Mold-Tek Packaging Ltd (MPL) (NSE: MOLDTKPAC, BSE: 533080) is a pioneer and innovator in the commoditized rigid packaging segment. The company transformed itself from a mere ‘polymer converter’ to a niche technology-driven ‘in-mould labeller.’ The investment thesis on MPL is based on its durable economic moat due to its superior in-house technology, cost advantage it enjoys from being fully integrated and long-term business relationships with clients. MPL derives its revenues from Paints, Lubricants and Food and Fast-Moving Consumer Goods (FMCG) segments.

Why we like Mold-Tek Packaging

Nascent Market – Growth in rigid packaging industry is mainly going to come from four main sectors – paint & lube industry, food & beverages, packaged food industry and pharmaceutical industry. In-mould labelling (IML), although expected to be the fast-growing segment, the technology still remains niche. IML currently accounts for only 2% of total global labelling market, while pressure-sensitive labels and glue-applied labels account for 39% and 36%, respectively. Even if India’s IML market is at 10% of European market size (~$1.5 billion), it works out to be $150 million i.e. ~Rs10 billion opportunity where MPL stands tall over its competitors who are still at a very early stage. Food and FMCG is going to be key driver going forward for IML labelling. Environmental benefits and zero human touch are the two key factors driving the demand for IML labelling. For food & FMCG industry where hygiene is of utmost importance, zero-human touch makes IML an apt method for packaging. IML offers better aesthetic value than other traditional methods such as screen printing and heat transfer labelling.

First Mover Advantage – MPL was the first company to introduce IML technology in India. The management realised early on that there was little product differentiation left in pail manufacturing and it would not be able to retain any pricing power especially during the downtrend in the commodity cycle. MPL’s management was able to convince its existing clients in lube and paint industry to move to IML technology from screen printing and heat transfer labelling (HTL) technology. The management also realised the need for cost economies and thereby decided to go for backward integration. MPL is the lone packaging company in India to go for backward integration.

Innovation at its core – Over the years, MPL moved from its commoditised business of screen printing/HTL for paint and lube industries to more specialised niche business of IML. MPL is among the few players in the rigid plastic packaging industry to have an in-house tool room facility. It has developed a centralised tool room to design, develop, manufacture and maintain the moulds and robots which are used for manufacturing a variety of products of different sizes, shapes and models with various decoration technologies. MPL imported two robots from Taiwan way back in 2010-11. After getting acquainted with robot technology, MPL started making in-house robots in 2013 and thus became the only packaging company in the world to manufacture in-house robots.

Durable Competitive Advantage – MPL’s competitive advantage is durable in the long run on account of its superior in-house technology, cost advantage that it enjoys because of backward integration, long-term relationship with its blue-chip clients and smart business strategies adopted by the technocrat management. MPL operates in the rigid packaging segment where most of the businesses are commoditised. The industry is capital intensive, requiring companies to keep adding capacity to maintain their growth rate and thus leaving little room for margin of error. Despite all these challenges in the industry, MPL is one of the rare entities which have been able to succeed and grow at a healthy rate, keeping profitability in focus.

Sticky clientele – MPL’s clientele includes some of the major companies in the Paints, Lubricants and Food and FMCG industries. Hence, these clients of MPL cannot take chances in terms of product quality and supply chain. As a result, switching costs for these clients is very high, thus resulting in very high customer stickiness to MPL. The company has not lost any of its major clients since inception of the business contract with them. MPL has also been continuously adding companies to its client list. Some of the major clients of the company are Asian Paints, Akzo Nobel, Shell, Castrol, Gulf Oil, Mondelez, Amul etc.

Operational and Financial Performance

INR Cr.	Mar-10	Mar-11	Mar-12	Mar-13	Mar-14	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19
Sales	118.50	146.30	169.95	186.93	244.85	275.74	267.07	300.66	339.24	393.92
% Growth YOY	-	23.46%	16.17%	9.99%	30.98%	12.62%	-3.14%	12.58%	12.83%	16.12%
Operating Profit	16.64	18.69	21.34	20.32	30.08	40.49	45.82	51.87	63.57	72.01
% Growth YOY	-	12.32%	14.18%	-4.78%	48.03%	34.61%	13.16%	13.20%	22.56%	13.28%
Operating Profit Margin	14.04%	12.78%	12.56%	10.87%	12.29%	14.68%	17.16%	17.25%	18.74%	18.28%
Net profit	7.36	8.00	9.33	5.78	9.07	16.87	24.10	26.88	31.70	24.11
% Growth YOY		8.70%	16.63%	-38.05%	56.92%	86.00%	42.86%	11.54%	17.93%	-23.94%
Net Profit Margin	6.21%	5.47%	5.49%	3.09%	3.70%	6.12%	9.02%	8.94%	9.34%	6.12%

• MPL’s competitive advantage and cost economies can be seen clearly in its financials. Except FY16, the company has showcased growth in its top line.
• Over the past 10 years, Sales and Net profit have been growing at a CAGR of 14.30% and 14.10% respectively.
• The management’s confidence in its operations is clear from the fact they have been aggressively ramping up their capacity often using debt and at the same time rewarding their investors with consistent dividends.
• However, the company has been paying out 30-50% as dividend each year, which is very high considering a capital-intensive industry.

	Mar-10	Mar-11	Mar-12	Mar-13	Mar-14	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19
Debtor Days	62.16	55.98	61.47	68.40	62.91	58.52	74.87	73.75	88.67	61.51
Inventory Turnover	10.51	8.23	8.39	7.92	8.66	9.97	11.18	8.29	6.72	8.98
Fixed Asset Turnover	4.03	4.01	3.63	2.66	3.40	3.85	3.30	3.32	2.96	2.19
Debt/Equity	1.19	1.44	1.16	1.48	1.39	0.16	0.23	0.26	0.45	0.50
ROE (%)	28.49%	27.66%	20.14%	11.77%	17.28%	14.59%	18.69%	17.26%	17.54%	12.65%
ROCE (%)	23.69%	21.45%	16.96%	12.19%	18.01%	24.66%	23.92%	22.11%	20.20%	16.45%

• The volume / sales contribution of Paints, Lubes and Food & FMCG in Q3FY20 was 51.5% / 49%, 30% / 27.8% and 18.1% / 23.5% respectively.
• The contribution of Food and FMCG segment in FY17 sales was 5%. The management expects that the share of Food and FMCG segment contribution to the total revenues will increase in the future. The company remains confident of achieving INR 200 Cr, turnover from Food and FMCG segment by FY22. Towards this goal, it has constantly been adding new customers and also launching innovative products.
• IML volumes / value contribution stood at 65% / 69% respectively in Q3FY20 higher than 19.1% / 20.4% reported in FY14.
• For FY21, capex expected to be INR 30 Cr. to expand its existing capacities from 37,000 metric tonne per annum (MTPA) to 43,000MTPA. For 9MFY20, company incurred a capex of INR 42 Cr.
• Overall company level capacity utilization stood between 71%; utilization levels at new plants of Vizag & Mysuru stood at 75% (25-30% in Q1FY20; 50% in Q2FY20).
• Raw material costs continue to be almost half of the total sales.
• The company also forayed into the Industrial business segment like packaging needs for micro-nutrients, aqua foods, enhancers, packaging for Indian sweets etc. As per management, this sector has a potential to generate revenues of INR 150 Cr. over the next 5 years.

Risks and Concerns

• By looking at the trends in trade receivables and short-term borrowings over the past 4 years, the company is not getting cash as fast as it is spending it. Both short-term borrowings and trade receivables have been showing an uptrend over the years.

• Asset turnover has been displaying a downward trend over the years.
• Promoter (non-core) Pledging is currently at 8%

Impact of COVID-19 and Outlook

MPL derives its business from three major business segments, Paints, Lubes and Food and FMCG. With strong growth in Paints and F&F segment, technological edge (developing packaging solutions which is bio-degradable) and limited competition from peers (small scale of operations), the company’s long-term growth story is intact. However, with the outbreak of COVID-19 and the subsequent nationwide lockdown, the near-term business of the company seems sluggish.

Experts believe that the Q1 FY2020 numbers will be one of the weakest for the Paint sector companies. Since the industry comes under discretionary spending and with companies shutting down their operations, uncertainty clouds would keep looming on the companies considering the possibility of an extension in the current country-wide lockdown. Also, the sales post-lockdown is likely to recover gradually and would take another couple of quarters to normalize with the expected normalisation of the economy. The ongoing measures in India to arrest the spread of Covid-19 has also severely dented the consumption of fuel in the country, with the growth in consumption of petroleum products falling.

The only silver lining in this scenario is the increased demand in the essential food items. As the company is expecting to increase its share of revenues from the Food and FMCG segment, I expect the same segment to lead the revenues both in sales and volume terms in the coming quarters. However, this expectation appears to be short lived as Covid-19 disruption seems to be wide and deep, and unlike the demonetization, impact on consumer incomes appears significant with the hit on daily wagers and pay cuts across companies. Consumer demand, which was already slowing down before this disruption, is likely to weaken further. Food and FMCG companies have also been running into logistics and workforce scarcity problems.

With that being said the current crisis provides an opportunity for long-term investors to get into a company with a deep and wide moat. MPL is decades ahead of its close competitions in terms of technology and capacity. MPL is currently available at a CMP of INR 165.95 (as on April 15, 2020) and a PE of 12.20, which is well below its 5-year median PE of 26.04. Promoters currently hold 35.08% stake as on December 2019. The Company targets to reduce pledged shares to ZERO by end of FY20. Currently promoter pledges were at 8% (pledge created by non-core promoters).

Team 3C Capitals

Sources

• Value Research Online
• Screener.in
• Financial Articles
• Investor Conference calls