Shaily Engineering Plastics Q3 – An expensive yet promising performer

Shaily Engineering Plastics(market cap: Rs 1,137.05 crore), a company under our coverage purview, manufactures high precision injection moulded plastic components for original equipment manufacturers (OEMs) in India and abroad. Exports constitute nearly 70-80 percent of the company’s annual turnover.

In Q3FY18, Shaily’s turnover growth was attributable to a higher machine utilisation rate (69.7 percent in Q3FY18 vs 62.7 percent in Q3FY17) and some key order executions. The volume of polymer processed during Q3FY18/9MFY18 increased by 57/27 percent year on year (YoY), respectively.

The YoY operating margin uptick was on account of an improved product mix (due to emphasis on high-margin products). Working capital requirements increased during Q3 because of GST-induced disruptions and delays in receiving export incentives.

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What works for Shaily?

Home furnishing segment

In the recently concluded quarter, Shaily executed a major portion (19 products) of the Rs 60 crore order (for 21 products in totality) received from a Swedish home furnishing major that happens to be its biggest client, accounting for 50-60 percent of the company’s annual revenue.

Since incremental orders (approximately amounting to Rs 60 crore) are likely to be placed by the Swedish client with Shaily every year for existing/new product categories, a consistent inflow of revenue from this segment is almost certainly assured.

Pharma segment

In Q3FY18, Shaily received a business confirmation to develop and supply 6 different types of medical pens for a series of therapies/customers. Commercialisation of this order is anticipated to commence towards the end of FY19, thereby aiding top-line growth.

Shaily also bagged an order to manufacture a device from a domestic pharma company for global markets (launch in FY20). With good order visibility and higher operating efficiency at the child-resistant closures (CRC) unit, the contribution of this segment to total sales is likely to be 20 percent by FY20 end.

Outlook?

Shaily claims to be on track to achieve its turnover target of USD 100 million by the end of FY20 on the back of strong order visibility from its Swedish client, higher capacity utilisation at its CRC facility, possibility of working with Sanofi on new products, and improved sales traction from FMCG and automobile clients.

The capex allocation in this regard for the next 3 fiscals is pegged at Rs 30-35 crore per year. Shaily aims to derive higher asset turns from this investment through a combination of volume-driven growth (mainly in respect of the Swedish client and CRC clients) and realisation-driven growth (in relation to the other segments).

However, in the near-term, headwinds such as inventory build-up and high raw material prices could impact margins. Secondly, a big chunk of Shaily’s additional sales in the long-run would significantly depend on how quickly the SHFM scales up its pan-India operations in cities other than Mumbai and Hyderabad.

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Shaily has witnessed a steep re-rating in the past 3 months, and the stock trades at 30.5x FY20 projected earnings, thereby pricing in most of the positives. However, given the promising future outlook, accumulation on dips is suggested.