Sunday, 11 December 2011

Mayur Uniquoters: Good Business, Better Fundamentals, Great Value

Mayur Uniquoters Limited, one the largest player of PU/PVC leather in India, was established in 1992 by Mr. S.K.Poddar. PU/PVC leather, popularly known as synthetic leather finds applications in variety of industries including footwear, automobile seats,upholstery, furnishings, sports goods, apparels, leather bags and hosts of fashion accessories. Moreover synthetic leather is fast replacing natural leather in most of the industries due to limited availability and high cost of natural leather, increased awareness towards animal rights/cruelty and high polluting production process of tannery. In contrast, synthetic leather offers a great alternative as it is cost effective, less polluting and made from the fabric base.

Quality of Business and Economics:

Market Leader: Mayur Uniquoter is undisputed leader in synthetic leather market in India. It has current installed capacity of 1.4 million meters/month (expansion by 2012 to 1.9 million meters/month), more than twice that of its nearest competitor!

Preferred Supplier: Mayur has built enviable list of customers due to high quality of its product, system oriented approach and its ability to develop customized and high value products due to its in house R&D facility. Following is the client list.

Footwear: Bata, Liberty, Paragon, Khadim's, Action, Carbon
Automotive: Ford, Chrysler, MAruti, Honda, Tata, Nissan, Hyundai, Mahindra,

They are in the process of getting approved vendor list from BMW, Mecedez and GM.

Focus on high value/high margin products: Company has maintained continued focus on developing and marketing high value products by leveraging its strength of quality and R&D. This strategy has paid off well and company has improved its NPM from 4% to 10.13% in last 5 years
.Mayur has increased ROCE from 16% to 56% in 5 years while RONW has increased from 13.6% to 41%. This clearly indicates that Mayur has created a strong brand equity amongst its customers by differentiated and value added products.

Financial Matrix:

If one were to look at quantitative matrix for evaluating the company, let me tell you, it can't get better than this!

P &L Statement:

Mayur has increased its revenue from around 69 crores in 2007 to 270 crores in 2011 while increasing its net profit from 2.66 Crores to 25.27 crores in the same period. This translates into CAGR of 31 % and 57% for top line and bottom line respectively. However what is eye catching is the consistency!
Mayur has consistently grown its top line and bottom line through up/down business cycle. A case in point is FY 2008-09. FY 2008-09 was one of the worst years for most of the companies around the globe as well as India, however Mayur managed to grow its top line by 23% and bottom line by 19%!

Balance Sheet:

I am big fan of a companies that manage their growth without losing sight of tight balance sheet management. My bias is based on rationale that it provides enormous flexibility to the company in terms of financial manoeuvring while transcending from existing level to higher orbit. Mayur comes out here with flying colours. Company while growing its top line and bottom line at breakneck speed, has managed to reduce its long term debt to equity ratio from 0.28 to 0.1. Management has done excellent work in terms of managing its current assets as well. Mayur's inventory grew by only 60% while its sales grew 4 times. similarly receivables grew by only 100% in 5 years. This deft management led to reduced working capital days from 72 to 48.

Cash Flow & Dividend:
Mayur has managed to generate free cash flow in each of last 5 years, a huge plus for a company on growth trajectory! As company was generating substantial free cash flow in each of the last 5 years, which helped company in reducing debt and increase its dividend pay out. Mayur has increased dividend payout from 15% to 100% in last 5 years.

Whatever matrix you choose,you will find consistent improvement for Mayur. In my view, ROE and ROCE are two most critical parameters. Mayur has grown its ROCE from 14% to 56% in last 5 years while it has grown its ROE From 13 % to 42%. Higher trajectory of ROE/ROCE validates earlier points of strong brand equity and differentiated products. Mayur has increased its inventory turns, asset turns and debtors turns substantially in last 5 years. This reflects positively on management's ability and focus in streamlining its operations.

As it is said in value investing "price is what you pay, value is what you get". So let's see what value we are getting for Mayur? 

Mayur currently trades at market cap of around 183 crores with P/E ratio of 7 and P/B ratio of 3. Based on FY 11 balance sheet, company has 23 Crores in cash and fixed deposits and 8 crores of debt leaving 15 crores of cash and cash equivalent net of debt.

Thus if you were an private investor you are getting  a debt free business at 168 crores (183-15). Company's FY11 NP is around 25 Crores and net cash flow is 22 crores.  If we consider CAGR of 15% for 10 years in FCF ( almost 1/4 of last 5 year average growth) and terminal growth rate of 3% and discount rate of 12%, NPV of future FCF is 592 crores.

Thus, we have huge Margin of Safety of 70%. In other sense, even if we consider doomsday scenario where company grows its earnings at only 5% CAGR we end up with valuation of 330 crores, margin of safety of 45%. Thus even if the worst case scenario pans out, in all likelihood, investor can expect to double its money!

Icing On the Cake:
Not only the cake is very delicious, but also the icing on the cake is equally enticing.
- Mayur has been able to penetrate into major international automobile OEM's approved vendor list. It has started supplying its product to Ford and Chrysler in last year and its products are under approval from BMW, GM and Dailmer. This is going to be a huge plus as it can prove to be high barrier to entry and higher value added product.
- Mayur has recently appointed two industry renowned professional to manage their R&D and quality management process. Management has clearly indicated that it wants to promote professional management, which can provide further streamline operations and processes.

In all, I feel Mayur is a good business with great financial and economics available at substantial discount from its intrinsic value...


  1. Hi Dhwanil,

    Its very good analysis. I am not able to understand few thins. can you please explain the below section a little more.

    "If we consider CAGR of 15% for 10 years in FCF ( almost 1/4 of last 5 year average growth) and terminal growth rate of 3% and discount rate of 12%, NPV of future FCF is 592 crores."

    I am not getting how you came to a conclusion of 592 crores.


  2. Hi Dhwanil,

    No doubt, Mayur uni is a decent business.

    But you seem to be taking FCF status of Mayur too far. For FY11, working out FCF as NCFO -Capex will give just Rs 3 cr, and numbers should be reworked at this base, if you will.

    For a small company such as Mayur, if we take a 10 year kind of call, it will have to regularly incur capex to be able to generate free c/flow. And i hope you understand 15% CAGR on an increasing base is a very tough ask unless the business enjoys tremendous pricing power.

    Anyhow, a good post.



    Visit me at

  3. Hi Sravani,

    Regarding your query,I have stated the assumptions required to arriver at net present value of future cash flows. I have assumed that free cash flow of company will grow at 15% for 10 years and after 10 years growth rate will be constant at 3% to determine terminal value. In order to get the net present value of future cashflows, I have taken discount rate of 12%. Once I apply this parameters to DCF model, I arrive at value of 592 crores. Hope this helps.

    Happy investing

    Dhwanil Desai

  4. Hi Shikhar,

    Thanks for your inputs. I do agree with you that 15% growth for 10 years is a tough task! This translates into increasing revenue by 4X over 10 years. However my assumption for 15% growth is based on following obervations.

    - I have acquaintances working in similar industry and as per my interaction with them use of synthetic leather is growing at phenomenal rate and quality synthetic leather manufacturers are handful. So MUL is in a industry which is likely to grow at decent pace
    - Secondly MUL has diversified client base in consumption led industries such as footwear, fashion accesories, furnishings etc. These end use industries are also likely to grow at decent pace. MUL is working with some the leading brands and hence can command higher value for premium products and quality conscious companies.
    - MUL has just penetrated export auto OEM market where opportunity is large and according to management value addition is 2-3X.This higher value products may lead to higher revenues/margins
    - Management has indicated that they are looking at market size of 3000-4000 crores in next 5-7 yeras.Generally management has been conservative in their guidance.

    Regarding FCF
    -MUL business is relatively asset light business. In last 5 years average gross block addition is 4.5 crores/year and NWC net of cash is almost constnat at 15 crores in last 5 years.
    -In the current year, MUL has incurred capex of 12 crores which is substantially higher than 5 yr average.
    - In my opinion for a business like MUL, depreciation may be a good substitute for replacement capex. Hence I have reduced depreciation from NP to arrive at FCF rather than taking 3 crores as FCF which may not represent past/future FCF appropriately.

    Do let me know if you find any missing links/undue optimism in my assumptions as it is always better to err on conservative side while practicing value investing.

    Thanks again for raising interesting questions.

  5. Hi Dhwanil,

    Few of my observations:

    1. Actually, it's the diversified client base (diversified across verticals) that in my view makes it difficult to sustain 15% kind of growth in FCF.

    2. It might have been possible to preserve that niche to some extent, if they were catering only to few auto majors/OEMs.

    3. Taking depreciation as substitute to capex does not make sense to me conceptually, though the numbers for current years may be of the same order. I hope it's not endowment bias to enhance a view already held.

    4. I have seen quite a few small companies of the size of Mayur (not necessarily listed) which have good order book and being in a sweet spot industry load on debt to put up another manufacturing line and then FCF debate becomes just academic.



  6. Hi shikhar,

    I do agree that small companies in sweet spot industry may load up debt by being over aggressive and end up with negative FCF.

    However generally while calculating FCF, one takes into account maintenance capex only. Even though there is no specific framework to separate maintainance capex from growth capex, generally accepted practice is to substitute depreciation with maintenance capex. The rationale behind this approach is that depreciation evenly spreads cost of the asset across its life and similar amount needs to be spent each year to maintain it at existing capacity.However companies involved in business which are high capital intensive/maintenance prone (such as oil drilling) depreciation may not be an appropriate substitute.

    Following are some links disucssing the issue of maintenance capex in detail,

    Another approach to calculate maintenace capex by Bruce Greenwald is indicated here

  7. Thanks for the links Dhwanil.

    1. With due regards to professors/analysts, at the end of all accounting entries, we need to see free cash flow whatever be the nomenclature of capex used. If one is stuck with this maintenance stuff, you'll never spot zero FCF status of a software company on an acquisition spree because they are all growth oriented exp.
    2. The very idea of FCF is that there are no assumptions made and business is analysed on the basis of what is actually available.
    3. I disagree with any equivalence with depreciation made in such calculations if we want to be realistic.There may be temporary undervaluation for 1 year if you deduct growth capex but in a multi-year period, it will reveal the true picture since those streams will flow in.
    4. I was seeing a co. BS where cash & cash equiv is locked since it is provided as margin for bank guarantees, and analysts are happy to factor this cash in their rosy EV projection. You very well know that in equity analysis, it helps to be conservative. Ultimately choice is that of an individual investor.

    Above discussion is on the subject of FCF. I have no doubt that Mayur may be a great company and that's not the purpose of this post.



  8. I am getting your point here that by considering whole capex, you are undervaluing a security and that is always good if the focus is on value investing.

    Thanks anyways for interesting discussion and as you rightly said, the discussion relates to FCF rather than company.