A combination of engineered/specialised product lines, growing order book from marquee clientele and robust fundamentals bodes well for the company.
Shaily Engineering Plastics, a company under our coverage purview, is a manufacturer of high precision injection moulded plastic components. The company is an original equipment manufacturer for domestically and globally-renowned companies across sectors such as home accessories, pharma, automotive and FMCG. Approximately 70-80 percent of the yearly turnover is from exports.
Increased order inflows from the home furnishing segment, ramp-up of capacity utilisation levels in the pharma packaging division, initiation of medical device supplies, addition of product verticals in the FMCG arm, and growth in the auto ancillary domain are among the key tailwinds that may augur well for Shaily in the long run. Despite the steep valuation, investors may want to keep it on their radar.
In FY18, the company registered robust year-on-year (YoY) top-line growth on the back of order traction in the home furnishing, medical devices, FMCG, auto ancillary and lighting space. However, lags in connection with passing rising crude prices to customers and changes in accounting policies impacted margins.
The road ahead
Home furnishing segment
In FY18, Shaily commercialised new orders worth Rs 60 crore to the Swedish home furnishing major (SHFM), that contributes nearly 50-60 percent to the company’s revenues every year. Two more products with a revenue potential of Rs 11 crore per annum are being developed for the SHFM. The supply for these will commence from H2FY19, thus aiding top-line growth.
Utilisation levels at Shaily’s pharma packaging facility are expected to go up (from 5-8 percent in FY18) as orders from Indian medical companies gain momentum. Consequently, sales are anticipated to grow at a faster pace than other divisions, albeit on a low base. Additionally, since gross margins in this segment are better than home furnishing, operating leverage can be derived early on too.
Medical devices (a sub-segment within the pharma segment)
Conclusion of consolidation at Shaily’s healthcare manufacturing facilities could result in better operational efficiency by way of cost savings. Besides, the company has bagged orders for two new medical pens and is also developing a medical applicator. The latter will get commercialised over the next 7-8 months, while the former will be launched in a staggered manner starting Q2FY19.
The company will incur capital expenditure amounting to Rs 30-35 crore each in FY19 and FY20. Apart from maintenance capex, some funds may be used to increase the count of moulding machines from 109 currently. Capex of Rs 47.5 crore expended in FY18, including Rs 30 crore on capacity expansion, should also start yielding higher revenues from FY19.
Since most of Shaily’s contracts include a ‘pass-through’ clause, risks associated with rising crude prices may not affect the company materially. However, there is a lag of a quarter in terms of receipt of the extra costs billed to clients. Similarly, for foreign exchange risks in relation to rupee’s depreciation versus the dollar, the company is adequately hedged and foresees no major impact on its financials.
Can Shaily’s ambition materialise?
Shaily reiterated its target of achieving $100 million revenues by March 2020. The plan would entail fixed asset turns of roughly 2.5 times the projected gross block by FY20 end, as against the present number of 1.97 times. Though we don’t have any doubts regarding the execution capabilities of the company, in our view, this could be a challenging task given the revenue visibility scenario in the near-term.
Firstly, the SHFM is yet to launch its Indian stores. Secondly, incremental orders of Rs 10-11 crore per year from the SHFM will accrue only from H2FY19. Thirdly, the pharma packaging segment’s capacity utilisation levels are far from what was originally envisaged. And lastly, the contribution of fast-growing segments such as auto and FMCG is not big enough to move the revenue needle noticeably.Should you invest at current levels?
Despite the roadblocks, Shaily has all the right ingredients to outperform its commoditised plastic counterparts in an environment where high crude prices could lead to a contraction in margins for the latter. A combination of engineered/specialised product lines, growing order book from marquee clientele, and robust fundamentals bodes well for the company.
Shaily has re-rated sharply over the last 12 months in tandem with a good set of numbers over the quarters and favourable investor sentiment. In spite of the rally, it is 9 percent down from its all-time high that was seen less than a month back. Nevertheless, at 27.1 times FY20 estimated earnings, the valuation appears expensive. Any significant correction may provide opportunities to enter the stock.Moneycontrol Research page