Shaily Engineering Plastics: Engineered for better earnings visibility
Shaily Engineering Plastics is no ordinary plastic manufacturer, and therefore, don’t be surprised to see the consumption company valuation that it commands. Shaily is a niche player in the high-value engineered polymer processing domain.
The company manufactures high precision injection molded plastic components and cater to requirements of original equipment manufacturers (OEMs) in India and abroad, with exports constituting 70-75 percent of its turnover. The clientele is clearly marquee and the relationship sticky. While the stock has re-rated on the back of strong moats, the road ahead looks promising enough to beckon attention.
The company primarily caters to four end markets, as seen in the exhibit below:-
Shaily has been reporting impressive numbers, and the trend continued in the quarter gone by.
Shaily received new business confirmations from three large pharmaceutical companies (new customers) for supply of medical pens, apart from skin care packaging orders from five others. The company completed the coversion of a metallic auto component to plastic for Honeywell, too.
Why should you look at Shaily?
Largest supplier to a globally well-known Swedish home furnishing major (SHFM)
Shaily has been managing the entire supply chain of products to SHFM’s stores across continents for household goods since the past 13 years. SHFM prefers sourcing most of its products from a few reliable suppliers (Shaily being one of them) rather than opting for procurements from multiple ones, even if it means paying a slight premium.
Of late, SHFM, the world’s largest furniture retailer, plans to expand its footprint in India through store launches (in Mumbai and Hyderabad, to start with), besides committing an additional capex of up to Rs 10,000 crore for 25 new outlets in tier 2 and 3 cities of the country in the coming years.
Given the inelastic demand for home furnishing products in India and SHFM’s brand appeal globally, Shaily should see business momentum from this opportunity. The company has begun manufacturing a new set of products by increasing its stock keeping unit count to 38 from 18, which may add roughly Rs 60 crore to the top-line in the near future.
Traction in the pharma segment
Shaily has an exclusive licence to manufacture child resistant closure caps and bottles (CRCCBs) in India as per a patent technology agreement with Global Closure Systems, a French company. The company’s product offerings in the medical space also include injector pen devices for different applications such as diabetes and asthma.
CRCCBs are high-margin products with limited competition owing to immense emphasis on accurate specifications and high statutory costs. Shaily’s foray into CRCCBs aims at meeting the USFDA-compliant packaging requirements of India’s leading pharmaceutical companies.
Shaily invested Rs 30 crore for setting up a CRCCB plant in early FY17 (annual capacity: 100 million caps and bottles). At peak utilisation levels, up to Rs 60 crore can accrue to the company’s operating income in due course.
Expertise & client stickiness
Shaily supplies exclusive, unconventional, and customized engineered plastics for a wide variety of uses. In the past, the company successfully initiated process/product re-engineering for Honeywell, Wockhardt, Sanofi, MWV, Pepsico, P&G, ABB, HUL, and CORVI. Shaily is well-poised to offer end-to-end solutions to OEMs for their high-end plastic requirements from conceptualisation to commercialisation.
Efficient supply chain management across various geographies, the ability to maintain high quality output standards and provide value-added services, a distinctive/non-commoditised/specialised range of products, and strong technical capabilities are some of the other factors that have enabled the company to differentiate itself from its peers by forging long-term relationships with its clients.
Outlook and valuation
Backed by a growing order book and good business visibility, Shaily remains confident of achieving a top-line target of USD 100 million by FY20 end. The company is bullish on the prospects of its auto and FMCG segments, too. Capex amounting to Rs 25-30 crore is likely to be incurred per year towards meeting this objective.
However, the degree of client concentration risk (with respect to the SHFM) is pretty high. Volatility in the international trade environment may impact the company’s performance as well.
At 22.4x FY19 projected earnings, SEPL is worthy of being considered for accumulation with a long-term investment horizon.
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