Mold-Tek Packaging - A good FMCG Proxy

Mold Tek Packaging is a Hyderabad based company which was established in 1986. The company is into manufacturing of high quality plastic packaging products. The company has 6 plants and 3 stock points across India (As per Company Website). The capacity as on 2013 stood at 25,000 TPA. The market cap of the co. stood at Rs. 88 Crores as on 1st August, 2014.

Current Valuations:
CMP: 78.5
P/E: 6
Dividend Yield: 3.17%
Book Value: Rs. 51.47

There are a few downsides to the stock at the first sight itself:

i) High Public Shareholding:
Total Public Shareholding is 57.55%; 4.47% held by FII's; 24.18% held by big individual shareholders (Nominal Value excess of Rs. 1 Lakh); 20.89% held by retail shareholders (NV upto Rs. 1 Lakh)

ii) Low Operating Profit Margin:
The OPM stands at just 10% and the NPM is as low as 3.5%

iii) Higher Debt:
Debt is significantly higher at Rs. 66 Crores against the Reserves of Rs. 41 Crores

Positives:

i) Cyclical:
Auto Ancillaries benefit from a booming Auto market, the ancillary stocks are left undervalued despite the Auto stocks performing excellently. But a time comes when the ancillaries catch up and reach fair valuation. Similarly, FMCG stocks have rallied and reached a good valuation. The packaging sector is directly related to this sector apart from other consumer goods sectors. We feel that packaging stocks will give good returns in the coming times. Mold-Tek is expected to benefit from this. This is a stock to ride the FMCG growth story through an undervalued proxy.

ii) Growth of In Mould Labeling (IML):
In-Mould Labeling is a process by which the label is positioned directly into the plastic mould by a robot. The plastic mould infuses with the label and the end product is ready in a single process instead of extra work for labeling or printing. This process of late is catching the fancy of many companies such as Cadbury, Heinz, Amul, etc. Mold-Tek is the market leader in this field and significantly ahead of other competitors. The company expects more companies to shift to this form of packaging and it's dominant position could help it capitalize on this phenomenon. The management has emphasized that IML will remain it's focus and the company will tilt fully into IML in the coming years. Before IML, the company had little exposure to the rapidly growing FMCG market in India. As indicated in the 2011-12 Annual report, the company had initially imported 3 robots for IML from Taiwan but later forayed into making it's own robots (10 in 6 months)

iii) Growing Revenues:
From Rs. 83 Crores in March '08, the Net Sales of the company has increased to Rs. 255 Crores for the year ended March '14. The net profit during this period has increased from Rs. 3.31 Crores to Rs. 9.07 Crores.

iv) Dividend Payout:
The company has maintained a good dividend payout from March '08. For FY 13-14, the dividend payout was 48%. The company has maintained an average dividend payout of 48% over the last 6 years. The company is available at a good yield of 3.1%

Negatives:

i) High Competition from China:
Plastic products in India are facing and will continue to face high competition from Chinese plastic products flooding the Indian markets.

ii) High Interest Costs:
At Rs. 8 Crores, the interest cost of the company is hampering it's NPM. The management has not given any guidance on it's plans of debt reduction. The debt is increasing, though this can even indicate heavy investments in the business. The company is still in a good position to service it's debts, so this is not a major issue. Still, it is against our comfort zone of advising low debt companies.

Overall, the stock provides a good opportunity for the coming 2 years. The margins and debt do hamper the overall prospects, but the company is significantly undervalued when compared to the growth it is showing.

FINANCIALS:

The company's net sales are growing at a 5 year CAGR of close to 16%. Assuming a 16% growth for FY 14-15, the Net Sales work out to be Rs. 295 Crores with a Net Profit of Rs. 14.75 Crores (5% NPM). Assuming a dividend payout of 48%, the dividend further works out to roughly Rs. 6 per share (After DDT). The company has an equity of Rs. 11.3 Crores. The stock is trading at considerably cheap valuations and one can expect a good rise in the coming days. It even is providing a good yield and we see it reaching 150 levels in the coming 2 years. One can allocate ~3% of his portfolio to this stock.