Based in Hyderabad, MTL has been a pioneer in injection and blow moulded containers and PET bottles and jars. It is acknowledged as a leader in pail packaging.
Mold-Tek Technologies Ltd (MTL) is abuzz with activity. While on one hand it is planning to de-merge its existing plastics business, it is also focusing on inorganic growth for its knowledge process outsourcing (KPO) division on the other hand.
Based in Hyderabad, MTL has been a pioneer in injection and blow moulded containers and PET bottles and jars. It is acknowledged as a leader in pail packaging, mainly supplying to paints and lubricant industry.
The company diversified into providing structural engineering design and detailing services in 2002 and is perhaps the only listed company in this space. The decision to de-merge both the businesses and list them separately is expected to unlock shareholder value.
Business
MTL commands a market share of 38% in the plastics pail industry. Pails are plastic packaging containers used for storing by paints, lubricants, grease, food products etc.
With manufacturing facilities in Chennai, Daman and Hyderabad, MTL has an impressive list of clients such as Asian Paints, P&G, ITC, Balmer & Lawrie, Indian Oil and HPCL.
The pail business enjoys a healthy CAGR of 35% and has grown from Rs 47 crore company to Rs 85 crore in the fiscal year 2007 in the last two years, said J Lakshmana Rao, chairman and managing director, MTL.
The merger of Tech-Men Tools Ltd with MTL is expected to broaden the company’s product portfolio. The KPO business, though at a very nascent currently, has immense growth potential. Established in financial year 2002, the KPO business provides complex designing and detailing services for civil engineering projects.
“In the last five years, we have acquired strong skill set in this segment,” added Lakshmana Rao.
This division has established itself as a reliable service provider for designing and detailing for American structural engineering fabricators, builders and contractors. It recently acquired an American engineering and detailing KPO Cross Roads Detailing Inc located in Indiana, USA for $1.3 million. Cross Roads acquisition gave MTL access to high-rise building detailing and designing.
Investment rationale
Both the divisions of MTL are profit making. The decision to demerge both the divisions into separate listed entities is based on the rationale of better management focus. Post-merger, the KPO business is expected to get better valuations based on robust growth prospects.
Apart from this, the demerger will also help in raising funds for expansions. The plastic business is expected to perform quite well due to new client additions, where MTL enjoys sole supplier status. Setting up plants close to client locations is expected to improve sales and margins.
The packaging division is expected to witness a CAGR of around 25-30% over the next three years. The KPO division is also expected to witness phenomenal growth. MTL has adopted a four-dimensional (4D) growth plan for its KPO business.
Concerns
The company’s KPO business is prone to currency fluctuations. Rupee appreciation could impact the bottomline of this division.
KPO business involves manpower and recruitment and retention of quality manpower is key to the success of this business. The packaging business is cyclical and is dependent on user industry like paints and lubricants and any slow down in the economy can affect this business.
Valuations
At the current market price of Rs.119.12, the stock is available at 7.5x its FY08 earnings. Projections for the financial year 2009 are not possible as the company is expected to announce its demerger ratios. The demerger will be effective only from April 2008. However, the stock seems to be a good buy given the huge potential in its KPO business.
Investors can add the stock to their portfolio and expect a very good upside on a long-term basis.
Disclaimer: The author does not hold any shares in the company
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