Mold-Tek Packaging Limited- Complete Analysis

Mold-Tek Packaging Logo

About the Company

Mold-Tek Packaging Limited (MTPL) is a leader in rigid plastic packaging in India and enjoys over 25% market share. MTPL manufactures injection molded containers for lubes, paints, food and other products. MTPL has a number of achievements and accomplishments to its credits

  • Pioneered In-Mold label (IML) decoration in India in 2011.
  • MTPL is the only packaging company in the world to be back ward integrated to make molds, labels and robot
  • They were first to introduce plastic packaging for lubricants
  • Mold-Tek is ISO 9001:2008 and ISO 22000 :2005 Standards certified company

Journey at a Glance

Mold Tek Packaging History

Key Products

Mold Tek Packaging Products.png

MTPL's Capabilities

In Mold Labelling

Mold-Tek Packaging was the first company to introduce decorated packaging in India in 2011. It uses Robots to place preprinted labels in the molds before molding the plastic flow thereby fusing the label during molding. The technique produces outstanding picture quality and everlasting decoration on the molded plastic that cannot be removed.

Heat Transfer labelling

Heat transfer labeling is a process where the design is printed on the release layer of a label. Upon application of heat, it is transferred on to the container.

Shrink Sleeving

Shrink sleeving is yet another technique of labeling where the label is slipped onto the container and upon application of heat the label shrinks and fits the container. The finish of shrink sleeving is better than screen printing and has maximum coverage that wraps around an entire product. Mold-Tek has in-house capability to manufacture shrink sleeves and offers decoration that caters to clients' needs and budgets.

Screen printing

Screen printing is the cheapest of the packaging decoration options. In this process ink is squeezed through exposed screen to the surface of the product. Mold-Tek has automatic screen printing which ensures better alignment of different colors. It is suitable for paints and lubricant pails but not preferred for food and FMCG product containers.

 

Plant-Factory Details

Locations

Mold Tek has total of 7 manufacturing facilities, 3 stock points and around 70 injection molding machines. Total capacity is around 27,000 tpa and it is expected to cross 30,000 tonnes in FY18. The capacity wise breakup is as given below.

Mold Tek Packaging Factory details

RAK Plant

Mold Tek has commissioned its first overseas manufacturing plant in UAE at al Ras Al Khameh with a capacity of 3000 TPA. It is a 100% IML plant. The plant was inaugurated in August 2016 commercial production started in November 2016.

The company has already bagged orders from a few lube and paint companies. The company has got clearance from Marmum, Al Ain and 3 other companies in the dairy segment. The plant has reached production levels of 60-70 tonnes and is expected to touching 100 tonnes by Apr 2017. The company targets to reach at least 66% capacity utilization which translates 2000 tonnes for the FY18 and Rs. 22-24 Crores in value.

Production, Capex and Expansion Plans

The company sold 4140 tonnes as against 4235 tonnes in Q3 2016. Volume in 9 months FY16 was 12,320 and the same for 9 months FY17 is 14,000. RAK plant will add another 2000 tonnes next financial year leading to 6-7% volume growth. In terms of capacity, RAK plant will add 3000 tonnes and another 1000 tpa capacity will added by Feb 2017 for Cadbury bringing the total capacity to 31000 tonnes by the end of FY 17.[SP1] 

Expansion for Cadbury

The company has bagged a big order from Cadbury. For accommodating this order they are planning to add 1000 tonnes to its annual production capacity which will cost them about 2-3 Crores.

Expansion of facilities in Hyderabad

The Company has recently acquired 2,191 sq. yards of land with 14,016 sq. ft. of building in Jeedimetla at a cost of INR 2.6 crore for Modern Tool Room and IML Label printing plant. It is expected to go into production early next year. Mold Tek has also acquired 1,677 sq. ft. of fully furnished accommodation along with proportionate share of land as an extension to the existing office facility in Jubilee Hills at a cost of INR 2.13 crore. So total capex in yderabad would be Rs 3-4 Cr

 New Plants for Asian Paints

 Mold Tek is setting up two manufacturing plants to cater exclusively to requirements of Asian paints, one in Mysore and the other in Visakhapatnam. According to plans, by 2021-22 these plants will also accommodate demand from Akzo Nobel, which has its own production facilities nearby here. Initially the capacity of each plant will be 3000 tonnes. Total Capex requirement for these two plants is 53 Crores of which 35 Crores will be used up in the first phase and another18 Crores will be utilized in capex expansion over next 3-4 years. Company has already spent Rs 6 Cr to buy 5 acres of Land in Mysore and 3 acres of land in Vizag. Construction activity will commence from June-July 2017. Another Rs 24 Cr to 26 CR will be invested in next financial year.

With the addition of these two plants the total capacity of Mold Tek will rise by 6000 tpa by 2021 -22.

The company has sufficient cash flows to fund the capex through internal accruals . Cash flows net of dividend are expected to be Rs 25 Cr. Cash flows from Apr-Oct 2017 will be around Rs 14-15 Cr. No increase in debt levels expected to fund capex requirements

Capex in FY17

Capex in first 9 months of FY 17 has been Rs 22 CR which includes capex for RAK plant. The capex is mostly through internal accruals. Total capex for FY 17 is expected to be around Rs 31 Cr. Around 4 Crores will be spent for buying new machines for Mondelez order and expanding tool room building and machinery. No significant maintenance capex is expected in FY 18

 

 Key Customers

 Mold-Tek is the market leader and accounts for 70% share in overall industry volume for lubricants packaging. It has 20 -25% share in paint packaging by volume. Mold -Tek has a number of blue chip clients such as Castrol, Shell, Asian Paints, ITC, Cadbury to name a few . Mold-Tek is the sole supplier to CastroI since 1997 and caters to 95% of Castrol's requirement of pails followed by Nerolac, Akzo Nobel and Asian Paints. Following is a visual presentation of Mold Tek’s Market Share for its Key Customers

MTPL Market Share for its Key Customer

Mold Tek derives most of its revenues from the Paint industry as of now. FMCG and food will be increasingly gaining bigger share going forward

Major Customer Contribution to MTPL Revenue

Update on Key Customers

MTPL has received inquiries from other marquee names like HUL and Nestle. The company expected orders valued up to 18 to 20 Crores per annum from these players which is almost 6% to 7% of MTPLs projected turnover for this current year, in the food and FMCG segment.

Edible Oil segment a non-starter

The edible Oil segment which was expected to be the future growth engine has proved to be a non-starter due to a sharp rise in the raw material prices that increased switching costs substantially (from tin to plastic packaging) for the end user entities. The company has got some orders from Bunge, Kamani and ITC Agro Tech. Company is providing square packs to this segment and expects Rs 6 Cr revenue this year and Rs 10-1 CR revenue from next year

Other clients continue to buy albeit in small quantities. Big bazaar and Allana groups are buying regularly. Healthy heart is taking small quantities for Metros. Even ConAgra has given Mold Tek repeat orders of small quantities, but they are not going all out aggressively because of the price differential.

Other opportunities

 MTPL is now looking at other opportunities to counter the loss of traction in edible oil segment. The company is in talks with corn flakes companies and those producing jams where though the volumes are less, but products can afford this kind of packaging. The company is also in talks with Haldirams and Patanjali. MTPL is actively pursuing Smithkline Beecham (for Horlicks), Dabur, Patanjali, Levers (for Vaseline), Britannia, ITC and Tatas. MTPL is also hoping to get micronutrient producing firms as customers. There are other companies too that are showing interest, one of them being Coromandel.

 

Industry Analysis

 Packaging is one of the fastest growing industries and stands at USD 700 billion globally. In India, it has grown at a CAGR of 16% from 2010 to 2015 and touched USD 32 Billion in FY 15. The per capita packaging consumption in India is quite low at 4.3 kgs as compared to developed countries like Germany and even Taiwan where it is 42 kgs and 19 kgs respectively. Indian packaging industry is expected to grow at 18% p.a. wherein, the flexible packaging is expected to grow at 25 % p.a. and rigid packaging to grow at 15 % p.a. As per a joint study by FICCI and Tata Strategic Management Group,The Indian plastics packaging industry is expected to touch USD 73 Billion by 2020.

Indian Plastics Packaging Industry

Packaging is classified into two significant types i.e. Rigid Packaging and Flexible Packaging. As compared to rigid packaging, flexible packaging is one of the most dynamic and fastest growing markets in India. There has been increasing shift from traditional rigid packaging to flexible packaging due to numerous advantages offered by flexible packaging such as convenience in handling and disposal, savings in transportation costs etc.

Globally, Plastics comprise of 42% of packaging with the combination of rigid and flexible plastics.

In India, most of the FMCG products consumed by households are packed in plastics. In 2014, more than 95% of the total number of biscuits, dried processed food items and hair care products; and over 85% of dairy products, baked goods, laundry and skin care sold in India were packaged in plastic.

Indian packaging industry at present is dominated by flexible plastics packaging. There is a gradual shift from rigid to flexible packaging as these have a higher visual appeal, are cheaper and durable.

Growth drivers of Plastic Packaging Industry

 Growth in F&B Industry:  The food and beverages industry is one of the biggest users of plastic packaging. The Indian F&B industry is expected to grow from USD 34 Billion in FY 15 to USD 78 Billion by FY 20 exhibiting a growth 25% CAGR. This is expected to fuel demand of plastic packaging.

Increase in per capita income: Rapid urbanisation, increase in the population of working women and rising per capita income is powering the demand for packaged food and use of plastic packaging. India's per capita spend is at USD 92 levels with a per capita disposable income of around USD 1500. As the economy grows the per capita income is expected to double in the next decade and the per capita spend is expected to triple to USD 305

India Packaged Food Per Capita Spend

Growth in Pharma industry: Pharma industry is another growth driver for plastic packaging. Indian pharma industry is expected to grow at 11-13% CAGR from USD 11 Billion in FY l6 to USD 21 Billion by FY20. Pharmaceutical Packaging is now becoming an integral part of the drug delivery system.

Increased food safety and shelf life: Plastics act as an excellent barrier to oxygen, water and carbon dioxide. They are highly durable as they are inert towards acids, alkalis and most solvents and therefore ensure freshness, safety & hygiene of the content. As per industry estimates, 35-40% of the food products produced in India are wasted due to deficient infrastructure and lack of food processing capabilities. Plastics find applications in packaging which increases the longevity and maintains quality of food which can reduce the post -harvest losses.

MTPL’s Addressable Market

Paint and lube segment: MTPL has a market share of 20% in the organized market. Company’s turnover is Rs 300 CR, organized market Rs 1500 Cr and unorganized market is around Rs 600 Cr. Total target market is thus Rs 2100 Cr

Food and FMCG segment: Total addressable market is Rs 2000 to 3000 Cr. MTPL’s turnover this year is just Rs 17 CR and will hit Rs 24 Cr next year.

 

Raw Material Analysis

The key raw materials required for Mold Tek's manufacturing units are Poly Propylene Co

Polymer (PPCP) and Poly Propylene (PP), both of which are crude derivatives. Hence their price depends on the price of crude. MTPL procures its raw material mainly from Reliance Industries. In fact, Mold-Tek is the largest buyer of high - impact grade PPCP from Reliance. The company has a supply contract with Reliance to cover the increase or decrease in PPCP prices. Due to its long-standing relationship with Mold-Tek, Reliance does not increase the price of PPCP for 2nd purchase if the price rises abnormally during the month. The company also gets sizeable annual discounts of INR 1-2 Crores from Reliance in the fourth quarter (Jan to March).

Brent Crude Price Trend

In 2016 raw material prices went up in the first six months from a low of Rs 70,000/tonne to up to 84,000 per tonne by June 2016 and was around Rs. 91,000 by Dec 2016.Crude price (Brent) had fallen to around USD 45 per barrel in Nov 2016. Crude then strengthened by over 20% since OPEC decision to cut production and touched USD 55 per barrel. It has cooled down to USD 48.5 per barrel over news of high inventories in US. Crude is expected to be around USD 55 per barrel in near future resulting in raw material price of around 90-95,000/tonne

PPCP costs are close to 55% of the total operating cost. Mold Tek's other raw material are Masterbatch, inks, films and other consumables that forms 8% of the overall costs. Any rise and fall in PPCP/PP price is passed onto the end-users as per the monthly raw material adjustment policy. The fall in other raw material prices is not passed on to the end user clients.

 

Mold Tek Moats

MTPL has some strong moats in its business. These moats emanate primarily from cost advantages and technological edge.

Cost Advantages

 Vertically integrated: Mold tek is a vertically integrated company with in-house robot manufacturing, mold &  label manufacturing and die-cutting facilities. It has around 44 robots. The integrated model gives the flexibility and complete cost control and enables quick delivery, customizability and maintenance. The company doesn't depend on Imports.

The in-house manufacturing of Robots al so helps MTPL provide better service to clients.

Strategic Location of Plants: MTPL plants are usually close to the plants of its customers. Even the new manufacturing facilities that are coming up for Asian paints is situated close to Asian paints plant. This certainly reduces the cost of transport of finished goods to the customers.

Close relationship with Reliance: MTPL’s long standing relationship with RIL helps in shielding the company from high volatility in raw material price movements. Reliance does not increase the price of PPCP for 2nd purchase if the price rises abnormally during the month

Technological Edge

 MTPL has presence in plastic pail packaging for over three decades. The company pioneered IML packaging in India. It has constantly stayed ahead of technology curve and innovation. The company has recently launched 5 L and 15 L capacity containers to cater to dairy industry. The company is in talks with a Korean company for oxygen barrier injection moulding to cater to any future need if it arises. Similarly, in RAK plant the company has set up 7 robotic machines and the entire facility is fully automated to serve customers better.

 

Growth Drivers

New Geographies: MTPL has recently set up a plant in UAE to cater to customers there. The RAK plant is expected to add 6-7% growth in volumes over the next two to three years. Middle East is a lucrative market with all major oil companies having a presence there. The market is currently served by a German company Jokey Plastics through its plant in Turkey. The market is big to accommodate one more player and MTPL is planning to exploit this opportunity

New Customers: MTPL is actively pursuing customers in new industries like dairy, Jam, corn flakes etc. The Company has been recently selected by Mondelez as a preferred supplier for Asia Pacific region. Britannia has adopted MTPL 's pail packaging for ghee. In the paints segment, Akzo Nobel is also expected to give clearance soon. The plant being set up for Asian Paints will also be used to cater to other paint companies in future.  The company is actively pursuing pursuing Smithkline Beecham (for Horlicks), Dabur, Patanjali, Levers (for Vaseline), Haldiram ,Britannia, ITC and Tatas

Growth in end user industries: MTPL expects around 6-8% growth in FMCG segment. There will also be growth in paint industry and the company will be a beneficiary of that growth. (For details, kindly check the Growth drivers for Plastic industry)

 Shift in Customer preference: MTPL is well placed in the IML segment of rigid packaging. There has been an increasing trend of customers shifting from HTL to IML in recent times. The company expects 5-7% increase in revenues due to this shift in customer preference. MTPL manufactures both IML and Heat transfer label (HTL). Most of the paint companies are moving towards these technologies. Nerolac is buying almost 40% to 50% of their products in IML now. Berger is picking less of IML but if HTL is considered then it comes to almost 40%. For Akzo Nobel, total packaging using these technologies is more than 60%. Largest Paint major of India, Asian Paints is now entering into HTL so it is just above 10% of their supplies currently. But going forward, HTL label decoration is expected to go up to 40% and may be touch 50% in the coming couple of years.

Capex: MTPL is building two new plants to cater to Asian Paints. The plants will have a combined capacity of 6000 tonnes and by 2020 the company is expecting to hit 4000 tonnes of utilization. The RAK plant will also add to 5-7% annual growth in volumes over the next 2-3 years

MTL has strong growth triggers in place and is hoping to achieve 20% annual growth rate for the next 2-3 years.

 

Shareholder analysis

MOld Tek Packaging Shareholder Analysis

The promoter shareholding has been gradually shrinking and when compared to Dec-11 figures, the fall is of more than 6%. From 15 to 16, promoters have increased their stake by 1.5%. Right from the beginning the ownership in hands of promoters has been under 45% which is not a comforting factor but at the same time considering that there is only one other group company, Mold Tek IT, it is not alarming either. On the other hand, Corporate bodies’ holding in the company has shown an increase to the present 14.7% which reflects the confidence they have in MTPL.

Management Analysis

Mold Tek Packaging Management

The remuneration of the promoters is quite low as a percentage of PAT. As there has been no revision in the salary since FY 2015 but the PAT has gone up by over Rs 7 Cr, this percentage has further fallen down and remains between 2-4%. This reflects promoters’ integrity and their commitment to Mold Tek Packaging and allays any fears around their limited shareholding in the table above.

All figures in INR lakhs

Revenue Analysis

Mold Tek commands 20 % market in the rigid plastic packaging industry. It caters to customers in three broad industry segments- Paints, Lubricants and FMCG & Food.

Volume breakup Q3FY17 vs Q3FY16

MTPL Volume Break up

IML- Non IML Split

MTPL Revenue Iml vs Non IML

The company sold 4140 tonnes as against 4235 tonnes in Q3 2016. Volume in 9 months FY16 was 12,320 and the same for 9 months FY17 is 14,000

Revenue Spilt- Geographical

 Almost the entire of MTPL’s revenues were from within India with exports forming negligible portion of the revenues. The company had export earnings of just INR 4.23 Crores out of total revenue of INR 308 Cr. The situation is now going to change with Mold Tek making a foray into the Middle East with its plant in RAK.

Revenue Guidance

Company expects to clock 5-8% growth in terms of volumes in Q417. Overall growth in FY17 will be 12%. RAK plant will give additional Rs 25-30 Cr n FY 18. The production will hit 6000 tonnes in FY19 from two Asian Paints plants. Revenue generation at full capacity of 6000 tonnes is Rs 180 per kg or Rs 180,000 lakh x 60 = Rs 120 Cr. The company is confident in clocking 20% growth in revenues in the next 3-4 years

Revenue Mix Guidance for FY18

 

Detailed Financial Analysis

 We usually analyse companies across an entire economic cycle of 10 years to gauge how the company has performed across the years. We not only look at the level of performance (CAGR) but also the consistency of it.

MTPL Financial Analysis

The revenues and profit figures of Mold-Tek Packaging reflect a healthy and consistent growth with an impressive CAGR of 15.5 % and more remarkable 24.3% growth in operating profit. This reflects operational efficiency and better management. One can further observe that even though the revenue has shown a dip from 2015 to 2016 but the operating profit has still registered a growth from 413 to 464.

Cash and Cash equivalents are on the rise and there is heavy investment in expansion plans that is evident from the rise in Capital expenditure. Receivables conversion period has gone up by 14 days whereas payables conversion period has remained almost same with a very small increase of less than 1 day. Working Capital cycle reflects this trend and shows an increase of 10 days from 67.7 days to 77.3 days. The inventory conversion rate has been sustained at 10.2 days for past 3 financial years which is offsetting the effects of an increased DSO to some extent.

Profitability of the company has been on the upswing with both Operating as well as net profit margins showing an upswing in the past 5 years. The average ROE has been a healthy 18.7% over the past 5 years.

EBITDA margins of the company have been around 16%. The company likes to measure its EBITDA in terms of EBITDA per kg. 9 month FY17 EBITDA per kilo stands at Rs 27.8. Company is aiming for EBITDA of Rs 29 per kilo for FY18. Margins in FMCG business is 22-25%. Blended margins will be around 14-15% in FY17. It will improve by 0.6% to 0.7% next year due to higher share of FMCG business. EBITDA margins in RAK plant are much higher at Rs 38 per kg due to 0 income tax and higher realisations.

Current ratio is at comfortable levels at around 2.6. It should be noted that the receivables form a large part of current assets of MTPL and thus need to be monitored closely

Days sales outstanding (DSO) is a figure that Mold-tek has to bring down or at least sustain at the same level with high growth in revenue. Further, increase in DSO can put severe pressure on the working capital cycle of Mold-Tek and with major capital expenditure and plans underway, there is a good chance of getting tangled in a debt trap. Cash from operations has been registering a great growth and current ratio is also excellent at 2.6 times.

Free cash flows have been persistently negative as the company is in expansion mode and had been investing more than the cash generated from operations into its expansions. Debt was high over the past few years but has thankfully come down drastically in the past two years

Quarterly Analysis

A look at the company’s performance over the recent most 8 quarters reveals that the company’s performance was adversely impacted due to demonetization in Q3FY17. The sales were flat while the profits took a 29% dip vs corresponding quarter last year. The sales, in volume terms were down by 2% ad profit by 8% versus Q2FY17.

MTPL Quarterly Analysis

EBITDA margins came down to Rs 23 per kg. The expenses include employee increments, selling and admin cost and expenses related to RAK plant like travel costs etc er kg due to demonetization and higher other expenses.

Earnings quality analysis

 We have tried to make an in depth look at various possibilities of earnings being manipulated by the company.

Revenue Recognition Risk

Sales Efficiency– It is defined as Receivables as a %age of Sales. A high sales efficiency ratio means the company has low bargaining power with its buyers and may face liquidity constraints. Therefore, a declining trend is desirable

MTPL Sales Efficiency

Mold Tek’s receivables as a percentage of its sales have shown an increasing trend which is not desirable and shows its limited power to expedite its receivables. This point can be better understood when you look at the customers of this Company. They are the leading names and big concerns in their respective industrial spheres. For example: Kansai Nerolac, Castrol, Asian paints, HPCL and BPCL to name the few. With customers who are much bigger in size and repute, it is but natural that the sales efficiency ratio would show an increasing trend as big customers translate into limited negotiating power. The favorable aspect here is that the customers of Mold Tek are big names with big businesses so the risk of default on collections is definitely low.  

Coupled with a fall in revenue by over 995 lacs from FY 15 to FY16 and DSO’s jump from 57 to 71 days is a cause of concern.

Accrual Ratio- It is defined as PAT-CFO-CFI divided by average of net operating assets. A positive accrual ratio means that some portion of PAT is the result of non-cash items (accruals).  Earnings spiked by accruals are considered to be of lower quality. Accrual ratio should therefore show a declining trend. An extremely high Accrual ratio of 2008 is because of ahude dip in profit of the company in that year

MTPL Accrual Ratio

The accrual ratio reflects a massive increase from 2015 to 2016. Though from the 2008 levels, the company has really come a long way. If we compare the sales efficiency as well as accrual ratio the trend is same- decline from 2013 to 2015 and then a tremendous spike in 2016. We know that the revenue of Mold Tek has dipped whereas DSO has shown an increase of 14 days which can be contributing factor here.

Cash Realization Ratio- It measures the cash flow component in earnings. Higher the cash flow component in earnings, better it is.

MTPL Cash Realisation ratio

Mold Tek’s Cash realization ratio has been on a decline since 2014. 2016 is their third worst performance after 2008 and 2012. This is a direct fall of increase in DSO from 57 to 71 days. After a stellar 2014, the realisation ratio has been on a gradual decline.

Contingent Liabilities Risk - Contingent Liabilities if materialised, can wreak havoc with the company's net worth. They should be as low as possible. The contingent liabilities of Mold Tek have been low and thus the risk is almost negligible. Even though there was an increase in 2014, but as one can observe it is coming down gradually and has already reduced by half from 2014 levels.

MTPL Contingent LiabilitiesRisk

Asset Manipulation

Depreciation vs Gross Block - This ratio is a check on whether the company is changing its depreciation rate to report better profitability. A company may report lower depreciation and bump up its earnings. There is a steady increase in depreciation and a very slight dip from 2015 to 16 but that could be because of brand new plant that has been capitalized in the books but would have registered depreciation only for part year.

MTPL Depreciation vs Gross Block

Asset Replacement Ratio- It is defined as Capex divided by Depreciation. If the value of this ratio is less than unity, the asset base is shrinking. The ratio for Mold Tek has been comfortably above 1 for all the years. In FY16 their capex registered an increase of over 150 Crores which reflects in the ratio of 2016 and can be attributed to the new RAK plant.   

Cash Pilferage Risk

 Siphoning of cash is a common practice by many unscrupulous promoters in India. They usually do that by either classifying the cash paid to them as a miscellaneous expenditure or through loans and advances to promoter held pvt companies. Mold Tek’s percentage of loans over net worth shows decline from time to time and is at healthy levels. They have extended a loan of INR 863 lacs to Mold Tek packaging FZE, a 100% owned subsidiary in UAE Free Trade Zone.

MTPL Cash Pilferage Risk

Tax Manipulation

Tax Rate- Mold Tek shows high tax rates after 2009. Presently they are at maximum bracket which means that they are not enjoying any tax concession presently that can disappear in future affecting cash flows and income negatively.

MTPL Tax Rate

Deferred Tax Liabilities vs. Net worth - Deferred tax liabilities are tax liabilities that will arise in future. This measure checks what %age of Net worth is deferred tax liabilities. Mold Tek’s deferred tax liabilities are existing but not alarmingly high. Moreover, there is a declining trend from 2014 to present times too.  Apart from the slight dip in revenue and accompanying DSO spike, the earnings quality of Mold Tek look healthy and favorable. The highly-reputed customer portfolio is also a comforting factor here.

MTPL Deferred Tax Liabilities vs Networth

 

Peer Analysis

MTPL has the second highest sales growth PAT growth and ROE among all its peers. MTPL has the highest margins owing to it being a vertically integrated player. The cash conversion cycle is second highest and this may be because MTPL is constantly trying to expand its portfolio of clients and favourable credit terms can be one of the tactics to attract new clients.

The accrual ratio in FY16 was second highest among all the peers and definitely requires closer monitoring going forward. The accrual ratio had shown a declining trend from 2013 to 2015 but then it showed a spike in 2016

Key Risks

 Delay in commissioning of new plants vis. a vis. Rise in Crude prices

Apart from the large investment getting locked, delay can hurt in terms of rise in raw material prices. Crude has already moved up by 20% and after the OPEC’s decision to cut production, it is expected to hit at least USD 60 barrel. Any further rise may prove detrimental to MTPL’s margins. Though the company has managed to pass on the rise in raw material prices to its consumers, we are skeptical about its ability to do so indefinitely in the face of rising crude prices

Downturn in end user industries

A major portion of MTPL’s revenues come from the paint industry. Paint industry itself is exposed to real estate and automotive industry. Any downturn in the end user industries will reduce the off take from MTPL and affects its revenues. Real estate is expected to be under stress over the next couple of years according to estimates and also after-effect of demonetisation. MTPL is also expected to be affected by demonetisation but the affect will be short lived.

New technologies

Any new disruptive technology can impact MTPL’s revenues. The company is constantly on the lookout for new innovative technologies and this gives us a bit of comfort.

 

Valuations

price as on 10th mar 2017

price as on 10th mar 2017

We like to think of investments as a game of probabilities and so instead of arriving at one valuation number by extrapolating the growth in earnings over certain number of years which is always fraught with uncertainty, we look at a matrix of prices on the basis of our investment horizon, expected growth rate in near term, current level of earnings and our expected rate of return.

Margin of safety is of paramount importance to us and so we do not base our buying decisions on an expected P/E expansion and consider the possibility of it only as an “icing on cake”. The average P/E of Mold Tek has been 10.46 in the past ten years. As evident in the matrix below, Mold Tek at the current market price of 209.5 is still way above its average valuations over the past economic cycle. It needs to correct by more than 50% for it to come at a price range (around 100) where we can feel confident of having some margin of safety.

Conclusion

 Mold-Tek is a company with a pristine balance sheet, strong moats and good revenue visibility over the next 2-3 years. The company is making all the right moves to ensure that growth is sustained over the long run. The same is recognized by the market and therefore the valuations are at a multiyear high. We have tried to give all relevant information about this company to help investors make an informed judgment about this company. Do let us know if you found this analysis helpful. If there is a particular company you want us to analyse, do let us know in the comments section below.

Disclaimer: All the data and analysis is based on publicly available information. This is not an investment recommendation and the sole purpose of this analysis is to let investors make an informed decision about this company based on their own conclusions.

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