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Thursday, August 9, 2018

Shaily Engineering Plastics - ROI @ 154% in 18 Months

Dear Reader,

We are pleased to inform you that our Hidden Gem stock of Dec 2016 - Shaily Engineering Plastics Ltd (BSE Code: 501423) which was released on 29th Jan'17 is giving as on date returns of 154% to our Hidden Gems members in period of 18 months. Our team suggested Buy on Shaily Engineering Plastics Ltd at price of Rs. 529.60 on 29th January 2017 with a target price of Rs. 1050. Target is already achieved and we informed our members to continue to hold the stock.

Shaily Engineering Plastics Ltd has made its 52 week high of Rs. 1520 recently and closed at Rs. 1343.40 yesterday giving absolute returns of 154% to our Hidden Gems members in period of 18 months.

Below is the summary of Shaily Engineering Plastics Ltd shared by us under Hidden Gem stock - Dec'16 released on 29th January 2017.

1. Company Background:

Shaily Engineering Plastics Ltd (SEPL), is a quality supplier of high precision injection molded plastic components, subassemblies & assemblies for various OEM requirements. Shaily Engineering Plastics is certified to ISO: 9001:2008, ISO/TS 16949:2009, ISO 15378:2011, ISO 13485:2012 quality certifications and is the first injection molding company to have obtained the ISO: TS16949 certification in India.

The company caters to a wide range of industries including FMCG, pharmaceuticals, switchgear components, auto components, electronics and electrical appliances, etc.

Currently, SEPL has five manufacturing facilities - four in Savli (Gujarat) and one in Halol (Gujarat). One facility in Savli is an Export Oriented Unit (EOU) which was set up around nine years back while others cater to both domestic and export markets. During FYl5, SEPL had set up a Pharmaceutical packaging plant for manufacturing of Child Resistant (CR) caps & bottles for packaging of drugs for regulated markets.

The plants are equipped with various post molding facilities viz., hot stamping, ultrasonic welding, Vibration Welding, vacuum metalizing, pad printing, Screen printing, Painting, hot foiling, Laser Marking, manual assembly lines, semi-auto assembly lines and fully automated assembly lines & other post molding services.

The company has been exporting components, sub-assemblies & assemblies to customers in US, Europe & middle East since past more than 20 years and is 100% compliant to the quality standards & logistics requirements of these customers.

SEPL is being managed by the promoter and Executive Chairman Mr. Mahendra Sanghvi who has experience of over four decades in Plastic industry. He is a Chemical engineer from USA and plastic technologist holding diploma in management with vast experience in North American Plastics Industry. He controls the overall affairs of the company. He is assisted by Mr. Amit Sanghvi who is Managing Director of the company. His brother Mr. laxman Sanghvi looks after procurement and project execution.

The Board of Directors of the company consists of veterans from the fields of Plastic as well as Finance. The overall management of the company is competent in their respective areas of operations.

SEPL has reputed domestic and international clients across wide range of industries which have been its customers since long. This includes FMCG sector customers like Ikea Trading (I) Pvt. ltd. (IKEA), Hindustan Unilever ltd. (HUL), Procter & Gamble (P&G), Switchgear customers like Lucy Electric, ASS, L&T, Siemens, Electrical appliance customers like GE appliance, Pharmaceutical customers like Wockhardt, Sun Pharma, Sanofi-Aventis, etc. SEPL manufactures insulin pen for Sanofi which is a global leader in its field and SEPL is the sole supplier of these pens to Sanofi globally. SEPL is catering to fortune 100 companies and has long standing relationship with these clients and gets repeat orders from them.

Gradually, SEPL has been increasing its focus on exports and has developed one 100% EOU plant. The company has developed the skill set to meet the requirement of the customers from developed countries. Its exports are geographically diversified with major export destinations being USA, Germany, Sweden, Netherlands, UK and Canada.

SEPL has tied up with Global Closure Systems (GCS), the European leader in CRC solutions. As per the terms of contract, SEPL will receive an exclusive licence from GCS to sell CRCs in India. SEPL has built its second ISO Class 8 Clean-room facility at Rania in Gujarat with a capacity to manufacture 100 million CRCs and bottles of varying capacities. The company received approval from two Indian drug manufacturers and is in talks with another 12 drug manufacturers for its new products. The company has started supplies in Oct 2016 to one of the major domestic pharma company. The CRC plant is expected to run at full capacity by FY19, contributing around Rs 60 crores to top-line in that year. SEPL will be the sole integrated supplier of CRCs and bottles in India.

Business Units

1. Switchgears - SEPL is one of the few companies which specializes in processing diverse, difficult and exotic Thermoplastic & Thermoset polymers. 1st company in India to introduce Thermoset injection molding technology in early 90’s; set a benchmark for processing tight tolerances Thermoset injection molded components particularly for the Switchgear industry serving the needs of demanding customers like ABB, Siemens, Schneider, Emerson Group companies etc.

2. Home Appliances - SEPL is a supplier partner to GE Appliances USA since past more than 18 years catering to their needs of various kinds of knob assemblies and critical components for different appliances. Each knob assembly is unique to its specification which involves molding, pad printing, heat stacking, inlay fixing, Spring Clip fixing and unique packaging. SEPL has been the sole supplier of these components since past so many years.

3. Healthcare - SEPL is one of the India’s leading injection molding companies with a vision to manufacture quality and affordable healthcare products to improve Healthcare environment. The company specializes in conceptualizing and manufacturing complex precision components and assemblies for medical devices, which require stringent quality controls, tight tolerances and high performance such as DPI’S, Pen Injectors, Healthcare Disposables and Primary Packaging material.

Over the years SEPL has established itself as a competent manufacturer of medical devices for companies like Sanofi, Sun Pharmaceuticals, Wockhardt, GE Healthcare, Westrock (erstwhile; MWV), Akums Drugs, Clearspec - McKesson and Zydus Cadila. Shaily has ventured into manufacturing of DMF grade (DMF NUMBER :28979 CANADIAN DMF:2015-200) Child Resistant Closures, HDPE Bottles for solid orals & Eye droppers recently

4. Home, Personal & Beauty Care -  SEPL setup a clean room injection molding facility & secondary operation facilities like Vacuum Metallizing, High Speed Pad Printing lines, Hot Stamping & Hot Foiling, Ultrasonic Welding, Painting in the year 1992 to cater the needs of customers like P&G, HUL, GEA, Sunpharma, Zydus Cadila etc. While this industry was on the growth path during the period starting 2003, global companies contemplated India as a one of the best and economical source for plastic components, sub-assemblies and assemblies. During this phase, SEPL got the opportunity for manufacture and supply of injection molded components and assemblies to one of the world’s largest Home Furnishing company based out of Europe.

5. Automotive - SEPL has been a niche player in the automotive industries, developing components from ultrahigh performance engineering plastic which are subjected to extremely high temperature, wear and tear requirements & are a direct replacement of metal to plastic. SEPL has developed proprietary molding process to manufacture components from Polyamide imide material – TORLON (One of the 2 processor of this material in ASIA) & PEEK (Poly ether ether ketone). Many of these components are used in US defense application and in the turbo charges of high end luxury cars like BMW, Audi, Volkswagen, Toyota, GM. SEPL manufactures extremely critical components for the car seat head rest assembly and the other components of car seats required for adjustment and maneuvering the seats.

6. Industrial & Electrical Applications - SEPL made a beginning in late 80’s with a purpose to cater the need of high precision injection molded plastic components manufactured from high performance engineering plastic materials. Its ability to consistently mold high precision components to tight tolerances, makes SEPL a leading player in manufacture & supply of engineering plastic component for power tools, Industrial & oil field valves, industrial & domestic LED lighting fixtures, photography studio equipment, Industrial flash lights, Industrial electronic, etc.

2. Recent Developments: (as on 29 Jan'17)

i) DSP Blackrock increases its shareholding in Shaily Engineering Ltd to 7.65% - Sept 2016

DSP BlackRock Trustee Company Pvt Ltd (DSPBRTC) is the trustee for the schemes launched by DSP BlackRock Alternative Investment Fund and DSP BlackRock Mutual Fund. DSPBRTC on behalf of the schemes of the fund has acquired equity shares of Shaily Engineering Plastics Ltd.

One of the scheme, DSP BlackRock Emerging Stars Fund has acquired additional 78,585 shares of the company at Rs. 514.98 per share on 1st Sept 2016. DSP Blackrock shareholding in the company across various schemes has increased till 7.65% of the paid up capital of the company.

Earlier on 8th March 2016, DSP Blackrock Emerging Stars Fund bought 4,50,000 shares of Shaily Engineering Plastics at Rs 500 on the BSE.

ii) IKEA to invest Rs 2,000 crore in Haryana; signs MoU with state – March 2016

Swedish furniture retailing giant IKEA signed a memorandum of understanding with Haryana government to invest an estimated Rs 2,000 crore to open its stores in the state.

IKEA India inked an MoU (memorandum of understanding) with the state of Haryana as a major step forward towards establishing retail stores in the state. IKEA will invest an estimated Rs 2,000 crore for its retail expansion in Haryana, will employ about 1,000 coworkers directly and engage around 3,000 more for providing services such as furniture assembly, delivery services among others. In 2015, IKEA had signed MoUs with Karnataka, Telengana, Uttar Pradesh and Maharashtra to set up stores. 

Haryana is a prioritised state for IKEA due to its open investment climate. IKEA will set up retail stores to bring high quality, functional home furnishings with affordability and design for the many people. IKEA said it sees India as an important future market and is evaluating different sites in the prioritised states of Delhi NCR, Bangalore, Mumbai and Hyderabad. IKEA announced opening of its first store in India at Hyderabad in the second half of 2017 even as it scouts for more sites in Delhi-NCR, Mumbai and Bengaluru. 

The company, which received government approval in 2013 for its Rs 10,500 crore proposal to open retail stores under 100 per cent FDI, plans to open 25 stores by 2025 in nine Indian cities.
Above development will augur well for SEPL in coming years as the company generates almost 50% of its revenue from client IKEA.

3. Financial Performance:

Shaily Engineering Plastics standalone net profit declines 3.14% in the Sept 2016 quarter

Net profit of Shaily Engineering Plastics declined 3.14% to Rs 4.01 crore in the quarter ended September 2016 as against Rs 4.14 crore during the previous quarter ended September 2015. Sales rose 3.70% to Rs 63.82 crore in the quarter ended September 2016 as against Rs 61.58 crore during the previous quarter ended September 2015

Shaily Engineering Plastics standalone net profit declines 4.14% in the June 2016 quarter

Net profit of Shaily Engineering Plastics declined 4.14% to Rs 3.24 crore in the quarter ended June 2016 as against Rs 3.38 crore during the previous quarter ended June 2015. Sales rose 10.09% to Rs 58.91 crore in the quarter ended June 2016 as against Rs 53.51 crore during the previous quarter ended June 2015.
Currently company generates majority of its revenue from IKEA in home and furnishing segment.  If we look at revenue contribution, 45-50% is from IKEA, 25% is from pharma and 25-30% is from appliances, FMCG and high end engineering put together.

We believe the company profit margins will improve in coming quarters along with robust revenue growth considering continuous addition of new clients from diversified sectors by offering innovative products.

4. Peer Group Comparison: (as on 29 Jan'17)

5. Key Concerns & Risks:

i) SEPL uses plastic granules as its major raw material. Plastic granules are derivatives of crude, whose price has reduced over the past one year. Volatility in prices of polymer, a key raw material for SEPL, may impact realizations of the company.

ii) As the company generate 65-70% of its revenue from exports, any slowdown in the global demand will have an impact on company’s growth.

6. Saral Gyan Recommendation: (as on 29 Jan'17)

i) Shaily Engineering Plastics is into a business of manufacturing high precision injection mould and plastic component assemblies for various industries, including medical devices, pharma, FMCG, home and personal care. IKEA is the company’s largest customer. SEPL continue to derive strength from its long and established track record in plastic injection moulding business. Experienced promoters, reputed clientele across diverse end use industries, growing demand for plastic with its increased application in various industries, healthy profitability along with moderate leverage give ample growth opportunities to the company.

ii) SEPL’s ability to manufacture innovative products on a consistent basis with superior quality at low prices earned a place for itself in the list of preferred suppliers for many big domestic and international clients. Some of SEPL’s clients include big names such as General Electric Appliances (GEA), Sun Pharma, Sanofi, Gillette India, P&G, and HUL. Most of these clients have relationship with SEPL since the past 15 years. The company is continuously adding new customers and also continue to strengthen its business relationship with key customer IKEA.

iii) The company has shown its ability to grow its scale of operations along with diversification of its customer base while retaining its existing clientele, sustain its profitability margins and improve its capital structure. The company has received business confirmation for manufacturing and supply of packaging for one of the largest global skin care brand. Also commenced manufacturing and supply of two new additional parts for Gillette in 2nd quarter. If we look at broad mix of businesses, 45-50% is from IKEA, 25% is from pharma and 25-30% is from appliances, FMCG and high end engineering put together.

iv) In terms of profitability and return on capital employed, the company’s performance has improved significantly over last couple of years. Though the revenue grew moderately during FY12-16, the EBITDA margin expanded steadily over the same period. The company has registered sales CAGR of 12.2% and profit CAGR of 28.5% with ROE of 17.7% over last 5 years.
v) Operations of SEPL are largely working capital intensive in nature since it gets lower credit period from its suppliers and it has historically been required to extend higher credit period to its customers. However, there has been gradual improvement in working capital management by the company. It has now put in place strict payment terms for its customers leading to improvement in its collection period to 58 days during FY16 from 68 days during FYl5 even with 25% growth. It continues to hold around 40 days inventory. Accordingly, its operating cycle has improved to 67 days during FY16 compared to 78 days in FY15.

vi) SEPL's sales with the top 5 customers contributing around 74% to its gross sales during FY16. Some of the injection moulding machines installed at company’s manufacturing facilities at Savli and Halol are dedicated to particular client's products. Also, the recently completed capex is dedicated to cater to a few large clients like IKEA and Sanofi. However, SEPL has added many new customers over the past few years. During FY16, SEPL has expanded its clientele with addition of companies like Gillette India ltd., Corvi LEDs, NATCO Pharmaceuticals, SP Pharmaceuticals.

vii) SEPL focus on providing customised solutions to customers has enabled it to enter categories such as automotives and FMCG. SEPL supported Honeywell to convert metal rods for turbo chargers in automotive applications to plastic rods which not only brought in cost savings but also higher efficiency for users. The company plans to continue focusing on customised, niche solutions which will aid future growth.

viii) Currently, the company generates around 25% of its total revenue from pharma segment. SEPL has increased its focus on pharma devices and packaging. SEPL currently manufactures insulin pens, asthma inhalers and speculums, among other pharmaceutical devices, and has prominent customers such as Sanofi, Wockhardt and Sun Pharma. It is a supplier of AllStar insulin pens to Sanofi and is also the sole supplier of insulin pens to Wockhardt. SEPL has also entered the pharma packaging market via Child Restraint Caps through a technology tie-up with Global Closure system (GCS) and has incurred capex of Rs 30 crores to set up a plant. As per management, this plant can generate revenues of Rs. 60 crores on full utilisation (by FY19).

ix) As of Dec’16, promoter’s shareholding in the company is at 54.09%. Promoters have not pledged any shares, Institution shareholding in the company is at 8.26%.

x) Management has once again started paying dividend to shareholders from 2015 onward, the dividend payout before 2015 was in 2008. The company has paid dividend of Rs. 4 per share for FY15-16, dividend yield at current price is 0.75%.
xi) As per our estimates, SEPL can deliver PAT of 27.90 crores for full financial year 2017-18, annualized EPS of Rs 33.5 with forward P/E ratio of 15.8X for FY17-18. Company’s valuation looks reasonable considering robust growth outlook with increase in product offerings to reputed clientele from various industries.

xii) On equity of Rs. 8.32 crore, the estimated annualized EPS for FY17-18 works out to Rs. 33.53 and the Book Value per share is Rs. 116.62. At current market price of Rs. 529.60, stock price to book value is 4.54.

Considering ambitious growth plan of the management with objective of achieving target revenues of Rs. 650 crores ($100 million) by FY20 with investment of Rs 100 crore on capex over the next 2 to 3 years, company’s expertise of manufacturing complex precision components and assemblies to offer total solutions in plastics to reputed clientele from various sectors, robust growth outlook with increase in demand of plastic based products and expected improvement in operating margins of the company from the current 17% due to better product mix and improving efficiencies, Saral Gyan team recommends “Buy” on Shaily Engineering Plastics Ltd at current market price of Rs. 529.60 for target of Rs. 1050 over a period of 12 to 24 months.

Buying Strategy:
  • 80% at current market price of 529.60
  • 20% at price range of 440 - 460 (in case of correction in stock price in near term)
Portfolio Allocation: 3% of your equity portfolio.

To Read / Download Saral Gyan Hidden Gem - Dec'16 Research Report on Shaily Engineering Plastics Ltd - Click Here

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