Should you invest in Mold-Tek Packaging for long term? Stock Analysis by Finology

Mold-Tek Packaging, India’s No.1 Rigid Plastic Packager, serves the top 4-5 players across sectors like Asian Paints, HUL, Shell Energy, etc.

Finology Research Desk has analysed the company this week, providing a clear verdict on whether Mold-Tek Packaging Ltd. is good for long term investing or not. Find out in this article.

What makes the Rigid Plastic Packaging Industry special?

The packaging Industry can be broadly classified into rigid and flexible plastic packaging. Rigid plastic packaging materials are those materials that maintain their shape and structure and do not bend or deform easily. Bottles, paint boxes, jars, etc., are rigid plastic packaging products. Flexible packaging refers to plastic packaging materials that can bend, fold, and change shape to the shape of the product they contain. Flexible packaging materials are typically lightweight. Bags, pouches, envelopes, wraps, etc., are some examples of flexible plastic packaging materials.

Source: Link Pack

According to a Fortune Business Insights study, the Global Rigid Plastic Packaging Market was valued at ~ USD 277.20 billion in 2023. This was ~1.9x times larger than the Flexible Plastic Packaging Market, valued at ~USD 149.32  billion in 2023. The Rigid Plastic Packaging Industry in India is expected to grow at ~10% CAGR over the 2024-2032 time period driven by the e-commerce industry's emergence in India and their growing desire for product safety and extended shelf life which has led to the boom of the Indian packaging industry.

We decided to look for key players in the Indian stock market who could benefit from the packaging theme. Our search led us to an interesting company: Mold-Tek Packaging Ltd.

Business Model of Mold-Tek Packaging Ltd.

Mold-Tek Packaging Ltd. is in the business of manufacturing and sale of packaging containers. It is the market leader in the rigid plastic packaging industry in India, with a market share of 25%.

It is the 1st company to use In-Mould Labelling (IML) technology in India. IML technology uses robots to place preprinted labels in moulds before injecting plastic, fusing the label into the moulded product. The technique produces labels that are attached to the plastic material and cannot be removed.

Source: Huarong Group

The company has a diversified source of revenue from multiple industries:

1. Paints Industry: Mold-Tek Technologies Ltd. offers IML packaging for paint boxes for major players in the paint industry. The company provides packaging materials to top players in the paints industry in India - Asian Paints, Pidilite, Berger Paints, Kansai Nerolac, Akzo Nobel, etc. The company also has tied up with Grasim Industries Ltd. to provide paint box packaging for Birla Opus paints. It is the company's major revenue-generating segment, contributing 42.5% to total sales and 46.5% of total volumes. However, it is less margin lucrative.

Source: Company

Asian Paints is the company's largest customer across all industries. Mold-Tek has 3 dedicated plant facilities for Asian Paints, with a total capacity of ~40,400 tonnes. More than 30% of the company's sales come from packaging. However, the paints segment witnessed a 7% sales decline due to the slowdown in the Asian Paints business for FY24.

2. Food & FMCG: The company provides packaging solutions for the Food and FMCG industry. Leading Indian FMCG companies, such as HUL, ITC, Cadbury, Amul, etc., have been long-term clients of the company. In this segment, the company is looking to expand its presence in the restaurant and sweetboxes industry. For FY24, the Food and FMCG packs segment grew by ~7%. However, emerging categories in this segment like sweet box sales grew by 100% for FY24.

Source: Company

The segment contributed 23.8% to the total sales and ~14% to the total volumes for the company. It is a margin-lucrative segment for the company.

3. Lubricants: The company provides packaging solutions for the Lubricants and Grease industry. Leading players like Shell, Castrol, Valvoline, etc are the key customers for the company.For FY24, the segment reported a moderate growth of 3.42%.

Source: Company

The segment contributed 26% to the total sales and 23.8% to the total volumes for the company. Over the years, the lubricant segment has witnessed growth due to the DEF (Diesel Exhaust Fluid) lubricant, which is a low-end lubricant. Growth of DEF lubricant has made lubricant segment less margin lucrative for the company.

4. Others: Apart from these 3 industries, the company generates a significant portion of sales from Square packs. The segment is a smaller segment for the company contributing 12.11% to the total sales and ~13% to the total volumes. The company has secured patent protection for its square packs packages.

Source: Company

The company has also started operations targeting the pharma industry. The segment is very small contributing only 0.4% to the total sales. It expects the pharma segment to be a significant growth driver in the future. The pharma segment, along with the FMCG segment, has a faster payment cycle with cash conversion cycle of ~45-60 days in pharma segment and ~30-45 days in FMCG segment.

To give you a snapshot, we have analysed this company using Porter's 5 Forces framework.

Porter’s 5 Forces Analysis of Mold-Tek Packaging Ltd.

Source: Finology Research Desk

1. High Threat of New Entrants: The company has a high threat of new entrants in the business. The packaging industry does not have high barriers to setting up a business. This is also because the packaging companies customers do not look to be too dependent on a single supplier and hence look to expand their supplier base. This makes winning contract orders relatively easier for newer players.

2. Low Bargaining Power with Suppliers: The company’s major raw materials are crude oil products. Its supplier base is heavily concentrated towards one supplier—Reliance Industries Ltd. Reliance Industries has many companies from different industries as its customers, and thus, it commands strong pricing power over packaging companies like Mold-Tek.

3. Low Bargaining Power with Buyers: The company has less pricing power over its buyers. This is due to the buyers having multiple packaging partners available with them in order to fulfill their packaging needs. Thus, the company has to face pricing competition and keep prices low to remain competitive in the industry.

4. High Threat of Substitutes: There are easy substitutes available for packaging products. For instance, the flexible packaging industry has gained strong momentum in the recent years as flexible packaging materials are less costly compared to rigid plastic packaging. Food items like sauce are being sold more in flexible packaging formats as compared to earlier rigid packaging formats. 

5. High Competition in the Industry: The company faces intense competition in the industry from existing players. Despite being a market leader in rigid plastic packaging industry in India, the company only has 25% market share. Even though Mold-Tek has been a trusted partner for big branded players in various segments for a long time, the company does not have exclusive packaging materials supplying partnerships with them. For example, Asian Paints, the company's biggest client, gets its packaging materials from another company too– Hitech Corporation.
 

What led us to reject Mold-Tek Packaging Ltd. for Finology 30?

1. Concentration Risk: The company's business faces concentration risk, both on the supply and demand sides. Although the company does not have import dependency, its domestic supplies are heavily concentrated. ~75% of its raw materials come from one company: Reliance Industries Ltd.

On the demand side, despite having a large customer segment, the company derives ~30% of its sales from a single company—Asian Paints Ltd. Hence, its business performance depends heavily on demand from Asian Paints.
 

2. Limited Pricing Power: Customers in the packaging industry try to avoid relying on a single supplier. This is done to ensure they have a continuous supply of packaging materials, even if any one supplier faces trouble delivering supplies. Asian Paints, the company's largest customer, also has multiple packaging partner companies (like Hitech Corporation Ltd.) apart from Mold-Tek Packaging Ltd.

This increases competition in the industry and thus limits pricing power over its customers.
 

The Bottom Line

We look for businesses with a strong sustainable business model. Mold-Tek Packaging Ltd. stands out in the rigid plastic packaging industry with its innovative In-Mould Labelling (IML) technology and strong market leadership in India. Its diverse revenue streams from industries like paints, food & FMCG, and lubricants highlight its broad customer base and potential for growth.

However, the company's heavy reliance on a single supplier, Reliance Industries, for 75% of its raw materials and its dependence on Asian Paints for 30% of its sales expose it to significant concentration risk. Additionally, limited pricing power due to competition from other packaging suppliers weakens its ability to maintain margins, making it a risky investment.

For Finology 30, our ideology has been to focus on strong business models with robust financials. So, we decided not to go ahead with Mold-Tek Packaging Ltd.

However, there are very few stocks that made it to Finology 30. Check them out here.