Mayur Uniquoters Limited – Artificial Leather Smallcap

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Mayur Uniquoters Limited

This post has been written by Ajay Krishnan for FinMedium Research Desk.

About the Company

Incorporated in 1992, with the commencement of operations in 1994 at Jaipur, Rajasthan, Mayur Uniquoters Limited (MUL) is in the business of manufacturing PVC coated fabric; commonly known as artificial/ synthetic leather.

Mayur Uniquoters Limited is promoted by Mr. Suresh Kumar Poddar, Chairman, Managing Director and CEO, who has more than four decades of experience in trading and manufacturing of artificial leather.

Mayur has two manufacturing facilities located near Jaipur (one facility each at Jaitpura and another at Dhodsar) having an aggregate of six coating lines (4 at Jaitpura and 2 at Dhodsar) to manufacture artificial leather along with backward integration for manufacturing of knitted fabric.

MUL has also forayed into manufacturing of PU fabric and started commercial production in January 2020.

During FY16, MUL had setup a wholly owned subsidiary, Mayur Uniquoters Corp., in Texas, USA as a marketing/trading arm to facilitate exports to its growing customer base from the automotive industry in USA.

MUL, over the years, has also registered itself as ISO 9001:2000 organization and has been awarded with various excellence awards.

The company is the largest manufacturer of artificial leather, using the ‘Release Paper Transfer Coating Technology’ in India.

They have come a long way in the past two decades from a meagre production of 0.25 million linear meters per month, to an astonishing 3.05 million linear meters per month, through their six state-of-the-art Italian coating lines. 

The company has now started a PU coating plant with an additional current capacity of 0.6 million linear meters per month.

Mayur Uniquoters Limited - Manufacturing Facility in Jaipur
Mayur Uniquoters Limited – Manufacturing Facility in Jaipur
MUL has an impressive client list
MUL has an impressive client list

Product Portfolio and Market Share of Mayur Uniquoters Limited

Mayur is one of the largest manufacturers of artificial leather/PVC vinyl in India with about a 37million meters (mm) annual capacity and around 8% domestic market share.

During the past five years, the company has reported a strong 20% profit CAGR despite 8% revenue CAGR supported by changing product mix towards higher realisation in automotive OEM exports and cost efficiencies.

Over the past seven years, MUL has steadily established its credentials as a quality supplier to marquee automobile players in the United States with the management now eyeing the European luxury car segment.

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Moreover, the company is foraying into Polyurethane (PU) leather by setting up a manufacturing unit in Gwalior which would entail a peak revenue potential of INR 500-600 cr.

Understanding what PU leather is – An important product from Mayur Uniquoters Limited

Together, the above-mentioned initiatives are expected to drive revenue and net profit growth of 22%-25% CAGR respectively over FY20-21 while creating a strong base for robust growth post FY21.

Mayur Uniquoters - Product break-up | Source: Tijori Finance
Mayur Uniquoters – Product break-up | Source: Tijori Finance

Mayur Uniquoters  - Location wise break-up | Source: Tijori Finance
Mayur Uniquoters – Location wise break-up | Source: Tijori Finance

MUL has the largest installed capacity in the country for manufacturing of synthetic leather in domestic organized segment with capacity of 366 lakh linear meters per annum (LLMPA) of PVC coated fabric and 60 LLMPA of PU coated fabric.

The company is in the process to expand its PVC coated fabric capacity by adding its seventh coating line at Dhodsar plant post which its total capacity for PVC coated fabric would increase to 426 LLMPA.

MUL manufactures more than 400 variants of artificial leather from PVC polymer which finds application in footwear (shoes/sandals insole and uppers), automotive (seat upholstery and inner linings), furniture & fashion items (apparel).

Mayur Uniquoters Limited's Furnishings and Product Line
Mayur Uniquoters Limited’s Furnishings and Product Line

MUL has a diversified clientele across various industries and caters to the synthetic leather requirements of reputed players like Maruti Suzuki, Tata Motors, Mahindra & Mahindra, MG Motors, Honda Motorcycles, Bata, Relaxo, VKC, Paragon, Baggit, etc. and shares long standing relationship with most of its clientele.

Mayur Uniquoters Limited's Furnishings and Product Line
Mayur Uniquoters Limited’s Furnishings and Product Line

Generally, MUL sells its products to the approved vendors of the OEMs which in turn supply the products to OEMs.

Owing to consistency in its product quality, stringent quality control measures and adherence to delivery schedule, MUL is also one of the very few approved vendors in Asia by global automotive OEMs [such as Ford (USA) and Chrysler (USA)].

Mayur Uniquoters Limited's Furnishings and Product Line
Mayur Uniquoters Limited’s Furnishings and Product Line

MUL is also trying to enter the European and other export automotive OEM markets by targeting reputed customers and has received product approval from Mercedes Benz (Daimler) and BMW for their specific new car models.

As articulated by the company management, MUL is expected to start supplying to Mercedes Benz by the end of Q4FY21 while supply to BMW is expected to start in FY23.

MUL has already set-up its 100% subsidiary named Mayur Uniquoters SA (Pty) Ltd, South Africa which will develop logistics to facilitate exports to Mercedes Benz.

Moreover, Volkswagen India, which used to import fabric from Germany, is expected to buy synthetic leather from MUL from Q4FY21.

(Source: https://s3.ap-south-1.amazonaws.com/stockdiscovery/tijori/2020/522249/AR-20.pdf#page=37)

Business Performance

The company’s business performance for the past 5 years is given below:

Source: http://www.screener.in

Total Operating Income (TOI) of MUL on a consolidated level declined by 11% during FY20 as compared to FY19 mainly on account of lower sales volume in domestic replacement market and automotive export market due to subdued demand.

The automotive replacement segment of Mayur Uniquoters Ltd which grew at CAGR of 23% over past four years ended FY19 was affected most during FY20.

Moreover, automotive export which grew by about 40% during FY18 on y-o-y basis, declined by 10% and 17% during FY19 and FY20 respectively.

Exports are, however, expected to gradually increase from FY22 as MUL starts supplying to vendors approved by Mercedes-Benz and BMW.

PBILDT margin declined by 219 bps during FY20 largely due to impact of operating leverage due to decline in sales coupled with lower share of automobile fabric exports which fetches relatively higher operating margin; albeit it continued to remain healthy at 22.34%.

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Further, PAT margin remained largely stable during FY20 at 14.61% due to lower tax rate.

Furthermore, MUL had healthy Gross Cash Accruals of Rs.93.64 crore during FY20 as against Rs.105.61 crore during FY19.

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As you can see from the above table, the sales were on the up move consistently for more than four years before the COVID-19 situation put a brake on it in Mar 2020.

Mayur Uniquoters Ltd – Performance update during the market crash in Mar 2020

This outlook has already improved considerably with the automotive and furnishing industries picking up pace, as seen by their own domains’ increasing sales and turnovers in Q3FY21 and Q4FY21.

What is interesting is the earnings per share has been on a steady climb until the pandemic, and this trend is likely to continue again as the vaccine is widely distributed, and business resumes to normal levels.

Capital structure of the company on a consolidated level continued to remain comfortable marked by overall gearing ratio of 0.08 times as on March 31, 2020.

The board of directors of Mayur Uniquoters Ltd in its meeting held on November 10, 2020, has approved the buyback of up to 7,50,000 equity shares of the company at Rs.400 per share aggregating to around Rs.30 crore (Rs.37 crore including share buyback tax at 20%).

Due to proposed buyback of equity shares during FY21, the net worth of the company is expected to decline to that extent compared to March 31, 2020.

However, despite reduction in net worth, the capital structure of the company is expected to remain very comfortable due to its relatively low reliance on debt on the back of healthy cash flow generation.

Moreover, debt coverage indicators marked by PBILDT interest coverage and total debt to GCA continued to remain strong during FY20 backed by low debt levels and healthy profitability.

Despite some elongation in its operating and working cycles, MUL’s liquidity remains strong with current ratio of 4.54 times as on March 31, 2020, and low utilization of fund-based working capital limits at 32% for the trailing 12 months ended September 2020.

Moreover, the company had healthy cash flow from operations of Rs.80.39 crore during FY20 (FY19: Rs.73.39 crore so a marginal YoY growth).

Furthermore, Mayur Uniquoters Ltd had unencumbered liquid investments and cash and bank balance aggregating Rs.185.16 crore as on March 31, 2020 significantly exceeding total debt of the company resulting in a zero-net debt position for the company.

As on September 30, 2020, unencumbered liquid investments and cash and bank balance stood at Rs.188.85 crore.

Having strong liquidity, Mayur Uniquoters Ltd had not opted for moratorium on debt servicing of any of its bank facilities the option for which was available as a Covid-19 relief measure as per RBI’s policy.

Furthermore, despite proposed buyback of equity shares aggregating up to Rs.30 crore (Rs.37 crore including share buyback tax at 20%), MUL’s liquidity is expected to remain strong due to strong generation of cash flow from operations.

As an investor, this is a very good opportunity as the company’s free float is slated to be reduced making your stock more valuable.

In addition, the company is well on its way to be debt-free, which makes it an even interesting proposition.

(Source: https://www.bseindia.com/bseplus/AnnualReport/522249/5222490320.pdf)

Emerging Trends

Making inroads in the European market along with deepening presence with existing customers

Mayur Uniquoters Limited began its sales to international OEM auto major since the last few years.

Its revenues from Auto OEMs through exports increased by 16% CAGR for the last 6 years from Rs. 43 crores in FY12 to Rs. 106 crores in FY18.

Today, Mayur Uniquoters is supplying to marquee clients like General Motors, Ford, and Chrysler in the US market.

The relationship with GM started with supplying for limited models in the US market and is now further developing for supplying for their worldwide sales across multiple models.

Similarly, Mayur Uniquoters also supplies to Ford and Chrysler in the USA and is expected to supply for their non-US sales as well. Mayur is also actively scouting for supplying to European carmakers.

Daimler, the maker of Mercedes, has already completed 3 audits over the last 2 years and Mayur is expected to receive final approval by Q4FY19.

Once done, this could open new frontiers for Mayur as it will set the stage for getting more customers from many European car manufacturers.

PU artificial leather can be a potential game-changer

Mayur Uniquoters Limited is now diversifying from being a pure PVC leather company to an additional product segment called PU leather.

The PU segment provides a large opportunity as India currently imports most of the ~24 crore meters per year demand.

It is setting up a new plant near Gwalior, MP in two phases having a capacity of 1.2 crores meters per year at a total cost of Rs. 140 crores.

This will be funded mainly through internal accruals and partially by debt. This PU leather plant will help the company to cater premium segment in the domestic footwear market.

To compete well with the Chinese, Mayur is setting up this plant with maximum possible backward integration to remain cost-effective.

Mayur’s confidence for this project comes from the feedback from its customers demanding this product to be manufactured locally.

Considering its experience in the premium artificial leather market, it is not unrealistic to assume that Mayur can do reasonably well in this new venture.

Finding New Avenues

PVC / PU leather also find applications in furnishing, purse, bags, and other products. Mayur is already present in these market in India through a furnishing brand and in exports through the distribution model.

These sales are booked under the category of Furnishing, Others, and General Exports.

Within the exports channel, Mayur is exporting to the Middle East, Cyprus, UK, Russia, Sri Lanka, Nepal, UAE and Mexico among many other countries.

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Additionally, a lot of people prefer artificial leather rather than natural leather due to the high prices of natural leathers and increasing demand on the ban on slaughtering animals.

Mayur Uniquoters Limited stands to gain quite a bit from this trend due to its quality artificial leather.

(Source: https://www.youtube.com/watch?v=5-U9Ex6gv8Y – Earnings Call Q1FY21)

Opportunities for Mayur Uniquoters

This small-cap, net-debt-free company provides many opportunities for the discerning investor.

Primarily, the company operates in a niche-domain that is not easy to enter – hence Mayur Uniquoters Limited enjoys a considerable moat.

This further explains why Mayur has been able to hold on to the excellent client relationships – both in India and abroad – with some of the biggest names in the world.

It is extremely difficult to find a quality player in this space for OEMs.

Robust domestic auto market to support consistent growth

The passenger vehicle sales in India has been growing at a healthy rate of 7-9% on a large base for the past few years. In the domestic auto industry, Mayur sells PVC leather to Auto OEM and secondary market. 

Both these segments have grown at a CAGR of 14% and 27% respectively for the last six years, indicating a strong out-performance to the industry growth.

Apart from deepening relationships and adding new customers in the OEM segment, Mayur has established an even stronger network in the premium seat cover secondary market.

In the secondary market, Mayur sells its artificial leather to the seat cover manufacturers who reaches the end customer through car accessories and retail shops/showrooms.

Considering the existing large and growing base of passenger vehicles in India along with the unmatched quality and innovative design provided by Mayur, it should be able to consistently grow for a long duration.

Significant revenue potential from foray into PU leather segment

The domestic PU leather market with a size of 18mm/month is currently 95% import dependent due to limited technical-knowhow and high investment requirement.

Buoyed by a strong R&D team, an existing footwear clientele base and sufficient funding from internal accruals, we believe the company is well placed to explore this opportunity.

Mayur Uniquoters Ltd is setting up a PU leather unit in Gwalior with an initial investment of INR 150 crores in 2 tranches (INR 90 crores and INR 50 crores) for two manufacturing lines of 0.5 mm /month between FY19 and FY21 to capitalize on this opportunity. Each PU line has the potential to generate about INR 120 crores in top line.

Eventually, Mayur Uniquoters Limited plans to scale this unit up to 5 lines over the next 5 years, creating a revenue potential of INR 500-600 cr.

Additionally, with the current PVC utilization reaching 75%, it is setting up a new 4-line PVC leather facility in Mysore to cater to rising demand in South India while also reducing logistics cost. The unit is expected to come on stream by FY21.

Increased cost efficiency measures to further aid margin improvement

The company’s backward integration in fabric manufacturing has been immensely beneficial pruning fabric cost per unit by 24% in the past 5 years and improving margins.

Going forward, Mayur Uniquoters Limited is looking to expand this unit to keep pace with rising volumes and increased demand.

Looking at the overseas and local need for this type of fabric, which are cheaper and easier to obtain, we see that Mayur will greatly benefit from the trend.

In-house product development, adequate backward integration and focus on high margin products

This strategy has enabled Mayur Uniquoters Limited 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/innovation, adequate backward integration, and focus on high margin products (both in domestic and export markets).

Mayur Uniquoters Ltd has sufficient capacity to manufacture knitted fabrics used in automotive exports which results in cost efficiency, better quality control and consistency in supply.

During the past few years, MUL’s management has made conscious efforts to focus on high margin products catering to automotive segment, replacement market and lifestyle products (furniture & apparel) as against relatively low margin products like footwear.

Contribution of footwear segment in its total sales has gradually reduced from 46% during FY16 to 36% during FY19 mainly on account of relatively lower profitability and longer credit period (5-6 months) in footwear industry.

But the same increased to 39% during FY20 largely due to decline in sales from automobile exports and replacement market due to subdued demand in those segments.

Risks Associated

Although the company shows great promise, it is imperative to discuss some of the risks that may come with investing in Mayur Uniquoters Ltd.

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 the fluctuation in international crude oil prices.

Mayur Uniquoters Ltd enters into medium term contracts with its suppliers to mitigate any large volatility in raw material prices.

Moreover, Mayur Uniquoters Limited being a market leader has the bargaining power to pass on an increase in raw material prices to its customers resulting in a relatively steady gross margin of around 40% during the last 3 years ended FY20.

Mayur Uniquoters is also exposed to foreign exchange rate fluctuations on the back of its large imports which was 49% of its total raw material requirement during FY20. However, forex risk is partly mitigated through natural hedge available by way of exports.

Elongation in working capital cycle

MUL’s operations remain working capital intensive as the company maintains two months of raw material inventory for smooth production due to lead time involved in import of some of the raw materials.

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Moreover, export sales entail lead time of around two months which also leads to higher requirement of inventory.

Furthermore, the company extends credit period of around 30-90 days to its customers.

The operating cycle of Mayur Uniquoters Limited which has been gradually increasing, further elongated from 100 days during FY19 to 127 days during FY20 largely due to higher inventory holding including raw materials and finished goods which the company could not dispatch to USA on account of Covid-19 pandemic.

Subdued financial performance during Q1FY21

This was due to nation-wide lockdown arising from Covid-19 pandemic; however, recovery in performance during Q2FY21 is being seen.

With national lockdown imposed by the Government of India to contain the spread of the Covid-19 pandemic, MUL had shut down its manufacturing units from March 24, 2020, and resumed its operations gradually with partial relaxations received in early May.

Sales and capacity utilization during Q1FY21 remained lower than normal level due to limited availability of manpower, restrictions due to compliance with government guidelines related to social distancing and staff strength.

However, sales have started picking-up post relaxation in lockdown backed by pickup in demand from automotive segment.

Further, Mayur Uniquoters Limited has taken various steps for cost reduction like salary cut of employees at higher position, reduction in travelling cost which resulted into lower expenses.

Competitive Landscape

Mayur Uniquoters Limited also faces competition from other leather manufacturing companies, who are now expanding into artificial leather and PVC products.

However, since the OEMs usually go with a preferred partner it is highly unlikely that these competitors will be able to tip Mayur from its current position of advantage.

The major competitors are as given below:

Competitors of Mayur Uniquoters Limited | Source: Tijori Finance
Competitors of Mayur Uniquoters Limited | Source: Tijori Finance

The Road Ahead for Mayur Uniquoters

Mayur has a very promising but also challenging way ahead as they come out of the struggles from the pandemic period.

A very experienced management, low free-float, increasing insider buying of stock and recovering sales are going to be the distinguishing features of this company and hence, for the financial health of the investors in it.

Artificial leather which mainly finds application across segments like footwear, automotive interiors, furnishing, auto replacement market and fashion accessories are in great demand not only in India but also abroad.

There is growing awareness and acceptability for artificial leather products across these industries as compared to natural leather, being a cheaper alternative with good aesthetic quality.

However, demand from automotive, footwear and replacement market were impacted by Covid-19 pandemic.

With the implementation of BS-VI norms, manufacturing cost of automobile sector has increased to meet the new BS-VI emission norms along with the new safety norms.

As auto sales has been impacted due to Covid-19 pandemic, OEMs may face challenge to completely pass on increased cost of production immediately on account of subdued market conditions which may restrict MUL’s average sales realization amidst increasing raw material prices.

Auto sales has picked up gradually post relaxation in lockdown as people prefer personal mobility and pick-up in demand during festive season (October and November).

However, it remained low during 8MFY21 on an YoY basis.

Demand of auto sales is supported by wedding season, recovery of rural demand, higher farm income backed by higher MSPs announced and normal monsoon.

However, economic slowdown and falling household savings are key risks to the pick-up of demand in industry.

Demand for formal, casual, premium, and school footwear has been impacted due to Covid-19 pandemic due to increased time spent at home by consumers.

Moreover, recovery in demand of footwear is gradual given the relatively discretionary nature of the products in the backdrop of likely economic slowdown.

However, demand from the footwear market is expected to remain robust in medium to long term due to growing awareness and acceptability for artificial leather products and the high price differential between synthetic and natural leather.

Further, Mayur Uniquoters Limited faces competition from cheaper import substitutes and from smaller organized players especially in footwear segment and replacement market.

However, Mayur Uniquoters Limited has an edge over its competitors by virtue of being the largest player in the domestic market, having backward integration facility and being approved vendor of leading automotive OEMs which insulate the company from current industry scenario to some extent.

The investing argument for this business is strong in many areas, and would bode well for the investors who understand the opportunity whilst taking stock of the risks, and capitalizing on the recovery seen across the various OEM domains that partner with the company across the world.

This post has been written by Ajay Krishnan for FinMedium Research Desk.

Cover Image: Pinterest

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