Mallcom India - Guardians of the workers of the world?
A PPE manufacturer from India with humble beginnings and aspirational expansion plans
Hello friends, trying to analyze and put together few personal notes on a small business here that has a long history of more than 40 years in India. The name of the company was suggested few months back by a good friend and scribbling here what i could grasp from their annual reports, conference calls, investor presentation and other corporate filings.
Summary of Business: "Navigating the Business Horizon"
Mallcom India was founded in 1983 by Mr. Ajay Mall as a small leather gloves manufacturer from Kolkata. The company currently manufactures a variety of Personal Protective Equipment (PPE) and serving more than 55 countries, from its 13 production units in India, from states including West Bengal, Uttarakhand and Gujarat.
It is not to one’s surprise that, looking at the credential and educational background of Mr. Ajay Mall, Founder and MD (a fellow CA, BCom (Hons) from Calcutta University) and at the helm of Mallcom’s business for so long, managed to list this tiny company in Calcutta and Delhi stock exchanges back in 1997, listed in BSE in 2015 and later in NSE during 2022. The snap below may give you a better view on how the company has navigated their business during the past 4 decades.
Before we dive further into Mallcom and their business prospects lets briefly review the PPE Industry itself.
Industry Outlook: "Charting the Industry Landscape"
The global PPE market is estimated at a value of US$69 Billion as of 2022 and projected to reach US$115 Billion (i.e. INR above 9 Lakh crore) by 2028, with annual CAGR of above 7-8% industry growth. The industry growth is mainly aided by government regulation and stringent standards, increasing demand for PPE’s - worker wellbeing, expansion of construction activities etc. The major global payers in the PPE industry include Honeywell (USA), Dupont (USA), Kimberly-Clark (USA), Ansell (Australia), MSA Safety (USA), Bunzl (Australia), PIP (PIP), Sion Industries (Belgium), COFRA (Switzerland), Avon Rubber (UK) and many others. As per Mallcom’s report I could see that their customer list, include Honeywell, Ansell, PIP, Bunzl and few others as their white label customers.
During the last conference call Mr. Rohit Mall (General Manager, 2nd generation of Mall Family), has confirmed that their sales mix include sales through their own branded products in India, Indian sub-continent, South East Asia/Middle East as well as parts of Africa. While their white label supplier to brands and importers across the globe include Europe, North and South America, Australia and New Zealand. (Lately confirmed brands include: Honeywell, PIP, Ansell and Bunzl - Conference call dated Nov.15, 2023 ).
Major players operating in India’s personal protective equipment market include Mallcom India Ltd, Liberty Shoes Ltd. (Safety shoes), as well as other prominent companies including 3M India Ltd, Bata India Ltd. (Safety Shoes), Acknit Industries (Hand gloves, Garments etc., Listed: 88cr Mcap), Honeywell International India Pvt. Ltd., etc. Most of the Indian players listed above can’t be called as a niche/core business player in PPE industry other than Mallcom, as the others only provide one or two of such products part of their business.
In summary: On Industry as a whole and where Mallcom stands: The PPE market across the globe is pretty much fragmented, unorganized and mainly controlled by the suppliers/companies from China, i.e. approximately about 80%. There are intense cost pressures to companies like Mallcom, from various low cost suppliers, rather large scale manufactures from other countries including China, Vietnam, Pakistan, Sri Lanka and many others. Mallcom certainly stands among the bottom few in this value chain and their intentions are to scale the production and to grab market slowly especially with the current phenomenon of so called China +1 factor across importers of the world. Mallcom is certainly eyeing this opportunity to be one among the reliable supplier for the other brands as well as to supply across Middle East region, Australia, Europe and Americas (as hinted in the latest AR’ 2023 as well as the recent concalls), and to grab domestic opportunities considering the industrial, construction/infra growth in India.
Business Performance: "Unveiling Business and Future Prospects"
Mallcom is a one stop solution for all types of PPE’s providing an array of products protecting Head to Toe. To list them broadly, the products include Safety Shoes (35-40% of Revenue), Safety Garments (28%), Leather Gloves (20%), Gloves/Others: 10-11% such as Face Masks, Gloves etc.
The pie-chart below (courtesy: tijarifinance.com) may give you a better view on the revenue contribution by category and the trendline of the same for the last 3 years, shows that all verticals are more or less grows in tandem. It would be ideal to look at the financial breakdown of the same later on.
Company’s revenue mix by geography is Europe at 44%, Asia 38%, South America 11%, North America at 4%, Africa at 2% followed by Australia at 1%.
Mallcom maintains captive test labs to ensure quality standards of its products. Its facilities are marked by certifications including ISO, SA, SEDEX and Fair Wear. While its products hold certifications including EN, BIS, ANSI, UKCA and AS/NZS etc.
Mallcom currently serves more than 55 countries across the globe, with 13 production facilities spread across 3 states in India. The recent and ongoing expansions include West Bengal - Phase-1 Ghatakpur expansion, Ahmedabad - Sanand -I and Sanand -II expansion MOU with Gujarat Government last year is expected to start production by Q2, of FY25.
90% of the companies orders are from repeat customers and their clients include to name a few are.., Ansell, Bunzl, Symbiotic, Honeywell, Michelin, V-Guard etc.
Raw Materials and Supply Chain
Company’s Raw material mainly include Polymers (Supplier: BASF, Huntsman), Nitrile Rubber (Supplier: Synthomer, Nantex), Leather (In-house Tannery) and Textile (Supplier: Prym, JCT Ltd). 85% of its raw materials are sourced locally and Mallcom’s intent is to further strengthen local partnerships for reliable supply sources. In the recent conference call, management did highlight about a ‘Fabric Supplier’ who closed their business which impacted their production for one of their products. On a specific question on the supply disruption impacts on revenue and responsibility of notifying the stock exchanges - the Management’s response that the particular incident was an immaterial item, and they may consider it in future if applicable.
Financial Insights: "Decoding the Numbers"
Mallcom’s trailing topline figures stands around 400Cr., and they are currently guiding to bring this topline to 1,000Cr, by FY28, i.e., in 4 years the company is aiming to reach 2.5x the current topline figures. Looking at last 4 years data this is a possible scenario, provided the expansion plans and order inflow stays stable. If we look at the revenue chart below one could summarize the sales growth in two parts; where 2014 till 2020 company almost maintained a lull or uneven growth, while if we take 2020 as a base year the topline growth is somewhat in between 10 to 15%. Note that, the kind of business they are in - there was no impact of Covid to Mallcom’s business, while they actually had some one-off’s in terms of higher sales in Gloves and Masks during the last couple of years. While the Profit margins have shown a relatively upward trend even though at a slower pace.
The recent numbers shows that company’s gross margins are in the range of 42-44%, and about 4-5% constitutes the employee/labor cost and the power/fuel cost. Plotting these data together, one could assume that; with the mechanized and partially labor involved production line they have, the operating leverage may playout only through sustainable growth in topline. During the recent conversation, management is guiding for a 14-15% Ebitda margin going forward and is inline with the current level of performance (Sept, 2023 Ebitda margin was at 14.4%).
As briefly mentioned earlier, the Company is currently eyeing few factors in their growth strategy including China+1 phenomenon, Increased safety regulations by governments and Domestic Infra projects/expansions to push the order inflow and in turn the revenue growth. One has to continue monitor the order pipeline and quarterly results given the size (Mkt Cap) and the existing order pipeline of this company.
Valuation Assessment: "Unlocking Business Value"
Mallcom’s current market capitalization is at about 655Cr at about 1.6x of Revenue., and latest PE is at around 17x, while historical (5yr) average PE is around 10-12x. Price to Book currently stands at approximately 3x. Overall, the company is certainly valued higher by market at the moment relative to historical figures. Obviously, the recent run-up in revenue, short to medium term outlook and guidance by the company, as well as the current bull market environment are all contributors to this run up.
Given the size of the company, its worth analyzing the outstanding shares of the Co., i.e. is just about 62.4 lakhs of which approximately 46 lakhs (74%) is held by the promoter, leaving about 16.4 lakhs share in public float, that too among around 7,000 investors leaving aside the promoters and body corporates. The float is certainly low and one can expect volatile movements in such scrip in no time, and liquidity will be very low on both sides (buy or sell) during panic moves and depend to market conditions. That uncertainty and risk is inherent in such kind of micro cap companies. Additionally, one of the large investor ‘Jaya Kumar Daga’ who hold about 9.5% of co., shares currently and gradually reducing the holdings since last few years. Although, company has clarified that these holdings were long term investments since 2005, and used to be part of the group ‘AB holdings ’ (Daga and Arindam Bose’s family office / Joint holding) which was bought out by the Co., and what’s left with J.K.Daga, is gradually being reduced by him. Note that, Arindam Bose is still part of the Board of Directors of the company. Although this is non-relevant item, certainly considering the float, any potential reduction in stake by Mr.Daga would result in supply imbalance of shares in market, and may lead to price volatility.
It is worth noting that, the number of retail shareholders has recently been increased from 4,000 to 7,000 during the last 2 quarters, comparing the FY23 Annual report versus the Q2 FY24; noticeably contributed by the stake reduction by Mr.Daga.
A broad look at the Financial statements is showing positive trend across Balance sheet and P&L such as reduction in borrowings/liabilities; receivables and inventories continue to be within thresholds and getting reduced showing the working capital efficiency and the Net blocks (asset value) continue to increase over the years showing the intent of expansion and grabbing market share is at play. Equity has never got diluted over these period as well. Company’s intent is to execute the ongoing and prospective plans fully through internal accruals. Currently, the D/E stands well within the optimal range of 0.43x.
Similarly, other indicators are optically positive including Current ratio (liquidity), revenue/profit margins, inventory turnover, operating leverage etc. The Asset turnover shows a negative trend due to recent expansions in Gujarat and West Bengal. Projected production pick-up and revenue growth should be closely watched for positive moves in asset turns.
From the cashflows of co’s last 5 years; the CFO of 170 Cr (after taxes), has mainly been used for the capex/expansions (147cr). Interest/dividend had minimal impact on outflows, while the financed cash inflow mostly for the short terms proportionately aligned with the topline increase. A better view of the same can be made from the common size B/S discussed earlier.
Technical Evaluation: "Beyond the Surface"
As referred earlier, Mallcom is a tiny company and the charts are highly volatile if we take Weekly or daily charts. However, we may find a broad direction by looking at the monthly price chart. I have used the BSE chart, since the stock was listed in BSE from 2015 (NSE listing in 2022). Company used to trade for long period in the range of price point between 100-200 during 2016 till end of 2020. As referred earlier, the fundamental performance of the company has pivoted since 2021 and the movement in price and volume has picked up by mid-2020, taking the price to the next base of 650-800 during 2021 - 2023 period. Current chart shows broad support in Rs.1,000 and the next support at 650-700 range. As mentioned earlier, given the very low public float, the price movement can be very quick here and technical analysis doesn’t add much value beyond a point.
Business Outlook, Opportunities and Threats
Boring but slow and steady business: Broadly, Mallcom’s business outlook is stable but going at a slow pace of growth. The PPE industry as a whole is growing at 7-8%, and the guided numbers of topline growth is at 12-15%, and has been maintaining around 13-15% on an average in the last couple of years. One would keenly be watching the next few quarters growth considering that the company is not sure of achieving the guided target of 15% in FY24 due to the muted numbers reported last quarter. It has increased the manufacturing plants’ from two to three states in the last few years, in response to better accessibility/logistics needs of distributions and expansional aspirations. Product mix has been changed to value-added products like synthetic gloves, high-end workwear and shoes. These are positive signs, while the order book growth (125 Cr as of FY23) and how well the company execute the ongoing expansions and sustain the growth is key.
Risks associated with new manufacturing facility in Gujarat: Mallcom has entered into a MoU with the Government of Gujarat to set up a unit for manufacturing of hand/ head protective equipment. The entire project estimated at 108 Cr by phases of over five years. In phase – I of the project, total capital outlay would be around Rs. 45 crore (including the cost of land)- capitalized in last quarter. Phase-1 is scheduled to become operational in Q1 FY2025. Potential risks include commissioning of the project within the budgeted cost and time, stabilizing the operations, and achieving desired process parameters and cost efficiencies.
Revenue Geography concentrations: Company’s India business is at 42%, and exports are at 58%, of which majority are into Europe. Company is expecting more orders from Middle East, Australia and other regions. The revenue concentration in Europe (44% of overall) might be a concern going forward, unless we see significant growth in other including domestic contribution. The ongoing disruptions in the Red-Sea route would be an interesting point to clarify and see when we see the Q3 results to be out in a week time.
On a positive note more than 50% of our revenues were from customers of 10 years or more. Top ten customers account for 40% of total revenue, indicating a moderately diversified customer base.
Row Material Sourcing and Supply chain: About 85% of its production raw materials are sourced locally and a positive sign. Company has around 83 dealers around the world of which 70 are in India and the rest are from Middle East and South East Asia. Company’s intent is to increase the number of dealers gradually, but follows certain scrutiny and selection process to maintain quality rather than the quantity.
Driving Success - Backbone of the Company: Mallcom is engaged in upskilling workers and plugged management positions, created the next leadership tier to address any emerging opportunities. Company has majority of the workers on temporary basis as i could read from the AR’s. More than 3,000 employees are working for the company while the permanent employees are around 330 (about 10%). Company’s permanent employees have increased by 15% compared to FY22. While, 36% of the total workforce is women and more than 32% are with the company for more than 5 years.
Credit Rating Agency’s View (ICRA): ICRA’s recent report has reaffirmed the outlook of entity as “A Stable” business considering stable demand outlook, experienced management, sustaining profitability for long term and steady growth in business during last 3 years. Its worth noting that, company was rated BBB+ Stable in 2021, upgraded to A- Stable in 2022, and then to A Stable in 2023 and recently reaffirmed in Oct, 2023.
Broad Risks Checklist/Summary:
Competition - Customer Retention, Branding,
Working Capital - Disciplinal and Improving.
Supply chain - Diversified suppliers,
Forex Risk - Maintains Hedging
Regulatory Risk - Maintains Diversified portfolio,
Product liability - Availed Insurance coverage,
Environment and Sustainability - Follows Sustainable practices (as applicable), Compliance with regulations, Transparency and collaborations.
Signing off and leaving this 6 minute promo video by Mallcom in 2023. Invested and Biased; no transactions in last 30 days. Please do comment to collaborate and improve the business awareness. Thank you.
Data/Image Courtesy: Tijorifinance.com, Screener.in, tradingview.com
Mallcom Corporate Video - 2023
Disclaimer: This blog is purely for referencing, personal note and do not consider as an investment advise. I may or may not hold this stock when you read this. Take investment decisions upon discussions with a qualified investment advisor.