This article provides in-depth fundamental analysis of Mold Tek Packaging Ltd, the market leader in rigid plastic packaging in India.
I would like to thank Vivek Choraria, a reader of this website, for spending time in analysis of Mold Tek Packaging Ltd, interacting with the company and sharing the results with the readers and author of www.drvijaymalik.com. I appreciate the time and effort put by Vivek and the kind gesture of sharing it with everyone else.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Mold Tek Packaging Ltd Research Report by Reader
Q: Hi Dr Vijay,
I have forwarded you below the chat, which I had with the management of Mold Tek Packaging Ltd by email.
- On the surface, the management is guiding for a steady 25 % topline growth for at least the next three years with improving margins.
- Doing my research, I found that Mold Tek Packaging Ltd was awarded the SME of the year in 2013. I am not sure if that is reason enough to get excited.
- Mold Tek Packaging Ltd has built in-house robots for the IML packaging and seems to be the front-runner as far as this innovation is concerned.
- Major portion of its revenues has been coming from the paints and lubricants segment but in their last annual report, Mold Tek Packaging Ltd has indicated that it would be pushing hard to get orders from the FMCG sector, trying to derisk its revenue sources.
- Mold Tek Packaging Ltd did about INR 9 crores in net profit in FY2014 and looks set to deliver INR 17-18 cr of net profit in FY2015 and maybe about INR 23-26 cr in FY2016.
- The stock is trading at 20 times its 12 months trailing earnings and has run up a lot over the past one year.
- I started buying it from INR 80 but my average cost price must be about INR 110.
- ROE of Mold Tek Packaging Ltd is about 20%.
- It is a consistent dividend paying company and as such, I cannot find anything fishy about it.
- Mold Tek Packaging Ltd is planning to raise about INR 60 cr via qualified institutional placement (QIP) or fresh issuance of shares. I fear they might dilute equity at very early stage of growth.
Let me know what you think about it. It would be great if you could cover the stock in detail in your blog.
Below is the reply I got from the Investor Relations (IR) team of Mold Tek Packaging Ltd:
With reference to your below questions, we wish to clarify the following few points:-
1) For the next financial year 2014-2015, we are expecting to achieve turnover of Rs.350 to 360 Crores from Rs. 285 Crores last year.
2) With additional orders from customers and new Business, new additions are planned to meet.
3) Currently, plants are operating at 80% capacity on 3-shift basis and progressively there is increase in demand for Co’s products.
4) Raw material (RM) cost has very little impact as end prices are tied up with RM prices. However increased IML sales and capacity utilization is upward margins progressively.
5) We hope to continue to grow around 25% CAGR over the next 3 years.
This is for your information.
Mold Tek Packaging Ltd
With Reference to your below mail, please find our reply for your reference.
Q1 – What is the scalability of our business model? Is it possible to move into a different orbit as far as revenues and profitability is concerned? Over the next say 5 years, is it possible to grow revenue by 3-5x.
Ans:-The Company is planning its new products in the line of FMGC sector and to expand its business operations by setting up plant in UAE which may result in robust growth and profitability.
Q2- Can the company have some degree of pricing power because of the IML innovation and take advantage of the falling raw material costs? That is important to get a higher valuation than our peers.
Ans: The IML will improve on bargaining power and may result in cost reduction overall to the company which will seek better margins in the future.
Q3 – Will the company keep diluting equity in order to fund expansion or is there any plan to use internal accruals to fund expansion?
Ans: This is the first time in the 18 years we are raising funds from institutional investors for the purpose of expansion plans for its existing and new projects, augment of working capital, acquisition of new business and projects of the Company.
This is for your Information
Mold Tek Packaging Ltd.
Dr Vijay Malik’s Response
Thanks for writing to me! As mentioned above, I appreciate your efforts for analysis of Mold Tek Packaging Ltd and the interacting with the company for clarifications.
Let us first analyse the past financial performance of Mold Tek Packaging Ltd.
Financial Analysis of Mold Tek Packaging Ltd:
Mold Tek Packaging Ltd has shown consistent sales growth of about 20% with stable operating profit margins in the range of 10-12%. It validates the information provided by the company that the contracts with customers allow it to pass on the increase in raw material costs to customers. The rating rationale of Mold Tek Packaging Ltd by credit rating agency, ICRA Ltd, also mentions the same:
“The ratings are however constrained by the moderately high working capital intensity of operations; Ltd pricing flexibility due to competitive pressure, although the company’s pricing terms with major customers allows for partial pass through of volatility in raw material costs;……”
Maintenance of operating margins by passing on increase in costs is a good sign for any potential investment opportunity.
However, net profit margin (NPM) of Mold Tek Packaging Ltd has been declining over the years. The main reason behind it seems to be increasing interest costs year on year, which is evident from the increasing debt levels of the company over the years.
Over the years, the tax payout ratio of Mold Tek Packaging Ltd has been near corporate tax rate in India, which is a good sign.
Operating Efficiency Analysis of Mold Tek Packaging Ltd:
Mold Tek Packaging Ltd has been able to convert its profits into free cash from operations, which is reflected by cumulative CFO for last 7 years (2008-14) being higher than cumulative PAT over the same period. PAT for last 7 years is INR 47 cr. whereas the CFO during the same period is INR 88 cr. It indicates that the profits are not being stuck in working capital as reflected by inventory turnover and receivables days.
Inventory turnover ratio and receivables days of Mold Tek Packaging Ltd have been almost stable over the years. Inventory turnover ratio has been stable within the range of 9.8 to 10 over the years. Receivables days are stable within the range of 52-55 days.
Fixed asset turnover ratio of Mold Tek Packaging Ltd reflects that it has not been able to improve its efficiency levels over the years. Net fixed assets turnover has declined from 4.5 in FY2011 to 3.6 in FY2014, indicating that the operations are becoming more capital intensive as it grows in future.
Declining fixed asset turnover indicates that the company needs to put in additional funds to maintain its sales growth. Mold Tek Packaging Ltd has been utilizing both equity and debt as additional sources of funds to meet its funds requirements.
Mold Tek Packaging Ltd has raised funds from equity in the past. Promoters’ stake has been consistently falling over the years. Promoters’ stake has reduced from 44.87% in June 2010 to 34.96% in March 2015. About 12% of promoters’ stake is pledged to lenders at March 31, 2014. Low promoters’ stake with consistent declining level is a worrisome sign. An investor should be cautious while investing in such a company.
Mold Tek Packaging Ltd has been raising funds from debt as well to meet its cash requirements. Debt levels have been increasing year on year. Total debt of Mold Tek Packaging Ltd has increased from INR 29 cr. in FY2009 to INR 66 cr. in FY2014.
Debt to equity ratio is high at 1.2 levels in FY2014. Increasing debt levels have been taking its toll on profitability in terms of increasing interest costs and thereby decreasing profitability.
There is another strange pattern noticed in the financial details of Mold Tek Packaging Ltd. It is clear to us by now that the company operates in a capital-intensive business, which needs capital over and above what can be generated by its profits. Such companies usually retain all their earnings or payout minimal dividends so that the most of the profits can be used to meet the cash requirements of future growth. However, it seems that Mold Tek Packaging Ltd has been paying out 30-50% of its profits in dividend each year, which is very high considering a capital-intensive industry.
Effectively, Mold Tek Packaging Ltd is using profits to pay dividends and equity & debt to fund its growth. An investor should be cautious while investing in company showing such behavior especially when they have low promoters’ stake. It might be possible that going ahead interests of promoters and shareholders might not remain aligned.
You as well as the company have mentioned that they are trying to diversify their revenue sources by selling to new industries like FMCG and geographies like UAE. The impact of these developments as well as the results of innovations like robotic IML packaging remains to be seen. An investor should keep a close watch on these developments.
As per your mail, the company has mentioned about achieving sales of about INR 350-360 cr. However, during April-Dec 2014, Mold Tek Packaging Ltd has achieved sales of about INR 225 cr. Whether it is able to achieve its promised sales target remains to be seen. However, I would not rely a lot on the growth estimates provided by any company. Companies have the reputation of missing targets most of the times.
Margin of Safety in the market price of Mold Tek Packaging Ltd:
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, Mold Tek Packaging Ltd seems to be a company growing at a descent pace while maintaining its operating profitability margins. However, increasing interest cost of ballooning debt due to capital-intensive operations and declining asset turnover is affecting its net profitability. Mold Tek Packaging Ltd is able to convert its profits into cash; however, its cash requirements are not met through its profits. Therefore, it is relying on debt as well as equity to fund its operations leading to high leverage (debt to equity ratio). Mold Tek Packaging Ltd has been distributing a significant portion of its earnings as dividend, which comes as a surprise. Promoters’ stake has been declining consistently over the years, which is a cause of concern.
An investor should keep a close watch on its debt levels, promoters’ shareholding & their share pledge levels along with the outcomes of geographical & customer diversification as well as results of new innovations.
These are my views about Mold Tek Packaging Ltd. However, you should do your own analysis before taking any investment related decision about the company.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
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Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.