INSUBCONTINENT EXCLUSIVE:
Nirmal Bang Securities has a buy call on Mold-Tek Packaging with a target price of Rs 450.
The current market price of Mold-Tek Packaging is
Rs 298.
Time period given by the brokerage is one year when Mold-Tek Packaging price can reach the defined target
Investment rationale by the brokerage:Robust growth expectations from India business: The management reiterated its guidance of 15 per cent
volume growth for FY19 and more than 20 per cent for the next couple of years in respect of India business
Over the next five to seven years, MTEP aims to achieve Rs 10,000mn in revenues led by strong growth across segments
Both the new dedicated facilities for Asian Paints (Mysore and Vizag) aggregating to 6,000tn will start contributing meaningfully to
revenues from FY20 onwards wherein 50 per cent capacity utilisation is expected
The response from Asian Paints has been better than expectations as MTEP has already received orders which are being executed from existing
facilities till the time new plants come on board
We believe that 50 per cent capacity utilisation will contribute to around 10 per cent of incremental volume growth
Asian Paints has shifted to Heat Transfer Labelling (HTL) which enjoys a similar margin as that of IML and hence it will not be
Robust growth of Food FMCG (FF) segment will continue with new orders and an extremely encouraging response for generic containers and
Q-packs for ice-cream, edible oil and ghee containers
The tool room is running short of capacity due to robust demand and therefore currently 25 per cent-30 per cent of the generic moulds have
It was discussed that MTEP is going to expand the capacity for FF in Hyderabad and also new plant dedicated for FF would be set up in
2HFY20.Capex guidance for FY19 has been given as Rs.520mn and around Rs.300mn-Rs350mn in the next few years.
Improved performance likely
from RAK unit from 2HFY19: On the RAK facility of 3,000tn, it was informed that the delay in achieving break-even was because of
cancellation of one of the orders from Iran, lower-than-expected response for paint and lubricant divisions and overall economic slowdown in
However demand for FF has been very strong and MTEP has shifted its core focus on the FF segment at its RAK plant wherein some of the
machinery and related equipment have been relocated there
Currently, the facility is operating at 35 per cent of its capacity whereas the plant will achieve breakeven at 50 per cent utilisation
The management indicated that MTEP is in the process of achieving a big order from a FMCG company which can take the capacity utilisation of
RAK plant to 70 per cent-75 per cent directly.
Rising IML share will increase operating margin: MTEP has cost-plus contracts with all
clients and hence it does not bear the risk of raw material inflation
Also, with the new capacities coming on board, the product mix of the company is going to change in the medium term
Asian Paints - for the new capacity - has shifted to Heat Transfer Labelling (HTL) which enjoys margin similar to that of the IML segment
and hence will not be margin-dilutive
Also, a rising share of FF will continue to improve the share of IML and hence will uplift the margin profile of the company
The share of IML in volume terms in FY18 stood at 52 per cent and the same in value terms was 58 per cent
The same in FY17 was 47 per cent and 49 per cent, respectively
We expect blended EBITDA/kg to improve from Rs33 in FY18 to Rs38 by FY20E
Also, as currently the RAK division is incurring losses, it is expected to achieve breakeven in the current financial year
Hence, from next year onwards, blended margins will improve further to that extent.
Outlook and valuation: Considering the strong demand
outlook and capacity expansion plan, we continue to remain bullish on the long-term structural story of MTEP
It is on track to become a decent-sized FF IML packaging player and we believe that there could be an upside to our estimates
We expect volume/sales/EBITDA/PAT estimates to post CAGR of 14 per cent/18 per cent/23 per cent/26 per cent, respectively, over FY18-FY20E
Therefore, we have retained Buy rating on MTEP with a target price of Rs450 based on FY20E EPS and P/E multiple of 25x, indicating an upside
of 50 per cent from the CMP.
