Mayur Uniquoters Initiating Coverage Research Report By Edelweiss

Growth story steered by capex and product mix change

Mayur Uniquoters (MUL) is one of the largest manufacturers of artificial leather/PVC vinyl in India with ~37million meters (mm) annual capacity and ~8% domestic market share. During the past 5 years, MUL has reported a strong 20% profit CAGR despite 8% revenue CAGR supported by changing product mix towards higher realisation automotive OEM exports and cost efficiencies. Over the past 7 years, MUL has steadily established its credentials as a quality supplier to marquee automobile players in the US with the management now eyeing the European luxury car segment. 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. Together, the above mentioned initiatives are expected to drive revenue and net profit growth of 22%/25% CAGR respectively over FY18-20 while creating a strong base for robust growth post FY20.

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. MUL is setting up a PU leather unit in Gwalior with an initial investment of INR 150 cr in 2 tranches (INR 90 cr and INR 50 cr) for 2 manufacturing lines of 0.5 mm /month between FY19 and FY21 to capitalize on this opportunity. Each PU line has the potential to generate ~INR 120 cr in topline. Eventually, MUL 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 utilisation 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 FY20.

Mercedes’ nod to open doors to European luxury car segment

MUL’s presence in the automotive segment has, so far, been restricted to the domestic market and bulk carmakers in US & Asian countries. However, the company has now set its sights on entry in European luxury car makers. Companies like Mercedes, BMW and Audi represent a standard quality management system called VDA, meeting which makes an automotive vendor like MUL eligible for supplying to all the 3. MUL is in the midst of a process to get Mercedes’ approval, bagging which will open the doors to other European luxury car makers as well. With one final round of inspection due from Mercedes in May 2018, MUL can potentially generate revenue from FY20. While this will add ~5-7% to the company’s existing top line initially, the uptick potential in the medium term is significant.

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, MUL is looking to expand this unit to keep pace with rising volumes.

Valuation & recommendation

MUL’s strategy of PU expansion and client diversification backed by a a strong balance sheet will mark its future growth trajectory. This, coupled with a core – ROCE (net of cash and investments) of 58%, makes MUL one of the best plays in the industry. We value the company at 20x FY20E EPS of INR33 and initiate with ‘BUY’ recommendation and target price of INR 653/share.