Shaily Engineering Plastics Ltd: Huge China +1 Opportunity!

Shaily Engineering Plastics Ltd

Shaily Engineering Plastics Ltd. (SEPL) was started by Mr. Mahendra Sanghvi (a Chemical Engineer from Wayne State University USA, plastics technologist, and Diploma MBA from Toronto University) 3 decades back.

SEPL sells different types of plastic products that find applications in multiple industries like home furnishing, automobile, healthcare, FMCG, toys, etc.

The commercial production commenced in 1987 with just 2 moulding machines. Today SEPL has 6 manufacturing facilities with 120+ moulding machines.

SEPL derives 63% of its revenue from the export market and 32% of its revenue from the domestic market.

Shaily

 

How is this business done?

SEPL is a contract manufacturer (asset-heavy business) for Global brands such as IKEA, Gillette, etc. Global brands place their orders with Shaily and then Shaily starts producing.

Make-to-order business. Not first produce and then sell business.

Shaily supplies the products on which the Global brands put their stamp and sell the products to the final consumer. So this is a B2B business where success is dependent on the success of the customers.

In the majority of the cases, the customers give Shaily the product design. Shaily makes samples and sends them to the customers for approval. Once the customer approves, Shaily starts the commercial manufacturing of that product. So, products are customized as per the requirements of the customer. (Customized business)

This is a recurring business. Suppose Shaily got Rs. 50 Cr worth of orders from IKEA in 2018, then that order will be repeated every year.

Apart from all the new projects, 100% of the business is recurring in nature.

This is a Raw material neutral business, meaning the increase or decrease in raw material prices is passed on to the customer.

The pass-through is with a lag of three months, so with most of the customers, it is the previous three months’ average pricing, which gets applied to the following quarters.

50% of the raw material is imported which provides a natural hedge to the export revenue. And 70% of the export is Rupee denominated, which further reduces the forex risk.

Shaily uses different pricing strategies with different customers depending on the segment, complexity, value addition, compliance requirements, and capacity utilization.

Shaily works on percentage margins as well as per-ton margins. Also the margin changes with the product mix. Product margins range from as low as 14-15% to as high as 30-40%

 

Characteristics of the business

 

Business Segments

Shaily has a diversified product portfolio across various segments showcasing its capabilities in polymers.

 

Segment 1: Home furnishing

Shaily’s association with the Home Furnishings major (IKEA) dates back to 2004. Over the years, the business has grown multifold with this client and today Shaily is a trusted global supplier for them.

Shaily manufactures finished products for IKEA and manages the entire supply chain of products right from the factory to IKEA stores.
The orders from IKEA grew 5x leading to a revenue increase from 30% of the topline in FY-13 to 56% in FY-18. Shaily has scaled up from 18 SKUs in 2017 to 48 SKUs in 2021.

Today IKEA sources about €1.2 billion worth of plastic globally. Shaily caters to €20 – €22 million of that. (largest supplier is about €150 million)
IKEA has entered into India with 2 stores and plans to take it to 20-25 stores with a total investment of about 10,500 crores over the next several years. Shaily is well poised to capitalize on this upcoming opportunity

 

Expansion

Started construction of a new plastic plant on new campus in Halol. This plant will be operational in the first half of FY2022 and will help them service the new orders especially for the home furnishing major.

 

Why doesn’t Shaily Supply to other Home furnishing majors?

The reason that Shaily doesn’t supply to other home furnishing major is that IKEA designs their own products and Shaily takes that design from prototype to validation to commercialization stage. So the products are very specific to IKEA’s needs. Other large chains are purely dependent on sourcing and selling, they don’t develop their own design. They go to factories which design a whole bunch of range and then source based on their requirement and price.

So the other suppliers take the risk of design development which Shaily doesn’t take and still earns similar margins.

 

Segment 2: Toys division


The toys initiative was started essentially two years ago.

Shaily has received initial orders from 2-3 customers which are among the top five toy companies globally. Spin Masters (12000 Cr) is one of the customers of Shaily.

The sales should start towards the end of 2021 and pick up in the first quarter of 2022. Ramp up has been delayed by a year due to COVID.
Shaily will be using a combination of products such as steel, plastics as well as electronics to make toys. Combination products usually have higher margins as they are complex to make.

 

Potential

As per the management the toys segment can be as big as the home furnishing segment.

Spin Master poses huge potential for growth. The 2-3 customers that Shaily has locked in would be sourcing $4 billion worth of toys out of which 90-95% comes out of China. Even if a small percentage moves out of China, Shaily will benefit. (Q4 FY-20 concall)

 

China

Till the 1980s, Indian toy manufacturers met 90% of the domestic toy requirement. But after the opening of the economy in 1991, Made in China toys began to flood the markets.

India imported around $1.5 billion worth of toys in the financial year 2020. Imports from China and Taiwan account for around 90% of the domestic toy market

Compared with China’s end-to-end integrated manufacturing facilities, India’s small-size factories ensured that there were no economies of scale.

Today China manufactures almost 75% of the world’s toys.

China+ 1 strategy is giving growth opportunities to Indian manufacturers like Shaily.

Global giants whether it is Spin Master, Hasbro, and all other people have been sourcing big-time from China. In fact, Majority of the toy manufacturing happens in China. All of these guys are looking at de-risking themselves from China and moving part of the sourcing out of China. This might benefit some of the Indian players.

Shaily who has experience of working with global majors and has established systems of the supply chain, understanding of logistics in addition to technology and manufacturing, would be able to take advantage of it.

Global toys market size is approximately $ 100 bn. China exported toys worth $ 71.5 bn in 2020.

A 10% shift from China to India will lead to multi fold increase in the Indian toy industry.

Toys have been identified as one of the 24 key sectors under Atmanirbhar Bharat Abhiyan. The government has approved eight toy manufacturing clusters worth Rs 2,300 crore.

 

Rational for getting into the toys business

  • To reduce customer concentration risk
  • Enhanced margin profile from the current level
  • Enhance ROCE
  • Shaily is manufacturing primarily for the export market where the compliance needs are very high, where health safety and chemical compliance are important to making good quality products. Shaily already has the required infrastructure and capabilities to meet the compliance needs.
  • Unlike Pharma business in which you invest and then expect orders in the future, you get the order first in the toys business, and then you set up. So it is a lot less risky than the healthcare business.
  • Also if the toys segment doesn’t work then that facility can be utilized in the home furnishing segment. (Low Balance Sheet Risk)

 

Segment 3: Carbon steel division

Shaily diversified into Carbon Steel Furniture due to

1) the strong relationship that IKEA and Shaily share,

2) consistent performance by Shaily and

3) IKEA’s confidence in Shaily.

And it was IKEA, who asked Shaily to supply carbon steel furniture. Shaily and IKEA have been business partners since the last 17 years. Shaily’s Foray into Carbon Steel furniture is an expansion of this relationship with IKEA.

Steel furniture will enable Shaily to enter into multi-material products. Multi-material products have a very high amount of value add and therefore command higher margins.

IKEA buys more than €2 billion worth of steel furnishings and plastics goods every year. And Shaily has become large enough to cater to a higher proportion of IKEA’s demand.

Given the 4.8x revenue jump from IKEA in the Consumer Plastics segment, the initial Rs. 130 Cr annuity order book in Carbon Steel Furniture can be just a trailer.

 

Current status of the plant

  • The furniture plant got delayed due to lockdown.
  • They started the trial production for 2 SKUs in Q2 FY-21. All the 6 articles will commence by June 2021.
  • The target is to reach 60-70% CU by 2022.
  • The blended margin will slightly improve, as steel furniture is a higher value add business.

 

China

  • Globally steel furniture is mostly sourced from China.
  • China’s raw material cost is far lower than India’s when it comes to steel furniture.
  • IKEA needs to diversify its sourcing. And there is high demand for the product as well.

 

Segment 4: Automotive & Engineering

In the auto segment, Shaily does metal to plastic conversion of certain parts and does only that business where high engineering is required. Apart from this, they do not actively pursue auto.

Shaily exited the Indian auto industry in 2009 coz of low margins. The auto business is the 3rd largest segment currently but in times to come Toys and Steel Furniture will be much larger segments than Auto.

 

Segment 5: Healthcare

Product 1: Drug Delivery Devices

Shaily manufactures plastic pen injections in this segment. They are India’s leading injection moulding company in the medical devices field. The product portfolio includes DPI’s, Pen Injectors, Autoinjectors.

There are probably 8 or 9 manufacturers of insulin Pens in the world, Shaily is one of them. No one in India manufactures pen injectors. Shaily is competing with global peers.

This is a very high gestation period business.

First they develop the pens, then they test it out, then they supply 1-2 lakh pens on trial basis to the Pharma companies for testing purposes. Then there is a gap of 6-9 months post which the commercial supply begins. Shaily has a volume indication of 5 million pens in the commercial phase.

Shaily has been developing these pens since the last 24-36 months. Currently, Shaily is about to enter the commercial phase. And as per the management guidance, the pens will commercialize between 2022 to 2025. This is when we will see massive revenues from this segment.

Shaily is making progress towards the commercialization of devices. Filing of documents with the US FDA is starting from Q3 of FY2021 to Q1 of FY2022.
Shaily has spent considerable time developing intellectual properties (IP) for these pens.

Customers acquired so far are all English Pharma companies. This business itself is for regulated markets, which means the primary target market would be the US.
Shaily is working with two companies in Europe and has tied up with a company to market the products in China as well. As per the management, China can be a very big opportunity. Management anticipates the pen injector business to be at least 2-3x in five years.

 

Product 2: Child Resistant Closures (CRC)

Products: 5 ml eyedropper bottle, 10 ml eyedropper bottle, Cap for eyedropper bottle, Plug for eyedropper bottle, CRC Cap, 120 ml Bottle, 100 ml Bottle, 60 ml Bottle, 40 ml Bottle, etc.

Shaily spent Rs. 30 Cr in this unit in 2015 and the revenue potential from this unit was Rs. 60 Cr. Unlike in the toys and the Steel furniture segment in which management received the orders first and then they had to set up the manufacturing facilities, in the CRC segment management had to invest first and then get their products validated and then get the orders.

Management gave very bullish guidance on CRC business as they had no competition in India. But they couldn’t get enough orders due to which the capacity was way underutilized.

This unit was operating at 15-25% capacity utilization and this facility was ultimately used in the pharma device business.

 

Segment 6: FMCG

Manufactures from razors to stylish casing for cosmetics. A small segment.

 

 

Where is the edge?

Now plastic sounds like a commodity type of a business that anyone can do but within this space, Shaily has tried to differentiate itself from others.

Different customers from different industries have different problems or design requirements. Some designs are straight forward and some are very intricate. So a solid process knowledge is required to cater to the demand of different companies from different industries. And this is where the edge of Shaily lies “Process Knowledge”.

Process knowledge helps you design moulds for complex plastic products. Due to this process knowledge, Shaily is present in a variety of industries like Consumer plastics, Automotive, Personal care, Healthcare, and Toys.

This process knowledge has enabled them to use the same material (plastic) across industries and de-risks their business model.

They take a concept or idea right from thin air and convert it into commercialized product. An idea goes right from design, prototyping, testing, validations, compliance to the final manufacturing of components and assemblies.

Shaily is not the lowest cost manufacturer, nor they have the cheapest labor but they have the capability to fulfill different requirements or solve different problems of customers.

In this journey of the last three decades, they have successfully partnered with large corporate MNCs to meet their unique requirements and introduce uniquely designed and manufactured products for them.

  • P&G: In the early 90’s P&G came to Shaily with a problem that they have their “Vicks containers” leaking because of climate conditions in India. Shaily changed its design to suit adverse climatic conditions in India.
  • Pepsi: Pepsi first launched “Aquafina” with a regular tamper evident cap. The problem that they faced was that the people would use the bottle and then refill it and seal it again. Shaily designed a unique cap incorporating their logo where the ring would essentially break off and could not be resealed.
  • Wockhardt: Shaily Designed and manufactured World’s First 100% Plastic Insulin Pen which they did for Wockhardt in 2005-2006.

There are 200,000 plastic moulders in the country and most people work on a conversion model. Shaily is trying to place itself as a reliable service provider.

Not a typical converter but you are a service provider.

As per the management, the type of products they manufacture may be simple but the way they design the process is very unique to which gives them better margins and makes them competitive. Also, the relationship that they have with Global Brands gives them an edge in acquiring new clients.

 

How did Shaily gain this technical know-how?

Mr. Mahendra Sanghvi, Executive Chairman, spend about 20 plus years in the plastics industry in North America prior to moving back to India and starting Shaily.

So the knowledge of polymer science has come from Mr. Mahindra Sanghvi, who has been in this business since the last 3 decades. And that knowledge has been transferred to the people, engineers, and technical teams of Shaily.

 

Long-term relationship-based business

Over the last 3 decades, Shaily has successfully partnered with many brands to meet their unique requirements and introduce uniquely engineered plastic components.

Most of the relationships with the existing customers have continued since the day those relationships started.

Relationship with GE goes back to about 17-18 years, with Unilever goes back about 20 years, with IKEA (50% of topline) goes back to about 17 years.

As the contract manufacturer performs year on year, the customers gain more confidence and they start increasing the order size. And this gives the contract manufacturer an opportunity to operates on a larger scale as the order size becomes larger.

And this becomes a virtuous cycle. Contract manufacturer performs -> Gets more orders -> Performs again -> Gets more orders -> Performs again……
Over the years Shaily has grown its consumer business multifold by strengthening the relationship with the home furnishing major (IKEA) by constantly adding new SKUs and thus increasing the overall share of the business. Sales to IKEA accounts for 55% of Shaily’s topline.

Shaily would be supplying around 30% to 33% of IKEA’s requirements in the respective product categories.

IKEA asked Shaily to venture into Carbon Steel Furniture (non-core business) and has given them an initial order of Rs. 130 Cr (annuity order). This is a testament to the strength of the relationship that Shaily and IKEA share.

The relationship serves as a competitive advantage that Shaily has gained after years and years of hard work. And this relationship helps Shaily get new clients as well.

Their long-term relationships have helped Shaily to foray into the toys business. They have already received annuity orders worth 80 Cr from the Global leaders in the Toy business.

No client has left Shaily in the last 32 years. It is Saily, who has stopped working with some client either 1) due to lack of growth opportunity or 2) due to lack of margin.

 

 

How does Shaily choose Clients/Businesses?

The focus is to enter into contracts that have margins at par or better than the current business. And the payback period should be 4-5 years. The business should have a good runway for growth.

Shaily is interested in those businesses where there is a need for the customer to utilize Shaily’s capabilities and there is a significant value add.

In 2009, Shaily had a very large portfolio in switchgear. They tied up as a contract manufacturer for all marquee customers like Siemens, Schneider, ABB, L&T.

Due to low realization and margins, Shaily slowly exited out of all the switchgear businesses and entered into areas that will give them scale, value, margins and enhanced their capabilities.

In 2012, Shaily started the consolidation activity. They started exiting those businesses (electrical business) or contracts which were a drag on the working capital, margins, and asset turns of the company.

Major consolidation happened in 2013, which is why we see a drop in revenue from some 140 Cr to 120 Cr. Till 2016 they had exited out of 95% of all low margin businesses.

Shaily internally sets a base margin below which they will not accept any business. And in the new and high growth segments, they look at a much higher margin than they do in traditional business.

Their entry into Pharma device (> 30% EBITDA margins) and Toys fulfill all the above conditions. Both these verticals could play a big part in our growth in the years to come.

 

How do they engage with potential customers?

They try to understand the need of the customers. Determine whether they can fulfill the customer’s requirement or not.

They showcase their historical track record of satisfied customers. Historical performance has been the barometer for engaging new clients.

Shaily makes sure that it doesn’t slip on quality and on deliveries. And ensures that the customer is not stocked out.

 

How should an analyst track this business?

As per my limited knowledge, one should look at Gross and Ebitda margins per ton which will help you understand whether the company is moving up the value chain or not.

Higher product volumes may not always result in higher revenue if the volume growth is from low realization products.

Shaily processes about 100 different grades of polymers ranging right from Rs. 100 per kg to Rs. 4000 per kg. So a lot of it depends on the quality or the type of polymers (product mix) which they have processed.

Try to understand which segment accounts for what proportion of the topline.

Pharma devices is a very high margin business as compared to blended margins. So on the same volumes if Devices account for a higher proportion of revenue then both revenue and margins will be positively impacted.

So sometimes higher volume or higher utilization may not always result in higher revenue.

To conclude, look at the product mix.

 

Growth drivers

  1. Shaily wants to become a multi-material product company (high margins) over time.
  2. Sell more products to existing customers.
  3. New client addition in Pharma and Toys segment.
  4. Reduce client concertation (IKEA is 55% of topline) by increasing revenue from other business segments.
  5. Ramp up Healthcare Business and Toys business which have massive potential and higher margins.

 

Risk

  1. After going through all the historical concall, the main risk I could come up with is the “Delay in execution of new projects”. The delay could be either from Shaily’s end or from the customer end or any approval delays.
  2. Another risk is that of Customer concentration. Shaily derives 50-55% topline from IKEA.
  3. This is a commoditized industry with thousands of players. Shaily needs to continuously evolve it’s processes or enter into newer verticals or strengthen the relationships to stay ahead of the competition.

 

Competition

As per the management, Shaily’s real advantage comes from

  • Innovation of the process,
  • The designing of the moulds,
  • How efficiently they set up the manufacturing process and
  • Consistently delivering on customer expectations regarding quality, delivery security, regarding service level to the customer.

They have different competitors in different business segments because there are not many companies that are into all the segments that Shaily is in.

Shaily’s main competition is from China and Europe.

Competition in various segments:

 

 

1. Medical devices

  • No domestic competition. Major competitors would be based out of Europe
  • Players like Nypro, Ypsomed, BD, Gerresheimer, Owen, Mumford, etc with presence in India that Shaily competes with on a global level.

 

2. Primary packaging

  • Triveni, Shrey, BVG, Berry possibly some competition even from Gopaldas.

 

3. Home furnishings front

  • Competition is global, there is a Chinese company called Hisense, it is a very large conglomerate, it is one of the key competitors in the home furnishing business.
  • Current competitors for the IKEA business in India are companies like All Time Plastics based out of Vapi, Gujarat, and Fancy Fittings based out of Surat, Gujarat.

 

4. FMCG

  • Companies like Creative, SSF, or Alpla.

 

Management Quality

This management doesn’t leave any stones unturned to achieve growth.

Shaily exited out of low margin business (switchgear), and in the last 7 years, they have entered into high margin businesses such as CRC, Pharma devices,  Toys, Steel furniture, etc which shows that management is thinking about long term growth and they want to de-risk their client concentration risk.

Pharma Business was a high-risk call that management took. As there are a lot of regulations in Pharma. And in the pharma business, one needs to invest first, then the products go for validation, and then they receive orders.

But management is now very prudent in taking risks. They set up the Steel furniture plant once they received an annuity order worth Rs. 130 Cr. In the Toys business also they are investing Rs. 20 Cr against an annuity order of Rs. 81 Cr.

So they are taking bets which will NOT destroy the Balance sheet to achieve rapid growth.

They are upfront about their mistakes as well. They have clearly communicated about the labor issues, power failures, inability to scale up CRC business in their conference calls.

Also, management has taken steps to fix the above issues. They have started hiring permanent engineers from CIPET and ITIs, they have hired a new CEO to handle the daily operations, they have fixed their power problems, they are using their CRC facility for Pharma devices.

Despite the labor and power issues their customers have not lost faith in them. Further, IKEA has asked them to foray into Steel furniture.

Over the last 32 years, Shaily has not lost a single client. It is Shaily who has stopped working with a client due to lower margins.

 

Clear Strategy

Shaily has a very clear strategy of not entering B2C business as they are aware that their P&L will not be able to handle this space. Also, they don’t want to come into direct competition with their customers.

Focus is on growing topline, increasing margins, ROCE, doing CAPEX. And reducing past issues.

 

CEO

  • The decision to hire a new CEO shows that they are getting ready for a bigger play.
  • Appointed Mr. Anil Kalra as the CEO of the company. He has very rich experience in manufacturing spanning over four decades and holds a mechanical engineering degree from IIT Delhi.
  • He has been associated with Samvardhana MothersonO.
  • Shaily is struggling with a lot of operational issues whether it is labor, whether it is power, project delay, etc. So the purpose of appointing a CEO is to really bring operational excellence into the organization.
  • Hiring a CEO will free up Mr. Singhvi’s time to do justice to both R&D and business development.
  • The new businesses like toys and pharma have very high potential. So hiring a CEO will allow Mr. Sanghvi to move out of operations where someone like Mr. Anil who has such a strong background in operations and turning around companies can come in help manage that part of the business and allows Mr. Sanghvi to focus purely on strategy and business development

 

Missed Guidance

Management has always given guidance based on the order book, but despite the capacity expansions, the management has missed the guidance in the last 3 years due to internal and external issues such as labor issues, power failures, change in inventory policy of IKEA, project delays, design change problems with some clients, ramp up issues in some verticals (CRC) etc.

All these issues have led to a flat topline in the last 3 years.

In 2016, the management gave a Guidance of $ 100 million in topline by 2020 (2.8x revenue growth) and Shaily was compounding its PBT  at a phenomenal rate till 2018. And due to both these reasons, Mr. Market took the stock to an earnings multiple of 52x in 2018.

Shaily started facing internal and external issues from 2018 onwards, and as a result, the performance was flat from 2018 to 2020. Mr. Market got pessimistic and dropped the earnings multiple to 30x in Jan 2020.

But in the last 2 quarters, the growth has begun and this can be reflected in the stock price as well.

History tells us that Shaily Engineering has been a consistent performer and the last 3 years can be considered as a hiccup. Shaily has massive growth opportunities (Toys, Pharma, Steel furniture) which can put it right back on the growth trajectory going ahead.

 

Industry

Plastic is a very fragmented industry with 30,000 units involved in producing a variety of plastics through various methods such as injection molding, blow molding, extrusion, and calendaring.

Plastics manufactured through the above methods find application in a plethora of industries such as Pharma, Automobiles, Textiles, Electrical appliances, Kitchenware, Home furnishing, Toys, roads, railways and shipping infra, water and sanitation management, irrigation, building & construction, power, transport, retail, etc.

Plastic products are increasingly finding application in all sectors of the economy, replacing other competing products such as steel and aluminum. Also expanding middle-income groups and new applications have led to increasing plastic consumption over the years.

Till 2010 the Indian plastic industry itself was growing at 12-14%.

The plastics processing industry in India has grown at a CAGR of 11% in value terms from 35000 Cr in FY10 to 100000 Cr in FY16. Global Plastic Industry: US$ 569 Billion (2019)

The plastics processing industry in India has grown at CAGR of 10% in volume terms from 8.3 MMPTA in FY10 to 13.4 MMPTA in FY16. And has an installed processing capacity of 30 MMT

China processes 80 million tonnes of plastic (1/3rd of the world) while India manufactures 17-19 million tonnes.

 

Characteristics of the industry

The plastic processing industry is highly fragmented.

  • The top 100 players account for just 20% of the industry turnover
  • 70% of the industry is unorganized
  • It is very difficult for a player to create an edge in this industry.
  • One can create an edge through constant innovation of new products and processes.

 

Financial Analysis

The above is a standalone balance sheet structure as of 2020. Out of the total assets, 67.2% (256 Cr) is invested in the operating assets, which do 1.28x asset turns and generate 17% EBITDA margin. So this is an asset heavy business with moderate margins. One needs to sweat the asset (operate at higher utilization) to improve the ROEs.

 

Past expansions

Shaily

 

Over the years, management has continuously expanded their capacities. This shows that management has the intent to grow their topline. But the topline growth has not been able to keep pace with the asset growth due to internal and external issues that Shaily has faced in the last three years.

 

Working capital

If we look at the last 10 years, WC/Sales ratio is at the lower end of the bracket. One can safely assume a 20% average working capital to sales requirement going ahead.

Shaily

 

 

Cash generation

 

Company generates +ve cashflows, which means that the company doesn’t require Short term debt to fund its working capital. Also the average CFO/EBITDA of the last 5 years is 0.8x which shows that Shaily is able to convert earnings to cash.

 

Debt

Cumulative FCF since the last 10 years is at negative Rs. 110 Cr. And they have paid cumulative dividends worth 19 Cr. And this explains the current debt of Rs. 134 Cr.
A negative FCF means the cash flows that Shaily earns is reinvested in the business further they are taking debt to fund the reinvestments.

Shaily

 

The D/E and ICR has drastically reduced over the years due to growing Networth and EBIT. And once the new business verticals kick off, the ratios will go down further.

 

Profit and Loss

Shaily had a dream run from 2009 to 2018. Revenue compounded at 20% in this period. IKEA business increased 5x from 2013 to 2018. In 2013, IKEA was contributing 30% of topline which increased to 56% topline in 2018.

Post 2018, Shaily faced a lot of internal and external issues as mentioned in the below table.

Shaily

 

 

Margins

The margins were improving till 2016 as Shaily exited out of all low margin businesses. Post 2016, the margins have been stagnant due to no positive triggers. But as and when the new verticals scale up, the margins will improve by few 100 bps.

 

Profitability

Shaily

 

Till 2018 the Pace of PBT growth was very high due to Revenue growth as well as Margin growth. Margin growth was led by the consolidation of business and operating efficiencies.

Stagnant growth in 2019 and 2020 is due to internal and external issues.

Shaily will go back to its growth trajectory once the new business verticals kick-off.

 

DuPont analysis

Shaily

 

NPM: Till 2018, NMP improved due to exit from low margin business, revenue growth from high margin business, and operating efficiencies.

ATR: Asset turns have reduced in the last 2 years due to lower capacity utilization resulting in stagnant topline growth, which was due to the internal and external issues mentioned earlier.

Leverage: Over the years the leverage ratio has reduced due to an increase in the equity base.

ROEs will improve going forward due to

  1. Improvement in asset turns once the new projects kick-off
  2. Improvement in margins by few 100 bps as the new business have better margins

 

 

Orders that will commence in 2022

Carbon steel plant: 130 Cr annuity order.

Toys business: 80 Cr annuity order

Home furnishing business: 120 Cr annuity order

As per the management Pharma devices will increase to at least 2-3x in the next 5 years once the pens get commercialized.

So on an existing topline of Rs. 330 Cr, management can do additional business of 330 Cr + a massive opportunity is Pharma device business (From few lakhs to 5 million pens)

Also if the projects ramp up, then there is a chance of margin improvement by a few 100 bps as the Toys, Carbon steel and Pharma (30% + EBITDA margin) are high margin business. Also, higher capacity utilization will lead to operating leverage. And selling more combination products will give a further boost to the margins.

Currently Shaily has one large segment which is home furnishing but in the next 5 years it could have other 2 equally large segments such as Toys and Pharma Devices.

We have witnessed how IKEA has increased its order size in the consumer plastic segment. The investors may witness the same in the Carbon Steel Furniture segment in the times to come.

Valuation

Shaily

If one gives an exit P/E of 20x, which is way lower than the median P/E of 30x, still one makes an IRR of 22%. And at 20x earnings in FY-23, If the business compounds at double digits, then it will still be a hold.

Shaily

 

Conclusion

Shaily Engineering Plastics Ltd. is run by competent management, which has evolved over the years. Management has taken significant steps in the past from exiting out of lower-margin business to entering into higher growth opportunities like Medical devices, Toys, and Steel furniture business.

Management is very forthcoming in accepting the issues that Shaily is facing and is working towards solving those issues.

They have been able to create an edge through process knowledge and long-term relationships that they share with global companies.

The toys and Pharma business are at initial stages and can be as big as the home furnishing business 5 years down the line. Also, there is a huge China + 1 opportunity in the toy business.

Contract manufacturing business, in general, is in tailwinds. A lot of global brands are looking at India as an outsourcing destination.

Shaily has a small equity base. If the growth comes then due to small equity this can turn out to be a multi-bagger but if the stock doesn’t perform then one will not be able to sell the holding as well.

The stock trades at an expensive valuation coz

1) there is long runway for growth and

2) Recent quarterly performance.

Our allocation strategy

We have taken an initial position in our portfolio at Rs. 950/- and will decide further allocation based on the company’s performance and progress on the new business verticals.

Disclaimer: We are not SEBI registered and views may be biased.

Read us more here.

15 thoughts on “Shaily Engineering Plastics Ltd: Huge China +1 Opportunity!”

  1. Excellent analysis… very detailed and comprehensive! Everything seems to have been taken into account…

    Will certainly look forward to reading more of your analysis.

  2. Samaresh Chatterjee

    Thanks sir for your indept analysis of Shaily’s strength and its present and future cash flow .Your work is exemplary in nature .

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