Krishna Karwa Moneycontrol Research
Shaily Engineering Plastics is a niche player that manufactures high-precision injection moulded plastic components for some of the world's most well-known original equipment manufacturers (OEMs). Exports constitute nearly 70-75 percent of the company's turnover.
Quarterly performance
For Q1 FY19, Shaily reported robust revenue growth on a year-on-year (YoY) basis on the back of a 35 percent increase in volumes.
The company's margins bore the brunt of staff shortage, high power cost, lower realisations (due to a change in product mix) and delays in passing on the impact of high raw material (crude) prices to clients.
What lies ahead?
Swedish home furnishing major
Shaily's 14-year long relationship with a Swedish home furnishing major, should help it capitalise on the latter's aggressive growth plans for the Indian market.
The Swedish client, besides opening its first Indian outlet recently at Hyderabad, is likely to commence operations at its Mumbai-based store in FY20. It has also announced a capital expenditure of Rs 11,000 crore to open 25 new stores by FY25.
By doubling its stock keeping unit count to nearly 38 by FY18-end, Shaily has been able to supply a wider range of products to the Swedish client for the latter's global and Indian markets. Currently, 40 stock keeping units are manufactured for the Swedish client.
In Q1 FY19, Shaily received confirmation of new business from the Swedish client to supply 6 new products (such as cabinets, shoe racks and tables) under the 'carbon steel furniture' category. This number is expected to increase further in due course as the latter's operations gain momentum.
For this initiative, capital expenditure amounting to Rs 40-50 crore has been earmarked to set up a new dedicated plant at Halol, Gujarat. The facility, which can potentially generate revenue of around Rs 100 crore over the next 2-3 years, will be commercialised by September 2019.
Healthcare segment
This vertical is divided into 2 categories - medical devices (insulin pens, dermatological pens) and primary packaging (Shaily licensed the rights to manufacture and supply child-resistant closures and bottles since 2015).
After seeking requisite validations from a US-based medical company, Shaily aims to achieve revenue of around Rs 20 crore from sale of medical packaging goods by the end of this fiscal year.
Competitive intensity in the packaging space is low because of high compliance costs and intolerance of errors. As a result, Shaily gets some leeway on the pricing front to maintain its margins.
Cost control
According to the management, challenges associated with labour and electricity in Q1 FY19 could get resolved in the second half of the current financial year, thus curtailing additional outflows. Consequently, the company's margin profile may improve.
Key risks
At present, utilisation levels at Shaily's healthcare factory remain fairly low due to slower-than-anticipated order offtake from Indian pharma companies. This restricts the overall operating leverage, especially because the healthcare segment constitutes approximately 20 percent of the turnover.
In the near-term, the company's operating margin may be impacted due to the high scale of investments and increased costs (towards hiring new employees and increased spending on overheads) in setting up new capacities for the home furnishing segment.
Should you invest?
Prospects of strong revenue traction in the home furnishing business, capabilities to meet demand for specialised products from FMCG and automobile customers, and long-standing relationships with marquee clientele across segments should bode well for Shaily in the long run.
At 25.8 times its projected earnings for FY20, the stock commands a steep valuation compared to other plastic manufacturers, given its unique investment propositions. In spite of a sharp rally during the course of the past year, we believe there is adequate scope for an appreciable re-rating going forward.
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