July 7, 2010

Analysis - Mayur uniquoters

About
Mayur uniquoters is in the business of manufacturing synthetic leather. The company’s products find usage in the footwear, automotive, apparel and sports goods industry.
The company supplies to the major automotive companies in the country and abroad. The company has Ford, GM, and Chrysler as customers in the export market and maruti, Tata motors, Hero Honda and other local players as domestic customers. In addition the company is also a supplier to the replacement market.

Financials
The company has performed quite well in the last 8-10 years. The topline has grown by 20% and net profits by 25% in the last 8 years. The current year profits are a cyclically high due to lower raw material costs and exchange related gains.
The company has consistently maintained an ROE of 15%+ and has reduced its debt to 0. The company now has excess of cash of almost 15 crs on its balance sheet.
The current net margins of the company are around 9% which as stated earlier are higher than normal. The normalized profit margins can be assumed to be between 6-7%.

Positives
The company has been doing fairly well in the last few years. The company has been expanding in the export markets and is now an approved supplier to several international OEMs such ford, GM etc. The company has managed to grow inspite of the recession in the export markets.
The company is also a debt free company and can fund the required capex from the cash on the books.

Risks
The company as an OEM supplier is bound to face continued and relentless price pressure from its customers. In addition, the raw material component is around 75% of the sale price and hence the margins of the company are very sensitive to the raw material prices.

The industry is very competitive and it is unlikely that any participant in the industry can earn large profits in the long run. A ROC (return on capital) of 15% would be a good return for an efficiently managed company.

The no.1 risk is not the business, but the management’s intentions. The management awarded themselves around 800000 (around 15% of equity) warrants in 2007-2008 and exercised those warrants at market price. I consider this as a big negative.
As I have stated in the past – warrants are not free and have a value in itself. In addition, the company did not seem to be in need of capital at that time. The sole purpose of issuing the warrants seemed to be to increase the holding of the promoters (which now stands at almost 75%)

Competitive analysis
The product is characterized by minimal brand value for the end customer. The customers (automotives, apparels etc) however value quality and a reliable supplier for the synthetic leather going into their own products. As a result the brand value exists in the mind of the OEM (original equipment manufacturer) buyer.

The industry is characterized by a large number of smaller players in the unorganized sector of the market. The industry is highly competitive with thin margins and poor quality among the smaller players.

The larger companies like Mayur have an opportunity to establish themselves as reliable suppliers to the OEMs and benefit from the economies of scale at the same time.


Management quality checklist
- Management compensation: the management compensation does not appear to be high. The management (who are also the promoters) is paid around 5% of the net profits (around 80 lacs) which although not low, is reasonable.
- Capital allocation record: the capital allocation record seems to be decent. The management has paid down debt, raised dividend over time and now has cash to re-invest in the business. It will be interesting to see how the management will deploy the surplus cash in the future.
- Shareholder communication: disclosure seems to be adequate and in line with other companies.
- Accounting practice: could not see anything out of the ordinary. I need to dig deeper to find if there is anything to be concerned about
- Conflict of interest: other than the warrants, I could not see any related party transactions of concern.
- Performance track record: fairly good so far

Valuation
The company can be assumed to have a normalized profit margin of around 6-7%. As a result the net profit is in the range of 12-13 crs on a normalized basis. As the industry is highly competitive, it is difficult to assume an extended period of high returns for the DCF calculation.
A back of envelope calculation (assuming PE of 12-13) gives a fair value of 150 crs.

Conclusion
The current price is 50% of the fair value. The crucial point is not at arriving at a fair value number, but figuring out the economics and future profitability of the business. If the current numbers can be maintained, then the stock is a bargain.
The other major concern I have is the management attitude towards the minority shareholders. The warrant issue does not inspire confidence and has left a concern in my mind.
I am still halfway through my analysis and will make up my mind after I dig deeper into the company

Disclosure: I have a starter position in the company. A gain on my current position will not pay for than a nice dinner. Please make your investment decisions independently.

31 comments:

valueinvestor2010 said...

Hi Rohitji great writing. Just a suggestion, check for the company by typing MAYUR LEATHER PRODUCTS LTD. on watchoutinvestors.com
There was some transactions whose declaration was delayed.
The website is run by SEBI or MCA I think.Quite useful.
Regards

Navjot Kashyap said...

Thanks for the detailed analysis.I appreciate the hard work you do to research companies.
But I'll give this a pass.Reading your analysis,I don't find it lucrative.If you want to see companies then see-
1]Symphony Comfort Sys.
2]IFB Industries
3]Force
4]Money Matters

All are 0 debt,high ROE,low PE,constant performing.Better then Mayur.

Anonymous said...

Rohit - Nice analysis!! I analyzed this company in Nov, 09 when it was available @117.

The main reason I did not invest was management warrants - at the time when company does not require money.

On top of this - I was not sure if company will continue to do well in future.

So if you are not sure - do not invest.

Thanks
Prashant

Praveen said...

The stock zoomed 8.5% after ur post., any conspiracy??? :)

Rohit Chauhan said...

hi valueinvestor
i checked the site. as i suggested, the management has clearly done stuff in the past which is not above board.
btw, the penalty for doing that is laughable ..50000 ?!!

rgds
rohit

Rohit Chauhan said...

hi navjot
will look at the companies.
what is your negative thesis on the company ?

rgds
rohit

Rohit Chauhan said...

hi prashant
why do you think the company will do badly in the future ? i am trying figure that part out

rgds
rohit

Rohit Chauhan said...

hi praveen
wish i had that power :) would have retired by now

rgds
rohit

Madhav said...

Hi Rohit, great analysis. Thanks.

By the way, how is your portfolio doing these days?

Navjot Kashyap said...

Hi Rohit,
My theory has been very simple on this.If you can find a better company then Mayur,then why waste your capital on Mayur.Always choose the BEST you can get.All the above 4 I mentioned are better then Mayur.Forget Force,it has debt,but other 3 are very good.I have holdings in them and I am mighty happy with them,so far.
Remember,I wrote a software based on Jeol's book to get data of all 3994 BSE companies.It helps me zero-in the companies that I can research.Although,I am not as good as an analyst as you are.But still add the software benifits plus my limited skills,its giving decent returns.
Of course,I have learned a lot from your blog too.Still learning...

Pradeep said...

@Navjyot: Symphony has shot up so badly in a short period. It had 19 crores of extra ordinary income last year and hence effective P/E is now 10-12. Though low, am not sure whether there is a 30-40% margin of safety.

Rohit Chauhan said...

hi madhav
portfolio is doing much better than expected. ofcourse that means i need to find new ideas which is difficult these days

rgds
rohit

Rohit Chauhan said...

navjot
symphony and IFB have been good turn around stories, so at current valuation it requires deeper analysis on whether they are still undervalued - i dont know as of now.
money matter looks strange - from large losses they have swung to such huge gains ..50% + profit ..
what exactly are they doing now for such obsence profits ? selling drugs :) ?
just joking

sachin8778 said...

Hi Rohit, Thanks for another nice post and discussion also has been helpful.

Navjot,
What is with the software from Joel's book. I might have missed when you brought it up in this blog. Is that in public domain can you point me to more information on that? Is it same as magic formula stuff?

~Sachin

Anonymous said...

Hi, where do you get your annual reports from? I'd like to know how much it would cost to get annual reports from 1990-01 period or earlier.

amit said...

Hi Rohit,

I don't know if this is the right place to ask but I have a question regarding taxation. What is the tax treatment of derivative transactions? Is it counted as other income or capital gains or business income?

I am a salaried professional but also do a bit of investing and a bit of derivatives. As the deadline is approaching, I am not sure which ITR is applicable to me - ITR1, ITR2 or ITR4?

regards,
amit

Investologic said...

Navjot,
Your list of stocks are featured in my magic formula list on www.investologic.wordpress.com. All the ones you mentioned were good picks earlier in the year, though they still find themselves in the list, I find them to be at a saturation point. Only a good trigger like unprecedented quarterly figures can give these companies a lift from the current levels. Whereas Mayur is trading at a discount to intrinsic value. The only negative is that there is a lot of competition from small timers and sustainability might be an issue.

Anonymous said...

Hi Rohit,

good analysis as always. any thoughts at portfolio approach now - how much cash are you in nowdays?

Amit

Rohit Chauhan said...

hi anon
most reports you can get from company's website. others i buy from reportjunction.com

hi amit
i do not have too much idea of IT issues. you may want to talk to an accountant on biz v/s income issues

rgds
rohit

Rohit Chauhan said...

hi investologic
true ..a lot of stock have achieved full value ..although the overall market has been stagnant

hi amit
i have selling off overpriced stocks and moving into cheaper position. so overall my cash levels have not changed since begning of the year.
personally i dont target any specific levels

Financial Planning said...

The board of Mayur Uniquoters in its meeting on 29 May 2010 has recommended final dividend at the rate of Rs 3 per share (30%).

Overall Mayur Uniquoters is doing pretty good.

Navjot Kashyap said...

2Pradeep,
Symphony has grown 10 times in a yr.hahaha
As far as PE is concerned it will drop after June quater results are out,as I believe results will be good.This is summers were very harsh,you forget.
By the way,I took a seat in the rocket before it took off,so I am happy.
You will do well if you read Investologic blog.
2Rohit
Sir,even better then drugs,they are printing currency notes in their own backyard at night and during the day they wear black suits and ties and like to call themselves Investment Bankers.
2Sachin
Yes,its based on Jeol's Magic Formula only.I just download data of all 3994 BSE companies i.e. PE,ROE,EPS and put it in xls sheet.You can rank it and use it whatever way you wish.Just send me a mail at kashyap9_navjot if you want the xls.The mail id is at yahoo servers.
2Investologic
Man,I am from your camp only.You did it in VB,I do it in Java.I have visited your blog earlier.The major problem I faced with your selection is more then 80% of them are below 100cr market cap.Some even at 4-5 cr.You will do much better on risk and returns front if you choose upward of 200cr.

Vic said...

Hi Rohit,

What's the 50% discount price for Mayur? I haven't checked the price.

Thanks,

Vikas

Arun said...

Hi Rohit,

Good analysis as usual.But don't you think its better to wait for better opportunities than to invest in a small secondary company when market seems to be fairly/over valued?

Also whats your opinion on Jindal Polyfilms? The company seems to be undervalued and the company is buying back at Rs 450 in the market.

Regards,
Arun

Rohit Chauhan said...

financial planning
yes, thats true. however the key question is if it will do so in the future

rgds
rohit

Rohit Chauhan said...

hi navjot
can you share your automated spreadsheet ? if yes, my email is rohitc99@indiatimes.com

rgds
rohit

Rohit Chauhan said...

vic
dude..do a little work :) i have given the fair value ..you just need to divide that by the no. of shares.
you are a prime candidate for my paid service :)

rgds
rohit

Rohit Chauhan said...

hi arun
havent seen jindal polyfilms

i usually dont invest based on overall market levels ..difficult to make decisions based on that. how can one say if the market is overvalued or not as a whole

need to make stock specific decision. mayur is not a slam dunk, but worth tracking and may be investing a small portion if continues to do well

rgds
rohit

Vic said...

Good one Rohit..:-)

Soon will be learning such details.

Thought will start with your Long Awaited Book first..so that we can put that to test from day one..:-)

Thanks,

Vikas

Rohit Chauhan said...

vic
in due time my friend.
have to take care of that small thing on the side - day job :)

rgds
rohit

Amritpal said...

Hi Rohit,

I see Mayur going up nearly 50% since you mentioned...I bought around 160 and now thinking of selling it..just wondering where its valuation stands?

amritpal