Highlights:
- Mold-Tek Packaging is growing at a healthy rate- Foray into FMCG segment to enhance margins
- Capacity expansion to drive volumes
- Strong market positioning with high-teen return ratios- Steady earnings growth available at reasonable valuations
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Mold-Tek Packaging, the manufacturer of plastic moulded containers for paints, lubricants & food, has been growing at a steady rate. The operating margins remain stable despite a surge in oil prices. The business seems on positive progression considering the new client and capacity addition and expansion in FMCG business. The company is staring at an optimistic future and the current valuations coupled with strong business fundamentals make the stock attractive for accumulation from a long-term perspective.
Strong foothold in paints and lubricants industry
Mold-Tek Packaging started the business in 1986 as a supplier to Asian Paints and has seen remarkable growth in the past three decades. The company diversified into other industries through an expansion of product portfolio - paint buckets, lubes & grease packs, ice-cream tubs, retail packs, q-packs and it now caters to marquee clients from the paints, lubricants, pharma and Food & FMCG space. While paints and lubricants remain Mold-Tek’s largest revenue contributor, the clientele list now includes other sector heavyweights such as Unilever, ITC, Ranbaxy and Cadbury.
Foray into the high-margin FMCG business
Mold-Tek’s foray into the FMCG packaging business has been the key revenue driver for the business in recent years. Innovative packaging along with deeper penetration has helped the company scale up this segment at a rapid rate. In FY18, the segment clocked a revenue of Rs 61 crore, that translates to a revenue share of 17 percent for the overall business.
While the segment presents a huge opportunity in terms of size, the company also stands to benefit from higher margins as certain items such ice creams packs generates an EBITDA per kg of Rs 60-70 compared to the EBITDA per kg of Rs 30-35 for the overall business.
Capacity expansion at Vizag and Mysuru
The company has a total manufacturing capacity of around 33,000 metric tons spread across seven plants in India and one plant in the UAE. The company has a strong focus on R&D and was the first company to introduce IML (In-mould labelling) technology in the country. The industry has witnessed a steady adoption of IML products, which now contribute more than 55 percent to Mold-Tek topline.
While the domestic business has been performing well, the UAE-based 3,000 metric ton RAK unit is operating at sub-50 percent capacity utilisation and continues to be a drag on the business profitability. Given the weak demand scenario in GCC, the company has decided to shift 1,200 tons of machinery capacity to India for packaging of ghee and edible oils.
The company is enhancing its capacity by setting up new units for Asian Paints in Vizag and Mysuru. These plants will have a capacity of 3,000 metric tons each and are expected to start commercial production from Q4 FY19.
Healthy operational performance in the first half
During the first half of this fiscal year, the company reported a strong topline growth of 20 percent on the back of 12 percent volume growth in Q1 and 19 percent in Q2. Operating profits came in 16 percent higher as the margins dipped moderately on account of increase in consumables (linked to crude oil and currency devaluation) and new staff addition. While the operating performance was healthy, the bottom line was subdued due to higher depreciation and a sharp jump in interest expenses.
Change in packaging trends to be monitored closely
The packaging industry has witnessed a significant transformation in the historic past from bulky containers to flexible light-weight boxes which offer convenience along with ease of transportation. The industry trends are fast evolving and Mold-Tek needs to keep a track of the latest packaging trends and regulations. Besides, any slowdown in the domestic consumption is bound to have a direct impact on the business volumes as the company derives its demand from the consumer-focused businesses. Further, the inability to pass on the increase in input costs (linked to crude) could have a bearing on the realisations as well as margins.
Secular growth story available at reasonable valuations
We remain optimistic about the long term prospects of Mold-Tek Packaging as the company is an integrated packaging manufacturer with a consistent track record of execution.
The current valuations (FY20 price earnings estimate of 19 times) appear fairly reasonable for entry from a long term perspective considering its strong market positioning, earnings visibility and high-teen return ratios.
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