Mold-Tek Packaging Ltd.

 

“Past performance is not indicative of future returns”, Mr. Warren Buffett once said: "Clearly, Berkshire’s results would have been far better if I had caught this swing of the pendulum. That may seem easy to do when one looks through an always-clean, rear-view mirror."

Mold-Tek Packaging is a leading player in the rigid packaging business and is into manufacturing decorative packaging containers for paint, lubricant, FMCG & foods (F&F) industry. It was the first to introduce in-mould label (IML) products and QR coded packaging products in India. 

• 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.
• 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 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.
• 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. 

 

They have ten processing plants and three stock points across India, with a total capacity of 40,000 million tonnes per year (MTPA). Mold-Tek is India’s pioneer in the field of In-Mold label (IML) decoration and the only fully backward-integrated company with a state-of-the-art integrated facility for IML.

By importing two robots in 2011, Mold-Tek pioneered the in-mold labeling (IML) process in India. The label becomes a part of the product in the IML process, as opposed to other techniques in which the label is either pasted or printed on the container. Because it eliminates the need for a separate label application process, the process improves operational efficiency.

 

Rear-view: Over past 5 years, the company has grown 10% CAGR in volume, 12% CAGR in revenues and 16% CAGR in EBITDA. Mold-Tek Packaging is definitely among yesterday’s proven winners. 

Indian packaging industry valued at $75 billion in 2020, is expected to reach $204 billion by 2025, with a CAGR of 26.7%. The growth will be driven by
a) Lifestyle changes
b) Boom in e-commerce
c) Consumer awareness of packaged food
d) Rise in organized retail footprint.

Product segments:
Paints: Mold-Tek enjoys 25%market share in paints industry. Paints remains the largest contributor for Mold-Tek’s revenue,thanks to the ever-growing volumes. The company supplies to all big players in the paints industry, Asian Paints being its largest client.

IML Vs Non-IML mix for FY21 was 63% Vs 37%, while majority of non-IML was attributed to paints segment. So, there is a wiggle room for IML growth in paint industry.

Lubricants: Lubricant face maximum risk of duplication, hence they’d want to make the most of IML technology. Most lube companies have already shifted their packaging completely to IML. 

 

Food & FMCG: Packaging industry is witnessing solid traction across various F&F segments such as ice-creams, chocolates, edible oils, and other dairy products etc. Edible Oil and Ghee are growing at 30-40% and are expected to do better in future as well.

These segments enjoy ~2x realization at a normalized level compared to Paints and Lubes segments.

Pumps: Addition of Pumps has opened the Personal Care market for Mold-Tek. Apart from the better quality of pumps, MTEP has an edge on account of import duty on pumps (~27%).

Also, management is in discussion with a major MNC for the shampoo portfolio. Currently the company is producing 1.5 mn pumps/ month and expects to end the year with 4-5 mn/month.

Capex: Total capex of 50 Crs for FY2022 is approved of which 33 crores has been committed. FY22 & FY23 capex for Berger and Nerolac will be approximately 20 Cr.

New Customers: BPCL, Gulf Oil orders are worth 90 Cr. Mold-Tek is looking to venture into agrochemicals space as well. 

 

Value Add Services: QR Enabled IML. IML products already deliver 150% higher EBITDA/kg compared to Non-IML products. QR enabled IML will further this gap.

Sustainability: All the pails/packs manufactured by MTEP are reusable and are more than 700 microns in thickness. The higher thickness ensures that the life of the pack is far beyond the initial usage cycle. 

 

MTEP’s products are 100% recyclable as the entire package including jar, lid, handle and even labels are made up of the same type of RM – PP (polypropylene plastic), making segregation unnecessary while reprocessing, thereby allowing complete recyclability.

The pandemic has further helped Mold-Tek gain more clients as demand for IML packaging (no human intervention) has increased.

With expansion planned for Mysore and Vizag for paints and at Hyd for F&F, total installed capacity will be 44000 MTPA. With future growth visibility, it is capable of achieving 800 cr revenue in couple years. Back-of-the-envelope calc suggests EPS can be 28-30 Rs in couple years 

 

Additional:

Mold-Tek Packaging’s revenue has grown by 34% year on year (Q2 FY21 to Q2 FY22) — from Rs.119.06 to Rs.159.53 crores whereas Net Profit has grown by 30.68% from Rs.13.46 crores to Rs.17.59 crores. The growth has been so remarkable that the company’s share price has grown by 166% in the last one year.
On the back of strong demand offtake from the Paints segment, growing opportunities in the Pumps division, demand revival in Food &FMCG led by edible oil and ice creams segment, and pricing power, management has revised its Volume and EBITDA/kg guidance for FY22. 

 

Risks: 

Competition: The closest competitor of Mold-Tek is Hitech Corp which is the largest supplier to Asian Paints (a related company to AP).

Demand slowdown: Any slowdown in demand from key end-user industries Paints, F&F and Lube may impact its operational performance.

Packaging industry is very price sensitive, if any competitor is able to provide better packaging solution at a competitive price, Mold-Tek may lose a great revenue generating client to competition. Maintaining competitive pricing without hurting profit margins is a key challenge for the company.