Shaily Engineering Plastics – Value Added Play in Ubiquitous Plastics
Company Name – Shaily Engineering Plastics Limited (Shaily)
Current Share Price – INR 1,505 (January 17, 2023)
Market Cap – INR 1,380 cr
1. What is interesting about the stock?
Plastics are a ubiquitous part of our lives. From the dashboard of our car to the handle of our toothbrushes, we are surrounded by plastic products in every part of our daily life. The flexibility and durability of plastics make them a material of choice across various industries such as packaging, automotive, medical and healthcare, and construction.
Shaily Engineering Plastics Limited (Shaily), established in 1987, is engaged in manufacturing high-precision injection molded plastic components and sub-assemblies for various original equipment manufacturers (OEMs). Injection molding is a complex yet popular method of the plastic parts manufacturing process. This process uses a hydraulic/electric machine that melts, injects, and sets the plastic into the shape of a metal mold fitted into the machine after being designed per the application and client requirements. It facilitates large production runs of identical parts which are cost-efficient and consistent in production quality.
Shaily has more than 180 Injection Molding machines across its 6 manufacturing plants located in Gujarat. Additionally, Shaily has an additional plant catering to carbon steel furniture, a new business vertical for the company. Shaily supplies its products across various industries such as medical devices, pharma packaging, automotive components, home furnishing, toys, and personal care segment.
Consumer Segment – Shaily supplies 80+ SKUs under this segment. Home furnishing is the major division where Shaily manufactures kitchen, storage, and other furnishing products for global giants. It has been a preferred supplier for Swedish furnishing major since 2004 and today more than 50% of Shaily’s revenue comes from this single customer. As of September 2022, the company has an order book of INR 200+ Crores from this client. Recently, Shaily has added toy manufacturing into its portfolio and has bagged orders worth USD 10 million from two major European clients – Spinmaster and Hasbro. Shaily’s ability to manage complex manufacturing and high-volume production capabilities lend it a strong competitive advantage amidst the burgeoning “Make-in-India” theme.
Healthcare Segment – The healthcare division is the second largest revenue contributor to Shaily’s topline. Shaily ventured into complex drug delivery devices in early 2000 and supplied to marquee clientele in regulated markets such as US and UK. The company manufactures insulin pens, inhalers, and primary packaging for solid orals and liquid formulations. Shaily is the 1st company in the world to manufacture a 100%-plastic insulin pen (developed for Wockhardt). Shaily’s clientele in this segment includes Sanofi, Sun Pharma, Lupin, Dr. Reddy’s, etc. which demonstrates its capabilities in this highly regulated segment. Shaily is also deepening its foray into its own IP devices which will improve margins in the future. Currently, Shaily manufactures 6 million pens which are likely to go up to 20 million in the next 3-4 years. As of FY22, Shaily has 5 different own IP devices (shown below) and a few more under development. In the pharma packaging business, Shaily supplies ophthalmic and skin-care brands and produces specialized Child Resistant (CRC) Packaging. These are high entry-barrier businesses due to the stringent quality requirements involved.
Automotive Segment – Shaily manufactures high-value-added engineering plastics in this segment which are geared towards decreasing the weight of the vehicle. Shaily’s unique capabilities include the conversion of metal rods to plastic (which finds application in turbochargers for luxury vehicles) and a proprietary molding process to manufacture components from Torlon and PEEK (high-performance polymers). Major clientele includes Honeywell, ABB, Schaeffler, and Haier. The company is working on introducing a few more niche high-performance products by the end of the year.
Personal Care Segment - Shaily services major FMCG players such as P&G, Unilever, Himalaya, and Gillette in this segment. It manufactures primary packaging for cosmetics, trigger sprays, pumps, and razor handles for Gillette. The company also supplies critical components for knob assemblies in various electronic appliances. Shaily also houses capabilities for manufacturing industrial land domestic LED lighting fixtures.
Indian Plastic Industry is expected to grow a CAGR of 7% from USD 37 billion in 2022 to USD 125 billion in 2027. It is one of the leading sectors in India’s economy employing more than 4 million people and exporting to over 200 countries in the world. Globally, plastic compounding is a largely secular trend with an expected CAGR of 2.6% between 2021- 2026.
Within the sub-segments in which Shaily operates, the home furnishing sector is expected to grow based on rapid urbanization and socio-economic changes in India. The online home-décor market is expected to grow at a CAGR of 10% between FY21-FY26 in India.
The global toy market is projected to grow from USD 141 billion in 2021 to USD 231 billion by 2028 at a CAGR of 7.3% in the 2021-2028 period. Shaily will be benefited from the China+1 theme as global toy manufacturers plan to de-risk their supply chains and diversify their sourcing. Toy exports from India have grown from USD 202 million in FY19 to USD 325 million in FY22.
The global medical device market is expected to grow at a CAGR of 6.3% between 2022 to 2027 on the base of its current market of USD 434 billion. An increase in the adoption of injectable drugs used in diseases such as hormonal imbalance, diabetes, and autoimmune diseases, offers a fast-growing subsegment for Shaily.
Shaily has a strong design, development, and fabrication capabilities as evidenced by its marquee clientele across segments and long-standing customer relations. It has enabled Shaily to diversify its portfolio into newer segments like toys and carbon steel furniture manufacturing.
Shaily is among the 8 manufacturers of insulin pens globally and continuously expanding its footprints by developing its own IP devices. This is a high-entry barrier segment where competitive intensity is low due to the complex regulatory approvals requirements and extreme quality standards required in high-volume precision manufacturing. They have recently developed a wearable autoinjector for the oncology segment.
2. Key Historical Financials
FY20 & FY21 sales were impacted by the Covid-19 pandemic. Despite it, Shaily has maintained a sales growth CAGR of more than 17% over a 3, 5, 7, and 10-year time frame.
The fluctuations in EBITDA margins are due to volatility in crude which serves as raw material for the various polymers used in the manufacturing process. However, Shaily has maintained an OPM of more than 15% in the longer time frame.
Shaily is planning a CAPEX of more than 200 Crores over FY23-24 which will impact utilization levels in the near term. Capacity utilization for H1FY23 stood at 47% (as compared to 62% a year ago) which was also partially impacted by the recession scenario in Europe and North America. A major part of the CAPEX plan is towards the healthcare segment which will remain a strong growth driver for Shaily. Also, the ramp-up of the carbon steel and toys division will improve the utilization levels in the near term as the demand scenario improves in its export markets.
Net Debt/Equity Ratio has improved to 0.36X as of March 22. Shaily did a preferential allotment of 150 Crores in FY22 the proceeds of which will be used for CAPEX along with internal accruals.
Shaily has maintained a good CFO/EBITDA ratio (excluding FY21 which was impacted by the pandemic). The receivables cycle in the consumer segment is ~30 days which helps maintain high ROCEs. However, the other segments are majorly export-driven which causes pressure on the working capital cycle.
3. What is my view on Company valuation?
Currently, Shaily is trading at a TTM PE of 42X which is slightly higher than its 5 Year median PE of 40X. Given its differentiated capabilities, Shaily has always traded at premium valuations. We must keep a tab on the demand scenario in the US and the Americas as the slowness could impact the turnover in the near term. I expect the PAT margin to improve gradually in FY24 as the current cycle of CAPEX is fully deployed and the average plant utilization level goes back to 60%-70% levels with a corresponding improvement in ROCE to 20%+ levels.
The management has targets for a revenue CAGR of 17-20% over the next few years driven by the growth in the consumer division and healthcare division. EBITDA margins are likely to improve as the company develops its IP products in the medical devices segment.
A long-term investor can look for entry in this script when the TTM PE ratio is around 30X which provides a considerable margin of safety given the company’s aggressive growth plans and diversified product portfolio.
4. What are the risks to the investment analysis?
Risks to the analysis are:
More than 75% of Shaily’s revenues come from exports as it supplies to global OEMs. Hence the company is exposed to geopolitical, environmental, and FX volatility risks.
Almost 55% of revenue comes from the Swedish Furniture retailer which exposes Shaily to client concentration risk. Shaily intends to mitigate this risk by increasing its healthcare vertical in the upcoming 3-4 years horizon.
The key raw material of Shaily is a derivative of crude oil and hence the gross margin is susceptible to sharp movements in crude oil prices. Even though Shaily has a pass-through mechanism for raw material price movements, it happens with a time lag which can impact quarterly results.
In the healthcare segment, Shaily is exposed to delays in the regulatory validation which can stretch the working capital cycle and reduce asset turnovers.
About the Author
I am an MBA grad from the Indian Institute of Management, Bangalore, and currently working as a corporate finance specialist in a technology-based startup. I have cleared all 3 levels of CFA, US. I am an avid reader of businesses and like to analyze emerging trends in various sectors and macro economy.
I have had no stock, option, or similar derivative position in any of the companies mentioned for the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.