Astral Poly Technik

Background

Astral Poly Technik (APL) has its production facilities at Gujarat and Himachal Pradesh to manufacture plumbing systems from ½” to 8” diameter.

APL was the first licensee of Lubrizol (formerly B. F. Goodrich), USA to manufacture and market CPVC (patent protected) piping and plumbing system in India in 1999. APL entered into a techno-financial joint venture with Specialty Process LLC of USA, which provided the required technical expertise for manufacturing CPVC pipes and fittings for home and industrial applications. Specialty Process LLC, USA has 14.08% ownership in APL as part of the Promoter group. APL claims to be the only Licensee of Lubrizol in India and neighbouring countries for the use of the trademarks ‘‘BlazeMaster” (since 2006), and “Corzan” (1998). “FlowGuard” (1998) license is also available with2 other unlisted players  Ashirvad Pipes (Bangalore) and Ajay systems (Delhi).

APL has ISO 9001:2000 certification for manufacture and supply of CPVC and PVC pipes and fittings for plumbing systems and industrial piping system. Astral is the only company in India whose manufacturing plant is approved by NSF, USA. The NSF certification represents the highest standards in public health & safety and environment protection. The NSF mark is recognized for its value in international trade around the world and is respected by regulatory agencies worldwide. Astral recently received ISI approval for its CPVC products in the country.

APL’s manufacturing facility at Barotiwal-Solan District (HP) enjoys tax benefits/ concessions, relating to duties of Sales Tax, Excise and Income Tax. Overall tax rate for the company in FY2010 was 16.90%. These benefits are expected to continue till FY15.


Main Products/Segments

Main products include Chlorinated PVC (CPVC) pipes and fittings for hot and cold water plumbing systems, CPVC industrial piping system for transportation of hazardous and highly corrosive chemicals, and lead free PVC systems for cold water application.

APL introduced a new product range in lead free PVC pressure pipes and fittings in 2004, again a first in india. With the concept of providing a one-stop source for all plastic piping systems, APL also began trading in products such as CPVC and PVC fittings, flanges and valves from Spears (USA), solvent cements (adhesive solutions) for joining pipes and fittings from IPSC (USA), underground specialty fittings from Hunter (U.K) and CPVC and PVC plastic pipes of larger diameters from Harvell Inc. (USA).

CPVC product segments contribute roughly 65% of Sales, balance is from PVC products.


Main Markets/Customers

  • Astral Flowguard & Astral Acquarius – for usual hot and cold water plumbing solutions
    • Residential Housing Projects
    • Hotels, Hospitals, Malls, SEZs, Airports – Construction projects
    • primarily sold through the distribution network
  • Astral Corzan – for transportation of highly corrosive industrial chemicals and gases
    • Industrial projects
    • primarily marketed by Direct Sales as it requires concept selling
  • 65-70% of Sales are reportedly from the Residential Housing sector. Balance from Commercial
  • Main demand is from Metros & Tier1 cities. However as per the company FY10 saw increase in demand from Tier2 & 3 cities.
  • As per the company increased focus on Replacement market (10% of CPVC Sales which has huge future potential especially in infrastructure, hotels, hospitals) and Projects in FY11
  • Some major customers in FY10
    • Bangalore – Apollo Hospital, Columbia Hospital, Hotel Novatel
    • Delhi/Gurgaon – Medicity, Max Hospital, Delhi international Airport

Bullish Viewpoints

  • Proxy play on the growing domestic construction sector – 26.53 million dwelling units housing shortage in India by 2012 is the estimate by a Technical commitee of the Ministry of Housing and Urban Poverty Alleviation. The plumbing segment is expected to grow between 15-20% annually for next few years based on demand from new residential, commercial and industrial projects. Apart from this, incremental demand also comes from the replacement of GI pipes installed in the existing projects. APL with its strong product basket catering to a diverse demand base (residential, hotels, malls, SEZ, airports, and replacement market) should do well.
  • Excellent growth – Check out the Astral Poly Technik Growth Snapshot here. Sales over last 5 years has grown at an astonishing 52% CAGR to clock ~300 Cr in FY10 from little over 58 Cr in FY06. And Earnings have grown at a much higher 62% CAGR going up over 7x in 5 years from ~4 Crin FY06 to over 28 Cr in FY10. Starting out in 1999, the company has set a scorching pace and is likely to cross 400 Cr Sales in FY11 in just 12 years.
  • Quality of growth – The rapid growth has been achieved with decent returns and margins. Check out the Astral Poly Technik Profitability snapshot here. Normalised Return on Equity (RoE) and Return on Capital Employed (RoCE) is 20% plus. Operating margins have been between 13-15% generally.
  • Timely expansions have propelled growth – Capacity has been gradually but regularly scaled up by APL from 4000 MT in FY05 to over 30000 MT in FY10, or over 7x in 6 years. Reportedly this has been enhanced further to over 45000 MT by FY11 end. Capacity utilisations have generally remained over 75%.
  • Strong Balance Sheet – APL had raised ~Rs 34 Cr in March 2007 as IPO proceeds to part finance its expansion plans. It is pleasing to note that the balance sheet has been progressively strengthened while this stupendous growth was being achieved.  Check out the Astral Poly Technik Financial Health Snapshot here. Debt-to-Equity has come down from 1.18 in FY06 to 0.34 in FY10.
  • Backward Integration may help shore up margins – In Oct 2010, APL bought 85% stake in Advanced Adhesives Pvt. Ltd. The subsidiary company will manufacture Solvent Cement in India. Equity base of the company is around Rs 5 lakhs and expected to incur Rs 4 crore of capex. Solvent Cement hitherto purchased by APL used to be ~6% of Sales.
  • New product launches to be growth drivers – APL has a good track record in regularly launching new products and bringing in advanced technology into the country. In FY10 various products launched by the Company were SWR Pipes, Underground Drainage Pipes, Foam Core Pipes etc. These products were extended pan India in FY11 apart from new launches in FY11 like Manholes and Inspection Chambers. Blazemaster Fire Sprinkler system slated to be launched in FY12 is anticipated to lead to huge growth in volumes as these are becoming compulsory for multistoried buildings, Hospitals, Hotel, Malls, Airports etc. It has UL approval and awaiting BIS approval for launch. Fire sprinkler systems will require many more pipes & fittings than conventional.
  • Strong distribution network – A distributor in every state. APL has set up an extensive distribution network having India wide presence with 250 distributors and 5500 dealer network. They have an access to large numbers of resellers across the territory and enjoy good relationships with architects, consultants, plumbers, builders, etc.
  • Recent Financial performance – In 9mFY11, APL has already done 269 Cr in Sales (187 Cr in 9mFY10) clocking over 43% growth. This shoould be maintained for full year FY11 as the second half traditionally records higher sales. However earnings growth will probably be in the lower 20% range (9m earnings growth is 26%).
  • Further expansion plans – The company has purchased land in 2 more places as part of its FY12 expansion plans. 44,000 square yards in Dholka (Gujarat) and Hosur (Karnataka). Capacity is indicated to be ramped up to 60,000 MT by FY12 end.

Bearish Viewpoints

  • Over-dependence on a few suppliers to meet raw material requirements. APL largely depends on a few suppliers to meet its raw material requirements. CPVC is the primary raw material for manufacturing operations. 60-65% of raw materials are sourced from Lubrizol, USA. Any disruptions or changes in supply terms may adversely affect its operations and profitability of business.
  • Foreign currency fluctuations – APL imports raw materials, finished products and machinery. It also has FCNR loans. Both these involve risks associated with foreign exchange fluctuations, and in extreme situations as in FY09 have drastically affected the revenues and profitability of operations. Despite an excellent 42% sales growth, APL had registered degrowth in profitability for FY09. The US$ had increased from Rs. 40 to Rs. 52 level which resulted in a loss to the tune of Rs.7.34 Cr in foreign currency loan liability and Rs. 6.10 Cr on account of cost of import of raw material. In aggregate, APL had incurred a loss of Rs.13.44 Cr due to foreign exchange fluctuation. In FY10, the FCNR loan stood at 23.5 Cr and RM imports at 104 Cr.
  • Aggressive expansion plans carry execution risks – The only way APL can keep growing is continuous expansion. So far APL has managed this judiciously. However any slippages in execution or reversal in demand situation, can pose serious risks.
  • Stronger Competition – Its a matter of time before the Indian market for plumbing & fittings solutions, esp. growing CPVC markets attract the attention of other global/bigger players in the Indian plumbing & fittings market. Other CPVC compound suppliers could start focusing on India and license bigger players/suitors from PVC or GI segments. Even Lubrizol could license other new players setting up bigger capacities.
  • Recent performance on margins front needs watching – Operating profit margins have been coming down sequentially since last 4 Qrs. APL had registered OPM of 16.19% in Q4 FY10. Since then OPMs have sequentially been 14.49%, 12.40%, and down to 11% in Q3 FY11. Thats a significant drop of over 5% in the last 4 quarters. RM as a percentage of Sales meanwhile has gone up but only by 2.5% or so. This may need watching over next few quarters to see if things revert to normalised levels.

Barriers to entry

  • First mover advantage – First licensee of Lubrozol in India for its main brands “FlowGuard”, “Corzan” and BlazeMaster”. To set up a facility for manufacturing CPVC it requires typically 18 to 20 months. Approval from various authorities like UL, BIS and NSF typically takes another 24 months.
  • Company continues to have strong support from Lubrizol, with which it has right to receive the CPVC-resin, key raw material to manufacture CPVC in India. Lubrizol doesn’t revise the prices of raw materials more than 3 times in a year, which gives time for the company to adjust unlike for other raw material producers of PVC business which change prices frequently.
  • Astral has historically maintained stringent working capital cycle especially in the CPVC business. The company gets around 120 days credit from the supplier i.e. Lubrizol for the raw materials. It gives around 45 days credit to its distributors. The conversion time from raw material to pipes/fitting is just around an hour so the inventory days are mainly a function of transit period. Whatsoever working capital the company requires is mainly to fund its PVC business.
  • New product launches seem to be planned well in advance in this company. For e.g it had licensed Blazemaster (Fire Sprinkler system) from Lubrizol in 2006 itself and applied for UL certification which it has recieved. Local approval is awaited
  • Astral is now in a position to provide the complete solution for Plumbing which covers Drinking Water, Sanitation,Waste Water, Rain Water Harvesting, Hot Water and Transportation of Chemicals, etc.
  • Strong brand image and distributor pull – Regular product launches – Innovative product introduction, technologically advanced products, NSF and UL standards compliant products, coupled with a broad product basket has created a strong brand image and distributor pull for the company.

Interesting Viewpoints

  • Sourced from Draft Red Herring Prospectus 2006, Astral Polytechnik
    • CPVC Technology – CPVC Resin technology is patented by B. F. Goodrich of USA, which has been taken over by Lubrizol. This technology enables enrichment of the chlorine content in PVC by chlorination. This modifies some of the root characteristics of the polymer and results in an altogether new range of polymer called CPVC. The characteristics like tensile strength, capability to withstand high-pressure, impact strength, capability to withstand high temperature; anti-flaming characteristics etc. make CPVC very different from other plastics. PVC can not withstand temperatures of more than 55◦C, whereas CPVC can carry liquid upto 93◦C. The density and viscosity of the material is increased substantially but yet it is capable of extruding and moulding like PVC.
    • CPVC vs PVC – PVC is one of the most used plastics in piping and plumbing systems. However, PVC has much lower tensile strength, capacity to bear pressure and temperature resistance as compared to CPVC. Hence, it is not recommended to be used for high pressure applications, hot water applications and also in concealed environment. CPVC is also more UV resistant as compared to PVC, which renders it more suitable to applications where the piping system remains exposed to sunlight for long time. Similarly CPVC is truly fire retardant material whereas PVC is not. Thus for all purposes, CPVC is a better material as compared to PVC and both are not comparable on most grounds. Thus there is a very limited area of competition between PVC and CPVC which is low pressure, low UV exposed, non concealed, cold water application segment.
    • Competition in PVC Market – PVC pipes and plumbing is a highly crowded market. The market is highly fragmented by many small and regional players. However, there are many established players such as Supreme Industries, Finolex Industries, Prince, Kisan and more. PVC piping system is increasingly becoming popular amongst Indian housing sector for transportation of cold water in low pressure environment. Being fragmented in unorganized sector like GI, the quality varies in wide range from organized sector players to small local players. Most PVC pipes manufactured in India are made out of compounds containing some lead elements.
    • Tin Based – Lead Free PVC – is a chemical compound prepared by APL, investing in in-house research and development. Presently most of the PVC pipes available in India are made of lead based compounds. This tends to render them unhygienic for applications, which involve direct or indirect human consumption. World Health Organisation (WHO) has also prescribed lead free systems for transportation of potable water. APL has developed a lead free compound and introduced the same through its plumbing solutions under its brand name of “Astral Aquarius”.
    • Competition with other CPVC pipe makers in India – There are two other manufacturers of CPVC apart from APL in India. Ashirvad Pipes Private Limited, originally a PVC pipes manufacturer is manufacturing CPVC systems for residential and commercial plumbing out of Bangalore and Ajay Industrial Corporation manufactures CPVC systems out of Delhi. APL claims it is the first licencee of Noveon to introduce CPVC systems to Indian plumbing market in 1999.
    • Other sources of CPVC compound – Other than Lubrizol, there are few other manufacturers of CPVC. Further, at present demand for CPVC in India is still in its initial stage and therefore very small as compared to Europe and North America. The prices of the end product are also low as compared to North America and Europe. It is for these reasons that other players have no focus over Indian market for now. However, as the size of CPVC market in India grows, other players may start focusing on this market and this may give rise to new competition in coming years.
    • Raw Material – There are two major raw materials required in the products manufactured by APL, CPVC and PVC. APL imports CPVC from Lubrizol, USA. PVC is generally purchased from Reliance Industries Limited from their Gujarat plant. Apart from that APL requires some chemicals, which are easily available, locally both in Gujarat and Himachal Pradesh.
    • CPVC vs Galavanized Iron (GI) – Worldwide, CPVC is replacing various traditional / legacy piping systems such as Galvanized Iron (GI) or Copper tubes. Thus the primary competition is with incumbent dealing in legacy materials. India is predominantly a GI user. Even today GI enjoys a lion’s share in the plumbing market. A very small market share is shared amongst Copper and various Plastic polymers such as PVC, CPVC, PPR, ABS etc. Amongst all the polymers or non metallic material CPVC is the only polymer which overcomes all the limitations of GI and other metals. It is comparable in terms of tensile strength of GI, it is UV resistant, Fire retardant, resistant to high pressure and high temperature and carries anti scaling and anti corrosion properties.
    • GI business is highly fragmented amongst large number of players in unorganized sector; however, some of leading brands are Tata, Jindals etc. CPVC is different from GI in terms of the features and characteristics. In terms of price, in 2011, CPVC was available 20% cheaper than the prices of branded GI materials. Thus, CPVC is competing GI in upper strata of residential and commercial construction market. CPVC is expected to compete with GI even in the middle segment of the residential and commercial construction market.

Disclosure(s)

Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years


Astral Poly Technik

Company Background

 

Astral Poly Technik (APL) has its production facilities at Gujarat and Himachal Pradesh to manufacture plumbing systems from ½” to 8” diameter. Main products include Chlorinated PVC (CPVC) pipes and fittings for hot and cold water plumbing systems, CPVC industrial piping system for transportation of hazardous and highly corrosive chemicals, and lead free PVC systems for cold water application.

APL was the first licensee of Lubrizol (formerly B. F. Goodrich), USA to manufacture and market CPVC (patent protected) piping and plumbing system in India in 1999. APL entered into a techno-financial joint venture with Specialty Process LLC of USA, which provided the required technical expertise for manufacturing CPVC pipes and fittings for home and industrial applications. Specialty Process LLC, USA has 15.xx% ownership in APL. APL claims to be the only Licensee of Lubrizol in India and neighbouring countries for the use of the trademarks ‘‘BlazeMaster” (since 2006), “FlowGuard” (1998) and “Corzan” (1998).

APL introduced a new product range in lead free PVC pressure pipes and fittings in 2004, again a first in india. With the concept of providing a one-stop source for all plastic piping systems, APL also began trading in products such as CPVC and PVC fittings, flanges and valves from Spears (USA), solvent cements (adhesive solutions) for joining pipes and fittings from IPSC (USA), underground specialty fittings from Hunter (U.K) and CPVC and PVC plastic pipes of a larger diameter from Harvell Inc. (USA).

APL has ISO 9001:2000 certification for manufacture and supply of CPVC and PVC pipes and fittings for plumbing systems and industrial piping system. Astral is the only company in India whose CPVC products are approved by Nations Sanitary foundation (NSF) USA. Astral recently received ISI approval for its CPVC products in the country.

APL’s manufacturing facility at Barotiwal-Solan District (H.P) enjoys tax benefits/ concessions, relating to duties of Sales Tax, Excise and Income Tax. Overall tax rate for the company in FY2010 was 16.90%. These benefits are expected to continue till FY15.

 


Growth Snapshot

We can’t just look at a series of past growth rates and assume that they will predict the future – if investing were that easy, money managers would be paid much less, and this stock analysis would be much shorter. It’s critical to investigate the Sources of a company’s growth.
Variable FY06 FY07 FY08 FY09 FY10
Sales Turnover (Rs. Cr.) 58.19 101.70 144.53 205.25 304.52
Sales Growth Year on Year 79.47 40.71 42.30 50.15
3yr Average Sales Growth 54.16 44.39
3yr Sales CAGR 58.91 41.50 46.17
5yr Average Sales growth 53.16
5yr Sales CAGR 52.41
Profit After Tax (PAT) (Rs. Cr.) 4.02 9.11 17.07 14.19 28.03
Adjusted EPS 1.79 4.05 7.59 6.31 12.47
EPS Growth Year on Year 126.62 87.38 -16.87 97.53
3yr Average EPS growth 65.71 56.01
3yr EPS CAGR 106.06 24.81 28.14
5yr Average EPS growth 73.66
5yr EPS CAGR 62.50

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Profitability Snapshot

Profitability is the second, and in many ways, the most crucial, part of our Analysis framework. How much profit is the company generating relative to the amount of money invested in the business – the returns? This is the real key to separating a great company from average ones -the higher that return, the more attractive that business. Net profit Margins and comparing cash flow from operations to reported earnings per share are good ways to get a rough idea of the company’s profitability (because cash flow from Operations represents real profits!). But neither account for the amount of capital that’s tied up in the business, and that’s something we cant ignore. We need to know how much economic profit the company is able to generate per dollar/rupee of capital employed because it will have more excess profits to re-invest which will give it an advantage over less-efficient competitors.
Variable FY06 FY07 FY08 FY09 FY10
Operating Profit Margin 13.76 14.10 15.23 11.54 14.45
Net Profit Margin 7.47 9.44 12.57 7.34 9.66
Fixed Asset Turnover 2.35 3.13 3.30 2.45 3.30
Asset Turnover 1.70 1.05 1.21 1.47 1.83
Return on Assets 12.68 9.90 15.24 10.77 17.68
Financial Leverage 2.29 1.36 1.40 1.42 1.34
Return on Equity 29.03 13.48 21.37 15.30 23.73
Return on Capital Employed 20.60 13.75 19.74 16.36 24.33
Debtor Days 64.54 76.92 88.42 77.96 84.82
Inventory Days 115.01 96.49 99.96 117.11 112.53
Cash from Operating Activities (Rs. Cr.)
Operating Cash Flow to Sales
Capital Expenditure 11.85 28.91 32.74 17.73
Free Cash Flow
Free Cash Flow to Sales
Equity Dividend (Rs. Cr.) 0.00 0.00 1.13 1.12 2.25
Dividend per share 0.00 0.00 0.50 0.50 1.00
Adjusted DPS 0.00 0.00 0.50 0.50 1.00
Dividend Growth Year on Year -0.88 100.89
3yr DPS CAGR 41.11
5yr DPS CAGR
Dividend Payout 0.00 0.00 6.62 7.89 8.03

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Common size P&L Statement

Can we dig deeper to see what else we can understand about how this company makes money? A good way is to look at the common size profit and loss statement. Common size statements are great tools for evaluating companies because they put every line item in context by looking at each of them as a percentage of Sales.
Variable FY06 FY07 FY08 FY09 FY10
Common Size Sales 100.00 100.00 100.00 100.00 100.00
Common Size Raw Material 58.70 72.79 67.41 75.46 73.34
Common Size Power & Fuel 1.92 1.97 2.04 2.41 2.44
Common Size Employee Cost 4.28 3.54 3.69 3.18 2.84
Common Size COGS 62.50 76.11 71.22 79.89 77.94
Gross Profit Margin 37.50 23.89 28.78 20.11 22.06
Common Size Depreciation 2.55 2.28 2.40 3.20 2.96
Common Size Interest Cost 2.34 1.95 1.98 2.75 1.67
Common Size SG&A 28.21 15.62 16.71 15.80 12.09
Operating Profit Margin 13.76 14.10 15.23 11.54 14.45

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Financial Health Snapshot

Once we have figured out how fast (and why) a company has grown and how profitable it is, we need to look at its financial health. Even the most beautiful home needs a solid foundation, after all.
Variable FY06 FY07 FY08 FY09 FY10
Financial Leverage 2.29 1.36 1.40 1.42 1.34
Debt to Assets 0.51 0.27 0.29 0.30 0.25
Debt to Equity 1.18 0.36 0.40 0.42 0.34
Interest Coverage 4.93 6.73 8.22 4.06 7.97
Interest Cost to Total Debt 7.73 7.68 8.37 13.60 11.98
Current Ratio 2.11 3.42 3.74 2.09 1.96
Quick Ratio 1.15 2.59 2.63 1.16 1.14
Cash to Assets 3.91 39.86 23.11 1.66 2.38

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Suprajit Engineering

Background

Incorporated as a Private Limited Company in 1985, Suprajit Engineering Limited started manufacturing high quality liner cables to exacting Japanese standards for the automotive industry in 1987.

Currently catering to a wide spectrum of automotive and non-automotive cable requirements, Suprajit Engineering has achieved phenomenal growth and has cemented itself as India’s largest manufacturer of automotive cables with a capacity of over 150 million cables a year.


Main Products/Segments

  • Control Cables, Speedometer Cables, Speedometers, etc for 2 wheeler and 4 wheeler industry
  • Automotive Cables, Non-automotive cables, instruments

Main Markets/Customers

  • Over 60% market share in automotive cables for 2-wheeler segment
  • 60% Sales from 2 Wheeler segment, 40% from 4 wheeler segment
  • Main Customers : TVS, Bajaj, Hero Honda, M&M, General Motors, Suzuki, Piaggio, Tata
  • Main Competition: Remsons Industries, AC Engineering And Madhusudan in 2 wheeler segment and Tata Ficosa, Hilux (Japan), and Infat (Samyeong, major suppliers to Hyundai) in 4 wheeler segment

Bullish Viewpoints

  • Largest automotive cable manufacturer in India having a capacity of 75 Mn cables (FY10) – spread over 10 strategically (close to major customers) located plants
  • SEL enjoys over 60% market share in the two-wheeler automotive cables segment for OEMs
  • Currently sole supplier to TVS, 80% of Bajaj motorcycles & 80% of Hero Honda requirements
  • Aggressive expansion – Total cables capacity likely to touch 110 Mn by Dec 2011 (new chakan plant, non-automotive expansions, and Sanand plant for Tata Nano)
  • Increasing presence in 4 wheelers – customers include Tata Motors, Mahindra & Mahindra, Hyundai, Ford and General Motors- It outbid 5 competitors for Tata Nano Cable supply for which it is the sole supplier
  • Major Export customers include General Motors in US, Suzuki in Hungary, Piaggio
  • New customer additions- Volkswagen (Polo in India), Arvin Meritor, Brozer (Germany), BMW (for Germany & Europe), Nissan (Chennai plant), Palio. BMW, Volkswagen, Nissan are all initial orders, when implemented successfully, can add momentum in FY12
  • Auto Replacement market growing strongly – Contribution likely to double to 25 Cr in FY11 and further to 50 Cr in FY12 on the back of investments made in establishing pan India distribution network – a distributor in every state, 2-3 dealers in every district
  • Non-automotive business growing strongly – Expected to double – Sole supplier to John Deere, the world’s leading manufacturer of farm equipment -the 100% EOU unit for non-automotive cables caters to this customer & others newly added like Kubota, Club Car, EZGo, Jacobson, JCB, L&T
  • 7 yr I/tax and excise duty exemption for the recently completed Haridwar plant (catering mostly to Hero Honda’s requirements). 5yr I/tax holiday for the Pantnagar plant (catering to Bajaj Auto). Effective Tax rate is ~29%

Bearish Viewpoints

  • Large exposure of over 60% to the 2-wheeler segment
  • Top 3 clients contribute over 50% of revenues
  • Export markets may not recover anytime soon – growth may be tempered
  • Raw material price volatility – Raw materials like Steel wires, Steel, PVC, Brass, Alumunium & Copper constitute 60-65% of Sales typically. 50-60% of RM is steel & steel wires
  • Increased use of electronics in 2-wheelers replacing traditional control & transmission products, even speedometers are turning to LCD displays
  • Significant competition in 4-wheelers, presence of MNCs
  • Needs continuous investments in Capex to grow

Barriers to entry

  • Strong Customer Relationships – virtual customer lock-ins in 2-wheeler industry
  • Location – Suprajit has set up capacity at 8 different locations across the country to be close to its main customers in the North, West and Southern belts. Haridwar plant next to Hero Honda, Pantnagar plant next to Bajaj, the planned Sanand plant next to Tata Nano, etc.
  • Cost leadership – Focus on cost & quality leadership – Successful in pursuing new product development strategy for initial orders with multiple clients with – TVS, Tata Nano, John Deere for non-automotive cables, Volkswagen, Nissan

Interesting Viewpoints

  • Company maintains it is progressively de-risking its business model vis-a-vis Auto-Industry cyclicality with following measures:
    • Growing Non Automotive Cables market – is tripling production capacity and is confident of doubling contribution from this segment in FY12 to 25-30 Cr. (FY11 expected 12-15 Cr)
    • Growing Higher-Margin replacement market – Suprajit currently gets only 6% of its revenues from this segment (12-13 Cr in FY10), but is confident of doubling this to 25 Cr in FY11, and 50 Cr in FY12. As a premium cable supplier Suprajit should eventually get to 20% of this estimated 400 Cr market, currently it gets just about 5-6% of this market
    • If the contribution mix of domestic auto OEM:Others is 85:15 today, this is changing to 75:25 tomorrow and 60:40 in 2-3 years time
  • Company maintains it will be able to sustain margins over its historical 15% OPM levels due to following:
    • Growing contribution from higher-margin replacement & non-automotive markets (if auto OEM market is 15% OPM, these are more like 20%)
    • A Rs. 25 cable (or Rs.150 for a cable set in a Mobike) is a low value item -typically under the radar-of OEMs. Even a Rs 1 push-in on end-price per cable is like 4-5% increase
  • Raw material sourcing from China (mainly steel) -10-15% of requirement
  • Huge Relationship potential with major OEMS – does not happen overnight though. new platform product development cycle is 18 months, existing platform new sourcing takes 6-9 months (like in BMW)
    • John Deere -Total annual cable purchase is 20 Mn, Suprajit is just doing 0.5 Mn from a 1year old relationship; John Deere team is expected to come negotiating for a large chunk of business
    • GM global cables buy – atleast 60 Mn, Suprajit does only 2 Mn
    • BMW, Nissan, Volkswagen – all initial orders, big potential from all

Disclosure(s)

Donald Francis: No Holdings in the Company;


Poly Medicure

Background

Incorporated in June 1995, Poly Medicure started manufacturing medical disposables like IV cannula, blood bags, in 1997 under the brand name Polymed. It currently produces over 40 different types of medical disposables at its manufacturing facilities spread over 180,000 sq ft in Faridabad.

Today it is the leading supplier of Intravenous (IV) Cannulae, Safety IV Cannuale, IV infusion sets and blood bags. Exports contributed to ~58% of Sales in FY10. It faces competition from Hindustan Syringes & Medical Devices Ltd., Eastern Medikit Ltd., and Romsons.

The company had acquired a subsidiary in USA, US Safety Syringes Co., LLC, USA in 2007. This company is yet to start business activities. Poly Medicure (Laiyang) Co. Ltd, China is another subsidiary which started commercial production during FY10 and achieved a turnover of Rs. 1.18 Cr but is currently making losses. The company expects the China subsidiary to break even in FY11.

The company has one Joint Venture in Egypt Ultra for Medical Products, Egypt. The Company has achieved sales of Rs. 28.45 Cr during the year ended 31st December 2009.


Main Products/Segments

Intravenous (IV) Cannulae, Safety IV Cannuale, IV infusion sets and blood bags.


Main Markets/Customers

Disposable Medical Device OEMS and hospitals.

Exports contributed to ~58% of Sales in FY10


Bullish Viewpoints

  • Expansion programme – The company was in the process of expanding its installed capacity by around 20% in FY11 to meet the increased demand at a capital cost of Rs. 30 Cr. FY10 installed capacity was 36.40 Cr pieces. (in 3 shifts).
  • Successful backward integration – Poly Medicure successfully indegenised production of needles used in IV Cannula and blood bags (earlier imported from Japan) resulting in major cost savings and control over product quality. The needle capacity is ~ 100 mn pieces per annum.
  • Product Innovation – Innovated manufacture of Safety IV Cannulae (with retractable needle that lowers risk of contamination to nurses/doctors administering patients) and successfully defended patent infringement suit brought on it by German major B. Braun. In developed markets like USA, only Safety IV Cannulae can be used. This is potentially a very big opportunity for the company and a growth driver for the future.
  • Turnaround in last 2 years – After a dismal FY09 and FY08 (where the company suffered degrowth in net profits on account of forex derivative losses), Polymedicure posted excellent results in FY10. Sales grew at 21% (136 Cr) y-o-y while Net Profits grew at 177% (16.43 Cr). Turnaround achieved on lower forex losses, successful backward integration, and other cost efficiencies achieved. In FY11, the company is on course to register a ~25% increase in Sales.
  • Return to High Margins & Profitability – Poly Medicure registered an Operating margin of over 22% and Net Margin of over 12% in FY10. Return on Equity (27%) and Return on Capital Employed  (25%) are back to robust levels. Going by 9m of FY11, this record is likely to be sustained in FY11. Most of the long term Forex derivative contracts entered into earlier have expired. Only 2 contracts remain, which the company assures it has learnt its lessons, and are adequately hedged and the impact will be limited if any.
  • Excellent Track Record – Its a young company – just 15 years old and starting from scratch, the company has come a long way. In Yr 2000, the turnover was just 10 Cr and this year the turnover is expected to be above 170 Cr.
  • Good team – The promoters are well qualified, young and ethical. The company has Mr. D R Mehta as its chairman and he is well renowned for his dynamism, honesty and fairness towards small shareholders.

Bearish Viewpoints

  • Forex Derivatives contracts – A major source of risk for the company has been the unexpired derivative contracts entered into by the company to hedge the risk of changes in Foreign Currency Exchange Rate on Future Export Sales against existing long term contracts. Outstanding as at March 31, 2010 for hedging currency related risk aggregate to Rs. 118.54 Cr (Previous year Rs. 197.73 Cr). The company has been accounting for the losses or gains on maturity of the contracts. The Mark to Market notional losses as on March 31, 2010 are of Rs. 15.43 Cr (previous year Rs. 41.10 Cr) and with the considerable volatility in foreign exchange rates, the impact may increase or decrease.
  • Raw Material prices – The company faces fluctuation in price of raw materials – which are crude derivatives (plastic granules, PVC rigid films, IV components). Raw material/Sales is ~43% in FY10
  • Company needs to keep developing new products also to maintain long term growth.

Barriers to entry

  • Backward Integration – Successfully indegenised production of needles used in IV Cannula and blood bags (earlier imported from Japan) resulting in major cost savings and control over product quality. The needle capacity is ~ 100 mn pieces per annum.
  • Product Innovation -Innovated manufacture of Safety IV Cannula and successfully defended patent infringement suit brought on it by German major B. Braun
  • Economies of scale – With an installed capacity of 36.40 Cr pieces, Poly Medicure is the largest exporter of IV Cannualae and other disposable medical products from the country.

Interesting Viewpoints

  • Poly Medicure wins patent infringement battle against German major B. Braun for its safety IV Cannula product in both German & Indian courts. The German major is free to appeal and/or initiate further legal proceedings against the company.
  • USFDA approval for its Faridabad plant (Dec 2010) is a big development. The company is aiming to enter the market by the middle of next year. Distribution partnerships will be key
  • Consolidating on this development, Poly Medicure expects to seal secured multi-year supply contracts for the US market from some major OEMs

Disclosure(s)

Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years


Modison Metals Management Q&A: Mar, 2011

Management Q&A

1.   DEMAND FOR LOW-VOLTAGE SWITCHGEAR IS DRIVEN BY ELECTRIFICATION OF RESIDENTIAL AND COMMERCIAL ESTABLISHMENTS, WHEREAS MEDIUM AND HIGH VOLTAGE ELECTRICAL CONTACTS DERIVE THEIR DEMAND FROM INCREASED SPEND ON TRANSMISSION AND DISTRIBUTION INFRASTRUCTURE.

Kindly give us some idea on the current market size, your revenue mix and margin realizations from low, medium and high voltage electrical contacts segments and Modison’s share in the domestic market. What is the share of unorganized players in both segments? What is the global market size for electrical contacts?

Electrical contacts is a high-precision and complex manufacturing business. Modison Metals enjoys about 60% market share in the low voltage contacts segment. The balance is spread between Hindustan Platinum and Choksi Heraeus. In medium & high voltage contacts business we are the sole players. We supply to the switchgear manufacturers and not the end customers, so cannot comment much on the share of unorganised players. Revenue mix is more or less equal between the two segments, though it fluctuates from quarter to quarter between the two. Medium & High voltage segment has higher margins (upwards of 25% or so) while low voltage segment has lower margins (downwards of 15% or so).

2.      MODISON IS AN APPROVED VENDOR FOR MAJOR SWITCHGEAR MANUFACTURERS LIKE L&T, CROMPTON GREAVES, AREVA, ABB AND SIEMENS.

Kindly give us an idea of your top customers. Does the company service the same customers in different segments or are there major players in each segment? Does any customer account for over 10% of Sales, leading to over dependence on any account?

L&T is our biggest customer in the low voltage segment. Havells is the other customer in this segment. In medium & high voltage segment we have Areva, Crompton Greaves, and Siemens which are big customers. L&T is one customer which accounts for over 10% of Sales.

3.      SOME OF THE CLIENTS SUCH AS AREVA HAVE A GLOBAL SOURCING SYSTEM HELPING MODISON ENTER NEW MARKETS. MODISON EXPORTS ELECTRICAL CONTACTS TO DESTINATIONS SUCH AS EUROPE, JAPAN, RUSSIA AND CHINA.

Please explain the sales/distribution model for export sales. Exports currently account for some 12 % of Sales. Is there going to be an increasing focus on exports in the near future? Are export realisations higher than domestic realizations? Who are your top export customers? Any other global sourcing successes on the lines of the Areva model?

Electrical contacts are made to order custom products. Sizes range from 10 gms to 10 kgs or more. It does not lend itself to a distribution led sales model. All our sales have to be direct sales. We are dealing with our main customers since several years, we are known for our quality. We participate in international trade fairs like in Hanover, which is an yearly event. There is good opportunity in the domestic markets and not much to differentiate in terms or margins or realisations from exports. In the coming years exports will probably continue at similar levels.

4.      CHINESE SUPPLIERS HAVE BEEN REPORTEDLY SUPPLYING LOW-VOLTAGE ELECTRICAL CONTACTS AT A PRICE WHICH IS AT PAR OR BELOW MODISON’S RAW MATERIAL COST. ALSO REPORTEDLY SMALL-SCALE MEDIUM- AND HIGH-VOLTAGE SWITCHGEAR ASSEMBLING FACTORIES ARE GAINING MOMENTUM IN INDIA WHO ARE IMPORTING COMPLETE SWITCHGEAR SUBASSEMBLIES MAINLY FROM CHINA AND KOREA.

How big are these threats? Are they taken seriously by your major customers? Are you currently supplying to any customers who are also sourcing their requirements from Chinese/Korean imports? When we say Chinese imports are of low quality, is it the reliability of contacts, purity of the contact material, or something else?

We have not faced any serious threat from the Chinese players. As mentioned before we do not supply to the end customer e.g. State Electricity Boards or contractors who may or may not be buying chines products. We supply to the switchgear manufacturers and there we have not faced any issues or threats from Chinese substitutes. We cannot comment whether switchgear manufacturers are entertaining Chinese electrical contacts or complete sub-assemblies.

5.      MODISON’S RAW MATERIAL COSTS CONSTITUTE ABOUT 65% OF SALES. WITH SILVER ACCOUNTING FOR CLOSE TO 70% OF RAW MATERIAL COSTS, THE COMPANY IS SUSCEPTIBLE TO MARGIN PRESSURES ON SHARP MOVEMENTS IN PRICES.

Despite rising silver prices in Q2 & Q3 FY11, we have curiously seen raw material/Sales going down from ~67% to 65% or less, adding directly to operating margins. Please explain the linkages between raw material purchases and billing rates. And what are the strategies employed by the company for mitigating price volatility –escalation clauses, hedging, etc.?

We have price escalation clauses in our contracts which allows us to pass on any sharp changes. If there is a sudden drop in prices, there may be some pressure on margins. Some 50% of our raw material (semi-finished state) is procured from group companies, where we may have a little bit of flexibility. The cost of electrical contacts is some 2-3% of total switchgear costs, and hence we do not find our switchgear customers too sensitive to the price variations. Having said that, any dramatic or continuous rise/fall is bound to affect. We are pretty hopeful of being able to maintain our margins.

6.      ELECTRICAL CONTACT MANUFACTURING IS REPORTEDLY A TECHNOLOGY-INTENSIVE BUSINESS. MODISON HAS HIGH-PRECISION MANUFACTURING FACILITY AND SKILLED WORK FORCE WHICH ENABLE IT TO CONVERT METALS (SINGLE OR A COMBINATION) SUCH AS SILVER, COPPER AND TUNGSTEN INTO ELECTRICAL CONTACTS.

Please explain a bit on the manufacturing technology, machinery and processes involved. The technology-sharing agreement with Doduco expired in 1997- some 14 years to date. How has the company managed to keep pace with the technologies involved and compete effectively with Doduco itself in the Medium/High voltage segment? Is there a great difference in the technology involved for low and medium/high voltage contacts?

Can’t comment on the manufacturing technology myself. Electron beam welding machines are used. Lead time for these kind of machines is some 10 months. We were able to absorb the Doduco technology completely. Our investments in-house R&D has enabled us to keep pace with any changes/upgradations in technology -processes, machinery or alloys. We have to keep investing in new machines every year.

7.      INSTALLED CAPACITY IN FY09 AND FY10 IS SHOWN AS 450 MT. PRODUCTION QUANTITY HOWEVER WAS ~36,000 KG (FY10) AND 41,000 KG (FY09). CAPITAL EXPENDITURE (FIXED ASSETS) IN THESE 2 YEARS HAS BEEN ~7 CRORES EACH.

Reportedly capacities have been expanded at Vapi over the last couple of years. Kindly explain the linkages in capital expenditure with installed capacity and actual production. Kindly give us an idea on the kind of expansions envisaged in the next couple of years and what will be the capital expenditure spends for the same. What is the kind of maintenance capex that is needed to be incurred? Is the 450 MT installed capacity indicative of future production scalability in any way?

Currently we are spending about 5-7 crores every year on Capex. This is likely to be the pattern in the coming 2-3 years as well. Like we said before the investment is in new machinery, etc. It is very difficult to provide any figures on capacity utilisation as we deal with custome proiducts and custom sizes -every order is different. While current premises are adequate for the immediate future, we have to expand capacities within the next 2 years. We are looking for land around our existing facility.

8.      IN LOW-VOLTAGE CONTACTS APART FROM MODISON, COMPETITION IN THE ORGANISED SEGMENT IS FROM PLAYERS LIKE HINDUSTAN PLATINUM AND CHOKSI HERAEUS. IN MEDIUM-AND HIGH-VOLTAGE CONTACTS, IT FACES STIFF COMPETITION FROM FOREIGN COMPANIES SUCH AS AMI DODUCO, ELECKTRO METALL AND LOUIS RENNER.

Kindly explain competitive advantages enjoyed by Modison metals in both segments. Please give an idea of the scale of Modison capacities as compared to the nearest competitors. How strong are the customer relationships? What are the factors that keep Modison ahead in the game?

We enjoy 60% of the market share in the low voltage segment, the balance being shared by 2 other players. We are roughly 2-3 times the nearest competitor. Hindustan Platinum for example does not see electrical contacts as their only focus like we do. In medium and high voltage segment there is no effective competition. Imports lead time is too high so players like Doduco, Electro Metall, or Louis Renner cannot effectively service our domestic customers. Our main and only business is electrical contacts. We keep abreast of the latest technology, processes or advances in alloys, etc.  And there lies our competitive edge. We have had long-standing relationships with our customers who trust us to deliver quality.

9.      RECENTLY CHANGES HAVE BEEN MADE IN ANCILLIARY CLAUSES OF MOA TO INCLUDE NEW BUSINESS ACTIVITIES LIKE POWER GENERATION, OIL & GAS, MINING ETC.

Are there any material developments expected in the near future? How does the company plan to fund such capital intensive businesses?

Well we tried to bid for a Solar energy project of NTPC. That required the change in MoA. We were unsuccessful in the bid. While the expectation was that bids will be entertained at some Rs. 17 per unit, actual bids got placed at less than Rs. 9. We did not find these levels attractive and were unwilling to revise the terms. Oil & Gas or Mining are just generic extensions made for cover as we cannot make changes to MoA everyday.

10.   MODISON PVT. LTD AND MODISON COPPER PVT. LTD. ARE GROUP COMPANIES. THE FORMER IS INVOLVED IN SILVER REFINING AND MANUFACTURING OF SILVER ALLOY SEMIS, BI-METAL AND SOLID SILVER CONTACTS. THE LATTER MANUFACTURES COPPER ALLOYS TO MAKE FLATS, ROUNDS, SEAMING DISCS, RODS AND PROFILES.

Related party transactions with Modison Pvt Limited and Modison Copper Private Ltd. are worth ~18 Cr and 12 Cr respectively in FY10, roughly 50% of total raw material requirement of the company. How does the company ensure that these trabsactions are conducted at arms length?

All these transactions are conducted at arms length. The promoters are the same in the companies, so there is no apparent conflict of interest.


Disclosure(s)

Manish Kulkarni: No Holdings in the Company; ;
Donald Francis: No Holdings in the Company; ;
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