EQUITY RESEARCH: Mayur Uniquoters (MAYUNI)

Mayur Uniquoters Ltd is a holding business enterprise. The Company is engaged in the production of artificial leather/foam leather, and different substitutes of leather. It manufactures covered fabric cloth. The Company's merchandise are used in segments, including shoes, furnishings, automobile original equipment manufacturer (OEM), automobile replacement marketplace, and automobile exports. It sells its merchandise to OEMs and other manufacturers, and wholesalers in India, and also exports to diverse nations, inclusive of the US and the United Kingdom. It produces specialized polyvinyl chloride (PVC) vinyl for the footwear industry. It offers products for numerous parts of footwear, including shoe uppers, shoe lining and insoles. It offers products, which are used in upholstery for sofas, chairs, cushion-covers and bean bags. Its production devices are placed at village Jaipura and Dhodsar, Jaipur. Knitted cloth synthetic at Dhodsar plant is consumed by and large as captive intake.

Mayur Uniquoters (MAYUNI)

ABOUT

Incorporated in 1992 with the commencement of operations in 1994 at Jaipur, Rajasthan, MUL is in the business of manufacturing PVC-coated fabric and PU-coated fabric, commonly known as artificial/synthetic leather. MUL is promoted by Suresh Kumar Poddar, Chairman, Managing Director, and CEO, who has more than four decades of experience in the trading and manufacturing of artificial leather. MUL has two manufacturing facilities located near Jaipur (one facility each at Jaitpura and another at Dhodsar) having an aggregate of seven coating lines (four at Jaitpura and three at Dhodsar) to manufacture artificial leather along with backward integration for manufacturing of knitted fabric. MUL has also forayed into the manufacturing of PU fabric and started commercial production in January 2020. During FY16, MUL set up a wholly-owned subsidiary, Mayur Uniquoters Corp, in Texas, the US, as a marketing and trading arm to facilitate exports to Ford and Chrysler, while during FY20, MUL set up a wholly-owned subsidiary, Mayur Uniquoters SA (Pty) Ltd, South Africa, as a marketing and trading arm to facilitate exports to Mercedes Benz’s plant in South Africa. In May 2022, MUL set up a wholly-owned subsidiary, Mayur Techfab Private Limited, for the retailing of PVC fabrics. MUL is an ISO 9001:2000 organization and has been awarded with various excellence awards. 

SHAREHOLDING PATTERN

INDUSTRY OUTLOOK

Artificial leather mainly finds application across segments like footwear, automotive interiors, furnishing, auto replacement market, and fashion accessories. There is growing awareness and acceptability for artificial leather products across these industries as compared to natural leather, which is a cheaper alternative with good aesthetic quality. However, demand from the automotive, footwear, and replacement market was impacted by the COVID-19 pandemic. Sales of automobiles declined by 18%, 14%, and 6% in FY20, FY21, and FY22, respectively, on a y-o-y basis mainly due to the COVID-19 pandemic, the higher cost of vehicles post implementation of the BS-VI norms, reduced disposable income, and semi-conductor shortage. Automobile sales are expected to grow with ease in the supply of semiconductor chips coupled with the pent-up demand and upcoming festive seasons. Furthermore, the replacement demand for synthetic leather from the automotive segment is also expected to support the overall growth in the automotive segment. Moreover, demand from the footwear market is expected to remain robust in the medium to long term due to the growing awareness and acceptability of artificial leather products and the high price differential between synthetic and natural leather. MUL faces competition from cheaper import substitutes and from smaller organized players, especially in the footwear segment and replacement market. However, MUL has an edge over its competitors by virtue of being the largest player in the domestic market, having a backward integration facility, and being an approved vendor of leading automotive OEMs, which insulates the company from industry downturns to some extent.

CONCALL - AUG 23

Financial Performance:

• Mayur Uniquoters achieved revenue from operations of INR 192 crores, PBT of INR 39 crores, and PAT of INR 30 crores in Q1 FY '24.
• Revenue from operations on a consolidated basis increased by 4%.

New Products and Orders:

• The company has received good and confirmed orders for upcoming new models in the export and domestic market, expecting a significant increase in OEM export sales in the next 3 years.
• Mayur Uniquoters is focusing on becoming a preferred supplier for leading OEMs, especially in the US and European regions.
• Mayur Uniquoters is planning to open plants in North America or Mexico to support the expected growth in export OEM sales.
• Mayur Uniquoters is in talks with big brands in the footwear and leather goods industry to expand its customer base.

Corporate Social Responsibility:

• The company is working on corporate social responsibility initiatives, including regular plantation and education programs for underprivileged children.

Management and HR:

• The company is working on professionalizing the senior management and has hired an HR consultant for guidance.

Market Outlook:

• The domestic auto OEM market is expected to increase by 12-15% every year.
• The footwear market is facing challenges due to BIS standards introduced by the government.
• The company expects a margin improvement in the export OEM business and overall growth of 18-20% in the next 3 years.
• Mayur Uniquoters is confident about achieving a 15% revenue growth in FY '24, with a focus on increasing sales in Q3 and Q4.
• The company is optimistic about the future and sees opportunities in the Indian market and the shift of brands from China.

FINANCIALS:

• Regarding the stock: An industry leader in the production of synthetic leather (PVC, PU) for footwear, garments, and other applications is Mayur Uniquoters (MUL).
• The majority of sales, or about 50-60%, came from the automotive sector. Twenty to thirty percent came from the footwear sector, and the remaining sales came from other sources.
• As of FY23, it had consolidated sales of $776 billion, with EBITDA and EBITDA margins of 139 billion and 17.9%, respectively, and PAT of 104.2 billion.
• Mayur is one of the very few businesses in the auto industry with the ability and authorization to supply its products to major manufacturers of luxury automobiles throughout the world, like Mercedes, BMW, and others.

KEY FEATURES

• Vast experience of the promoters in the artificial/synthetic leather industry with emphasis on research and development (R&D) activities for product development:

Suresh Kumar Poddar, Chairman, Managing Director, and Chief Executive Officer (CEO) of MUL, has more than four decades of experience in the trading and manufacturing of artificial leather. He looks after the overall operations of the company, including production, marketing, and strategy, and has been directly associated with the successful implementation of inventory management and other cost reduction techniques like total quality management (TQM), total productive maintenance (TPM), and R&D initiatives in the company. Moreover, Arun Kumar Bhagaria, Executive Director, has a similar experience of over a decade and is actively involved in managing the business. Manav Poddar, son of Suresh Poddar, has rejoined the company and is expected to take a position on the board in the near to medium term.

• Leader in the organized segment of the domestic artificial/synthetic leather industry:

MUL has the largest installed capacity for manufacturing synthetic leather in the domestic organized segment with a capacity of 486 lakh linear meters per annum (LLMPA) of PVC-coated fabric and 50 LLMPA of PU coated. MUL manufactures more than 400 variants of artificial leather from PVC polymer, which finds application in footwear (shoes and sandals in-sole and uppers), automotive (seat upholstery, door trims, steering wheel covers, inner linings, etc), furnishing (sofa, chair, cushion cover, etc), and fashion items (apparel, bag, belts, etc)

• Margins set to improve amidst rising share of high-margin Auto OEM Exports

By FY25E, it is cautiously predicted that MUL's EBITDA margins will nudge up to 20%. PAT CAGR is anticipated to be 21.6% from FY23 to FY25E, or from 104 crore to 154 crore.

• In-house product development, adequate backward integration, and focus on high-margin products enable MUL to report healthy operating profit margins:

Over the years, MUL has generated healthy operating profit margins in an otherwise fragmented and unorganized synthetic leather industry on account of its focus on in-house product development and innovation, adequate backward integration, and focus on high-margin products (both, in the domestic and export markets). MUL has sufficient capacity to produce knitted fabrics used in automotive exports, which apart from other value-added processes (printing, embossing, lamination), results in cost efficiency, better quality control, and consistency in supply, which increases customer stickiness. During the past few years, MUL has consciously curtailed sales to the low-margin North Indian footwear market, which also entailed a longer credit period of around six months. This, coupled with lower demand from the automotive segment, the production of artificial leather witnessed a declining trend over the last three years ended FY21, albeit the same increase during FY22 and Q1FY23, supported by a recovery in demand from the footwear and the automotive industries. The capacity utilization is expected to gradually improve in the medium term with the addition of new clients and/or models along with an improvement in demand from end-user industries. With the improvement in capacity utilization along with a better product mix, the operating profitability (PBILDT) margin of the company is expected to remain healthy, in the range of 21-22% in the medium term.

• Growth in the scale of operations with healthy profitability during FY22:

The TOI of MUL, on a consolidated level, grew by 29% during FY22 on a year-on-year basis due to the increase in average sales realization along with a 7% volume growth, supported by a recovery in demand from end-user industries. Moreover, the PBILDT margin declined from 24.69% in FY21 (supported by inventory gain in H2FY21) to 19.94% in FY22 due to higher input prices, which the company could not immediately pass on to customers. The profit-after-tax (PAT) margin declined in line with a decline in the PBIDLT margin. Moreover, despite healthy profitability, the ROCE of the company remained at 18% in FY22, as MUL’s liquid investment portfolio constituted 25-30% of its total capital employed, which generated low returns, and thus, impacted the overall return indicators of the company. Furthermore, MUL generated healthy gross cash accruals (GCA) of ₹115.13 crore during FY22 as against ₹108.35 crore during FY21. During Q1FY23, the TOI of MUL registered a growth of 65% on a y-o-y basis on a lower base and a growth of 21% on a q-o-q basis, supported by a recovery in demand from the footwear and automotive industries. The PBILDT margin stood at 19.21% in Q1FY23 (Q1FY22: 18.90%), which was impacted by an unfavorable product mix, apart from inventory loss. Automotive exports, which were declining over the last four years ended FY22, are expected to grow from FY23, with an expected recovery in demand from the existing OEMs coupled with the supply to BMW (expected to start in Q4FY23). Moreover, the automotive replacement segment, which was affected over the last three years ended FY22, is also expected to grow with an expected increase in domestic demand. Furthermore, the retailing of PVC fabric is also expected to support growth in the coming years.

KEY CONCERNS

• Continued elongated working capital cycle restricted operating cash flow: MUL’s operations remain working capital intensive, as the company maintains two to three months of raw material inventory for smooth production due to the lead time involved in the import of some of the raw materials. Moreover, export sales entail a lead time of around two months, which also leads to a higher requirement for inventory. Furthermore, the company extends a credit period of around 30-90 days to its customers. The operating cycle of MUL continued to remain high, at 160 days in FY22 (PY: 161 days), due to higher inventory holding on the back of an increase in raw material prices along with an increase in inventory associated with the PU business. The increasing working capital requirement has adversely impacted its operating cash flow, which remained at around ₹283 crore (cumulative for the last five years ended FY22), as against a cumulative PBIDLT of ₹663 crore and a cumulative GCA of ₹537 crore over the same period. However, despite the limited cash flow from operations, MUL’s reliance on external debt has remained low as the majority of its incremental working capital requirements are being funded by internal accruals. 
• Exposure to volatility in raw material prices and foreign currency exchange rate fluctuations: Almost 80% of MUL’s raw materials are derivatives of crude oil, hence, the prices of its raw materials vary with fluctuations in international crude oil prices. MUL enters into medium-term contracts with its suppliers to mitigate any large volatility in raw material prices. Moreover, MUL being a market leader has the bargaining power to pass on the increase in raw material prices to its customers, resulting in a relatively steady gross margin of around 40% during the last three years ended FY22. Furthermore, MUL is also exposed to foreign exchange rate fluctuations on the back of its large imports, which was 56% of its total raw material requirement during FY22. However, the forex risk is partly mitigated through the natural hedge available by way of exports.
• Under-utilization of the newly commissioned greenfield PU-coated fabric project restricted return ratio: MUL has forayed into the manufacturing of PU-coated fabric by setting up one coating line (consisting of one wet and one dry line) under Phase-I with a capacity to produce 50 LLMPA of PU fabric. The company has constructed a building and other peripheral infrastructure for four coating lines, considering the future expansion plans. As compared to PVC-coated fabric, PU-coated fabric has a closer resemblance to natural leather, with better realizations of the product. PU-coated fabric finds applications across similar industries like footwear, fashion accessories, furnishing, and automotive upholstery. At present, more than 90% of the PU-coated fabric is being imported from China, with the presence of a few domestic manufacturers with limited capacity. MUL foresees this as a cross-selling opportunity for its existing PVC fabric customers. In May 2022, the Central Government imposed an anti-dumping duty (ADD) of nearly ₹40 per meter on imported PU leather, thus reducing the price gap between import and domestic manufacturing. During Q1FY23, the capacity utilization from PU remained low, at 19%, with a revenue of nearly ₹7 crore. With the imposition of the ADD, production is expected to gradually ramp up over the next 6 to 12 months and revenue from the PU business is expected to gradually reach ₹100 crore in the medium term. Due to the envisaged gradual ramp-up of its operations coupled with competition from Chinese imports in its PU segment where MUL is a new entrant, its blended PBILDT margin can be impacted for some time. Thereby, the early stabilisation and ramp-up of the PU project remain critical for aiding the growth and profitability of the company, and in turn, improvement in its return indicators. Furthermore, as informed by the management, MUL may also plan a second phase of the project after the stabilization of the first phase.

VALUATION

Because of the company's strong growth prospects, particularly in the auto OEM export market, robust profit profile (20%), capital-efficient business strategy (RoIC: 20%+), and cash-positive B/S (Net cash at 180 crore as of FY23), we rate Mayur Uniquoters as BUY. We value Mayur Uniquoters at 700. Consistently good CFO generation at MUL with a current CFO yield of 10% and a technology risk-resistant product portfolio (No EV risk) also give us reassurance. This is our firm belief in the small-cap car auxiliary market.

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