Shaily Engineering Plastics Ltd

Today we shall bring to you an interesting company from the small cap space named as “Shaily Engineering Plastics Ltd. (SEPL)” Not many retail investors have heard of this company who is one of the suppliers to the Global Home Furnishings major HOME FURNISHING MAJOR for more than a decade.

Introduction of SEPL:

Established in 1987 at Halol, India with 2 machines SEPL is a quality supplier of high precision injection molded plastic components, subassemblies & assemblies for various OEM requirements.

The company has been exporting to customers in US, Europe & Middle East since more than 2 decades and is 100% compliant to the quality standards & logistics requirements of these customers.

Today SEPL has 5 manufacturing plants located near Baroda, Gujarat, India, with 100+ injection molding machines with clamping force between 35T – 1000T including 3 Injection Blow Molding machines.

Management team:

Mr. Mahendra Sanghvi (Ex. Chairman); Mr. Amit Sanghvi (MD) – Promoters of the company.

The company was started by Mr. Mahendra Sanghvi who during his initial days in the USA thought to use his experience in plastics engineering and hence came back to India and started Shaily Engineering.

Currently Mr. Amit Sanghvi runs the show and is actively involved in the operations.

What does SEPL exactly do?

They manufacture plastic products for companies from various different industries.

To give you a perspective, they have manufactured the following:

• The plastic bottles of the Vicks cold rub that we usually use for cold
• Caps on the Acquafina water bottle
• Gillette razor bodies
• Insulin pens for Wockhardt, Sanofi, etc. (Sanofi insulin pens are supplied in the developed markets of US, Europe, etc.
• Children’s cutlery products for HOME FURNISHING MAJOR (European Home Furnishings major) (and about 40 different products for HOME FURNISHING MAJOR).

What differentiates SEPL from other plastic products manufacturers?

SEPL does not only manufacture products, what differentiates them from companies like Sintex Plastics, Moldteck Packaging, etc. is that it gets involved right from the designing of products, to Raw material selection, to getting regulatory approvals for clients, etc. SEPL does not manufacture standard products like others. Customization and premiumization is their DNA.

Shareholding Pattern: (Source: Stock Exchange)

Shareholder type	No. of Shares	% to Equity
PROMOTERS	42,48,151	51.1%
FIIs	1,878	0.02%
MFs & AIFs	10,35,368	12.5%
BODIES CORPORATES	7,04,267	8.5%
PUBLIC & OTHERS	23,28,766	28.0%
TOTAL	83,18,430	100.0%

Top Shareholders:

HDFC Small Cap Fund (6.7 lakh shares i.e. 8%); DSP Blackrock Emerging Stars Fund (3.4 lakh shares i.e. 4%); Ashish Kacholia (10 Lakh shares i.e. 12%); Mukul Agarwal (8 lakh sgares i.e. 8.6%)

As we can see, the shareholding of SEPL has some big names, very rare to see these names in a smallcap unless the company stands true on performance, corporate governance and delivers on what it commits.

Awards & Recognitions:

Vision: -

To Become a USD 100 million plastics manufacturer with a Global footprint by 2020 (Rs. 650 Crores by 2020)

Shaily's key customers by industry segments: (Source: Company website)

Some of their achievements: (Source: Investor Presentation & Company website)

1) Conversion from Metal to Plastic for Honeywell:

They are the only Co. in the world who have successfully converted a metal component into plastic component for Honeywell

The plastic component of Honeywell that gets used in turbocharges in the engines of European luxury cars

2) Insulin Pens for Wockhardt & Sanofi:

Shaily is 1 of 8 manufacturers of Insulin pens in the World today

3) Shellpacks for MWV:

Started production for shellpacks in a record short period of just 8 months. SEPL for awarded for supplying shellpacks with ZERO defects.

“An Indian company supplying without a single defect” now that’s something unusual, right?? But yes, they shipped a total of 250 Million units with ZERO defects. That explains a lot about the quality that SEPL delivers.

Growth Story:

1) Vision: SEPL has stated a target of achieving Rs. 650 Crores of Revenues by 2020. The management states that currently it has a visibility of 80-85% of the stated target. That’s pretty impressive !!

With FY18 Revenues at Rs. 318 Crores, SEPL effectively aims at more than doubling its Revenues.

2) Home Furnishing Major in India:

SEPL has been associated with the European Home Furnishings major for more than a decade now. Recently in SEPL’s Q1FY19 Results Presentation the company announced that it received a new order worth Rs. 100 Crores from HOME FURNISHING MAJOR in a new product line which is different from Plastic. A year back SEPL had received an order of Rs. 60 Crores per year from HOME FURNISHING MAJOR, which SEPL has already delivered.

Under the “Make in India” programme the HOME FURNISHING MAJOR has announced doubling of its outsourcing from India to ~Rs. 5,000 crore by FY20E. Currently, it has ~50 outsourcing partners from India with SEPL among the preferred partners. SEPL & HOME FURNISHING MAJOR started doing business since early 2000’s with supply of goods worth Rs. 1 crore. Today, SEPL supplies ~40 SKUs in the furnishing products (for kitchen, children, cooking & eating, organising & storage).

We expect SEPL to record strong revenue CAGR of ~30% plus from FY18-20E (in line with historical trend) supported by rising demand from HOME FURNISHING MAJOR for its stores globally and expansion in India. HOME FURNISHING MAJOR plan to open ~25 stores India at an investment of ~Rs. 11,000 Crores by 2025 of which the first store has been opened in Hyderabad.

3) Pharma packaging & Devices:

SEPL’s healthcare segment has of two segments:

i) Medical devices: includes manufacturing insulin pens and dermatology devices (used in skin care), asthma inhalers

ii) Primary packaging: includes tablet bottles, packaging for liquid formations, dry powder inhalers and ophthalmic packaging (eye droppers), Child resistant Caps (CRC), etc.

SEPL has been categorically stating on the quarterly Earnings call that it has an increasing focus on this segment. This is a higher margin business. SEPL also aides its clients to get Regulatory approvals for these devices. “A manufacturer helping its clients to get an approval” now again this is something unique to SEPL.

Given a lower base for this segment, we expect this segment to clock ~40% CAGR over FY18-20E.

4) Automotive:

SEPL manufactures extremely critical components for the car seat rest assembly and other components of car seats required for adjustment and maneuvering the seats. It also manufacturers the Plastic Rods for Honeywell.

This segment has been doing well for SEPL and we believe that this segment too shall be a potential growth driver.

Risks:

1. Client concentration: European Home Furnishing Major constitutes 55% of the Total revenue. But the long standing relationship and increasing flow of order flows from this client gives comfort

2. Raw Material Prices: SEPL processes various types of polymers, the prices of polymers also depends on the Crude Oil prices. Current rise in oil prices and Rupee depreciation may impact SEPL’s margins. However, we believe that the RM costs are a passed onto customers. SEPL would have to bear the risk until the pass on happens

3. Lower production of Child resistant Caps (CRC): SEPL had already put up machines for manufacturing of this product, but the receipt of orders have been low and so this product is not earning much revenues to the company currently. SEPL believes that this product demand shall come in but cannot assure on the timelines.

Our Recommendation:

With a very strong client base, unique product offerings, excellent execution capabilities and the right levers in place, we like Shaily Engineering Plastics as a log term play.

At current price of Rs. 1,100 (as on 07/09/2018) the stock currently trades at 38 times of its FY18 PAT. Which a stock market analyst would say is EXPENSIVE, but good things come at a premium, don’t they?? Plus the management has committed to double its Revenue to Rs. 650 Crores. The prices will not stay at the same levels when this happens, right?

We believe that it can be a potential multibagger and can be considered as an investment.

Historical Financial performance:

(Source: Investor Presentation)

SEPL has been delivering good financial performance consistently, 21% Revenue Compounded Annual Growth rate (CAGR), 26% EBITDA CAGR, 46% PAT CAGR have been very impressive.

To reach Rs. 650 Crores of Revenues in next 2 years SEPL has a daunting task to achieve 50% absolute growth for 2 years, Management shows confidence on delivering those figures.

(Source: Investor Presentation)

SEPL’s margins have also been on an uptrend and given its focus on Higher margin Pharma business, the margins are expected to further go up from current levels.

(Source: Investor Presentation)

As we can see SEPL has healthy Return ratios, delivering ~20% Returns along with growth is a huge positive. The slight dip in RoCE from FY16 to FY18 is on account of increasing investments to support growth of the company.

(Source: Investor Presentation)

Last but not the least, SEPL has been paying out dividends consistently.

“Strong growth, improving margin profiles, Healthy return ratios and consistent Dividend payouts”, all this makes SEPL a strong case for investment. 

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