Balaji Amines

Background

Balaji Amines Ltd (BAL) is a leading producer of aliphatic amines and manufactures Methylamines, Ethylamines, Derivatives of Specialty Chemicals and Natural Products. Amine technology is a closely guarded process with only a few handful companies having access to such technology. BAL is the first Indian company to have tested an indigenously developed amine technology and is today a producer of export quality products. BAL is largest methylamine player in India (20,000 MTPA) and is the second largest ethylamines producer with a capacity of 6,000 MTPA. Reportedly BAL is one of the lowest cost producers of methylamines in the world.

It has successfully invested in R&D over the last few years to develop specialty chemical derivatives. Some of these serve the domestic market as import substitutes (NMP, Morpholine, Hydroxylamine) while some others are used for captive consumption (P2, GBL) and the backward integration has reduced dependency on MNC suppliers and are helping improve margins in BAL’s quest for cost-leadership.

The total installed capacity of the company at the end of FY10 stood at 55,000 MT (up from 50,500 MT at the end of FY09). Of this about 20,000 MTPA is methylamines, 6,000 MTPA is ethylamines, 6,000 MTPA is NMP/GBL, 3,000 MTPA is Morpholine, 1,200 MTPA is PVP-K30 and the balance are derivative products (18,800 MTPA).

BAL has successfully set up power plants for its captive use which includes a 2.5 MW co-generation plant and 1.75 MW of wind power in Maharashtra (2 units). Another, 1.5 MW wind power unit was just commissioned in Sept 2010, taking the total wind power capacity to 3.25 MW. BAL sells excess power to the grid.


Main Products/Segments

Sales are driven primarily by Amines – Methylamine, Ethylamine, Speciality chemicals – N-Methyl Pyrrolidone (NMP) & Morpholine, and Derivatives – Di-Methyl Amine Hydrochloride (DMA HCL), Choline Chloride and other derivatives. Main competitors in India are RCF (Methylamine) and Alkyl Amines (Ethylamine). With NMP & Morpholine the company has started competing with bigger MNC players like BASF.


Main Markets/Customers

BAL caters primarily to the pharma industry in India supplying to leading pharma companies like Sun Pharma, Ranbaxy, Matrix Labs, Dr.Reddys, Aurobindo Pharma etc. for their Active Pharmaceutical Ingredients (API) requirements. it also caters to the Agro Chemicals,  Refineries (lube extraction),  Water Treatment Chemicals,  Rubber Chemicals, and Photographic Chemicals industries.

BAL derives more than 20% of sales from export to several countries such as UK, USA, Canada, Latin America, Germany, Italy, Middle East, South Africa, France, Brazil, Mexico etc. BAL sells directly to its customers in India while in case of exports it goes through distributors.


Bullish Viewpoints

  • Strong R&D focus – The company boasts of having two state-of-the-art R&D centers at its plants. The R&D initiatives undertaken over the years have been one of the largest contributors in making the company a major player in specialty chemicals. For FY10 it has spent more than 3% of its revenue for R&D. As a result of its R&D and effort to introduce new products where only few global players are present, BAL has a very high market share in some of its products while some of its products are 100% import substitutes.
  • Near monopoly status for some of its products – Globally, amines technology is closely guarded. BAL is first company in India, to test an indigenously developed technology, as compared to its peers, viz- Alkyl Amines Chemicals Ltd and RCF, who preferred technical collaboration with foreign players. This, along with sharp reduction in power & fuel cost, helped BAL emerge as the lowest cost producer of Methyl Amines in the world.
  • Proven success of new products – BAL has recently developed two new value added products, which are currently imported. The company has set up dedicated plants for these products- viz N-Methyl-2-Pyrrolidone (NMP) and Morphline. Both these products could help in boosting sales and margin expansion, as BAL is the only domestic manufacturer (100% import substitute). Global manufacturers include BASF and Huntsman.
  • Strong & Diverse Clientele – About 50-60% of BAL’s topline goes to the pharma and pesticide sector while the rest is spilt amongst a number of other end users like oil refineries, water chemicals, rubber chemicals etc. BAL has a strong presence in the domestic market with major clients from the pharma sector including the likes of Aurobindo, Aventis, Clariant, Dr. Reddy’s, Glaxo, Merck, Ranbaxy, Sun Pharma, Wyeth, Wockhardt, etc. Other clients include rubber chemical companies in Kerala, Gujarat and North India and water companies like Ion Exchange and Thermax. Refineries like IOCL, HPCL etc. Lastly, pesticide companies like Rallis, Meghmani and Gherdia Chemicals are also part of its client list. A diverse and strong client base along with product acceptance from industry leaders augurs well for BAL.
  • Capacity expansions to drive growth – BAL’s gross block has nearly doubled from Rs. 80.5 cr at the end of FY07 to Rs. 157.5 cr in FY10. Total installed capacity has increased from 44,500 MTPA in FY07 to 55,000 MTPA. Few key additions have been the GBL Plant (backward integration), PVPK-30 Plant (forward integration) and DMEA. Dimethylaminoethanol (DMAE) plant with a capacity of 10 MT/day was commissioned during FY10. Other than that, the company has also added wind power of 1.5 MW in Sept 2010 at Satara, Maharastra and cogen of 2.5 MW in FY10. BAL plans to sell part of its surplus wind power to the grid and use 50% captively and post the methylamines expansion it could use the power itself.
  • Fresh Capex plans being undertaken could establish market dominance – BAL intends to add a 15,000 NMP/GBL plant at MIDC, Chincholi, Solapur (could be ready by December 2010) and 30,000 MTPA of methylamines at its MIDC facility (could be ready by June 2011) as per company claims. The total capex for the same could be in the range of Rs. 100 cr and will be partly funded via debt.
  • Strategic Backward & forward integration  – could lead to margin expansion and is a reflection of strong in-house R&D. BAL has successfully set up the plant for GBL, a key ingredient for NMP and now does not need to depend on import of GBL as its requirement can be fully met from captive production. This should reduce the cost of production of NMP and also enhance the product range to serve the domestic and export market. Interestingly, this GBL plant is first of its kind in India and is a 100% import substitute. Moreover, the company has developed the manufacturing process in-house through R&D with catalytic dehydrogenation. The hydrogen produced by dehydrogenation is further being utilized, for the first time in India for running the boilers. BAL has a cogen capacity of 2.5 MW that was sent up in FY09. These initiatives could lead to further margin expansion for the company once it gains the necessary scale. BAL’s strategic backward and forward integration could lead to higher growth rates for the company in FY11 and FY12
  • Good visibility on growth with margin expansion – Demand for BAL’s products could remain strong as the pharma and pesticide industry are on high growth trajectories. The capex and backward integration carried out in FY10 should translate into higher topline growth in FY11. Further, by Q4FY11 the expanded NMP/GBL facility could be commissioned leading to incremental growth. FY12 could see the full impact of NMP/GBL as well as part impact of the expanded Methylamine facility. BAL could continue to grow well due to new product introduction, increase in capacity utilization with timely execution of capex plans. Uninterrupted power supply from captive power plant could give additional margins and operating efficiencies along with improved productivity.

Bearish Viewpoints

  • High Leverage – BAL’s current debt on books is about Rs. 100 cr with debt-to equity at 1.26. In order to fund its future capex the company plans to take on more debt in FY11 and FY12 (another 100 Cr). This could stretch its balance sheet and also increase the company’s exposure to interest rate risk and higher interest and depreciation costs putting some pressure on margins.
  • Aggressive Expansion Execution risks – BAL has planned a number of expansion plans some of which come on stream in FY11 and the balance in FY12 (100 Cr for 15000 TPA NMP/GBL and the Methylamine 30000 TPA additional plants). Any delay in commissioning of capacities could impact the company’s growth prospects. Any change in demand forecast (esp. Methylamine) could lead to unutilised capacity and depressed return ratios.
  • Raw material price risk – BAL’s key raw materials include methanol (made from gas and imported from Saudi Arabia), ethanol (at times imported from Brazil) and ammonia (purchased from players like GNFC & RCF). BAL typically enters into monthly contracts for the procurement of its raw materials. Any sharp rise in raw material price could impact margins adversely.
  • Forex risk – BAL exports its products as well as imports raw materials. In FY10 forex earned was Rs. 61.3 Cr (USD and Euro) and forex used was Rs. 58.8 Cr (mainly USD). Hence, while BAL has a natural hedge In USD, it is exposed to Euro price risk.
  • Delay in approvals for PVP-K30 could mean under utilization of the facility and depressed return ratios & impact profitability for BAL.
  • Hotels foray – Diversification into hotels business may be considered by investors as unrelated. However the company feels that it is a way to exploit its land assets and offers some amount of derisking to its overdependence on chemicals business.
  • Low trading volumes – The scrip though listed on the BSE and NSE does not generate large volumes on a consistent basis. This could lead to higher impact costs.

Barriers to entry

  • Balaji Amines enjoys a near monopoly status for some of its products. Globally, amines technology is closely guarded. BAL is first company in India, to test an indigenously developed technology, as compared to its peers, viz- Alkyl Amines Chemicals Ltd and RCF, who preferred technical collaboration with foreign players.
  • The focus on in-house R&D and proven success is in the market for the specialty chemicals developed (NMP, GBL, Morpholine, P2, PVK-30) -5 key products in last 4 years – is a key differentiating factor for BAL.
  • Strategic backward integration for NMP (GBL) and forward integration for PVP (2P) should help augment Balaji Amine’s quest for cost leadership.

Interesting Viewpoints

  • PVP-K30 plant could contribute significantly to bottomline once approvals are in place – In FY10, BAL set up a 1,200 MTPA PVP-K30 (Polyvinyl Purrolidone) plant at a capex of about Rs. 35 cr. This plant is once again the first of its kind in India. PVP is mainly used by the pharma industry as a binder for granules and tablets. However, this product is awaiting approval from a number of agencies (USFDA, EuroGMP) which is mandatory before it can be used by the Pharma industry as an ingredient. This product is presently made by Huntsman and BASF around the globe, apart from some Chinese companies. BAL has the advantage of in-house raw material right from GBL & 2P leading to PVP K-30. Currently, India imports about 100 tons per month of PVP and BAL is hopeful of supplying this quantity to the domestic market once all approvals are in place. When PVP approvals are received, the product has the potential to contribute about Rs. 30 cr in a full year of operations as it sells at about Rs. 600 per kg. The profit margins in this product could be healthy as there is no domestic competition and is a 100% import substitute. Product acceptance and approval of PVP could be game-changer and lead to a re-rating of the stock.
  • Venture into hotel business – BAL has decided to venture into the hotel business with a view to diversify from being focused only on chemicals. The company plans to utilize its available vacant land in upcoming areas of Solapur for these purposes. The company has appointed Mahajan & Aibara, experienced consultants in Hotel and Restaurant Industry for giving feasibility report for the usage of existing land, who have submitted a report after thorough study. Accordingly, BAL has proposed to setup a Hotel with 100 rooms and banquet facilities with an investment of Rs. 40 cr. The project is expected to completed over a period of 2 years from now (by mid 2012). BAL has signed a formal agreement with Sarovar Group of Hotels for operating/managing the Hotel property.
  • There are prospects of a supply crunch in methylamine capacity with rumours (?) of RCF Mumbai facility marked for close-down. Balaji with its increased capacities may be in a good position to exploit this situation in the near-medium term.

Disclosure(s)

Donald Francis: No Holdings in the Company;


Pondy Oxides

Background

Pondy Oxides & Chemicals Ltd (POCL) incorporated in 1995, is one of the India’s leading metals, metallic oxides and plastic additives producers. POCL has broad based operations manufacturing of Lead, Litharge Red lead, Zinc oxide, Lead sub Oxide, and solid and liquid stabilizers of PVC. Lead smelting capacity is ~17000 tonnes per annum, Metal Oxides capacity is ~14000 tonnes per annum, while Plastic additives capacity is ~6000 tonnes per annum.

POCL has two subsidiary companies – M/s Baschem Pharma Ltd (100% subsidiary) at Maraimalai Nagar in Tamilnadu to manufacture liquid stabilizers and M/s Lohia Metals Pvt Ltd (51% subsidiary), which has an annual capacity of 12,000 tonnes of metal refining. Baschem Pharma Ltd is currently, solely engaged in trading activities and hence does not contribute any significant revenues/profits to the consolidated financials of POCL.


Main Products/Segments

POCL earns ~ 70% from metals & metal oxides division and another 30% from the plastic additives division. In the metals division lead metal forms ~80% of the sales while zinc forms the remaining 20%.


Main Markets/Customers

Automobile batteries industry (Lead, Lead-Antimony & Lead-Calcium alloys) is the major customer segment. Tyres & Ceramics (Zinc Oxide), Cable sheeting (Lead oxides), Galvanizing units (Zinc) and Plastics (PVC stabilisers) are the other customer industries POCl caters to.

POCL has a large clientele which includes big names like Amara Raja Batteries, Exide Industries, J K Tyres, Supreme Industries, Kisan, Shriram EPC, Chemplast, MRF Ltd, Tata Yuasa to name a few. There are also several top-notch clients in export markets like Korea, Indonesia, Malaysia, Srilanka & Vietnam.

POCL is a recognized export house and mainly exports lead metal. Even though plastic additives are also exported, they form a small part of the total exports of the company. The export margins of the company are higher and stabler than the domestic margins.


Bullish Viewpoints

  • Growth Potential driven by Lead Acid Battery Industry – Pondy Oxides is a good proxy play on the Lead Acid battery industry. There is a steady demand for lead acid batteries from Automotive OEM & replacement market, Telecom, Railways (AC coaches), Defense and the Power backup market, globally. Exide and Amara Raja have announced big capacity expansions in FY11 on the back of strong demand.
  • Stability in Lead prices – better volumes & margins: The business of POCL to a large extent is dependent on the metal prices especially lead as huge fluctuations in the metal prices create pressure on the margins of the company. The metal prices have stabilized since start of FY10 and hence has led to high volumes. POCL is also dependent on Zinc to some extent though lead is its main product. POCL buys/imports lead ore from Africa, Indonesia etc and also buys/imports lead bearing scraps. It converts this into pure lead metal and later part of it into lead alloys/lead oxide.
  • 51% subsidiary adds significantly to bottomline: Lohia Metals Pvt Ltd, its 51% subsidiary contributed significantly to Sales and profits in FY10, reversing the losses in FY09, again as a result of stabilising Lead prices and increase in volumes. Standalone EPS for FY10 is 5.71, whereas Consolidated EPS stands at 12.22.
  • Shift to LME based pricing for sales and purchases: This might help POCL earn stable profits. Earlier, POCL used to make its sales and purchases on a spot market basis and hence there was no assurance of maintainable profits, as the raw material price fluctuation could not always be passed on to its customers. In FY09, POCL took a hit on its profits because of this reason, as, the huge volatility in the raw material prices especially lead metal could not be passed on to its customers leading to a fall in its profits.
  • POCL has in FY10 started basing its pricing for sales and purchases based on the LME monthly average prices. This could lead to less volatility in the prices and profits. Currently one of the issues that POCL is facing is the quarter-to-quarter variation in the profits where in one quarter the company earns profits and the other it sees a fall. In order to prevent this from happening in future and to maintain sustainable profits going forward, it has taken up this initiative of linking its purchases and sales to the monthly average price on LME. This move seems to have enhanced the profitability of the company and the positive impact of this was seen in FY10.
  • Higher focus on exports : This could lead to better margins and improved working capital management. POCL is also into export sales, mainly of lead metal. POCL expects exports to form 50% of the total revenues in FY11. Exports form a key to the overall business structure of POCL. The robust export situation in H2FY11 could lead to better topline and bottomline for FY11. Export realizations are based on LME prices, further export sales are made against sight L/C and receivables are realized faster.
  • Valuations look good: Pondy oxides (CMP 35) is available at a dividend yield of ~3.5%, P/BV of 1.2 and P/E of ~2.86 on a consolidated basis. Sales grew at over 37% in FY10 over FY09
  • Recent performance is robust: Pondy Oxides registered 60 Cr in standalone sales in 1QFY11 compared to 27 Cr in the corresponding quarter of FY10. PAT grew to 1.4 Cr in 1QFY11 compared to 1Cr in corresponding quarter of FY10. Consolidated results are not available for 1QFY11

Bearish Viewpoints

  • Negative Operating cash flows: Operating Cash flows have turned negative for POCL in FY10. This is mainly due to huge increases in working capital requirements. Inventory days almost doubled to 42 days from the last 3 years average of 20 days. Debtor days also went up to 50 days. The company maintains this increase is due the sales mix shifting heavily towards metal exports. While there is increase in working capital requirements, on an absolute basis, 40-50 inventory/debtor days is not unusual for manufacturing firms.
  • Volatility in metal prices: Raw materials constitute 77-80% of Sales. One of the major concerns faced by POCL is the volatility in price of raw materials and finished goods. The adverse price fluctuation of the raw materials especially lead could negatively impact the margins of the company. Though POCL has tried to mitigate this risk by linking the prices of both to LME average prices, there is still some risk due to volatility
  • Slowdown in key customer Industries/economy: The products of POCL are consumed by various industries like automobiles, tyres & ceramics, plastics, etc. Any slowdown in these industries could impact POCL.
  • Environmental concerns: Lead metal industry is licensed and faces stringent environmental pollution norms. There is always a risk of environmental concerns with plant operations being asked to be shifted out/halted with norms getting tightened, environmental activism taking centrestage.

Barriers to entry

  • Lead metal refining/smelting needs licensing and environmental clearances. It is increasingly becoming tougher for new entrants to enter this market. More importantly lead scrap, ore, battery plates import licensing is also heavily restrictive.
  • Pondy Oxides in-house process design & fabrication skills have resulted in very low cost plants, at half the cost of other leading smelters, the company claims. For example, apart from the furnace, almost everything else in the Smelter plant is designed and manufactured in-house

Interesting Viewpoints

  • The company’s stated goal is to achieve a turnover of Rs. 500 Cr by FY13. One of the milestones towards this is increasing Lead smelting capacity from 2000 tonnes per month to ~6000 tonnes per month. The company is hopeful of closing the land acquisition in FY11 on the basis of application/bids put in by the company
  • The company is also considering moving into other metals like Aluminium to diversify operations. This is being considered on the basis of firm interest/prodding shown by top customers

Disclosure(s)

Donald Francis: No Holdings in the Company;


Pondy Oxides Management Q&A: Sep 2010

Management Q&A

1.  WE ARE IMPRESSED BY THE TURNAROUND POSTED IN FY2010. GOING BY 1QFY11 RESULTS, THE ROBUST RESULTS SEEM TO BE CONTINUING. CONGRATULATIONS!

FY09 was a difficult year for commodity metals. Compared to FY08 there is only a 15% jump in consolidated Sales, but consolidated EPS has gone up ~8x. Apart from the firming up & stability in lead & zinc prices in FY10, what are the contributing factors to this turnaround? Have you effected any changes in your business model from the learnings in FY09?

The kind of steep RM volatility seen in FY09 was never seen before. prices just kept plummeting and plummeting. After some 14 years in this business, in FY09 we were caught unprepared – with huge inventory pile up, high open positions in the spot markets.  We did our homework and shifted to a LME (London Metals Exchange) based pricing model, got key supplier buy-ins -linked purchase to sales, included monthly LME based price revisions in contracts. And capped open positions to only 15-20% for spot markets. This was retained so they could still take advantage of price swings when availble but cap the risk exposure.

It was a tremendous learning for us. We believe we have emerged a stronger company with better procurement and pricing models and removed some of the vulnerabilities from our business model. From a purely manufacturing company we are transforming to a more commodity markets savvy company as we continuously track and monitor global supply/demand and pricing, based on the models we work on/keep tweaking. We have done well in FY10, we should do better in FY11. Perhaps we will need to again sit and revisit FY11 to identify and reduce other vulnerabilities in our business.

2.  POCL BUSINESS IS MAINLY LEAD SMELTING AND ZINC REFINING. LOHIA METALS IS ENGAGED IN REFINING LEAD METAL FROM SCRAP LEAD. LEAD SMELTING & LEAD REFINING ARE ESSENTIALLY DIFFERENT PROCESSES.

Please give us an overview of the industry, your business positioning and that of subsidiaries. What are your main customer/product segments and how do you see the stability/growth in the near & medium term.

Lohia Metals Private Limited is engaged in the refining process of lead metal from the impure lead (commonly known as scrap lead) while POCL operates a lead smelter plant for the extraction of lead metal from scrap batteries and ore. The processes for refining and smelting are entirely different from each other. While the starting point for the former is lead bullion, for the latter it is lead ore or battery scrap. The clearances required from the Pollution Control Board for refining and extraction of lead are also separate from each other.

We operate in 3 segments. Metals, Metal Oxide and Plastic Additives. Metals segment is now more export focused (70-80%) with higher margins. Metal Export sales started from Oct 2009 onwards so FY10 saw about 6 month of export sales benefit; FY11 will be the first year getting the benefit of export sales for the full year. Metal Oxides segment (Litharge, Zinc Oxide, Lead Oxide) sees about 2/3rd sales in domestic market, while the balance 1/3rd caters to captive consumption. Plastic additives section caters primarily to the needs of domestic PVC pipe manufacturers and some exports. Plastic additives segment is ultra competitive fragmented market with low margins.

We enjoy a good position in Metals & Metal Oxides with a 8-10 percent market share. We are probably the largest organised player after the giant Hindustan Zinc which dominates this space. The only other listed player that we know of is Nile Ltd.

POCL brand has been slowly built up in export markets over the last few years. Our quality, deliveries, service & packaging meets international standards and Leading customers have put us on their approved list. We now are in a happy situation where we don’t have to worry about Marketing our product, but need to augment our manufacturing capacity substantially to meet demand. We do not see any slackening in demand from Battery manufacturers catering to Auto OEMs & Replacement market (which is bigger), Railways, Defense, and the Power substitutes like Inverters,etc. The demand will keep going up for many years to come.

3.  SOME OF YOUR CLIENTS ARE AMARA RAJA, EXIDE, SUPREME INDUSTRIES, JK TYRES, MRF

Please tell us more on your top clients and the nature of relationship with these clients. How much of your business is long-standing repeat business? Do you enjoy sole-supplier/critical supplier status with any clients? Any client contributes more than 10% of Sales?

Amara Raja is one of the top Indian clients. We have several top battery manufacturers in Export Markets. South-East Asian countries are our top export markets followed by the Middle-East. We also export to Japanese customers like Yuasa. Tata-Yuasa which set up battery manufacturing operations in India about 2 years back, is also a customer. About 80-90% of our business is repeat business. We have not lost a single client so far. Our relationships are deepening with time.

4.  EXPORT SALES HAVE DONE VERY WELL IN FY10. AT 51 CR THAT’S ~20-25% OF CONSOLIDATED SALES. THERE WAS ALSO A NEWS ITEM ANNOUNCING 100% EOU IN SEP 2009.

Please elaborate on the export sales/marketing model? Better margins, debtor levels management?? Is there a concerted focus on Export sales? How much will export sales likely contribute from here on?

We have developed the Export market from scratch in the last few years. Researching the customer base, personally contacting them, demonstrating our quality, labeling & packing practices, getting onto approved lists – the hard way.

Today POCL brand is very well accepted. Infact for most of our customers the trust in the brand is so strong that our metals do not anymore go in through incoming material inspection, but are taken in straight at the shop-floor.  We are seeing larger orders, and incremental Sales efforts are much less now.

Yes, Exports is the primary growth driver. Export sales contribution should double in FY11.

5.  COMPETITION AND MARKET SHARE

What is the nature of competition? Who are your biggest competitors – domestic & exports? What kind of market share do you enjoy in your respective segments? What kind of competitive advantage do you enjoy? Scale economies, better technology, integrated operations, entrenched customer relationships??

The customers that we supply to are huge. They have their own processes for supplier approval. It takes upwards of 6m-1 year for a metal manufacturer to get through this process and onto the approved list. We have not lost a single customer and 80-90% business is repeat business.

Lead refining or smelting is a space that has got restricted license-based entry, due to environmental pollution norms. It is not easy for new players to get started. Besides raw material import licensing is also a severely restricted process.

Our Lead smelting plant is one of the most modern facilities in India, with advanced smelting and spectro-analyser technologies deployed. We also enjoy tremendous cost advantages with in-house design and fabrication skills for many components. Our process knowledge and technology is among the best – We are able to customise alloy-lead as per any customer requirement. We are able to extract the last bit of lead present in any scrap, battery plates or ore. The SLAG (residual output) is completely lead-free.

Hindustan Zinc the giant PSU dominates our space. It makes only Lead metal and not Lead alloys. We manufacture both Lead and Lead-alloys as per customer requirements. We probably have a market share close to 8-10% of the overall market for lead metals and lead-alloys.

6.  500 CR TARGET BY FY12 –NEWS ITEM IN BUSINESS STANDARD SEP 2009

The Batteries division was closed in FY09. Baschem Pharma doesn’t contribute meaningfully to the topline/bottomline. What’s the Mangement’s vision and current direction? Where do you see this company in the medium term? Is the existing business scalable enough or are you eyeing further diversification into Aluminum and value added products as mentioned in the news item?

We have a internal target of reaching 500 Cr by FY13 (2012-13). Currently we are able to produce ~2000 tonnes per month. We have plans of setting up another modern smelting plant with a ~4000 tonnes per month capacity. We have applied/bid for land. We hope to have the land alloted in FY11. Setting up the plant would take another 9 months.

See the demand is huge. We could have made sales of 5000 tonnes per month, if we had the capacity installed today. So in the next 3 years the Lead metals segment itself can take us there, if things go well. There are some plans on Alumunium metal, but are too preliminary to discuss at this stage. Raising funds for capacity expansion is not a problem, as we are practically debt-free. Long term debt stands at ~1.4 Cr.

7.   INSTALLED CAPACITIES : METALS -17400 MT; METALLIC OXIDES – 14280 MT; PLASTIC ADDITIVES-6000 MT

Capacity Utilisations are respectively 51.14%, 32.53%, 88.43% for above. Metalllic Oxides saw lower utilization than FY09. Plastic Additives now contribute ~30% to revenues while Metals contribute 44% with Metallic Oxides contributing 26%. Kindly elaborate on the product mix strategies – current and planned

Metals segment capacity will see ~90% capacity utilisation in FY11, as we told you FY10 only saw 6 months of export sales which started from Oct 2009.

Lead Oxide that we produce is used only for captive consumption. Most battery manufacturers have their own Lead oxide plants. Zinc Oxide we are supplying to Tyre and Ceramic industries. We have increased manufacturing Litharge which will contribute to better capacity utilisation this year. This segment capacity will remain under-utilised for some time. You see getting licensing and increasing capacities is a cumbersome process in our industry!

Plastic Additives sector is operating at 90% utilisation, which will remain at these levels.

8.  TOTAL DEBT AT FY10 STANDS AT 60.27 CR AT ~2X DEBT-EQUITY. 54 CR OR 90% IS UTILIZED FOR WORKING CAPITAL. BURGEONING WORKING CAPITAL REQUIREMENTS ARE THE BIGGEST DRAG AND PRIMARILY RESPONSIBLE FOR THE SERIES OF NEGATIVE CASH FLOWS

Working Capital requirement seems to be running far ahead of Sales. From a low of ~18% in 2006, Working Capital/Sales is now touching 30% due to Inventory days almost doubling and Debtor days too seeing a huge rise . Operating Cash flows have been negative primarily due to this. What’s Management’s view on this situation? Any improvements likely in FY11 or the medium term?

Yes there is a surge in working capital -inventory days doubled from 21 to 42 days sales and debtor days went from 29 to 50 in FY10. This was essentially because of a shift in our product mix towards metal exports. On absolute basis these are not bad numbers for a manufacturing firm.

We are trying to bring down our financing cost. This will come down by 15-20% easily as we have better terms now on FCPC (Foreign currency packing credits) $ credit norms -Libor. Its likely that inventory & debtors will remain at these levels.

Long term Debt is only 1.4 Cr. Short term loans of ~53 Cr comprise the bulk of total loans of some 60 Cr for FY10.

9.  PROMOTER EQUITY STANDS AT A LOW 37% SINCE JUNE 2009. THIS IS HIGHER THAN THE ~32% PROMOTER EQUITY IN JUNE 2008. WE ALSO FIND THAT AS OF MAR 2006 THE PROMOTER HOLDING WAS ABOUT 42.13%, SUBSEQUENTLY THE COMPANY CAME OUT WITH A RIGHTS ISSUE BUT THE PROMOTERS HOLDING REDUCED DRASTICALLY TO 28.53% BY MARCH 2007.

Could you elaborate on the circumstances prevailing in 2006-07. What’s Management’s current view on enhancing promoter equity??

Together with our associates the promoter equity in POCL stands at about 43%. We are looking to augment this by another 10% as soon as we can. To sustain operations in FY09, lot of our personal funds had got tied up.

We don’t think the figure of 29% promoter equity in FY07 is correct. Promoter equity has always been above 30-32%.

10.  Lohia Metals is a 51% subsidiary. Its performance has significantly contributed to the turnaround in FY10.

POCL metals segment (smelting) and Lohia Metals (refining) –are they addressing different customer segments/applications? Otherwise isn’t there a potential conflict? Do they bring different advantages to the table? What is the more cost-competitive technology? Why hasn’t the Management converted Lohia Metals to a 100% subsidiary? How is the balance 49% structured??

Lohia Metals also exports Lead metal and did a turnover of 95 Cr in FY10. It operates a lead refining plant, whereas POCL operates a lead smelting plant. Lead smelting is more backward integrated as it can use anything that contains Lead metal in the smelter as a feed e.g. lead scrap, battery plates, and ore. Smelting has a slight edge on margins, but only that much.

Yes, Ashish Bansal who looks after POCL export marketing and is responsible for building the POCL brand in export markets, also looks after Lohia Metals!

So, why isn’t there a conflict of interest? How do we handle it? This might have been a valid question in the context of a declining market. But in a market where demand far outstrips supply, this is irrelevant. To give you a context, we can roughly manufacture 2000 tonnes per month; if we could manufacture 5000 tonnes per month we could have easily made the sales. We don’t see the demand slackening for the next 10 years! battery manaufacturers are thriving on auto OEM and replacement market (bigger than OEM), telecom, inverter, railways, defence markets.

11.  POCL HAS BEEN KNOWN TO BE A DECENT DIVIDEND PAYING RECORD. IT HAS BEEN MAINTAINING DIVIDEND PER SHARE AT THE SAME LEVEL FOR PAST FEW YEARS.

While Dividend per share (DPS) is maintained at ~ Rs.1.2 per share for last few years, dividend payout is not keeping pace with earnings. Payout has dropped drastically from over 40% in FY05 to below 10% in FY10, despite the good results. When will payouts improve? Is there a dividend policy that Investors in Pondy Oxides can expect in future?

We paid dividends even in our loss making year FY09, as we did not want our dividend payment record to be impaired. Yes, we did much better in FY10 but restored dividend to earlier year levels and didn’t increase it to compensate for FY09. FY11 should see higher dividend payouts.

12.  PONDY HAS MANUFACTURING SPREAD OVER SEVERAL LOCATIONS WITH RELATIVELY SMALL CAPACITIES.

Is there any locational advantage derived –in serving customers or procuring material? 75% of raw material is imported.

Well, historically our Pondicherry units had tax benefits that have ceased some 3 years back. It still has CST at 1% but that also might cease once GST gets rolled out.

There certainly is a advantage in having manufacturing spread across a few locations, and more so in our industry. Initially units are located at the outskirts of a town/city but with the passage of time as population spreads, environment pollution norms would require shifting to more distant locations, as we are in a what is called ‘Red category” industry.

13.  PONDY OXIDES SEEMS TO BE A NET FOREIGN EXCHANGE BUYER. EXPORTS CONSTITUTE 50% OF SALES BUT 75% OF RAW MATERIAL IS IMPORTED. CASH FLOW STATEMENT SHOWS A POSITIVE CONTRIBUTION FROM FOREIGN EXCHANGE FLUCTUATIONS CONSISTENTLY FOR THE LAST FEW YEARS!

What’s the foreign exchange fluctuation impact? What kind of hedging policy is involved? With growing contribution from Export Sales will a natural hedge get in-built in the business model??

Yes we expect export sales growth to build a natural hedge for the raw material import forex risks. We can’t say we have a very evolved forex hedging policy, we watch movements closely, we are proactive in tracking and taking corrective actions fast, that’s all I guess.

14.  1QFY11 RESULTS SHOW EXCELLENT TOPLINE GROWTH AND DECENT BOTTOMLINE GROWTH COMPARED TO 1QFY10. HOWEVER, OPERATING MARGIN IS BACK TO ~5% LEVELS (~8%) WHILE NET MARGINS ARE AT ~2% LEVELS (~3.5%).

This is on the back of lower finance charges – almost halving at 1.02 Cr vs 1.96 Cr in Q4FY10. What is the current debt level and what is it likely to be during the next few quarters? RM/Sales is back at 80%. What are the indications going forward? Where do you expect margins to stabilize at in FY11?

As mentioned our debt is almost entirely on account of short-term loans to cover working capital requirements. These are expected to remain at similar levels. We will bring down financing cost substantially. last qr finance cost was down to 1Cr levels (from 1.96 Cr in 4QFY10), which is where it should get pegged at similar level of sales.
We hope to maintain the profitability levels achieved in FY10.

Disclosure(s)

Donald Francis: No Holdings in the Company; ;
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