target of Rs 280 on 27th April 2011 and achieved our second
target of Rs 308 on 20th May 2011. Post the report it made a low of Rs 251.65 on 11th April 2011 and a high of Rs 467
on 21st July 2011. Currently the stock is trading at Rs 415.05. We hereby present an update on the stock.
Company Background
Mayur Uniquoters Ltd (MUL), 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. Synthetic leather finds application in footwear, automobile seats,
upholstery, furnishings, sports goods, apparel, women bags, and a host of fashion accessories and it is used as a substitute
for natural leather. The products are customized to suit various applications. Synthetic leather is available in a very wide price
range depending on application, inputs that goes into it, order size, etc.
Key Developments & Updates:
Recent Financial Performance – Q3FY12
MUL came out with decent Q3FY12 results. The company reported net sales of Rs 81.09 crs in Q3FY12 as against Rs 68.84
crs in Q3FY11 and Rs 76.19 crs in Q2FY12. The company has been witnessing consistent growth in its sales over the past 3
quarters. The operating profit of the company stood at Rs 13.76 crs in Q3FY12 as against Rs 11.79 crs in Q3FY11 and Rs
12.17 crs in Q2FY12. The Profit Before Tax of the company stood at Rs 12.45 crs in Q3FY12 as against Rs 10.88 crs in
Q3FY11 and Rs 11.10 crs in Q2FY12. The PAT of the company for Q3FY12 stood at Rs 8.65 crs as against Rs 7.32 crs and
Rs 7.45 crs in Q2FY12. The EPS of the company stood at Rs 15.77 in Q3FY12 as against Rs 13.53 in Q3FY11 and Rs 13.77
in Q2FY12. During the quarter the company earned a duty drawback on part of exports of Rs 0.47 crs, which was reported
under the other operating income and interest on FD was reflected under other income for a total amount of Rs 0.58 crs.
Depreciation and interest costs rose as a consequence of the capitalization of expansion plans. MUL reported a forex loss of
Rs.1.52 crs in Q3FY12 vs. a gain of Rs.0.36 crs in Q3FY11.
Capacity expansions to help MUL in growing its business
Exactly a year ago, MUL had overall capacity of 1.4 mn mtrs with 3 lines installed at a plant near Jaipur. The company
installed the 4th line, which has enhanced the overall capacity to 1.9 mn mtrs. The 4th line started its production from December
2011 onwards and started functioning full fledged from the 1st week of February 2012. The company is also planning to start a
5th line of production and for the same purpose it has purchased land about 15 kms away from the current location. Post the
completion of this line (which is expected to be completed by December 2012), the company expects its capacity to be
enhanced to 2.5 mn mtrs per month.
The 5th line is expected to be completed at a capex of Rs.22 crs while the 4th line was completed at a capex of 10-12 crs. The
higher cost of the 5th line is mainly due to the fact that the line is being implemented at a new site.
With the demand for synthetic leather rising consistently, capacity expansion of the company could be handy and could augur
well for the smooth growth of its business in the coming years.
Backward integration through production of fabrics
As mentioned earlier, the company has purchased a new plot of land, about 15 kms away from the current plant near Jaipur.
The company along with planning a 5th line of production is also in the process of starting a fabric production unit which will
manufacture raw material for the synthetic leather unit of MUL and hence is a backward integration initiative. The company
has already started work and could start trial runs from Sept 2012. The capex incurred for this is about Rs.25 crs for
production of Rs.45 crs worth fabric (at full capacity). The fabric plant will go into production in two phases (in terms of
processes). This will help the company to register an increase in its margins and also help in reducing the rejection rate of its
final products in export markets as it will have total control over the quality of a key raw material.
To finance these two initiatives, MUL could borrow about Rs.20 crs worth loans (including a large portion from Textile up
gradation fund which is available with 5% interest subsidy). The rest could be raised from internal accruals.