Mayur Uniquoter’s (MUNI) 2QFY18 revenue/EBITDA growth of 15%/11% yoy was mainly volume-driven as realisations remained largely stable. OEM export volumes grew by 17% yoy and domestic auto replacement volumes by 52% yoy led by some large orders from Maruti. Volume growth in the footwear segment was merely ~1%, but is improving and should accelerate in H2 (helped by soft comps). Firming up of RM prices and rupee appreciation led to a 210bps yoy gross margin contraction; however, 2H should see margins stabilise with (a) RM prices softening since June, and (b) improving demand enhancing the company’s ability to pass through rising costs. We revise our FY18/FY19 EPS estimates by +2%/+1%, maintain our target P/E multiple of 22x and roll over to Mar’19 TP of Rs 505 (from a Sep’18 TP of Rs 460). Revise to ADD.
Volumes continue to recover, to accelerate further in H2: MUNI sold 7.2mn meters of synthetic leather in 2QFY18 (2QFY17: 6.3mn meters), implying volume growth of 15% yoy. Capacity utilization also improved to 78% (vs. 71% in Q1, ~65% in FY17). Growth was mainly led by OEM exports and domestic auto replacements which grew 17% and 52% respectively in volume terms. US auto OEMs are growing well and the company has bid for many projects with domestic OEMs, which should come through as per management. The footwear segment has started to show positive growth (~1% in 2QFY18) and management expects it to improve further in 2HFY18 (soft comps will help).
Margins hit by higher RM prices, but to normalize ahead: Prices of PVC resin, the key raw material, rose by 5-6% in 2QFY18, but adverse market conditions constrained MUNI from passing this on to customers. Further, appreciation of rupee by ~4% yoy led gross margins to contract by 210bps yoy in 2QFY18. We think margins will stabilize ahead as RM prices have softened since Jun’17 and management expects to pass on rising costs in an improving demand scenario.
PU plan construction to begin on 29th Nov, but Mysore plans to face delays: The PU plant construction shall begin on 29 Nov’17 with operations likely to commence by Dec’18/Jan’19. However, for the Mysore facility, it may take another three months to get the land title due to some government-led delays.
Revise to ADD with a rolled over Mar’19 TP of Rs 505: A recovery in FY18 is happening on expected lines, and margins are also likely to stabilise going forward given the recent softening trend in RM prices. We maintain our target P/E multiple of 22x and roll over to Mar’19 TP of Rs 505 (from a Sep’18 TP of Rs 460). We revise our rating to ADD ( from LONG) as the recovery largely seems to be priced in.
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