Weekly Tactical Pick | Shaily Engineering Plastics: Strong revenue visibility makes it a great buy

This week we have chosen Shaily Engineering Plastics as our weekly tactical pick.

A differentiated business model, strong revenue visibility and a steep price correction from its 52-week high makes it a compelling buy. Marquee investors such as Ashish Kacholia and Mukul Agrawal also own stakes in the company.

Shaily is a high-precision polymer processing player that derives 70 percent of its sales from exports. It primarily manufactures boxes, tables, stools and other kitchen goods for a Swedish home furnishing major (SHFM). The company caters to globally renowned players in the pharmaceutical (packages, medical pens), automotive (high-grade plastic components used in vehicles) and FMCG (packages for products) space.

The SHFM is scaling up its operations in India after opening its first store in Hyderabad in August 2018 and has committed to an investment of Rs 10,000 crore by FY25. It has been associated with Shaily for over a decade and contributes nearly 50-60 percent to its topline annually.

To meet the increased demand for new product variants from the SHFM, Shaily is likely to increase its stock keeping unit (SKU) count from the current 40 levels. In the home furnishing segment, new orders worth Rs 10-15 crore from another global department store may have been executed in Q3 FY19.

In the healthcare segment, utilisation levels at the packaging facilities should rise as new orders start to come in. Medical devices for varied applications (insulin and dermatological pens) may also be launched from time-to-time.

The use of plastics in manufacturing specialised auto components has been on the rise of late. Since FMCG is a consistent growth story, demand for packaging products is expected to remain robust.

Operational difficulties faced in H1 FY19, which resulted in higher employee and power costs, will get resolved in H2. From FY19 to FY21, the management aims to repay Rs 65-70 crore of its long-term debt. These measures should aid net margin expansion.

However, volatile crude price movements could impact short-term cash flows and margin. Delays in bagging orders from the clients’ side could limit the scope for operating leverage.

Shaily trades at a reasonable valuation of 18 times its FY20 projected earnings.