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.