Self-made entrepreneurs are touchy to questions about their ability to run a business, especially Suresh Kumar Poddar, who has made a mark in the artificial (vinyl) leather business with Mayur Uniquoters. When an analyst interjected during an earnings concall asking: “Sir, the risk is that if you do not succeed in breaking the high-end stuff over time…” Poddar was visibly irked. He replied, “I am not a fool for investing so much money [in the high margin businesses]… I am 100% confident [of its success].” The analyst’s query was related to Mayur Uniquoters’ efforts in creating a premium product in its new product category, PU (polyurethane) leather.

For Poddar, the query was akin to questioning his judgement about a business that he has grown. The Rs.10-billion small-cap was an investors’ darling over FY10-FY18, when it hit an all-time high of Rs.552, generating around 52% CAGR during the period. For FY10-FY20, the compounding was lower but still impressive at 23%.

The analyst’s question may have been justified since the company has been known for its best-in-class polyvinyl chloride (PVC or simply vinyl) leather, which it supplies to the who’s who of the auto and footwear industry. These include clients such as MG Hector, Maruti, Tata, Mahindra, Suzuki, Bata, Paragon, Relaxo and many more. PVC accounts for 61% of its sales and the company is constantly adding new clients.

Even when the pandemic struck, Mayur Uniquoters started supplying vinyl to Bajaj Auto and struck deals with Hero Motocorp and Hyundai. “Its sheer size (six production lines — five Italian and one Chinese) and focus on quality have helped Mayur in positioning itself as a favoured supplier to OEMs in automobile, footwear and leather accessories segments,” mentions Anubhav Rawat, analyst, Monarch Network Capital.

New frontiers

In 2014, the company started exploring the opportunity in the PU space (artificial or synthetic leather), a market that was entirely dependent on imports from China. This softer and lighter material with higher tensile strength than conventional leather is unaffected by sunlight; thus, generating great market appeal.

Poddar realised that the absence of a domestic player was a huge opportunity but setting up the PU plant wasn’t an easy task. It went on stream only in January this year. “The delay was largely due to the fact that the promoter, given his hands-on approach, was very keen to consolidate all operations within his home state of Rajasthan,” points out Sumeet Nagar, MD, Malabar Investments, one of the biggest institutional shareholders in the company. After scouting for multiple locations in Rajasthan, they eventually set up the plant at Morena in Madhya Pradesh.

In the meantime, weak footwear demand and a bruised auto sector started hurting the business from FY18 onwards. Sales began to stagnate — from Rs.5.69 billion in FY18 to Rs.5.91 in FY19. This was followed by de-growth in FY20 to Rs.5.28 billion (See: Steady decline).

However, Poddar is optimistic that he can cash in on the Rs.35 billion opportunity now that the plant is operational. “PU is better than PVC, but the cost is high. But companies such as Tata Motors and Mahindra are using material that is 3x more expensive in their SUVs,” he explained to analysts during the concall. With many global players looking to reduce their dependence on China, Poddar hopes that they will also make a mark in the exports market. 

Trustline Holdings founder N Arunagiri, who holds the stock in his PMS fund, agrees. “Besides the domestic play, Mayur Uniquoters can also make the most of the current global scenario, where it can export to global OEM players looking for sources excluding China,” he points out. After all, the company is already a strong global player with exports accounting for 30% of its business, where it supplies synthetic leather to markets such as the Middle East, USA, Colombia, South Africa, Europe and others, through its three overseas subsidiaries.

With commercial production kickstarting this quarter (Q2FY21), it is the most opportune time due to the anti-China sentiment. Many believe this segment will be a growth engine in the coming years. “Given the tailwind, Mayur can easily achieve over Rs.2.5 billion sales from the PU business in two to three years,” believes Arunagiri. Concurring with him, Nagar says, “It’s clearly a stronger play for Mayur where it can easily compete with China as it has the advantage of lower freight costs and zero duties.”

To ensure that it has an edge over China in the artificial leather business, Mayur has been aggressively engaged in backward and forward integration. “We have installed 35 circular knitted machines (semi or fully automated knitting machines), from the best manufacturers in Europe and Japan,” mentioned Poddar. Next up is a PU resin plant by investing in PU chemicals (isocyanate and polyol). “This will help in keeping the cost low, fast production and quality control,” adds Poddar. The fabric occupies volume share of 80% in China’s footwear industry, where 16 billion pairs are manufactured annually. Meanwhile, this volume share is meagre 5% in India, where 2.1 billion pairs are manufactured every year, thus allowing the company to realise the material’s market potential.

The company has guided annual capex of Rs.400 million-500 million, which will include investments in the PU foam unit, PU fabric unit and dyeing unit. “Poddar is usually conservative, but the fact that he is spending shows his confidence, which is a good thing,” feels Nagar.

Margin play

Even though the overall economic scenario has hurt the company’s topline over the past two years, its profitability has remained intact. That’s mostly due to transforming its product mix in favour of high-margin segments such as export of auto original equipment (OE) products, which has increased from 16% in FY12 to 34% in FY20 (See: Foreign hand). Arunagiri says that realisation in this space (Rs.480/metre) is 3x that of domestic OE segment (Rs.150/metre).

The company is trying to get more European OEMs on board. After talks that lasted more than five years, Mayur Uniquoters bagged a deal with Mercedes. “With this deal and BMW’s approval in the pipeline, the company has more levers to expand margin in the coming years to reach expected realisation of over Rs.500-520/meter in this segment,” feels Arunagiri.

Similarly, replacement is a high-margin segment, whose contribution has increased from 9% to 24% over the same period. At the same time, low-margin footwear segment has seen its share fall from 60% to less than 34% in FY20. “This extraordinary focus on value-added synthetic leather (premiumisation) resulted in 900 basis points operating profit improvement to peak margin of 25.8% during FY18,” adds Arunagiri. Though it eased to 23% in FY20, it is expected to bounce back as things stabilise (See: Collateral damage).

Along with the tapering topline, the stock has de-rated from its peak multiple of 22x FY18 earnings to 12x FY22 earnings. “With growth cycle turning in its favour, we expect the valuation multiple to move up to its historical level in the coming years,” feels Arunagiri. Similarly, Nagar is also bullish on the stock. “While it was a screaming ‘buy’ a couple of months ago, the stock continues to trade at reasonable valuation,” he says. Based on free cash flow projections, Arunagiri believes the intrinsic value of the stock is over Rs.450, compared to its current market price of Rs.238 (on October 23).