Mold Tek Technologies

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   Basantji, cud you pls start a new topic for Mold Tek Technologies. I am providing a writeup here:

Mold Tek Technologies Ltd - Engineering a multibagger

In an interview on NDTV Profit, Madhusudamn Kela spoke about engineering services as a promising theme going forward. At about the same time I happened to look at Mold Tek, a Hyderabad based company

Mold Tek has two divisions - Plastic packaging and KPO services
KPO division is engaged in providing services for structural engineering sector in US & Canada specifically including pre-engineering and conventional detailing. 
Mold Tek has applied for the demerger of its plastic division into a separate listed company and is awaiting high court approval

Key figures:
Share price Rs 179
No of shares  11.6mn
Mcap: Rs.206 crores

Sales (FY08): Rs 125cr
KPO div Rs 25cr
Plastic div Rs 100cr

PAT (FY08): Rs 14cr

KPO div Rs 10cr
Plastic div Rs 4cr

I have tried to examine Mold Tek Technologies (KPO business) on two factors which are common to any potential multibagger stock 1) high earnings growth visibility 2) Potential for PE expansion

1) Earnings growth drivers:
a) US structual engineering services market is worth $6b (Rs 25,000cr). Assuming a 1% growth rate mkt will grow by Rs250 cr each year which itself is 10 times Mold Tek's FY08E revenues. So the external opportunity is huge esp. if we also include the EU market which I presume could be as large as US. In the past few years Mold Tek has grown revenues at above 100% CAGR.

b) To tap this huge market Mold Tek's strategy involves acquiring small sized firms in the US which would give ready access to clients and also provide the front end marketing setup to acquire new clients apart from critical technical expertise

c) HR: Currently MoldTek employs around 270 emplyees in its KPO and plans to reach a size of 1000 people in the next 2-3 years. I presume that in 5 years it will need around 3000 employees. It will be competing with IT and construction companies for talent and will have to contend with wage inflation. Though I believe that an entry level civil engineer will prefer Mold Tek over a Infy or Satyam as he would get a chance to put his civil engineering skills to better use unless the salary differential is large

d) Value chain: Currently, most of the work done by Mold Tek is in pre-engineering (140 employees currently) where billing rates are $2000-2500 per employee per month. As it increases exposure to the detailing segment (90 employees currently but low utilisation) where billing rates are 2x pre-engg rates, there is scope for employee productivity to improve

e) Based on this, I would assume a CAGR of 50-60% over the next 5 years. This would give a revenue figure of 200-250cr in 5 years which would still be only 1% of the current US market size. 
Assuming current PAT margins of come down from current 40% to 30-35% over time PAT number in 5 years time amounts to Rs 70-90 cr

2) P/E expansion:
a) Currently MoldTek trades at around 8 times FY '09 earnings. Post the demerger of the plastic packaging business the standalone KPO business could be rerated 

b) If the management can execute as per the above earnings growth estimates, Mold Tek could improve P/E to 15-20 times 1-yr forward as institutional exposure increases. As per September data Reliance Capital owns 3% stake in the company and there is no MF holding

As per this hypothesis, Mold Tek could prove to be a 10-15 bagger in 5 years. The key risks to this include execution risk, exchange rate, wage inflation  & risk of major equity dilution in the future (though high ROE should largely negate this possibility)

Would like to know what other members think of this company and any critical aspects which I may have missed in my analysis

I have a small exposure to Mold Tek in my portfolio and plan to increase exposure when I have excess cash

Mold-Tek Packaging to set up unit in Hosur