NGL Finechem Management Q&A – 26 Feb 2018

NGL Finechem Management Q&A – 26 Feb 2018
– Ayush Mittal
– Donald Francis

Human APIs/Veterinary APIs
Kindly educate us a little on NGLs addressable domain. Any plans for addressing adjacent domains?

We are into Veterinary and Human APIs. If we look at the Industry 80% of Veterinary products are also used for Humans. Exclusively veterinary products would be about 20% of the market.

Anthelmintics – De-wormers – is one major category of products we operate in. Animals have to take de-worming once a month due to raw food and conditions they ingest in. There is a huge number of worms that need to be routinely expelled from their bodies. Similarly Blood Parasites is another big category– Animals get bitten a lot by different types of ticks and fleas.

New product introductions is a continual process. We added one new Analgesic product. We are adding one product in muscle growth category. Till now we had been only addressing API requirements for mammals. Now we are looking to introduce five new Poultry products.

Business Evolution/Product Opportunity Choices
NGL Finechem enjoys a profitable niche today. Kindly elaborate on business/product choice philosophy/process.

The kind of product selection you see today started off by chance. In 1981 we were making pharmaceutical APIs like Erythromycin. Till the late 90’s we were into Human APIs. These were primarily 2-step, 3-step process chemistry with low/vanishing margins. The business evolved gradually. In 1997 a Dutch company asked us if we could manufacture a 8-stage-synthesised complex chemistry product. It was our first veterinary product that we delivered and it was very successful.

This was totally different to what we were doing till 1997 – dependent on bulk traders – a different customer set. We started to develop new set of client and product profiles – exploring synergies around customer needs. It took a long time. Gradually customers started asking us for new products – most of which were earlier manufactured in European Union.

In 1997 we had 1 product and by 2007 we could offer 6-7 such products. By 2017 we are now offering 22 products.

What will be the share of complex chemistry products in the 22?
Most are 7-8 stage synthesis complex chemistry products (higher scope for value-addition). Some are 3-4 step products. We have developed the process chemistry for all products in-house.

You enjoy high profitability margins. How do you go about choosing product niches? 
Whenever you start a new product, you are never the best at it. You become better, more efficient (process chemistry), with time. We don’t go by margins to start with. We have never chosen a product from market size/profitability analysis. Volume products usually see high competitive intensity. We have consciously chosen a low-volume niche game – products which we can make well and sell well. Every year while working on new products we need to also focus on improving process efficiency for existing products.

Markets/Customer Segments/Evolution
Can you please elaborate on the sell-well philosophy?
First we need to be able to make the product efficiently. Then we need to treat our customers well. No false promises. Be able to fulfill in the quickest possible time. Be transparent in pricing – we have actually passed-on price discounts to our customers on occasions where there is a big benefit. We have done this on 3 occasions till now. We always strive towards developing long-term relationships with our customers.

Could you give us a sense of how Customer Segments has evolved?
15-20 years back we were 100% dependent on traders. Today contribution from traders will be less than 10%. Traders are bulk customers and would order in Tons. Today we serve about 350 customers directly. Ultimate customer requirements would be in 50Kg to 100 Kg lots – but with higher profitability. We serve 4 of the Top 10 global customers. All customers from 1997 are still with us.

How easy or difficult is it to access/address top global customer requirements?
To address a top customer it can take anything between 2-4 years for first sale to happen. It took us 4 years with our largest customer. The requirements have become stiffer and takes longer with Customers now asking for 3 commercial batches versus lab sampling earlier. One now needs to provide stability data also. Most common requirement is 6 months accelerated study. And Customers will then perform their own checks. Our facilities are audited every 2 years. 40% of our Sales are to EU customers – but for Sales in other un-regulated markets.

You seem to be focusing only on un-regulated markets? The rationale?
At this stage of our business size we are content to play in un-regulated markets. We find there is enough scope in the medium-term for our product range to scale efficiently, and profitably in these markets. You see the cost-structures for a regulated market entry is much higher. It is not only the registration/filing costs; one cannot serve both regulated and un-regulated markets from the same factory – cost-efficiently. The investments in manpower, equipment, testing also are of a higher order.

If regulated markets are growing at 6-7%, how are unregulated markets doing?
Un-regulated Markets are growing at a much faster rate. What happened in India in the 80s is getting replicated in many countries. Every country/government is encouraging and providing incentives for local manufacture. To give some examples – In 2004 when we first went to Columbia, there were only 10-12 companies, today there are 300-350 companies. Bangladesh had 20-25 pharma companies, today there are 500 pharma companies, 20-25 are veterinary companies. Most of these companies are making formulations – they need APIs from quality and efficient suppliers like NGL.

What would be the addressable market for NGL’s current 22 products in unregulated Markets?
Difficult to put a proper figure here without published data. But should be around ~1000 Crores.

Nature of Customer Contracts. Proportion of long-term contracts versus SPOT orders?
Typically Customer relationships are all long term in nature. As mentioned before all our customers from 1997 are still with us. However most orders are on SPOT basis. There are couple of products for which we do contract manufacturing for which contracts are long term in nature.

Peer comparison: (Hester is not a relevant peer)

Particulars (in %)


Sequent Hester NGL Lasa
RM Cost 48.7% 23.3% 37.7% 65.5%
Employee Cost 14.3% 15.0% 13.9% 4.9%
Other Exp 26.1% 28.2% 22.6% 6.9%
OPM 11% 33% 26% 23%
Dep. 6.8% 5.7% 3.0% 4.3%
Finance Cost 4.0% 2.8% 0.7% 4.7%
PBT 0.1% 25.0% 22.0% 13.8%

Players like Sequent (with lot of common products) are focusing on addressing the larger market opportunity in regulated markets?
Yes. Sequent has set themselves a much bigger goal. They have taken a conscious decision to move away completely from un-regulated to regulated markets. In the initial transition/consolidation period efficiency/profitability may suffer. They should do very well post the transition.

Someone like LASA (with some common products) seems have much higher RM costs, yet operating at similar 20%+ margins? Any comments
Not sure why that should be so. One aspect could be that they might have a higher proportion of volume products. Typically lower step process products have lower gross margins (less scope for value-addition).

Please give us a sense of competitive intensity for NGL product segments
As mentioned before we consciously choose low volume niche product segments that are difficult to make well and attract low competition. For most of our products typically there would be 5-6 suppliers in our markets

R&D Investments/DMF Investments/Capacity

Kindly update us on your in-house R&D capabilities?
We have a full-fledged analytical lab set-up in-house since 2005. There are 22 people in R&D – 3 PHDs, 10-11 MSCs.

You have also filed for 2 DMFs. Kindly elaborate on that?
Yes we have filed 2 DMFs in 18 Countries in EU. We now have in-house capabilities to create product dossiers and file DMFs – with 6months Accelerated Study data, Real-Time data, Impurity Profiles, Pilot and then Stability Data. We seeded this in a small way to build-up our in-house capabilities.

Capacity creation has lagged behind? Kindly comment.
It’s very easy to create capacity!
We were caught on the wrong foot during last expansion. We thought of consolidating in 2012 for a couple of years. We wanted to start work in Nov 2014 but it took about 21 months to get EC approval – which we had not anticipated. By 2015 we ended up utilizing full capacity and could start expansion work only in 2016.

We are being proactive for future expansions. We have taken land in Tarapur. One EC approval we have got. Hopefully we should get the other approval soon. Will kick start next expansion once we hit about 50% utilization at the current capacity.

What kind of Asset Turns will be achievable at full capacity?
We should be able to meet our usual 2.5 Asset Turns norms

We see NGL setting a fine record in all round process efficiency. For example the energy and water usage drastic improvements. How are these targets set?
As they say sometimes necessity is the mother if invention. For example in one of our plants the Water Authority suddenly reduced the water pressure – with the result that where we used to get 55 Cu meters/day, we started getting only 35 Cu meters/day. We had to adapt and adapt fast.

Having said that we set ourselves yearly goals in the first month every year. We set a sort of wishlist and work towards that during the year. We set wishlists on how to make some things better, how to sell better, how to achieve better chemistry, how to improve our employee skills, how to reduce wastages. It’s a wishlist – a process for continuous improvement. Cumulatively the results show up. If we stop thinking, we stop growing.

You enjoy pretty stable operating margins. Yet, if most of your Sales are SPOT basis, aren’t there risks on price realisations being volatile? What has been the experience?

Today all pricing is Global and Open in nature. We haven’t experienced much volatility as we operate in low-volume niche markets, competition is low. Yes risks always exist for a new player to come in and under-cut. This is more common in bigger volume pharma product markets. But sometimes we do experience some level of dumping at quarter end.

What about risks on Environment regulations/Tightening Norms?
Regulatory Norms are getting tighter. In 2017 plants in Tarapore subjected to weekly monitoring by NGT. 8 plants have come under scanner in last 3 years. Cost of compliance is climbing up. For example Effluent Plant investment needed has gone up from 1 Cr to 5 Cr today. Our new plant is completely Zero Liquid Discharge compliant.

Fire Risks?
We had two instances of fires breaking out in 2003 and 2009. We have a full-fledged Fire Safety Team.

High Debtor Days (90-120 days)?
High Debtor days are a norm in most of our markets. In LatAm markets they require additional 40days of credit after receipt. But correspondingly we get higher realisations – say a $40/Kg product we would realise $44

Any other Risks?
In our business we always carry risks of new products doing well.

Risks of China Intermediates supply suddenly stopping?
Most of our intermediates are available locally. However it can happen in one or two products e.g. in Vitamin B12 and Amitraz – China supply for key intermediate suddenly got squeezed with some factories closing. RM costs shot up 8-10x. Market reaction was for substitute products getting prescribed/used.

Ayush Mittal – Invested; No transactions in last 30 days
Donald Francis – Tracking; Not Invested

Opto Circuits Stock Analysis Dec 2008


Readers, please note:

Uploaded on multiple requests from wannabe analysts for a usable stock analysis template. Use with care 🙂

This was the first ever report compiled by me in my investment journey back in 2008 – when I was a complete greenhorn, and when Opto Circuits business hadn’t yet run into rough weather (2011) with one acquisition too many. While this report perhaps does justice to business analysis as per PAT Dorsey’s 5 Rules for Successful Investing book’s template, it does not do enough diligence on examining the BS with equal depth – especially Subsidiaries, Intangibles or Related Party transactions, and the like. The bigger margin of safety was in the Price 🙂 !!


Management Q&A


Free-wheeling discussions with Shri Nishith Arora, Chairman MPS Limited

  • vendors adapting with speed to technology driven industry changes
  • partnering publishers transforming into content providers – changing business models
  • progressively outsourcing larger part of content transformation work?
  • faster author-to-reader turnaround track record/ end-to-end positioning

Must be a good place to be in where MPS finds itself today?

You have mentioned most of the dynamics. Especially on the academic/educational side lots of new services are coming into play. Also volumes have moved up substantially.

Many of the major customers are Million $ plus businesses. Elsevier 2014 revenues topped $5 Bn. Kindly comment.

Yes many of the big publishers have Billion $ Annual Sales. If we see it from their perspective, there is not much industry growth. Many of them are also struggling financially. There have been ownership changes and restructuring. As a CFO in such a business one of your priorities would be to reduce costs/increase outsourcing. Faced with stagnant sales or low growth, the annual outsourcing budgets however do not see much of a change. The attempt is to get more done from the same amounts every year. So there is pricing pressure. MPS attempt is to position ourselves as a Core Vendor of choice, and barter the pricing pressure with higher volumes.

Kindly explain the fast-changing dynamics for a player like MPS aspiring to be a CORE VENDOR of choice.

The way we have grown to see this dynamic landscape is best exemplified by the paradigm shift advocated from “Who moved my Cheese” to “Move your own Cheese”. In other words, to control your cheese, you need to be able to define your future, not just respond to whatever other people impose on you. We keep learning and adapting.

So how does MPS aspire to emerge as a Core Vendor of Choice? What are the key USPs needed?

Apart from the inherent technological and domain expertise needed to be a player in this market, the two key USPs needed to emerge as a Core Vendor of choice are 1) Client Confidence and 2) Client Relationships.

On the interesting “Move your own Cheese” paradigm that MPS aspires to live by, please elucidate in the context of a Publisher’s business.

So let’s look at a Publishers business. They have to source Content, Edit, Proof, and Design. Then they have to Market. An efficient publishing business today needs to have at its core an end-to-end Content Platform. The whole job is about faster turnarounds for a complete end-to-end Author-to-Reader service.

Customers of scientific and technical journals are also diversifying. If earlier they were university professors, today a large segment are students globally who also need to access and consume such content digitally. To stay relevant and address emerging customer segments and changing consumption patterns, publishers need to make major investments into end-to-end content platforms.

So where do you see yourself placed in walking this paradigm, successfully?

This is still early days for us in this business. We have to look into our business as a Platform – our processes, technology components, and workflows – and see how best to marry with Publisher platforms.

If we take an established publishing platform like Elsevier, is it right to say that MPS business is all about evolving into a complete Back-End pre-processing platform where the finished product (from author manuscript to reader consumable) is seamlessly made available for integration into the Front-End or Elsevier’s Publishing platform.

With many of our large academic publisher customers, we are integrated deeply into their processes – so today much of the work is getting done on our platform from the time author submits his manuscript to the time the finished product is made available.

Is it also fair to say that your major competitors would have also evolved to similar levels of sophistication in terms of fully integrated processes/back-end platforms?

Yes. Competitors have also been investing into building Platforms. Each has some advantages/disadvantages.

Kindly give us a flavour of the excitement in terms of numbers – have things changed drastically in the last 2 years?

As you are aware 2006-2011 things were not going well. The rich heritage and technical expertise available from providing back-end services for Macmillan platform were all there. Having continued to do business in a certain way for a long time, the nimbleness was perhaps missing. Under the new Management we have been able to quickly adapt and bring in efficiencies.

Having said that, we are extremely fortunate that we can lay claim to the rich heritage of Macmillan in India. In a way this whole industry niche started with Macmillan India doing the Back-end processing for its parent. There is a huge amount of valuable IP (Intellectual property) in the company and its people. Some of the leading players in this niche from India have folks who have had their roots in Macmillan India.

We have been able to address opportunities available before us where Customer was outsourcing this component but not that. Today we have reached a position of strength where we are among the 5-6-7 key players addressing the core segments.

In the last few months we have also started focusing and investing into Marketing for increasing MPS visibility and communicating our strengths better. We are having lots of customer discussions now, though things may take time to materialise.

What are the kind of outsourcing budgets that Large Publishers have started deploying? How have top 4-5 publisher outsourcing budgets grown over the last 2-3 years?

One of the large academic publishers has a $50 Million outsourcing annual budget. MPS revenues from one large academic publisher doubled in the last year, whereas from another it grew by 40%. Last year another large publisher started work with 4 new Core Vendors and total outlay (for outsourced work) would have been about $40 Million. But hardly much has happened since then, and business volume to a Vendor like MPS was still at around $1Million. So it takes quite a bit of time for things to pan out and scale up in this industry. But vendor rationalization is the key thing that is happening in the industry for sure, and should work in favour of players like MPS who are well-positioned, eventually.

Has the Runway also become longer (in last few years)?

Certainly. Dynamic changes in the Publishing domain have meant more investment requirement in technology platforms. Earlier there were gaps in MPS Technology Portfolio, we were at risk of losing core vendor status with some customers. Now that the portfolio is more complete, we are on a much stronger footing and can tap more customers, offer more breadth of services. MPS successful execution track record in last 3 years has enhanced our profile and positioning with major customers as a dependable and a credible Core Vendor of choice.

  • ELEMENT – Jul 2013 – School Education Services market
  • EPS – content creation services – Higher Education services market
  • TSI EVOLVE – Reading segment of school education market

How have the 3 acquisitions played out for you so far? Negative surprises? Also Apart from making for a more complete technology/services portfolio, how has been the performance on the ground post integration?

All 3 are now fully integrated and started contributing revenues. We have had our fair share of issues (smiles). One never knows how deep the waters run till you get into the water, but nothing that’s been a show-stopper.

We have had very pleasant surprises too. We could get selected as a Core Vendor for a customer of one of the acquisitions, where they were only a minor vendor (MPS had no presence). But such cases are one-off, the customer was keen on shortlisting to a few core vendors only, and we could make the grade. In another case, we could emerge as a core vendor on MPS own strengths.

Kindly explain your Acquisition Strategy – “We seek to acquire only those companies where the skill sets are complementary to ours, where the acquisition enjoys the approval of longstanding customers”?

Yes, Customer blessing is key. For example Element, our first acquisition, was one of the Top 3 Vendors for a leading publisher, who asked us to look at the opportunity – Element had a full-service editorial, design and production services in pre-K and K-12 markets, but was in financial trouble. Same was the case with EPS (Management was slow in technology adoption curve and high cost-structures) where again the Customer nudged us to take a closer look at the Opportunity.

Is it correct to say that the Customer will refer a Vendor (MPS) such opportunities, only when customer confidence is high?

That’s right. Today MPS is seen to be a financially stable and sustainable technology vendor with good track record over last 2-3 years. We have been able to execute and win the confidence of major customers. Most customers are looking to reduce the number of myriad outsourced vendors by focusing on a few Core Vendors.

So when the customer finds prolonged issues with any non-core vendors (technology upgrades, cost structures, and/or financial stability) they naturally want somebody with a stable track record to step in, if possible.

Does that mean for acquisitions planned in the near to medium term, one can similarly expect customer blessings?

(Smiles). One can say that’s the only way it works. For sustained business penetration, Its critical to align with Customer’s Road-Maps.

Will it be a fair comment that with last 3 acquisitions, gaps in MPS technology portfolio are more or less filled? So the focus for new acquisitions will per se be more on gaining new customer relationships/new markets

In the Educational area, MPS now has a much richer content and services offering for its customers than earlier. Focus is on both. A more complete end-to-end technology/services portfolio is needed to penetrate deeper into existing customers as well as gain new customers or services market. 

What is the visibility on new acquisitions planned?

There are several prospects we have been looking at that are up for sale. We are in discussions with a few. While there are good fits, we are not comfortable on the Valuations front (prospects have lofty expectations). But we are not in any hurry. Want to take it up like a project where we have a 3-4 year payback, rather than pay up and spoil things just because we have money. Or get into a game of trading our high PE multiple and buying businesses that deserve lower PE multiples. So we are extremely careful, we want to make sure we do not overpay, do not violate our financial discipline, and acquisitions prove margin accretive over medium to long term.

You have been on record for a 2-3 year timeframe for doubling of turnover using both organic and inorganic routes. Sooner than later the fund infusion has to be put to use?

Yes. Good thing is we have the Cash. We are not in a hurry to burn it. We can take time to deliberate on a good fit on all counts as well as valuations. Discussions are on.

 Acquisitions led growth strategies are fraught with risks too. What if the next one proves costly and sets MPS back?

Yes there’s always a possibility of things going wrong. We have to be extra careful in our diligence.


– SPI Global – 1000 Cr/ 20% Margin; Aptara – 600 Cr/ 20%; Innodata – 400 Cr/ 11%

– Lumina – 200 Cr; SPS – 200 Cr / 52%; Newgen / 40%

Kindly educate us on the different players in the industry, their service offerings/ differentiators vis-à-vis MPS.

Yes, as mentioned Innodata, Aptara, SPI they are the bigger players. iEnergizer which acquired Aptara has debts on book of about 800 Cr.

Lot of players in this space came in but haven’t scaled up. Not many have invested in technology. MPS Technology is far more evolved and at an exciting point today. But as mentioned before, getting market traction is a long drawn out process.

Is it right to say MPS is the only player who is singularly focused on the Academic/ Educational Publishing Industry?

No, SPS is the bigger more focused player here. They do 200 Cr business only from Academic Books & Journals, whereas MPS share in this segment is still only 120 Cr. They started as a captive for one of the large publishers. Volumes are huge. They do 50% of this publishers outsourced business. They also do huge work for other large publishers. SPS was started by ex- Macmillan India head.

Huge variance in margins amongst peers. What enables MPS to earn superior margins? SPS and Newgen seem to be playing in a different orbit, altogether?

The answer may probably lie in process and platform efficiency/reusability. We have also been alerted about superior SPS margins. Let’s wait and see at what levels their margins sustain this year.

What role or value-add can any India-based player acquisition bring to MPS, apart from quickly ramping up trained work-force?

Ramping up trained workforce is not an additional driver for us at all. We are able to do that ourselves.

  • Elsevier – ScienceDirect; Cambridge – Cambridge Journal Onlline system
  • Springer – outsourced to MetaPress; Oxford University Press – outsourced to Highwire
  • Atypon Premium

Most of the large publishers seem to have their own publishing and workflow management platforms?

There is high level of customer distinction in customer platforms and processes. Varies customer to customer.

And there are fully-featured services such as HighWire press and Atypon Premium?

Yes Atypon Premium is a bigger platform. Bigger platforms usually have product road-maps frozen from years ahead. Addressing customer requirements dynamically might become difficult at times because of this.

There are smaller suppliers such as Allen Press, AIP Scitation, Bepress and others.

These are all probably candidates for acquisition down the line.

So where exactly is MPS publishing and Workflow Management System positioned? SAAS (software as a service) offerings including workflow management (MPSTrak), editing and automated composition (MPS DigiCore), and business analytics (MPS Insight).

A leading scientific publisher is deploying the MPS Platform currently. There is lot of IP (Intellectual Property) effort going behind the platform. MPSTrak is being deployed at 6-7 customers. Going forward we want to be able to do this much more seriously for smaller publishers.


Journals – 33 % – Volume and Value play; Books – 26 % – stiff competition? MPS Technology standalone Sales – 8-10%; Fulfilment Services – 10%

Kindly educate us on the competitive intensity and Margin profiles of major business segments. Which are the most attractive in terms of growth potential and profitability. What is the direction of value-addition being sought?

All segments are equally attractive and growing well. Fulfilment Services we are doing for only 1 or 2 clients currently, but we can see big growth ahead.

How exciting is the MPS Technology Platform Segment (DigiCore /MPSTrak/MPS Insight) for you?

This business has huge potential in itself and we feel that’s the way for the future. We have continued to make investments in the Platform. As mentioned before its being currently deployed for They were looking for something like this, but were unhappy with available options in the market. They are pretty happy with our product.

  • Collaborative ethos
  • Strengthening the business of the customer/making them more competitive

Kindly explain this emerging trend – seems to be mirroring the IT landscape where Customers used to set the agenda first, tell what needs to be done; now it’s the other way around, with TCS like biggies educating/consulting clients on how they should be positioned for the digital future?

For a technology provider this is like being ready with the likely building blocks. It requires discipline to keep investing on building blocks and staying on top of trends. There are continuous interaction with clients setting and aligning our road-maps with theirs.

  • project specific custom processes; project specific custom DTDs
  • project specific custom tools – if no re-usable platform?

Kindly take us through the reasons why it is very very difficult to rebuild the processes/tools/infrastructure/DTDs from scratch – even say when the customer specifications are available

It takes time for project domain specific operating knowledge to be replicated – and can take years for a new player. New players do not have/have not invested in processes and personnel with deep domain skills.

But more than technology/entrenched processes, this is a Relationship issue. There is a deeply entrenched technology relationship between customer and vendor that goes back many many years. Customer and Vendor processes and workflows are married to each other.

Why will someone like an Infosys or TCS not be able to replace MPS in a customer project?

That is practically impossible. Customers will not entertain new players from scratch. Unless you are already an existing technology vendor to the Customer, you are unable to gain entry to the Customer.

So threat of new players entering and queering this market is practically non-existent?

That’s right.

  • Total Revenue Rs. 220 Cr. Total Customer 115.
  • Top 5 /10 customers contribute 50% / 80% revenue. Rest 100 + customers average contribution – few lakhs – to a Crore

80% of Revenues come from Top 10 Customers. Almost 60% from Top 5. There is huge concentration – why is this not risky?

We see high customer concentration as our Strategic Asset, rather than a Risk. We enjoy very strong relationships with these customers and they have a lot of confidence in our abilities. Focusing on a few customers and penetrating deeper is the way to achieve success in our business.

What about the balance 100+Clients? Business of a few lakhs only?

We have a lot of clients where business volume is very small. These are standard offerings which runs more on auto pilot, focus is on the major customers.

What % of Customer outsourcing revenue come to MPS as on date? How much further it can go in coming 3 years? What are the organizational challenges to overcome to achieve this?

All our large customer engagements are growing. But our share as a percentage of their overall expenditure is low.

Is it of the order of 10%?

Much lower share

  • Technology driven changes enhancing outsourcing market; MPS end-to-end positioning
  • Operating headroom to enhance people productivity through automation
  • single-shift basis – attractive operating leverage to increase head count without needing to rent or buy additional facility; What we have reported in the last few years was attractive; what we could now deliver may be truly exciting

Some of the quotes from your AR 2015 is singing a very different tune from that of 2014. Kindly take us through this palpable excitement that is STANDING OUT from AR 2015

As mentioned before, we certainly are at a point where more and more opportunities are coming our way. Although we are among the Top 5-7 technology players in this space today, we are already being counted in among the Top 2-3 by major customers – if we go by the project discussions/ interest being shown.

But as mentioned before, getting sustained traction in this space is a long drawn out process. The future that we see ahead is exciting, but it is by no means clear. There are Mountains to climb and it is quite foggy. From time to time the mists lift and we get a clear glimpse as we get nearer – there may well be crevices and precipices along the journey. But we are ready for that.


So far we have been hearing the brighter side of the story. Let’s shift focus – kindly take us through the real challenges before MPS as it scales up to address the significant opportunities before it.

We can be our worst enemy. At the stage that we are in today, opportunities will keep coming our way. But we are the ones who can really mess up – we have to guard against over reaching, getting too ambitious, say paying up too high while acquiring a new business. Our ability to execute – stay on top while adapting nimbly to the fast-changing dynamics of content transformation & technology requirements of major customers – will be crucial for the quality of our sustainable & profitable growth trajectory.

But the reality is that project realisations are declining?

While that’s true for the Journals segment, that still remains our most profitable segment

Clients know your cost structures only too well, why wouldn’t margin pressures become more severe as publishers face an uncertain future?

We like to believe that the profitability of any business depends on the way it is conducted. For e.g. – our earlier venture was a plain BPO which is probably viewed as a commodity business, yet if someone were to pull out the numbers, we enjoyed very good margins (perhaps the highest in the industry, though the size was small). It all depends on the key controllables – for e.g. we believe keeping the wage bill successfully between 40- 45% range is key to operating business success.

What we as technology vendors deliver for our customers – being integrated completely with their back-end processes to deliver a finished product for their publishing platform – is huge in their eyes! (compared to doing it themselves/options available).

TCS / Infosys sites reveal either they are already in this space or are fully ready to target this space. They have wide service offerings, massive technical strength, as also huge “capacity to lose” to enter a lucrative market. How big / important emerging competition like that could be?

We have covered this before in our discussion. Due to the nature of this business/industry and the legacy/technology issues involved, platform continuance/extension is critical for the customers in our core business segments. There is no way that any new vendor will be entertained for a complete re-engineering or setting up things from scratch. Only those with existing technology pieces and a rich experience/expertise base coupled with current track record of transformational execution are in business.


Donald Francis: More than 5% of Portfolio in the Company; Recent Entry; No transactions in last 30 days
Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 2 years; No transactions in last 30 days
Aveek Mitra: More than 5% of Portfolio in the Company; Recent Entry; No transactions in last 30 days
Rohit Balakrishnan: No Holdings in the Company; ; No transactions in last 30 days

Kitex Garments Management Q&A: Aug, 2014

Management Q&A

Kitex Garments Management Q&A : Aug, 2014


We just finished a tour of the Garmenting and the Knitting-Bleaching-Fabric-Processing factories. Its nothing like we have seen before. You have set up a high-quality infrastructure on par with the best in the world with state-of-the-art advanced machinery. Who were the early influencers? How did you benchmark Kitex to be where it is shaping up to be today – a preferred choice of the largest global retailers? [Kitex Production- Infrastructure Video]

Well I guess the credit for it goes to my dad and the early training he put me through. He was a strict disciplinarian and he ensured I learnt to respect every aspect of the work ongoing in our factory. As a 13 year old, I was started out from cleaning the lavatories, to the shop-floor, to becoming a machinist, technician, bleaching and processing to garmenting operator.

I grew up with the ethos and the confidence of trying to do something different from the run-of-the-mill. We were not afraid to take risks. We were always prepared to order and try out the latest advances in machinery that wasn’t being used in the country. Somehow from the initial days we focused on infant wear. Certainly I have traveled and seen many factories worldwide. But we haven’t copied blindly. We have adopted creative solutions that we found could add to quality, efficiency or productivity.

We make it a point to publish results immediately after the year-end – even that is a creative first!

The working & living conditions for the workers that we witnessed was the most striking – certainly a few notches above comparable factories in India/Asia. What would you attribute that to?

My early training ensured the need to provide good working and living conditions for our workers was internalised early on. As we grew, we therefore had no hesitation in investing in people, infrastructure and processes that complied with all social and environmental norms right from the start.

Kitex has established itself as a large manufacturer of infant wear globally and made rapid progress in the last few years. Kindly share with us more on the global market size, growth areas for next few years, and Kitex’s own unique positioning and current market share.

Kitex specializes in infant wear (0-24 months) market.  Trust and Quality play a big role in consumer buying choice. Quality Standards on fabric and dye stuffs, colours and printing methods are much stricter to ensure products are infant-friendly and harmless. Chemical dyes cannot be used in the fabric (child saliva often comes in contact with fabric), for example. Parents lay great emphasis on Trusted Brands like Carter, Babies-R-Us, Gerber, The Children’s Place, Mothercare and a few others – brands that have endured over several decades.

Infant wear has continued to enjoy a relatively protected niche. Unlike most textiles/garment segments, infant wear market is not commoditised. It is also the only textiles/garments segment to have proven to be relatively recession-proof.

These large brands sell in huge volumes in US, Europe and rest of the world. Globally there are 12 companies of some scale that manufacture volumes large enough to meet the needs of these large brands. Winlu (China) is the No. 1 player with 7.5L pieces per day today. Gyn (Singapore) with 6.5L pieces per day is the second largest. They have manufacturing facilities spread across various countries. At 5.5 L pieces per day, Kitex has now emerged as the 3rd largest manufacturer.


(US $20 Bn market, Canada, Japan & China – $25 Bn, as per Carter AR). Kindly give us a sense of how big is the runway. 

US is a huge market yes, but volumes in US market are stagnant.

But Asia is growing very fast. India, China and Middle East growing very fast. Korea there are lots of stores. China there are lots of stores opening. Most International brands are today present in India – the aspirations of the new generation are different. In the next 2-3 years I see every brand will be here in India – and not just the big cities.

Infant market is growing rapidly in India. Earlier a family had 5-6 children. Now its 1 or 2 children at most. [reels of many employee names with single child, speaking to AGM Finance]. Parents are ready to spend more. There are so many shops today targeting infants & toddlers. Even a small place like Cochin has 7-8 toy shops. There are small cars prices at 25000, 30000, 40000 and people are buying. I went back to one shop f3 days later for a Jeep for my son – the piece was gone – it was for Rs 32000! Nothing comes cheap in these shops. Small cute chappals for the kids cost Rs 700-800. Parents are willing to splurge.

Some brands like Carter may be selling upwards of $500 Million in India 3-5 years down the line and there will be fast ramp-ups. Look at US Population – 300 Million; India’s 4x that and couple that with twice the birth-rate; that’s 8x the US market potential in India only. 

Infant wear for 0-2 years has an added advantage. 2-month and 3-month old toddlers grow very fast till 2 years, adding 40 gm or so every day or about 1.2 kg every month.

But the price-structure may be very different?

Actually it is worth noticing that the US market sells products at half the price of the Indian market. A Tommy Hilfiger shirt sells for Rs 3500 in India. In the US it comes for $35-40. Buying at a sale you can get it for $25, so at a discount you can get it for Rs 1500. I am a fan of Tommy Hilfiger, I buy all my shirts in the US!

In US the Sale structure is very interesting. The Initial Sales are placed at a Value that gives them 80% margin. They make all the profits there. Then they start selling at 60% margin, and next at 40% margin and then finally at 20% margin to liquidate stocks and be ready for the next spring/fall season.

When the market really opens up in India in next 3-5 years, it will be good for players like us. We will be able to save something like 20% straight on the duties and logistics costs. Gerber sells a body suit for $2 in the US market or Rs 120. It sells 1 million pieces a month at Walmart at $1.78. A comparable kids garment in India sells for Rs 350-400.

But what about product quality? Jockey International and Jockey India products are very different and at different price-points.

Yes you are right if you take the example of Jockey International products and those that are offered in India. There is a reason for that – Jockey products are offered by a company in India under a License from Jockey. As a Licensee you have the freedom to design and manufacture as per Indian market conditions. However Franchisee operations are different – where the same global quality & standards & products are offered.

Mothercare hasn’t taken the licensing route and has established many stores in India under company owned and Franchisee operations. We expect similar initiatives from the others when they establish their presence in India.

Is it right to say that the Industry structure is favourable for large manufacturers like KItex – Large Retailers have to come to Large Manufacturers?

Look there are only 3 or 4 major players from India. All others are at $1Mn (or sub) kind of volumes. Gerber has only 3-4 vendors. Carter has 2 approved vendors and is trying for 1 more.

Who are these large vendors?

Best Corporation, Jay Jay Mills and First-step are some of the larger established vendors.

But we have heard Mothercare sources from 15 and more vendors for infant w

Mothercare came to India much earlier and has established more vendor sources.

As companies scale up direct sourcing, are large scale global sourcing firms like Hong Kong based Li & Fung getting limited. Carter scaled up direct sourcing from 5% to 30% in 2013 and has aims of taking it up to 50% in next 2-3 years? Earlier the same sourcing agent was handling 70% of inventory purchases. How widespread is this trend? What does it mean for a manufacturer like KItex – in working capital management & margins?

Not true. Direct Sourcing is being pursued aggressively by players but with little results to show. Just where are the manufacturers with scale? And sourcing from a large number of vendors directly, is proving complex.

Three years back a leading player’s annual direct sourcing target was $80 Mn but they could get only $22 Mn. Last year they planned for $500 Mn direct sourcing in 3 years but are making slow progress. The same player wanted Kitex to supply $150 Mn in 3 years. We are not ready to supply more than $50 Mn to a single player. It is much safer to spread the same volume between 3-4 leading players. 

Once you have a trusted supplier relationship going with a global retailer, kindly give us an idea of the level of penetration possible? $150 Mn is just 5% of Carter’s annual sales today.

We have very good relationship with all our Customers. Over the years of association, in many cases it becomes like personal family relationship. Some of them call me at any time of the night, on business. Some of them I have to call every weekend, wherever I am.

We enjoy preferred supplier status today. We can keep growing the relationship with all of them steadily. As mentioned before, though we have offers to scale up very significantly on one or the other relationship, we prefer to go about it in a balanced way – not expose ourselves to undue risks/pressures.

Does any scale-relationship with any one retailer, restrict or impose any limitation on sourcing by other Brands or direct competitors?

Not at all. US way of business is different – they are very fair. Just like they want us to be fair in all our practices as well like not forcing our Labour force and meet all social compliance norms – hygiene, work timings, fair wages, working conditions, etc. 

They don’t/won’t interfere in our business at all, there is complete freedom. Gerber or say The Children’s Place don’t ask us about the level of business that we do with others. 


Can you explain the difference between European brands like Mothercare and US brands like Carter?

Mothercare is UK based and sells at a premium. Their styling is simpler – more white-based. More family oriented. ” I love you Mummy” or “My Daddy” – with prints or embroidery.

US is more design oriented with lots of colours and various styling. Gerber and Carter sell in huge volumes in the US market. As mentioned before US market is the cheapest in the world. Quality and standards  are enforced. Customers don’t like a product they can return it. They have some health problems – they can make a claim.

It is interesting to note that KItex made its entry with Gerber Childrenswear (mass-market player) 14 years back and only in last few years getting into sourcing agreements with Carter premium segment player). Kindly comment.

As mentioned before we do not have a preference for any of the bigger players. We would like to be in a steady relationship with all of them and continue to grow the business. There is enough scope with all the leading players.

But some of them like Carter are more profitable and growing, whereas someone like Gerber has changed hands 4-5 times, and Babies R Us is a subsidiary of the loss-making Toys R US? So isn’t it fair to assume there would be a preference for the growing more profitable customer?

Actually, Gerber is the most profitable customer for us. They source in huge volumes and some of their designs run unchanged for 6 months or a year sometimes. The efficiencies and productivity we derive from there is much higher. 

Apart from Carter and probably Babies R Us, most of the global retailers are finding it tough to compete and have been having financial difficulties and/or downsizing home operations to concentrate on International operations like Mothercare? Kindly comment and educate us on on the risks from this front?

in Europe, population is coming down, birth rate is coming down. Most families have maximum 1 child. Its like a cycle you know. The US has also gone through that stage of 1 child. Now everyone there wants 2-3 children. They are coming back. My feeling is Europe will also come back a few years down the line.

But Middle East is selling very well. In 2 years India and China will be selling very well. Take Mothercare, earlier they used to sell 80% in UK and 20% Internationally. This is now getting reversed.

But in this process of major market shifts, profitability is at risk? As per Mothercare AR their top priority is to replace profitability, and per casual enquiries by us their sourcing people have very stringent profitability targets?

Yes, they are aggressive on pricing. They compromise maybe a bit on design and styling. It is certainly not affecting the manufacturers like us.

Most Brands are however concentrating more on E-Commerce? Their e-commerce sales are doubling every year? What does that trend mean for manufacturers like you?

Yes E-commerce is shaping up very strongly. In US, in next five years e-commerce may occupy more than 80% market share. No one has time to travel. Standards are very tight and customers are assured that they will not be cheated. Customers have right to return the purchase if they are not satisfied in any way.

But E-Commerce has also meant margins are thinner? Brands like The Children’s Place have increased sourcing from places like Bangladesh drastically, to meet profitability? Kindly comment.

In Bangladesh wages are 2000-3000 per month compared to 8000-10000 in India. Kitex wages are among the highest in textile sector in India. Bangladesh superiority comes where products involve lots of manual labour and less machinery. But in infant wear, machine productivity and process is equally important and Kitex can compete with Bangladesh lower labour cost with its higher efficiency and productivity.

Kindly give us a sense of the Revenue mix from your top customers. What level of penetration have you been able to achieve over the years?

First 2 years they watch our performance and execution – quality and on-time delivery, etc. Just like we watch them and the relationship. Beyond that stage, all our buyers are in the $13-15 Mn range or $28-30 Mn range. 

To give you an example, a new relationship is at $14-15 Mn for us currently – this can double – they are also watching. They are currently sourcing 60% from India and 40% from China. They are looking to increase this to 80-85% from India, 15% to China in next season. They don’t mind paying 2% higher here – value is much more. 

In the past you have tried to risk-diversify across smaller retailers in US & Europe. Apparently that did not work out and you have reverted back to focusing on the large customers. Kindly educate us on the reasons for the same?

Yes, we did experiment with that. In our own calculations we had reason to believe that would be more profitable. But it didn’t turn out like that. Volumes were smaller, designs changed faster, our utilisation, efficiency and hence productivity was much lower. Order flow was sometimes volatile, scaling up was proving difficult. We had to move away from that model.

Kindly educate us on the Jockey Relationship and its potential for next few years?

We forayed outside of infant-wear market on specific request from an existing Customer. Gerber had taken the children’s inner-wear license from Jockey and wanted to manufacture it out of China. They got it developed there but Jockey rejected on quality front. Subsequently they jointly came to us for a new concept OUTLAST® technology for inner wear, which regulates skin temperature and helps you feel cooler in everyday situations. We are the only manufacturer for that product.  We make 2x the Sales for the same production time as infant wear as value-addition is much higher because of special chemicals and raw materials. Sales have been flat for last 3 years, as this is a niche segment. The project was taken up to showcase our ability to make such a product with complex technical requirements. It is more of an aberration. Even Arvind Ltd. had tried but failed to deliver on this product.

So it will not be incorrect to say you will continue to focus on infant wear 0-2 years segment only? You do not even need to get into the Toddlers segment 2-4 years. You see enough opportunities for you to harness and scale up in infant wear itself for the next few years?

That is right.


Kitex today has established a world-class state-of the-art manufacturing plant with the latest advanced technologies. It has shown the vision and the self-confidence to do things differently than most others in the sector. Reportedly it has been a lead-user of latest advances in technology/automation. Kindly take us through this evolution. How were the early days? How long did it really take to start getting noticed?

From 1995-2000 we struggled. Buyers took us for a ride and exploited us. Gradually we understood the game and started investing in the Safety-Security- Social and Environmental compliance norms. We took big risks and invested in the latest advanced machinery. To maintain quality we standardised on our yarn suppliers – both in North and South India – and nurtured them. Today we have 4-5 major suppliers. We have agreements with them for guaranteed off-takes. Today we are known for the best quality at competitive prices.

What have been the critical milestones in differentiating Kitex as a serious player – able to rise upto and match/exceed the stringent demands of global customers?

1. In-house use of critical Technology and sophisticated state-of-the-art machinery for complete control over Fabric Quality (70m Open width Continuous Bleaching, Auto Dye Dispensing System, Continuous Cold Pad Batch Dyeing, Continuous Washing, Screen Engraving, Rotary Printing, etc) [Kitex Production- Infrastructure Video]

2. The right raw materials – Kitex specified high-quality yarn – based on Okeo Tex Class I – normally not available in the market  3. Superior process chemistry used for bleaching and fabric processing 4. Use of Organic Dyes 5. Lastly our Labour strength – which we can proudly say is much better, more efficient than elsewhere – they are better trained, disciplined and punctual. Our labour utilisation/efficiency levels are close to 50-60% whereas most would struggle at 40-45% in the industry. We pay them the highest.

So, how did you set out to do things differently?

Well it depends on individual capacity I guess. It is in the Execution. It is in the Creative Ideas. You have to design new things – you have to think!

Kindly explain to us the manufacturing process value-chain and how Kitex has been able to add value and where – Yarn—->Fabric—->Dying/Bleaching—–>Knitting—–>Cutting—->Sewing.

Yarn: Kitex specified superior quality yarn based on Okeo Tex Class I vs normal yarn used by other vendors

Knitting: Advanced machinery from Italy. 

Bleaching/Processing: Technically superior Open Width Continuous Bleaching process vs Soft Flow process used by others; completely controlled by advanced Robotics machine – installed recently, again a first-in-the country. Only one person required to operate the 70m long bleaching line

Dyeing/Finish: Only organic dyes are used; Recently we have used Avocado based dyes with excellent results; started recommending these to Buyers

Cutting: Advanced fully automated machines increasing efficiency and low wastage

Sewing: Advanced high-speed more efficient Japanese machines with lower power consumption

You continue to mention Quality as your biggest differentiator. Yet, isn’t it true that the Buyers specify the product they want? They specify the base fabric, the colours and the dyes, even the printing method, etc. They inspect and test as per specifications before dispatches are allowed. So where is the quality differentiator, really?

While dye stuffs, processing and finishing play their part, the difference comes mainly from the Yarn specifications. The feel of the fabric changes drastically depending on the yarn used. As mentioned before we only use Kitex specified superior grade yarn based on Okeo Tex Class I yarn. We have contracted suppliers with guaranteed off-takes of 100T/200T a month from them – on strict yarn specifications provided by us.

You will see that we are the only vendor in the country that specifies upfront the yarn that goes into our fabric. Interestingly the buyers do not specify what type of yarn is to be used. When they specify base fabric – they will mention either Interlock fabric, Single Jersey or Rib Fabric and along with that 150 gsm or 180 gsm which is a only a measure of the density. They do not insist on a specific yarn quality. The usual standard is 18% Combing on 100 Kg whereas 15% combing or 10% combing, even 1% combing are possible for different levels of value addition.

The fabric feel ultimately depends on the quality of the yarn used. What kind of cotton is used in the yarn – longer 8 mm staple or shorter 6mm or less staple. The longer staple gives more strength. In normal Okeo Tex Class I atleast 20% long staple cotton is to be used. There is a variety in Gujarat which is the most suited. We specify all that in our yarn specifications to our suppliers. Because of that we can ensure CPSI of 2700 (a measure of yarn strength/breakage) versus 2000 for normal yearn. Defects are nil or of the order of 1/3rd to 1/4th that from normal yarn. There are some 10-15 different parameters where Kitex specified yarn is significantly better quality than normal yarn – this is what we try to showcase and explain to our buyers.

Well usually there is a reason for such omissions by both vendors & buyers. It must be taking up your costs. So how do you compete, then?

Certainly, it is a competitive world, and we have to be competitive. What we offer by way of higher input cost raw materials and investments in superior technology machines and processes, we make up in volumes and constantly improving on efficiency and productivity levels. Today we are at 60% utilisation levels and we will take it up to 70% with more recent investments in advanced machinery and robotics. Beyond that it’s not possible in Knitting industry.

Let’s examine the impact of Sourcing by large buyers? Don’t they have stiff sourcing & profitability targets where they are continually focused on shaving of that 2-3% and exploring manufacturing from low-cost regions that can give them some incremental advantage?

“Sourcing” – as we have known/experienced has changed over the years, especially for the Infant Wear segment. Earlier the accent of sourcing teams was only on pricing. Teams would travel to Asia, visit lots of vendors, decide what to buy at what quantities at a pric
e. Earlier the Buyers (Sourcing folks) were mostly blind to issues other than pricing. Now they are getting a better holistic understanding of the larger issues involved – price-competitiveness is important, but so is on-time delivery and quality as they have realised from sourcing in other regions in Asia (especially for infant wear).

The 0-24 months segment is the most brand-quality-conscious. Colours, quality and design play a big role; there is a lot of Trust in the Product. The Customer’s Product Department decides the Product design, the Planning department distributes according to Sales Plan drawn out. And then the Buyers, Planners, and Sourcing Team gets into action.

Earlier only the Sourcing Team used to come and visit us. Today at major Buyers whole teams drawn from Product Design, Planning, Logistics, Sourcing get involved. Recently when I visited a large Buyer in the US, a 22 person cross-functional team sat down to understand from us and appreciate the myriad of issues involved.

We share with them the impact of using normal yarn vs Kitex specified Okeo Tex Class I yarn. We also share the outlook on Yarn costs, Trims & Accessory costs, Labour costs, and the $-Rupee equation. We provide them advance information if costs seem to be going up – that there may be a 1% cost escalation next year.

Yet, the reality is its a very competitive difficult market. Apart from Carter and maybe Babies R Us, no one is really profitable. They will be trying to find that extra 3-5% savings if they are to scale up a relationship?

Yes, we try to make them understand the impact of compromising on input costs on the quality. They do ask us if we can make cheaper by 3-5%.  We say No, we can’t as we will not compromise on quality. 

Instead we ask give us a full product line, you will see a 4-5% higher Sales. Retailers and wholesalers have found out that the customer can also easily discern better quality by just the feel of the fabric. The same brand/design (Kitex-sourced) sells out much faster. For example, earlier we had the last row in Babies-R-Us stores, now Kitex-sourced products are placed in first 10 rows. Every season Kitex-sourced garments sold out faster – which led to the upfront placement.

Buyers have started to appreciate that. You see everyone has to survive. No manufacturer can can continuously cut-down on costs. In 2008 in the face of recession, large buyers started squeezing. Every season they would ask for a 2%, 2% reduction. Now no Buyer does that. Why? They know after some time, it is bound to break. They all understand the cost structures today. They tried sourcing from China cheaper. They couldn’t supply. They didn’t get the goods on time, leading to loss of Sales because they had already booked space at places like Walmart and others.

Besides there are lots of sales “tricks” that Retailers resort to. The same product that sells for $2 in Walmart can be sold at $6 somewhere else with some more work (frills & accessories) and better packaging. They know how to sell it. Its like Fashion – not high fashion though. There are buyers who don’t buy at Walmart. There’s a 25% audience segment that does not look at prices. For them most important is the Brand – design & quality.

How critical a role have Technology Consultants/Employees like Christian Strahm (Santex and Strahm Texile Machinery) played in improving quality and matching up to global quality standards required? Have they also played a role in improving assembly line efficiencies and/or de-bottle-necking. Kindly give us a sense of the significance of these contributions.

Well he is a consultant for maintenance and upkeep of processing machinery. He was the owner of Santex Textile machinery company but unfortunately had to sell out. He was employed with us also for some time. Now he has started Strahm Textiles and back to his consultant role with us and visits us regularly. 

Kindly educate us on the Jockey Outlast manufacturing line? Are there major process differences? Where? Are the issues the same in scaling up these lines, or are there differences?

Not really. As mentioned before we can make twice the Sales from the same lines as value-addition is higher – raw materials and chemicals used.


While Kitex has positioned itself strongly today as one of the preferred choices for Global retailers, how ready is it organisationally to harness and execute on the opportunities before it? Kindly share with us the organisation structure and key operating responsibilities and the key people behind them? Their experience base and their journey within Kitex.

We are organised entirely along the lines of our Buyers. Business Managers are assigned to a specific Buyer depending on the volume of the business. For Jockey, we have 1 Business Manager with 500 people reporting to him. For Carter we have 2 Business Managers managing 1000 people under them. 

Each Business manager has several functional heads reporting into him. The Production Head, the Sourcing Head, Inventory Head, the Merchandising Head and the Operations Head for Jockey report into the Jockey Business Manager. So each Buyer has dedicated functional heads and dedicated Teams (across Production, Sourcing, Merchandising, Garmenting operations) for delivering on our commitments to that Buyer.

Its not about manufacturing/selling garments/products to the Buyer. It is about selling a factory to a Buyer. We like to sell by Blocks. You buy a Full Block’s capacity and you get a full dedicated group of workers to deliver that for you – the group includes your own sourcing, merchandising, production and operation teams including tailors and sweepers!

That’s why you might have seen that we are organised by Blocks. Each Production Block has its twin but separate  Block (in adjacent Tower joined by pathways) for accommodation and dining and other space for the Workers in the Opposite Block.

Wow! That’s a pretty interesting and original way of organising your business around Buyers. But what about the 2nd and 3rd level of Leadership in the organisation?

The 2nd rung of leadership is built around 8 Core Managers – managing operations at the company level – each handling a specific function – Finance, Administration, Production, Sourcing, Inventory Management, Merchandising – and have their own Centralised Sourcing Team, or Centralised Inventory Management Team, for example.

3rd Level of Leadership are the individual Business Managers. And 4th level are the Buyer specific functional heads.

So for each functional head, there is a direct reporting at the Business Manager level and also a lateral reporting at the Core Manager level? 

That’s correct.

Also how are the responsibilities divided, what does the Centralised Sourcing Team do and what does a Buyer Sourcing Head decide on?

The Centralised Sourcing Team is responsible for policy setting, vendor identification, selection and nurturing, etc. and managing the individual Sourcing Heads at the company level while the Sourcing Head at the Buyer level can decide which of the 4-5 company specified sources he/she wants to work with. The rest is all about execution and adherence to laid-out standard procedures.

Let’s move on to some group issues. Kindly share the genesis or the requirement for a separate entity like KCL (100% owned by you) in addition to the listed entity KGL?

This was a situation that was forced on us around 2006. We had plenty of orders to fulfill in KGL but also a stretched out balanced sheet. Bankers were unwilling to lend us the 30 Cr we needed for fulfilling orders on hand. I had no option but to create a separate entity like KCL. I took very high risks. Had to pledge everything I had, all my personal holdings and savings. Even then, no single bank w
as willing to fund us. we finally managed to rope in 3 different banks to fund us 10 Cr each.

This is how it happened. For me there is no difference between the two – it’s like my left arm and right arm!

We understand group capacity is at 5.5 L pieces/day today. While KGL (440 Cr) has higher Sales than KCL (250 Cr) it also sells Fabric. Kindly share the garmenting capacities at KGL and KCL specifically. (ICRA Reports on KCL and KGL cite this at 90 Mn and 65 Mn pieces annually).


You have talked about doubling the group capacities from 5.5 L pieces/day to 1.1 Mn pieces/day in next 2-3 years. How will this be achieved and what kind of investments will we be needing.

We completed ~70 Cr investments in the Robotics assisted Fabric Processing plant last financial year towards enhancing capacities. The fabric capacity now at 48 MT is sufficient to see us through the targeted garmenting capacity of 1.1 Mn pieces/day in 2-3 years.

Now some more investments will be required towards cutting and sewing machinery. We have already ordered Advanced fully-automated Cutting machinery that will be here soon. Also we have ordered more advanced Sewing machines that are more efficient and will consume less power. Totally some 30-40 Cr additionally for the group. For KGL it will be about 15 Cr.

So, how do you see KCL and KGL growing individually in the next 2-3 years?

Both will double the capacities. Both should keep growing at 20-25% annually.

What about the Employee Base? ~4000 are direct employees at KGL. What is the total KGL+KCL direct employee strength? How many are contracted?

Total employee strength is ~8000. There are no contract labourers.

While capacities are being enhanced what about the Labour situation? will that also need to be doubled ~16000 employees in 2-3 years? And, if you continue to double volume capacities every 2-3 years – realistically, where do we see Labour counts growing to in the next 3-6-9 years?

Actually we will need only incremental 10% more additional Labour to reach 1.1Mn/pieces per day.

That’s something difficult to grasp and will take some doing. Kindly share how will this be achieved?

Firstly productivity improvements through use of advanced technology, backed up by productivity improvements through increasing efficiencies. Thirdly automation is being brought in new areas. For example we are installing a shaving machine that will bring in 4:1 savings in manpower. That itself will free up 300 people. We are bringing in lot of automation in Kitchen that will free up another 100 people. Automatic Roti-Maker (just need to put the Maida) producing 60 Chapaties every minute. Automatic Idly-Maker producing 2000 idlies per hour. 30 kg onions will get peeled in 1 hour. 2000 plates will be cleaned every hour. All imported fully automatic machines being introduced. Imported German machines for Vaccuum Cleaning that will bring in 75% labour saving.

It’s not one single thing that will do the trick, but a whole host of new initiatives in every area that we can identify where we can improve productivity and/or increase efficiency. Together we are confident these will deliver double the capacity at low incremental labour addition.

Okay. But even managing a 8,000-10,000 kind of Labour Force with high attrition is a tough job. How are you handling things today? How do you manage attrition/training/motivation and sourcing Labour?

Earlier we were using local people. But since last 2-3 years that supply wasn’t enough and we had to source labour from other states like Jharkhand, Orissa and other locations. Fortunately we have found a very competent partner who is able to provide us on a regular basis.

However, the Training part is the most challenging. When you went around the factory, you must have observed how disciplined the workforce is – they continue to do their job efficiently, silently. Most people wont even look up while you are passing by except if you are directly at their table.

But getting them to be like this is a big big challenge. When they come they are uneducated, unhygienic, raw folks. There is also the phase of adjustment to Climate and adjustment to Culture, living and eating and even basic hygiene training. Its tough, but today we have the processes to manage this transformation. Don’t see a problem for next 5 years at the least.

So how big a acclimatization-training team do you have today?

At any point of time there are 100 people being trained at Kitex. 15 days off-line, followed by 15 days on the line on the job training. With this 1 month training they are at about 35% productivity. Another 45 days before they get to the usual 60-70% full productivity.

There must be constant outflux too. Normal attrition. plus since its mostly women once they reach marriageable age, etc. When they go on annual leave after a year, many may not come back? How big a challenge is it really as the Labour force scales up?

Yes it is our biggest challenge, but something that is manageable. We are probably doing a better job of it than most places in India. We have an excellent outsourced partner in Don Bosco. DB Tech or Don Bosco Tech mobilises these youngsters and sends for training in sewing to Kitex. Don Bosco has been managing the mobilisation extremely well for us.

The Kitex team takes over and is able to make them productive within 1 months and fully productive within 3 months as mentioned before. Actually when someone goes on leave for a month, they usually return with 5-6 of their own -sisters, cousins, neighbours, relatives – their transformation is there for all to see! [Kitex Training-Corporate Video]

Kindly educate us on the US Wholesale Operations set-up? What are the aims and what is the investment size?

There are 3 ways of entering the US market

A. X or Y Brand manufactured by Kitex (manufactured by Kitex is imprinted on the garment)

B. Kitex made private label for someone like Walmart (where Kitex branding is non-existent)

C. License some established brand – that is not present in infant wear – take advantage of the mother brand while providing best quality manufacturing by Kitex (again Kitex manufacturing brand is enhanced). In US market Quality comes first (probably even before Brand) hence huge Branding exercise may not be required. Since customers can return products even after few days of use, quality is critical, and we can leverage Kitex quality while piggy-riding on the mother brand.

Is it right to conclude that these are probably longer -term initiatives and that initially the most significant impact will be on timely deliveries and logistics cost savings? What impact is this likely to see on the margins front? and by when?

We have hired some office space in US. We will import Kitex garments in bulk ourselves, pay the landed duty price (LDP) and offer our products directly to retailers. This activity should get started in next 2 months and will help shave off 0.5% of current logistic costs.

In time we may be able to replace distributors in between and supply directly to Retail ourselves. Distributors today are marking up as much as 30-50% off us while selling to retail.

There looks to be a conflict of interest here. Why wouldn’t this strain your relationships with existing customers (like Carter) who also procure in volumes for themselves (their retail presence) as well as supply to Walmart and other big retailers.

No, we do not think so. US is a very competitive but business-like place. If you can get additional business from Retailers, good for you.

Why can’t
a US manufacturer do a good job with more of the automated machines and efficiency drivers like you have spoken of before?

$12/hour is the minimum cost of Labour. For 8 hours this would cost $96, say $100 or Rs 6000 per day. Rs 6000/- per month is the Labour cost in India. Even if someone were to manufacture in US efficiently, who is going to consume products that will need to priced that much higher?


Kindly explain the major product mix components. Baby/Layette, Sleepwear, Play clothes and so on.

Body Suits : 40%; Sleep Suits : 20%; 20% Playware; Caps/Booties:2% ; Others: Blankets, Mittens, Pvt Label

Which are the low-value items and the high-value ones? Are there major avenues for value-addition by moving up the quality-chain?

Caps/booties are low-ticket items while Body Suits are higher-ticket items 

What are the major sources of growth and profitability?

Body Suits with high volumes and higher realisation at $1.25/piece

Any plans of producing more than infant wear? What about Toddlers 2-4 or say 2-7 years and service the full range of a major retailer like Carter?

Only of there is a (unintelligible hand-notes :-().This 2-7 years segment is much more commoditised market.




In the past there have been instances where customer‟s product failure (2012-13) or delayed orders from clients (2010/11) has led to order volatility impacting the group‟s revenue growth.

As explained before we experimented with relatively smaller buyers, but that didn’t work out and we have resorted back to the large buyer relationships where visibility is strong and scale and volumes are maintainable.

You had problems with TESCO?

TESCO and another buyer. That was in 2010-2011 time frames

We haven’t incurred even 1 hour production loss in the last 3 years. Our business model now is more stable.

Today how are we safeguarded against problems of similar nature? Do contracts have stringent clauses for guaranteed off-takes/penalties for non-adherence to schedules?

Large buyers have contracted wall space with Walmart – much in advance of the season. Wall spaces like 3 feet, or 6 feet, 9 feet or 12 feet, Wal-Mart is in the business of selling walls to brands. Supposing you are booking space for Mar 1st to July 31st. In addition to the Rent for space, you have to provide a minimum sale guarantee. You have to fill the space in time. If you sell less than minimum guaranteed – you need to pay penalties.

This is not India – where if you have contracted something for Mar 1st, and you can call up and request can I shift to Mar 7th, my suppliers are unable to supply! 7 days of unutilised wall space at any retail outlet in US will carry huge penalties.

How are Order books/Capacities negotiated? How often are these negotiated – 6-monthly or annual process? Are prices fixed or is there some pass through for cost escalation, say with a lag effect?

Usually Orders are negotiated for the Season or 2 Seasons. Spring/Summer and Winter/Fall. No, once a order is negotiated the Price is fixed. Normally while negotiating for the upcoming season, the RM is available at fixed pre-negotiated points for us, and cost is known. Once the order is negotiated, currency hit/gain onus is on us completely as is fluctuations in yarn/other RM. 

However in case of any abnormal gains/losses (more than 10%) there can be some passing of benefits from either side in coming season(s). Cotton prices can go up one year and come down the next. There has to be give and take. Both sides have to survive. Only then both can win.

What is the relationship between annual order scale-up and the inevitable margin pressures? How often do you face this?

As explained before, those days are over. The cost structures are known to both sides. Everyone has to survive. Room for some minimal negotiation have to kept – the Buyers/Sourcers have to be seen doing their job. We have mechanisms in-built to handle that. 

What are the debtor days norms with major customers? Have there been any instances of debtors going bad with any of the major customers? In last 10 years Debtor days have usually been at ~58-60 days, FY 2014 has seen it at 45 days? Is this a result of any re-negotiations?

Standard Debtor terms are 60 days. For delays we charge additional 0.5% to 1% for 60-90 days. In some cases/new deals we open LCs 

Inventory days record has been more uneven. ~60 days in earlier years to 100-110 days post 2010 (RM used to include Processing charges till 2010, why excluded now?) is down to 17 days in FY14 (11 cr vs 45-50 Cr in immediately preceding years. Kindly comment. Is this a one-off aberration this year, or?

Standard inventory days are 45-65 days. You have seen higher levels when we had visibility of yarn prices shooting up. We are improving our Inventory Management processes and trying to bring Inventory levels lower. Lower levels should be sustainable.



What are your major Raw Materials – Yarn, Fabric? Who are your major suppliers? How many suppliers do you deal with? What is the duration of such relationships?

As explained before, Yarn is the mainstay of fabric quality. We manufacture garments only with superior quality Kitex specified yarn based on Okeo Tex Class I specifications. Yarn is the main RM (50-60% of total RM). Major suppliers are GTM and PBM. Kitex specified superior quality yarn is not available in the general market.

What kind of contracts do you sign with major suppliers? Are they spot-basis, yearly negotiated or long-term contracts with cost-escalation pass-throughs? What is the nature of cost- escalation pass throughs – only currency related?

We have been nurturing 4-5 suppliers (both in North India and South India) for over 5 Years. We offer guaranteed payment for guaranteed volumes. For some of them we have been sourcing 100T/200T per month. 

Who are your major technology suppliers? Do you enjoy any supplier credits with them?

We enjoy very advantageous pricing deals – we get all machinery at Cost Price. They are willing to give up their profits as Kitex buying some machinery from them is something of an endorsement for them.

Why exactly are you in that happy situation today?

We are known for our willingness & ability to take risks on using advanced machinery using latest technology. Our technology suppliers take credit in showcasing Kitex factory as a buyer for their latest advanced machinery. They bring customers from all over Asia and even European countries like Turkey to our factory. Every month there is someone or other visiting.

Creditor days have been constantly improving over last 5 years, dropping to 20 days in FY14 (Sundry Creditors have stood at ~24-26 Cr over last 5 years despite the impressive Sales pick up). Kindly explain – why have you been obliging suppliers with such benign credit terms?

Our interest charges work out to be 7.5% whereas our Supplier have to work at 12-14%. We are availing less credit from RM suppliers and negotiating better prices for us.


The augmented Fabric Processing Capacity at 48 MT is sufficient for catering to what Garment capacity? 11 L/pieces per day? When will we need the next big augmentation of Fabric Processing capacity – at what Garmenting capacity?

The Knitting and Fabric processing capacity curr
ently should see us through the next 2-3 years i.e. suffice till targeted Garmenting capacity of 1.1 Mn/pieces per day.

Kindly educate on how 90 Mn Annual capacity (KGL) and 65 Mn Annual capacity (KGL) translate to the 5.5 L/pieces per day. How many working days/month or year

Working days are 26 per month, Sundays being weekly off. Add some festival holidays. 

72 Lakhs capex was completed in FY14. This was mainly for the Fabric Processing part. Is it correct to say all Capex in FY15 and FY16 will now mainly be for augmenting Cutting and Sewing machines? How much for Cutting machines? How much for Sewing machines?

Yes further capital expenditure will be on Automatic Cutting machines (already ordered) and more advanced Sewing machines as explained earlier (already ordered)

What has been the spend so far in FY15 and what will be the spend till Mar 31st?

About 15-20 Cr

Will we see some augmented capacity in place by 1HFY15? And what will be the likely enhancement by FY15 end?

Gradual ramp-up throughout the year.

What happens to the older machines? For sewing machines that get replaced say, are you able to get a good price or they are more like scrap?

Our accounting depreciation rate taken is ~8%. But Heavy machinery have a practical life of 20 years. Even Sewing machines – we are not using any Chinese machines. We have been using robust Japanese machines, where initial investment is very high, but these have a practical life again of 19-20 years.

We are able to get a decent price. a) A new sewing machine say today costs $800, roughly the same it used to cost when we originally purchased on $basis. b) while purchasing our $-Re equation would have been at Rs 35!

How often do you need to replace machinery?

In our experience, we have seen it is better to replace every 5 years. One, it straightaway leads to a 10% increase in efficiency. That allows us to get more productivity out of the labour-force – something that we are quite focused on.

Net-net, what would you say is your Return time frame for investment in machinery?

Processing machines returns – Maximum 3 years; Sewing machines – 2 years


FY14 Q1 Sales came in flat at ~100 Cr. Was this more due to the ongoing technology/ automation initiatives pursued by the company that required extensive trial runs as also the stabilisation of the enhanced Fabric processing capacity?

Mainly attributable to seasonality in Sales

Kindly explain the seasonality experienced in Sales during the quarters? Why?

For US and Europe, Spring/Summer and Winter/Fall seasons- that’s how the Buyers procure. Fall/Winter sees heavy buying while Spring/Summer is slower. Spring you get only about 1 month of Sale, while in Summer you get 2 months of Sales (holiday season). So barring some exceptions, you will see that Q1 is always slow, Q2 is better, Q3 is heavy, and Q4 super heavy sales. 

Kindly share the contribution from government subsidies, duty drawbacks and other export incentives? 

TUF   – 5% subsidy on interest rates; 10% subvention on Capital Expenditure

Packing Credit – 3%  

What is your average cost of Capital (Debt Funds)?

Term Loans – 12.5% currently. But we are expecting will come down by atleast 0.4% to 12.1% or so as our credit ratings have been revised 2 notches up by ICRA from A- to A+. We may be the rarest of the rare Textile company to be rated A+ – most Textile companies are at A- levels or lower (about 750 Textile companies are rated today). And better still our Bankers – State Bank of India have upgraded us to SB2 from SB4 (SB1 is the highest rating).  


Would it be correct to say that the Marketing challenge is over? It is now mainly an Execution challenge in stepping to service demands from global customers?

You can say that. 

What are the major challenges before the organisation?

Today Labour training/controlling is the only real constant challenge. We are in a comfortable situation on most other fronts.

What is the take on lack of geographical diversion – both on customer front and manufacturing front?

While US is still the largest market, all major customers have a growing international presence. As explained before, Middle East and Asia are growing very fast. In the next 2-3 years we will see more business from every buyer from these regions.

Manufacturing wise, we have no foreseeable plans to locate another plant elsewhere. 

Why is the Political Risk not real or negligible in your eyes? Everyone says Kerala is a very difficult place to do business in. 

That is mostly perception (misplaced). Those days of business-unfriendly political and labour environment are long gone. Today Media is very strong, development oriented public opinion is strong, people are much more educated.

Every year we contribute 700 Cr of valuable foreign exchange to the state. We are already the largest employer in Kerala. This would not have counted for much in bigger states, but Kerala is a very small state. The political establishment – all mainstream parties – value our contribution to the state. 

Yet you yourself have faced protest and delays in clearing expansion plans in the past. While coming to your factory we saw hoardings of Panchayat and SDPI – citing some details against Kitex?

We have not done anything wrong. We have never violated any laws of the land. We pride ourselves in adhering and bettering every environmental or social compliance norms/laws. There are no issues with mainstream political establishment. This was a small outfit called SDPI who are always trying to create trouble, in order to extract something. But we have handled that in our own way.

Why are you confident this cannot/will not repeat again – there will not be any production stoppages or some charges slapped unfairly on other grounds of say – women workforce exploitation – the bogey that SDPI raised?

For that you will need to understand the genesis of the problem, our determination in weeding out the problem, and our process behind the same.

This all started in 2012 in June by a local outfit called SDPI – (Wikipedia Link) – they controlled the local Panchayat at that time. Our environmental license was up for renewal and they started making hugely exorbitant demands. Naturally we refused.

They first raised the environment pollution bogey and ran a mis-information campaign against us. They enlisted  local villagers support (we had minimal local contact then). Their attacks got more and more personal and made me to be seen as a villain and a criminal, vilified me in every manner possible.

One way is to acquiesce and pay what they want. Keep on paying bribe/sleaze money and work without any problems. But I have been seeing these things – seen my dad suffer from the time when I was in 1st standard. 

But now we had the resources to mount a serious challenge at the very roots of the problem. For a normal fee of x, if someone puts up an extortion demand of 10x, we can spend 100x to quash the problem once and for all. 

The problem was our lack of contact and strong support base within the local village community then. I started local contact myself. I went direct to the people and explained how my father brought me up, inculcated the discipline in me, so we could create something like Kitex in your village. I explain
ed my vision for the village, how every child can be taught the value of discipline, and aspire to achieving the best in life. Fortunately people listened to me, staying on in rain for hours, and urging me to speak on every time I wanted to stop. They wanted to hear me. Meeting went on for 3 hours non-stop, people came out in large numbers to hear. Opposition also conducted meetings – attendance started to become thin -if they had 50 people gathered, our meetings would have 5000! [lots of footage shown to us].

Soon, we conducted a signature campaign. In one day we collected 16000 signatures!!

We started conducting cultural programs on Onam festival for the region – with 25000 people in attendance. We went to schools in the region and sponsored their football teams. Today we support 40 football teams of schoolchildren – soon we will have our world-cup [laughs]. We have conducted all types of awareness programs, invested in projects for drinking water supply, and the like.

We want to make this village a model village – example of the best, anywhere in India. This is the third year of engagement. we have the complete support of people in this village and nearby villages.

Today if I stand for elections, I will win easily. Opposition will lose their deposit.

Some might question if this is not bordering on over-confidence? And, you are so passionately involved now, it will be fair to question whether your priorities might change – after all you are the key man for Kitex?

[Smiles] This work/passion is properly scheduled. Sundays and after 5 Pm. Also on holidays. Kitex is always remain the first priority – that is business.

All this must have been very frustrating for you, also depleting lot of your energy?

With every opposition, I have only grown. What is Life without challenges? 


There is no stated Forex/Hedging policy outlined. We are watching the situation very closely and have taken adequate measures. We hope to show some decent gains


What is your stated dividend policy?

Again no stated dividend policy. But we will show steady, stable growth in dividends. We must ensure there are no dips.

As companies get comfortable on the debt front and there are stable cash flows, mature companies have a fixed/target Dividend Payout in line with the Earnings growth. What is your thinking on that front?

We are not yet a mature company. We have taken very aggressive bets to reach here.

Our first target was to become debt free. You can say we have reached zero debt level only now, if you account for the Cash. Whatever Surplus we generate, we need to ensure enough to save us on a rainy day. What if there is a crisis next year, what do you do? 

There are external pressures (from shareholders), but I think we are right in resisting those pressures till we reach a situation where we can be called a mature company.

10. Kitex Garments Ltd and Kitex Childrenwear Ltd

Minority shareholders like us are however concerned with the listed entity KGL. In the current scheme of things, concerns on Management discretion and Corporate Governance will always remain. Why not merge the two?

Yes Merger should happen at the appropriate time. 

One needs to appreciate that we are in this situation, because of historical reasons, as explained in detail earlier. You must also appreciate that there is lot of value creation still to be done at KCL level. I have staked everything I had on this entity (taken on very aggressive bets) and merging the two at their current stage will be really short-changing myself and my children. When KCL business and Clientele grows to a certain level, merger is surely on the cards.

What kind of value creation are you looking at?

First, the business in KCL has to grow to a certain level. It has to independently demonstrate the track record of sustained growth on the back of sustained customer relationships. Once that level is reached, it will be easier to envisage for anyone whether KCL can go the next level or not. That will be the right time to merge the entities.

You already have significant holding in the listed entity KGL. Purely from a financial gains standpoint (notwithstanding the value creation) – Investing community likes to point out Merger of the 2 entities looks unlikely because with Promoter shareholding is capped at 75%, you lose more.

Yes, we appreciate that.

So, you are saying you don’t mind that minority shareholders getting benefited more?

Yes. It should be a win-win situation. Shareholders in the company should also benefit

But Actually minority shareholders (of KGL) are walking away with a good chunk of the value creation in KCL for free, while you stand to lose that chunk of value creation, in the merged situation. There would be other gainful options for you, surely?

There will be value unlocking in both the companies after the merger, the combined entity valuation will benefit everyone, so even if I give away some to minority shareholders I too stand to gain.

An objective assessment of this situation would point to the above inequity and suggest that KCL acquiring KGL is the more likely outcome – after the Value Creation.

Not going to happen!

Taking that argument line, one can say I can do anything with KCL – I am the only owner. But KGL is a listed entity – there are other significant shareholders, one cannot just walkover them. Any decision taken can only be arrived at after due process. Only proposals that can carry everyone and convinces everyone, can be taken for KGL.

————————————————-  End of Q&A———————————————————–


Management Q&A:

1. Ayush Mittal : Tracking & buying > 1 year, added more recently; Holdings > 5% of Portfolio

2. Tirumal Rao: Tracking & buying > 1 year, added more recently; Holdings > 5% of the portfolio

3. Pratyush Mittal:Tracking & buying > 1 year, added more recently; Holdings > 5% of Portfolio

4. Anil Kumar: Recent entry; Holdings > 5% of Portfolio

5. Vinod MS: Recent entry; Holdings > 5% of Portfolio

6. Donald Francis: Recent entry; Holdings > 5% of Portfolio

Special Contributors:

1. Kiran D: Recent entry; Holdings > 5% of Portfolio

2. Omprakash Davuluri: Recent entry; Holdings > 5% of Portfolio

————————————————-  End of Disclosure(s)———————————————-


Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 1 year;
Tirumal Rao: More than 5% of Portfolio in the Company; Holding for more than 1 year;
Pratyush Mittal: More than 5% of Portfolio in the Company; Holding for more than 1 year;
Anil Kumar: More than 5% of Portfolio in the Company; Recent Entry;



Muthoot Capital Services Ltd. promoted by Muthoot Pappachan Group is a deposit taking Non Banking Finance Company (NBFC) registered with the Reserve Bank of India and listed on the Bombay Stock Exchange. 

Established in 1994, Muthoot Capital Services Ltd offers vehicle loans – primarily 2 wheeler and 3 wheeler loans.

Main Products/Segments

Muthoot Capital AUM (Cr)
Sales (Cr)
2 Wheeler 504.54 1.01% 386.46 96%
3 Wheeler 105.41 4.86%    6.57 4%
Blended 609.95 1.68% 403.03
Muthoot Capital FY09 FY10 FY11 FY12 FY13 9mFY14 FY09-FY13
AUM (INR Lacs) 7167 9669 17184 29578 45569  60995  58.79%
Disbursements (INR Lacs) 1044 4285 13835 28845 43117  40316  153.53%
Avg Lending Rate 24.25% 28.81% 28.74% 28.39% 28.79% 27.09%
Avg Borrowing Rate 10.72% 11.01% 11.08% 11.92% 12.83% 12.39%
NIM 13.53% 17.80% 17.66% 16.47% 15.96% 14.69%
Avg Loan Size (INR) 33405 33315 39391 43351 45139 42502 7.82%
Gross NPA 0.94% 0.81% 0.63% 0.26% 1.00% 1.84%
Net NPA 0.73% 0.63% 0.52% 0.20% 0.87% 1.61%
RoA 9.32% 8.43% 6.85% 6.24% 5.50% 3.89%
RoE 38.29% 38.29% 38.27% 26.71% 22.92% 19.51%
Cost to Income Ratio 0.44 0.38 0.39 0.42 0.45 0.46
Capital Adequacy Ratio 21.12% 20.86% 16.48% 28.56% 21.71% 19.61%
Total Customers 4343 15393 46589 99647 118568 212682 128.58%
Avg Monthly Disbursement 260 1072 2927 5545 7960 10540 135.23%
Salary Costs/Op Income 5.05% 11.15% 13.84% 18.22% 20.39% 21.90%
Sales (INR Lacs) 1712 2239 3770 6701 10664 11235 57.98%
PAT (INR Lacs) 542 717 967 1551 2176 1626 41.55%
Total Employees 55 207 505 1034 1626 2146 133.18%
Avg Employee Count 131 356 770 1330 1886
Sales/Avg Employee (INR Lac) 17.09 10.59 8.70 8.02 5.96
PAT/Avg Employee (INR Lac) 5.47 2.72 2.01 1.64 0.86

Source: Company

  • Group Branch Network: 3800 Fincorp branches -currently as cash payment collection points
  • Operations Network: 29 Hubs; 8 MCS owned and 21 shared premises with Fincorp
  • Dealer Points: – 1200 @2-3% commission; Usually 1 Customer Sales Executive (CSE) at dealerships
  • Disbursements Concentration 9mFY14 (FY13): Kerala 54% (60%), Tamilnadu 15% (14%), Andhra Pradesh 10% (9%), Karnataka 16% (13), Goa 0.6% (0.6%), Gujarat 2% (1.5%), Mahrashtra 2% (1.5%)
  • Group Customer Base: ~3.2 Mn Fincorp customers; Not much active cross-selling at the moment because of absence of unified database. (planned availability FY2015)

Main Markets/Customers

  • Strong Kerala Presence statewide – 20-25% market share. Competes strongly with IndusInd Bank and HDFC Bank. No#2 in Kerala just behind IndusInd Bank. Total Kerala market ~40,000 vehicles financed per month.
  • Muthoot Fincorp branches in Kerala are pretty much all leveraged by MCS. Fincorp has 900 branches in TN and around 600-700 branches in AP and KN each which leaves lot of space for leveraging on.
  • Nascent presence in Tamilnadu, Karnantaka, Andhra Pradesh (historical stronghold of Shriram City Union Finance?). These 3 states are traditionally huge markets for 2Wh financing. The company plans to grow Sales substantially leveraging existing Fincorp branch strength (without incurring much by way of fixed costs) – which is pretty entrenched in these 3 states.

Bullish Viewpoints

As on Mar 2013/
Dec 2013
SCUF SHTF Chola Sundaram MMFS Bajaj Finance
Size (AUM Cr) 610  15800 49700 19000 17600 27900 17100 Dwarfed when compared to Industry
Years in Business
28 (11) 35 36 60 23 27 Miles to go before proving itself
Capital Adequacy 19.61% 23.3% 19.9% 17.1% 17.7% 19.1% 20.9% Adequate; may need replenishing
3Yr Earnings CAGR 50% 45%  19%  74%  20%  39%  58% Robust growth
Cost to Income 46% 37% 26% 50% 37% 33% 45% High
Cost of Funds 13.10% 12.6% 9.8% 10.6% 10.6% 9.9% 10.3% Industry Highest
Employee cost/Avg no of Employee (Lacs)  1.66  1.75  5.36  12.19 Industry Lowest
Business Size/Avg no of Employee (Lacs)  38  92  385  553 Industry Lowest
Margins 14.69% 11.2% 7.0% 7.6% 8.4% 9.4% 12.1% Industry Highest
Yield 27.4% 22.1% 16.3% 15.4% 17.7% 16.4% 20.7% Industry Highest
Gross NPA  1.68%  2.4%  3.2%  3%  2.5% Industry Lowest
RoA 3.89%  3.2%  2.9%  2%  3%  3.4%  3.6% Industry Highest
P/B (CMP 87) 0.88   2.2  1.8  1.5  2.4  3.05  1.6 Attractive
P/E (CMP 87) 4.57   12.7  10.37  10.6  15.14  14.35  11.24 Attractive

Source: Company, Annual Reports

  • High Growth – Earnings have grown at an impressive 50% CAGR over last 3 years next only to Bajaj Finance – albeit on a much lower base. There is huge headroom to grow -provided the funding constraints get adequately addressed.
  • Highest Yields & Margins in the Industry – Again despite a declining trend, Margins (14.69%) and Yields (27.4%) for 9mFY14 are the highest in the industry, although on a much lower base compared to bigger competitors.
  • Highest Profitability in the Industry – Even with a declining profitability trend over last few years, MCS RoA at 3.89%  (9mFY14) is the highest in the industry. With the steps Management has been taking, RoA looks set to improve in near to medium term.
  • Stringent Credit Policy – As per the Management the primary reason for its strong showing and low NPAs is very strict adherence to the robust and detailed credit policy laid down by the company – extensive covering of different models and different customer segments (salaried, income-based, Asset-based, or NO docs financing with higher down-payments). Different Loan to Value (LTV) levels apply for different customer segments.
  • 85% of Loans backed by “Own House” documents – This is probably unique to Muthoot Cap that 80-85% of its disbursements follow asst-financing model – loan to folks with own-house document proof – either the borrower or the guarantor (usually close relative). This helps the company in collection/recovery process – as borrower is reluctant to run the risk of property attachment in case of default – especially for small loan sums < Rs 40,000.
  • Lowest NPAs in the Industry – Gross NPAs at 1.68% is the lowest in the auto-financing industry. All auto-financiers including Bajaj Finance have been seeing a spurt in NPAs in recent quarters. MCS has been managing the NPA situtation admirably. Collection Executives are focused on bringing down the ~15.75 Cr of likley NPAs substantially down by 31st March 2014 or, Gross NPAs to <1.5% or less. Senior Management is focused on closely monitoring stressed A/Cs (likely to become NPAs) and Collections on a daily basis.
  • Extreme Focus on write-offs recovery – MCS is again probably unique in its focus of trying to ensure recovery of every rupee that is written off. Post Arbitration (company has appointed arbitrators) 3-4% of cases vehicles are repossessed and sold off. Cases are filed and in due course company is confident of recovering loan amounts due along with legal costs and charges.
  • Big Productivity Improvements likely in FY15 & FY16 – With enterprise-wide automation being introduced and Profit Center benchmarks being established, company is embarking on a productivity linked budgeting exercise from FY15 onwards. Management opines this will help the company monitor income and expenses more granularly and modify policies for getting the best productivity – locations-wise and team-wise.
  • Cross-selling within Fincorp customer base – Fincorp has a customer base exceeding 3.2 Mn Customers today. Effective cross-selling may become possible once Fincorp group database becomes available (post automation) in FY15 and may provide a kicker to Sales growth.
  • Attractive Valuations – MCS is currently (CMP 87) trading at a discount to Book and ~4.5x PE with a 4.8% dividend yield – which looks reasonably attractive.

Bearish Viewpoints

  • Declining profitability trend – While 5 year Sales or Profit CAGR may look healthy, and FY14 Sales may register 40%+growth, FY14 PAT is likely to register flattish or negative growth. Return on Assets (RoA) have consistently declined and halved from ~9% levels 5 years back.
  • Employee Productivity bottleneck – If we examine the reasons, what strikes immediately is the nearly ~3 to 5-fold drop in Sales and Profitability per employee. The situation has got accentuated on 2 fronts. First, disbursements didn’t keep pace with recruitment leading to under-utilisation. Company was doing ~60 Cr disbursement by Mar 2013, but in 9MFY14 has managed to disburse only ~400 Cr. Secondly there is enormous duplication of excel-based data-entry work between Operation Hubs and Back-Office in the absence of enterprise-wide automation. Company has been cognizant of the second front and has been working to introduce fully-automated Loan Origination System covering Sales, Operations and Credit processes from April 2014 -planned to be fully operational by end of Q1FY14.
  • Delay in Bank Funding – Disbursements have been hampered by delayed funding availability from Banks. Typically Bank Limits are enhanced based on the current Balance Sheet. The BS gets ready by April/May with Banks taking another 2 months. So while company had a disbursement run-rate of 60 Cr by Mar 2013, it could disburse only ~40 Cr in Apr-Aug’2013 (up to 50-60 Cr for Sep-Dec’13) despite otherwise having ready sales/operations personnel – leading to under-utilisation. In earlier years this hadn’t proved a bottleneck (probably shareholders equity sufficed for first few months till enhanced bank borrowings kicked in) but it certainly has impacted disbursements and profitability significantly in FY14. For FY15 Company expects to kickstart approval process with banks within Q4FY14.
  • Deteriorating 3 Wheeler Market/Portfolio – MCS 3 Wheeler Loan market (primarily Kerala) has been steadily deteriorating. Monthly Sales at 7500 vehicles is now down to 3500 vehicles per month. Reportedly daily earnings of 3-wheelers down to 450/- from Rs 850/- earlier. The 4 wheelers Tata IRIS/ACE has also started doing well. 3 Wheeler Associations have written to prominent vehicle finance companies to stop issuing 3 wheeler loans in Kerala. Debt servicing capability of borrowers is badly dented and gross NPAs are on the rise [~5% in 9mFY14]. However, 2 Wheeler gross NPAs remain firmly under control and are probably the best in industry at ~1%
  • High Cost of Funds – MCS Cost of Funds is the highest in the industry at 13%+. Dependency on Bank Funding is high and  current A (negative outlook) rating by CRISIL (clubbed with Muthoot Fincorp) isn’t helping either. Public NCDs/other options are probably restricted till a ratings upgrade is in place.
  • A (Negative Outlook) CRISIL Rating – While the reasons and rating sensitivity cited by CRISIL in its negative outlook are mostly attributable to the Gold Loan business of Muthoot Fincorp, declining profitability on MCS count has not helped either. Senior Management is strongly of the view that they have proven in last 6 years that MCS 2Wheeler/3Wheeler Auto Financing is a successful, sustainable, and scalable business model. They have moved out completely from the Gold Loan business. They deserve a standalone MCS rating which they feel merits much better rating – that may alleviate its funding constraints in a major way. Discussions are on with ICRA and CARE.
  • Single Product dependency – MCS product portfolio currently comprises of only 2 wheeler and 3 wheeler loans. With 3 wheeler NPAs rising company is consciously cutting back on 3 Wheeler loans. Dependency is very heavy on 2 wheeler loans. Any adverse developments in the industry/economy could significantly affect the company’s fortunes. Going forward the company has to look at product diversification for better risk-adjusted growth profile.
  • Funding constraints – Tier I & Tier II Capital – Currently Capital Adequacy stands at ~19% (Min CAR of 15% as per RBI). If MCS continues to grow at 40-50% rates, it will need capital infusion in the form of Tier I or Tier II Capital pretty soon. Raising Tier I (Equity Capital) is probably not an active option for the company (cf. current valuations). For Tier II Capital MCS has options of either going the route of Sub-ordinated Debt or Preference Capital – which may get decided based on Group liquidity levels in 2015/16.
  • Hero/Honda Company Financing – MCS is hugely dependent on financing for Hero and Honda 2 wheelers. In the event that either of these start their own financing arms – and provide preferential access to financing from their dealerships – MCS prospects can be affected significantly.

Barriers to entry

  • Unique/Flexible cash payment schemes – Customers can pay from any Fincorp branch anywhere in the country. A web-based collection module of MCS provides access to customer details and payment schedules, etc. for all Fincorp branches. Customers can choose to pay the monthly EMI say Rs 1500/-, in even Rs 200/- or Rs 300/- flexi-instalments. Fincorp collects 0.5% (up from 0.2%) as collection fees from MCS from FY 2013.
  • Leveraging widespread Fincorp network – With a growing pan-india network of more than 3800 branches – this is at the heart of the efficient collection system for MCS. MCS can simply piggy-ride this expanding retail network and does not really need to set up this infrastructure of its own as it scales up. MCS does not need branch offices as sales originate primarily from Sales Executives placed at Dealer Points. [Operational Hubs are required for managing every 30-40 Dealer points – where again shared (but separate) premises with Fincorp is the norm. Out of 29 Operational Hubs only 8 are MCS-owned including the Head Office location.]

Interesting Viewpoints

  • Started taking Deposits – MCS has recently started taking 1-3 year deposits at upto 12% rates through Muthoot Exim which acts as the broker. ~40 Cr deposits have been mobilised so far. The company seems confident of mobilising ~150-180 Cr (the max limit – 1.5x Net Owned Funds) within FY15. This will go way a long way in ensuring Margin Requirements with Banks and pave the way for enhanced Term Loans availability for the company.
  • Impending introduction of Automation – As per the company major automation in Loan Origination System (LOS) – covering Sales, Operations and Credit processes – is set to be introduced across all company Hubs and Offices in 1QFY15. Part of a much larger group automation project standard operating procedures (SOPs) have been defined by IBM in consultation with functional departments over the last 2 years. 3I Infotech is the major vendor and implementation partner. Apart from providing single-source unified MIS views, this is likely to bring in huge operational efficiencies and savings in FY15.
  • Muthoot Fincorp Sales Agency model – With Gold Loan business volumes coming down, Muthoot Fincorp has started proactively sourcing customers for MCS on commission basis (2%). Started only a year back, all Fincorp branch personnel have now been trained. With Muthoot Fincorp intrinsically incentivised (low Gold Loan Sales) this is expected to be rolled out to all 3800 branches in FY15 – reducing the dependency and large costs incurred by MCS on Sales Executives at Dealer points. Model is working well and expected to start delivering ~7500 vehicles (avg 2) a month.


Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 6 months

Muthoot Capital Services Management Q&A: May, 2014

Management Q&A


Muthoot Capital has chalked up a rapid growth rate only in the last 6 years or so, despite being listed from 1995. Kindly take us through the journey and the key success factors. What has changed, and how exciting is it to be where MCS is today?

As you are aware in 1994 Mr Thomas Kuruvilla (ex SEBI) was appointed as the MD & CEO of the company which was started for offering Capital Market Solutions, though the Company did not start the business. It did not have a NBFC license then. In ’95 there was a small but well subscribed Public Issue.

The company did not do well and was more or less dormant till 1997-98. It was revived in 1998 after getting the NBFC License. The company started doing business of Gold Loans. In 2005-6 the company started some 2 wheeler loans but did not succeed in making a mark – and was stopped. In 2007, 2-wheeler Loans were again started but this time only to Fincorp group customers (Gold Loan, Insurance products).

1st Mar 2008, Mr R Monomohanan joined the company as CEO. He had a Corporate Banking background – 20 yrs with SBT. He headed IndusInd Bank Kerala Operations from ‘1996-‘2003 and was with Exim Bank Tanzania from ‘2003-‘2007. The Company also brought in Mr R Balakrishnan – with over 15 years of hard-core 2-Wheeler industry experience in Operations, Sales and Collections spread over Integrated Finance and TVS. Mr Balakrishnan was given a free hand in setting up his team.

This was the time many players were vacating the 2 Wheeler financing space due to high default rates – like ICICI Bank, Citi Financials, UTI Bank. We saw it as an opportunity due to our reach and loyal customer base.

In Oct 2008 we started full-fledged operations. We started lending outside the group too. We disbursed Rs. 10 cr, Rs. 43 cr Rs. 138 cr, Rs. 288 cr and Rs. 431 cr respectively in 2008-2009, 2009-2010, 2010-2011, 2011-2012 and 2012-2013 respectively. In March 2009 we reached a loan book size of Rs.10 Cr, Rs. 40 Cr in 2010, and followed it up with ~Rs. 130 Cr in 2011. In 2012 we reached Rs. 290 Cr and ~Rs. 482 Cr in 2013.

We hope to keep the momentum going. We have laid strong foundations. We have been testing waters so far. In 5 years we have reached a level of ~650 Cr, where (we daresay) reaching 2000 Cr was not difficult.

We believe we have demonstrated a robust business model in the tough terrain of 2-wheeler financing. While we have grown rapidly, we have ensured high Return on Assets (RoA) and some of the lowest NPAs in the industry.

2Wh Loans constitute the bulk of the Loan Book. Post 2008 (2009-10) timeframes Private Banks mostly vacated this space. Also NBFCs like Fullerton (300 Cr Auto Loan book), CitiFinancial, GE Money scaled down operations drastically. Why has this business proved difficult in the past? Why were you confident of executing where others have failed before?

As mentioned before, this is a difficult terrain. There were very high defaults in 2008-9 time frames – Retail Banking was a numbers game being played out – anyone and everyone could avail of a loan – proper verification procedures were probably not in place, and credit policies were lax.

Because of our Corporate Banking background, we ensured we offered the Right Product.

And what is the Right Product?

Product that is first and foremost backed by a Robust & detailed Credit Policy. Policies that ensure a wide coverage of different models, different repayment schedules and different customer profiles – salaries based, income based financing, asset-based financing, and even a No-Docs financing (50-55% down-payment).

We started offering only for Honda and Hero vehicles – we are the preferred financiers for them today.

Secondly this is backed up by 3-level customer profiling and verification (which goes up to 5 levels in certain cases). First by the Counter Sales Executive (CSE) at dealer premises, followed up by an independent Field Investigation (FI) Verification Agency that confirms physical address proof and background check, and finally a CIBIL score elimination.

Thirdly we offer a product that is tailored just-right for its audience segment. Flexible Repayments. We do not take any Post Dated Cheques (PDCs). In what is probably a first-in-industry and unique to Muthoot we allow the customer to pay in cash – in any of the 3800 Muthoot Fincorp branches – all over the country. For an EMI of Rs. 1500/- say, he can even pay in Rs 300/- or Rs 200/- flexi-installments, any time he chooses. We call this facility “Ultimate Flexi Payment”.

Apart from these obvious Product structuring strengths, kindly elaborate on the key business tenets for MCS?

The core business tenet is “Asset Quality”. This is our primary concern for every employee of MCS. Nothing is outsourced – except the Field Investigation Agency. We follow a stringent system of concurrent audits (audits happening at the Operation Hubs concurrently with approvals).

For maintaining desired Asset Quality, we lay great stress on our people. Interestingly we do not follow the prevalent Agency model.  Unlike Direct Sales Agents (DSAs) we have a Counter Sales Executive (CSE) stationed at Dealer premises – an employee on our rolls. Every employee has been handpicked/recruited by referrals – no advertisements. Employees are assured great career advancement prospects – to ultimately retire with the company. From 15 employees in 2008 we have grown to 2100 employees today, in 7 states.

How well-placed is MCS in 2Wh/3Wh space? Who are your main competitors? Is your audience segment completely different from those served by Banks?

Our main competitors are IndusInd Bank and HDFC Bank. IndusInd Bank has higher expenses because of higher incentives for dealers at 4-5%. Their NPAs are also higher. HDFC Bank as you know has a separate vertical for Auto Finance. They are the bigger players.

We are a small player with ~2% market share. We have huge headroom to grow.

Where does MCS see itself 5 years from now vis-a-vis current competition?

We aim to become a significant player in this space in the next 5 years with atleast 10-12% market share. Major players have somewhere between 15-18% market share today.

What do you see as the biggest challenges to your growth plans?

Availability of Funds and maintaining our Yields at current levels.

How ready are you organizationally for the challenges ahead? And Why?

As you are aware, we are a small organisation. We have laid a strong foundation with the right people, right product and processes within the organisation. However in-order to enable us to scale up significantly from here, we have been taking following steps:

a) Complete Automation – major automation is being introduced in Loan Origination System (LOS) – covering Sales, Operations and Credit processes – set to be introduced across all company Hubs and Offices in 1QFY15. This is part of a much larger group-wide automation project where standard operating procedures (SOPs) have been defined by IBM in consultation with functional departments over the last 2 years. 3I Infotech is the major vendor and implementation partner. Apart from providing single-source unified MIS views, this is likely to bring in huge operational efficiencies and savings, starting FY15.

b) Productivity linked Budgeting –  Company is embarking on a productivity linked budgeting exercise from FY15 onwards – Profit Center benchmarks are being established  – this will help the company monitor income and expenses more granularly and modify policies for getting the best productivity – locations-wise and team-wise.

c) Arbitrator appointment – For speedier processing of loan recoveries appointment of Arbitrator has been started.

Muthoot Pappachan Group is a diversified conglomerate -Financial Services, Hospitality, Automotive Dealerships, Real Estate & Infrastructure, IT Services, Healthcare, Precious Metals, Global Services and Alternate Energy. Ev
en during the press release of MCS results update MD speaks about Muthoot Pappachan group and other businesses like MF, Housing, gold loan etc. – Which is the priority and how is promoter/management bandwidth?

We are a completely professionally run set-up. There is zero interference from the Promoters in day to day activities.


Back-Office/IT systems/Risk Management

Entire Back-office, New automation system for Loan Origination System and other IT facilities, Document Storage, and Risk Management Team is based out of Cochin.

Business/Operations – Front Office

Sales originate from the ~1200 Dealer Points spread across 7 states.

Operations HQ is Cochin. There are some 29 Operational Hubs. These Hubs usually handle sales origination from some 30-40 Dealer Points. Operational Hubs usually house the Credit Team, Operations Team with Tele-Callers, Collection Team and a Concurrent Auditor.

Team Sizes

Sales – ~950-1000; Collections – ~800, Operations – 115; Credit -~50; Risk Management – ~40


What is your Loan Eligibility process?

Around 80% of loan origination happens in non-metro regions – at rural location dealers.

Loan eligibility is decided on various parameters. Broadly the flexibility increases as the Loan to Value (LTV) goes down. If everything is in order, Loan Approval is sanctioned. 80% of loan disbursal is for Honda/Hero products. LTV is different for different 2-wheelers. Generally resale value for Honda/Hero 2-wheelers is higher, so there is better security.

Different combinations of LTV, proof of landed property, customer profile, income documents, guarantors, kind of 2-wheeler being financed, existing relationship with MCS/group companies and CIBIL score decides the loan amount.

More than 90% of the customers have a property in their or guarantors name. MCS takes copies of tax receipts of the property. This helps MCS in case arbitration/legal proceedings are needed for recovery of loan.

MCS can disburse a loan without income proof – where the LTV has to be lower than 50%. Less than 10-15% of accounts may be under this category. Of course 2 guarantors are signed-up for almost all cases.

When company/competition markets “100% funding” schemes – this is only smart product packaging. In such products advance EMIs of upto 5 months is collected upfront by anyone offering such schemes.

Generally 80% loans are based on assets owned by the client, 5% cases are based on his income proof, and balance are no-income/asset proof cases.

Kindly educate us on the Loan Sanction/RISK Management process?

Counter Sales Executive (CSE) does the first round of customer profiling by collecting details and documents from customers directly. The Tele-caller at Operational Hub makes the next round of residence and employment verification.

Field Invstigation (FI) agency does the address verification at customer’s residence and also does a background check by contacting neighbours, etc.

A CIBIL report is also generated.  CIBIL records are available for 30% cases. Though the score is not used directly, the repayment habits and current liabilities of clients are ascertained using the CIBIL report.

Whenever Loan to Value (LTV) is above 70% the risk team appraises the case before sanctioning. A Risk Team (stationed at HO) consisting of ~40 employees work closely with the Hubs. Risk team picks up cases through random sampling, references from credit team and on any other triggers/hints they get.

The trigger/hint may be in the form of abnormal number of defaults from a specific sales staff, dealer, area, segment of clients etc. There is a list of “negative” segments.

Flexible repayments is what is said to be MCS “real differentiator”. Kindly elaborate.

Very flexible installment payment options and various methods to evaluate credit capacity allows MCS to compete effectively. A customer can pay his installments partly or in full at any Muthoot Fincorp branch in the country. He need not give PDCs or ECS instructions.

In any PDC system 80:20 rule applies. 20% of the cases there is cheque bounce. When customers of competitors have to deal with penalties for cheque bounces i.e. defaults,  a MCS (defaulting) customer can make at least a part payment. He can pay daily/weekly or monthly.

The MCS Operations Team sends an SMS reminding them of the due date. The Collection Team then guides customers to the nearest branch for the payment.

Kindly educate us on Collection And Recovery Processes.

An SMS goes to the customer informing due date and amount for payment of installments.

If the customer does not pay in time, Tele-caller calls to check. Customer is persuaded for making the payment/even if partly, at any of the Fincorp branches.

The big Fincorp branch network ensures that collection team guides the customer to nearest Fincorp office. The flexibility to pay daily/weekly ensures collection of some amount happens.

Collection Team consists of ~800 execs with each Team Leader managing on an average 7 Executives.

What are the main advantages/differentiators vis-a-vis Competition?

Competitors employing collection agencies and using PDCs route for monthly payment are usually slower to start the follow-up as the trigger for follow-up is usually on cheque bounce being first reported.

Competitors would perhaps take around 45 days for collection process to start after the due date – once any PDCs bounce, and penalties are imposed. A large chunk of 2-wheeler customers may not be used to regular banking habits and PDC bounces might be frequent. The penalties will further irritate them.

MCS collection team works very closely with the customers and this also gives valuable information about the clients, their whereabouts, best way to collect from them etc.

How strong/influential is Customer Knowledge and the Relationship? And role of Guarantors?

With ~800 executives in the collection team and attrition being low at 1%, the long term relationship (in-place) with clients  is very important for recovery. Teams are very well versed with the area they operate in.

MCS strategy is to operate in areas around Fincorp branches, thus there is high possibility of a client being an existing client of Fincorp or being known to a client of Fincorp. Many a times Fincorp’s help is requested to know more about the clients of MCS.

Most clients do not want a collection agent to visit them, and/or interact with their colleagues, family members or neighbours. Hence in most cases recovery is successful through positive persuasion.

The 2 Guarantors usually are close relatives or friends. This also acts as a deterrent/strong persuasion point for defaulting customers. MCS can proceed with arbitration against Guarantors as well.

What is the process on payment defaults?

Whenever the customer defaults one of the first 3 EMI cheques are utilised. The Credit Team and CSE concerned are also utilised for persuading the client. This is because the client and his details/whereabouts are still fresh.

2-wheeler loans being low-ticket items most customers do not want recovery actions, especially when even their property can technically be at risk. MCS possesses the vehicle in case of default over 3 months. Some of them (25% in FY13) are released after collection of some amount.

When the company repossesses and sells vehicles, the balance un-recovered amount is written off immediately. But MCS is confident of recovering this amount through arbitration/legal proceedings.There are 550 Cases under arbitration now.

[Senior Management is very confident about the Arbitration/Legal process for recovery – due amount plus all legal fees/charges included. They opine “Every Rupee given out since 2008 will be recovered, there would not be any real “write-offs”.

MCS is very confident of its 2-wheeler loan book and gross NPAs are currently at 1%.] p>

What kind of skills-profile do you require for these jobs?

Normal graduates.

What kind of training do you equip employees to deal with – say the tough collection process?

Orientation training at HO. 1st-15th of the month training facilities are always booked. Whenever Credit Team or Operations Team visits – local trainings are conducted. Most of the learning though is on the job.

How do you create the right incentive structures? Loan growth vs profitability vs Collections?

We have an incentive structure which rewards the field level executives in both sales and collections according to their contributions. The structure also takes care of their supervisors, for keeping the field staff motivated and involved. For the senior staff, we have a flat 10% incentive structure plus a component based on quantum of disbursement. As mentioned before, we are bringing in productivity-led benchmarks that will help us to fine tune incentive structures in the near future.


What is the total market size of 2 Wheeler Autoloans? What is the market share that MCS has in Kerala & overall?

Overall we have ~2% Market share. Some 40,000 vehicles per month need financing in Kerala Market. We are able to do ~10000 vehicles per month, so ~25% market share.

30 lac customers for the group and 2.25 lac for MCS. How do we plan to tap this base?

As mentioned before, major automation/ERP systems is being introduced within the group. Both MCS and Fincorp will have Loan Origination System (LOS) operational by Q1FY15. We should be able to leverage the group database fully from the coming financial year.

Do you share branches with Muthoot Fincorp? How many branches are company owned?

As mentioned before, MCS does not need conventional branch presence – Sales originate form dealer points where we maintain a Counter Sales Executive (CSE). What we do need is what we call Operation Hubs – which on an average manage some 30-40 dealer points. We have 29 Operations Hubs. 21 of these are shared (but separate) premises with Fincorp branches, and 8 belong to MCS.

There are 20,000+ staff working in the 3800 Fincorp branches all over the country. We are uniquely positioned to leverage on this group branch network that acts as Cash collection points for us.

So what is the relationship/arrangement with Fincorp? How do you account for the costs involved?

Fincorp branches also act as our Cash collection points. We pay them 0.5% as commission from FY14 onwards (revised upward from 0.2% earlier).

Any other synergies with Fincorp/Other group companies?

Yes. Sales Promotion activities for 2-wheeler loans are regularly arranged near Fincorp branches – to leverage the group customer base.

And of late Fincorp branches have started generating sales for MCS. We have provided required training to personnel at all Fincorp branches. This will be rolled out across all branches in FY15 – we expect significant traction from this going forward – roughly 2 vehicles per Fincorp branch per month run-rate is targeted by the end-of-year.

Why does this work for Fincorp? Why would they prioritise any Sales for MCS?

As you are aware the Gold Loan business is seeing a down-cycle. So it’s a win-win situation for the group companies.

New product lines – Company mentioned LAP, second hand auto loans, lease financing, tractor loans. What is the plan and opportunity size?

At the moment we are focused on 2-wheeler/3-wheeler loans. Other avenues will become available as we attain some scale and are also able to attract substantial funding.

What is your strategy around tie ups with more players besides Hero Motocorp and Honda?

We are the preferred financiers for Honda and Hero vehicles. They are growing at a rapid pace. At the moment we are focused on servicing this market.

How is you expansion plan playing out in Goa, Gujarat & Maharashtra? Do you expect to maintain the NPAs in these markets also? You would have had a better credit history of customers in your primary market because of group/historical customer relationships. Will this be an additional risk in the new markets?

Our recovery performance and low delinquency ratio in Kerala and the other Southern States are on account of our business model, which include strict customer profiling, flexi-payment option to borrowers, doing the business with own employees instead of engaging agencies, strict and vigorous collection measures, etc. We expect to continue the same collection performance and low levels of NPA in the other States also, by continuing the same business model.

You have presence across 1200 dealers? How will this number grow over time?

Currently we have ~1200 dealer points. If things go as planned this will reach 1600 dealer points next year and 2000 dealer points by FY16.

Will it be correct to assume a similar trend for disbursements?

Yes. We certainly hope to maintain a fast clip. As mentioned before, we think reaching 2000 Cr in disbursements  is not difficult – and a good target for us to achieve within next 2-3 years.

How much contribution comes from 3 wheelers today? What is the average yield, default rates and tenure of 3 wheeler loans? Does permitting play a role in terms of what the demand is like?

3-Wheelers constitute a very small portion of our product portfolio ~4%. 3-Wheeler Loan market (primarily Kerala) has been steadily deteriorating. Monthly Sales at 7500 vehicles is now down to 3500 vehicles per month. Reportedly daily earnings of 3-Wheelers down to 450/- from Rs 850/- earlier. The 4-wheelers Tata IRIS/ACE has also started doing well. 3-Wheeler Associations have written to prominent vehicle finance companies to stop issuing 3-wheeler loans in Kerala. Debt servicing capability of borrowers is badly dented and gross NPAs are on the rise [~5% in 9mFY14]. However, 2-Wheeler gross NPAs remain firmly under control and are probably the best in industry at ~1%

What percentage of your customers would have a CIBIL record? Do you initiate a credit check for all your customers before sanctioning?

Roughly 30% of customers have a CIBIL record.

What is the competitive advantage that you have over your competitors especially in areas where you don’t have your branches and Muthoot brand does not have a strong recall?

The Ultimate Flexi-Payment facility across 3800 Fincorp branches all over the country has proven to be our key differentiator. Also being a single-product company we are certainly more focused on this segment than our much larger bigger competitors (Banks like IndusInd and HDFC). Our products & processes are probably more finely-tuned to the requirements of the customer segment we serve.

How do you handle the Trade? 2-wheeler Dealers in metro cities are known to demand huge trade advances and higher commissions?

We are a small company. We can not pay 1 Cr trade advance! We offer between 10-15 lakhs as trade advance. While competition is known to offer 5% kind of dealer commissions we offer 2-3% commissions. But we do offer the best payment terms to the dealers – payments are processed immediately without any delays. Some of the bigger competition is known to delay payments by over 2-3 months.

What is the Rural/Urban Sales mix for Muthoot?

80% Rural, 20% Urban.

What is your current organization structure? What is the average tenure of the employee? What kind of attrition levels do you deal with

Sales – ~950-1000; Collections – ~800, Operations – 115; Credit -~50; Risk Management – ~40

1% Attrition levels. There is no retirement in Muthoot group. Post 58 years employees are offered gainful engagement on contract basis – based on the skills profile.


Your borrowing costs are creeping higher over the last couple of years? What is the current cost of borrowing and do you expect it to further trend higher? How are you compensating for this rise in cost of borrow

Our average lending rate for 9m FY14 is at ~27.09% while average borrowing rate is at 12.39%. NIM is thus 14.69% and the highest in the industry. Maintaining yields is becoming a difficult task. We are in discussions with ICRA & CARE for standalone MCS ratings – that should help bring down our borrowing costs somewhat, in near future.

In the last quarterly results the Admin costs have increased from Rs 3 Cr to Rs 7 Cr YOY & Employee costs increased to Rs 9 Cr from Rs 6 Cr YOY? Why are such huge jumps happening?

There was significant scaling up on the Employee front which resulted in the higher costs. We had factored in higher disbursement rates for FY14 based on our Mar 2013 run-rate achieved.

Going forward what will your target NIIs, ROAs and expense ratios? Your expense ratios have been climbing sharply over the last 2 years?

Profitabilty was hit in recent quarters as expenses shot up but disbursements couldn’t keep pace. We expect RoAs to climb back to 4.5 to 5% levels.

How are your Gross NPAs faring? Is the incidence of NPAs increasing? What are the measures your are taking to reduce the overall incidence of NPAs?

Gross NPAs for 9mFY14 are at 1.84% levels. It has gone up significantly as compared to previous years. This is in line with the stress in the overall economy. However our NPAs are still the lowest in the industry and reflects the focus within the company to manage collections and customer relationships, identify stress areas early and work towards reducing likely NPAs.

Can you give us some sense of the increasing NPAs? Are some segments effected more than others?

As mentioned before 3-Wheelers constitute a very small portion of our product portfolio ~4%. 3-Wheeler Loan market (primarily Kerala) has been steadily deteriorating. Monthly Sales at 7500 vehicles is now down to 3500 vehicles per month. Reportedly daily earnings of 3-Wheelers down to 450/- from Rs 850/- earlier. The 4-wheelers Tata IRIS/ACE has also started doing well. Debt servicing capability of borrowers is badly dented and gross NPAs are on the rise [~5% in 9mFY14].

However, 2-Wheeler Gross NPAs remain firmly under control and are probably the best in industry at ~1%.

So how long is the pain going to continue in 3-Wheelers? Any plans of reducing/exiting this segment altogether?

We have already curtailed fresh 3 wheeler disbursements. The total disbursement in FY 13-14 for 3 wheelers was only Rs. 20 Crore, compared to Rs. 80 Crore in the previous year. The portfolio will be depleted substantially in another 2 years.

So is it correct to say 2-wheeler NPAs are doing just fine?

Absolutely, Yes. 2-wheeler (96% of the business) NPAs remain within ~1%

If the NPA recognition is reduced to 90 days from 180 days currently?

These were proposed in 2012. At the moment they remain as proposals only and we haven’t seen any indications/activity on that front.

However, if these norms do get introduced, it will affect the NPA situation significantly.

But that actually defies current trends in the 2-wheeler industry too? Why are your NPAs keeping so low when the whole industry’s/bigger player NPas are rising?

As mentioned before at the start of this discussion, this is a reflection on 3 things. Robust Credit Policy backed by Stringent Verification Norms and a Right-Fit Product flexibly tailored for the needs of the segment we serve. We have some unique differentiators in place.

At the same time, we maintain the highest focus on customer relationship and collections – tracking and helping them maintain their repayment schedules.


Raising adequate funding is probably a key challenge for MCS. There is probably heavy dependency on Bank Funding and options are rather limited? How will you ensure enhanced funding availability? Kindly comment.

We have started taking deposits recently – we have a deposit-taking NBFC License. We have reached a deposit base of ~40 Cr. Interest rates offered are upto 11.25% with a 1-3 year tenure going upto 5 years in some cases. Muthoot Exim is the broker and they are being paid a 2% commission.

We can raise a maximum of 150-180 Cr deposits as of now (1.5x Net-owned Funds). Seeing the current uptake we think reaching a 100-150 Cr deposit base is pretty comfortable. For Term Loans, Banks require us to maintain 25% with the Bank as our own Funds (Margin requirement).

Having this deposit base will take care of this margin requirement, free up tied capital and enhance our working capital limits.

You had this issue in each of the last 2-3 years – of delayed Bank Funding – sometimes by end of Q1? Why are you confident this situation will be better managed this year and will not prove another unnecessary constraint for disbursements?

We already have some sanctions from banks in place and some other facilities in advanced stages of sanctioning. We have adequate working capital for continuing operations in the first quarter of the financial year itself.

There is also the issue of A (Negative) Rating from CRISIL. Is it right to say that Public NCDs will be an option as & when (or if) Ratings improve to AA. Kindly comment

The rationale and rating sensitivity cited by CRISIL in its A negative outlook are mostly attributable to the Gold Loan business of Muthoot Fincorp. We are strongly of the view that we have proven in last 6 years that MCS 2Wheeler/3Wheeler Auto Financing is a successful, sustainable, and scalable business model. We have moved out completely from the Gold Loan business.

We deserve a standalone MCS rating which we feel merits much better outlook/rating. This will alleviate our funding constraints in a major way. Discussions are on with ICRA and CARE. We are pretty confident this will be resolved soon – even the CRISIL rating should get revisited.

Capital adequacy at 19.61% looks adequate at the moment. But you have set a fast clip in dealer point expansion and disbursements growth. You are looking at a disbursement target of probably 100-1200 Cr for FY15. Why wouldn’t you require enhanced Tier I/Tier II Capital in FY15 itself? Or would that become necessary only by FY16? Why or Why not?

We are projecting a loan book size of about Rs.1000 Crore for FY 2015. We may require enhancement in Capital for maintaining the Capital Adequacy Ratio above 15%. We are thinking of a Tier II issue of about Rs. 50 Cr during the FY 15.

What is the Management/Promoter thought on raising Tier I Capital at current valuations? And is it fair to assume Tier II Capital is the only real option in the near future?

You may be right, Tier I Capital at current valuations is not an option. For Tier II Capital we have 2 options. Either raise Sub-ordinated Debt (lock-in of 5 years and may need higher interest rates) or Preference Capital – which may get decided based on Group liquidity levels in 2015.

CFO Anil Kumar R resigned 30th Nov 2013? What were the circumstances?

He was 56 years old – had a bypass surgery. He resigned due to health reasons.


Disc: Ayush Mittal, Vinod MS, Gaurav Sud and Donald Francis were involved in this extensive Management Q&A and follow-up discussions.

Ayush Mittal – Invested; <5% Portfolio allocation, from more than 6 months

Vinod MS – Invested; >5% Portfolio allocation from Jan 2014

Gaurav Sud – Invested; >5% allocation from more than 2 years

Donald Francis – Invested; >5% Portfolio allocation from Feb 2014


Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 6 months;
Gaurav Sud: More than 5% of Portfolio in the Company; Holding for more than 2 years;
Vinod MS: More than 5% of Portfolio in the Company; Recent Entry;
Donald Francis: More than 5% of Portfolio in the Company; Recent Entry;

PI Industries Management Q&A: Sep, 2013

Management Q&A



Kindly educate us on OSHEEN product, USPs, advantage over competitive products,etc.

As you are aware Osheen is a 3rd generation systemic insecticide invented in Japan by Mitsui Chemicals Agro Group (MCAG).  PI Industries has registered and developed OSHEEN for the Indian market, in collaboration with Mitsui, Japan.

OSHEEN has been trusted as a most reliable solution to effectively manage the Brown Plant Hoppers in Rice for number of years in the leading Rice growing countries. It has also been tested and recommended by leading agriculture research institutes of Govt. of India on Rice crop and Cotton crop.

You are known for registering/introducing in-licensed products only after proper gap analysis. Is it correct to say OSHEEN is a uniquely positioned product, just like Nominee Gold was?

Yes of course. OSHEEN has been introduced through due process – has unique advantages of longer control period and better coverage. Because of its unique mode of action OSHEEN effectively controls the target pests which are not controlled by other molecules.

So what additional benefits does it bring when compared to other competing Insecticides?

OSHEEN has fast action due to which target pests stop damaging the crop after coming into contact of OSHEEN and start dying within few hours. It has systemic action and quickly gets absorbed into the plant, effectively killing the target pests present in the different parts of plant and provides longer and effective control on targets pests. OSHEEN has trans laminar action due to which spray done on the upper surface of the leaves gets translocated to the lower surface and controls the target insects hiding on the lower side of leaf.

But then it must be a more costlier product?

See you must realise for Farmers its not about a BRAND. For him the only thing that matters is cost of application/acre, and there OSHEEN delivers much better than many competing products.

So there has been enough efforts on farmer education?


What about Data Protection? How many years will it have an uninterrupted run?

Well it has the usual 3 year data protection as per Indian laws. Post that a generic me-too source may be eligible to apply – depends on how good the product is. Even with a good product, effectively it will be 4-5 years before any effective competition emerges.

Any co-marketing efforts already on?

That will come later. First OSHEEN needs to be seen to be delivering the goods.


Kindly update us more on Nominee Gold. You had allowed co-marketing of the brand with other MNC/innovative agrichem partners? What are the results?

As you are aware we had enetered into reciprocal co-marketing arrangements for Nominee Gold with a few MNC players. That allowed us access to some of their brands for co-marketing by us. We entered into these realtionships after due evaluation for optimising product portfolio in certain markets to offer complimentary product baskets. Results have been encouraging so far.

But you have also extended co-marketing to Rallis & Dhanuka too? Aren’t you diluting the BRAND if its available from everyone? What’s the deal there?

Again we evaluate these things from a relationship perspective too. They have reasonably big distribution network in certain regions and It ensures our presence in those markets.

You had mentioned last time if PI were to try and cover the whole market it would take us 10 years. Co-marketing would allow us to increase visibility and allow us faster coverage in 4-5 years? How far has that played out? How much additional sales has been generated for the product through co-marketing?

Should be 15 – 20%

Rice Herbicide penetration was mentioned last time at 5% levels? Where is that now?

It should be ~8-9% of total rice acreage.

So there is growth possibility definitely for next 4-5 years?

Much more than 4-5 years of good growth.

Now that Data Protection for Nominee Gold is over, what about emerging competition?

That was over last year itself. Few Companies have applied. It will take time before we see effective products on ground.


In-licensed vs Generic products. Is the current ratio still 60:40?

It is about 65:35 right now

You had mentioned that this ratio will rapidly change, by now you had predicted 80:20 actually; going upto 90:10 eventually

That’s true, but take into account last year. Because of the pretty bad last year, we got behind. We should be there in the next one or two years.

You launched 2 in-licensed new products. Kindly educate us about In-licensed Pipeline vs Competition. What’s the process? How do you keep abreast/ahead?

We have ~8-9 products in development pipeline and several others at negotiation table. This is a continuous process and our Competitive Intelligence mechanisms giving us inputs long before products are actually out in the market. Our process cannot depend on assessment of pipeline of others. As you are aware, we have very strong in-house gap-analysis MIS culled from all over the country for prioritising our pipeline.

What’s the price/revenue mechanism with In-licensing Innovators?

It’s based on simple long term purchase contracts. We purchase the Raw Material – active ingredients or formulated product.

What’s the pricing strategy for new generation in-licensed products?

As mentioned before, end of the day the farmer has to see lower of application/acre and therefore, your product price proposition should be attractive for him.

There are quite a few new breed of competing products like Round Up and others. What kind of threats do you see for your product lines?

We think there is room for all to grow. We focus on identifying a gap and providing better yield/productivity for the farmer.

What kind of impact do you see of the Food Security Bill? Is that a positive?

This to my view should drive food production, productivity and yields have to go up substantially. Farmers will get incentivised. If Farmer is happy, we will be happy.

You have lot of exposure to the Rice crop. First through Nominee Gold and now Osheen. Have you seen much of Hybrid Rice? Is that growing rapidly? What’s the potential?

Yes this is true. However, Osheen is also doing well in cotton.  Also we have several other products in fruit, vegetables and other field crops.  Hybrid seed is rising and so is the research seed.  Next wave of growth in seed may come from corn.



For the first time we have seen CSM overtake the Agri segment. Revenue Contribution in FY13 was 55:45 CSM:Agri. How long before this scales to 65:35? Strategically, is this a great development?

It’s certainly good to see CSM scaling up the way it has done in the last 2-3 years. However for us it is important to be able to grow both segments equally well. For two reasons:

1. This gives us a neatly de-risked/balanced business model
2. Agri segment – the domestic opportunity is huge. It’s a very low-capital intensive business. Given the strength of our model and the strength of the agri-business sector in India, this segment is poised for 30-40% kind of growths over the next 3-5 years horizon. This segment provides us the CASH to fund the scaling up of the CSM business.

Give us a sense of the split between Long term contract vs annual contracts  in CSM?

~60% is in Long Term contracts while roughly 40% get negotiated annually.

And the Long Term Contracts are all guaranteed off-takes model?

Yes, Take or Pay.

You have cited deliberately not expanding $300 Mn order book (static for 2 years) – for flexibility in accommodating higher value/volume molecules that had some visibility.

That’s right. Keeping the Order Book at an optimum level gives us the flexibility to balance investments required for sewing in long term contracts for say 10 years. Accordingly you need to invest in plant for tapping new opportunities.

So any success there?

That is what you are seeing today. The ramp up is from that success. We had promised 30% but we grew by 60%, isn’t it. This is happening because we have retained the flexibility.

14 molecules in Commercial stage. Please give us a sense of the longevity of Molecules – new vs old?

Both old and new molecules. Some have been there for long. Some have dropped off to be replaced by new molecules. That is why you need the Pipeline.

Pipeline of 28 molecules. With a 40-45% success rate you hope to see 10-12 going to commercial success? Is it right to say you have pipeline that provides visibility for next 4-5 years?

As you know Pipeline keeps getting refined on a continual basis. We have a robust Pipeline is what I can say.

Please give us a sense of existing Customers. How many in Commercial stage and how many at R&D/Pilot stages?

8-9 Customers at Commercial stage (14 molecules). Rest in R&D/Pilot stages

Please share with us the Competitive scenario currently? You used to be single, 2nd or 3rd alternate supplier. Is that still valid?

Yes there are no more than 2-3 suppliers. We continue to be the dominant supplier for many of our customers.

How is the geographical spread between customers – US, EU & Japan?

It’s more or less balanced.

What’s the typical commercial life-cycle for a CSM molecule? How much of useful patented life is left for commercialisation, typically? What’s the payback period?

We assume a typical 4-5 year payback. Which means it will need to be replaced with a new one. But in actual practice it turns out much longer usually 10+years.

Any new competition from domestic markets? Or all are overseas competitors?

Given the products we are in, all competition is mostly from developed markets.

Recently we have seen players like Hikal stating they have partnered with agrochem innovators for CSM? Kindly comment.

No comments.

Give us a break-up of Commercial Molecules – agri/pharma/fine-chem? Where is the Focus?

Currently 80-90% is from Agrichem. Focus is on balancing the Portfolio.

Is it right to say Pharma molecules have higher margins?

Yes. Higher EBIDTA margins but not necessarily high ROI because the investments are huge.

Pharma CRAMs players like DIvi’s have 30-35% EBITDA margins. PI Industries EBITDA margins are much lower. Kindly comment.

Yes Divi’s Labs has EBITDA margins of 30-35%, but Asset Turns <2. PI has EBITDA margins of 20-25% with Asset Turns 2.5 to 3.Things should be seen in that context.

You have today ~600 Cr coming from 14 CSM molecules. Is that ~40-45 Cr per molecule?

(Laughs). Well different molecules have got added at different stages. They come in different sizes. Having said that it’s not so skewed also as say 2 molecules contributing 500 Cr and rest 12 contributing 100 Cr.


Nothing new to report.

Why are your R&D expenses so low compared to other players?

If you are engaged in innovation research/ANDAs your R&D costs will of course be at higher levels. We on the other hand are involved with process research where costs are much less.



We are starting to see good contributions from Jambusar. But project is delayed by 2 to 2.5 yrs?

All delays are attributable to delays in getting pollution clearances and the Environmental Clearances.

Given the 10 yr tax concessions already underway, is there a focus to ramp up subsequent phases?

Of course. We are already doing erection work for next phase.

First phase took 2 to 2.5 years. What’s the timeline for commercialisation of next phases?

May be 9 – 12 months.

Sterling SEZ progress. Would you say there are any risks to progress?

None at all. As you are aware Gujarat is a very progressive state. Everything is progressing normally.

We have already reached 90% utilisation at some 100-120 Cr. What happens to Asset Turn targets of 2-2.25x?

(Sighs). One must look at the total investment versus investment for Phase1 and then compute Asset Turns. Our existing Asset Turns are greater than 2.5x. Going forward you will see these numbers. Projects will come/being negotiated with these figures in mind.

What are you Long Term Debt goals. Do you intend to become Debt free in future? Interest Costs will continue to be low

Yes, that’s the goal. Interest costs will be low.

With Free Cash flows flowing in, are there inorganic moves being planned?

Yes, we are investigating.

We were visiting companies across Gujarat and came across your Panoli facility. We couldn’t help notice the severe smell/pollution?

We are not in the Perfume Industry, you know. (Laughs, from all around).

Did you notice it all along the highway? or only along our plant. This is a common feature across the belt.

So aren’t these things monitored by any Agency?

Let me state that India is at least 10 -15 years ahead of China in this aspect. We have been having very stringent norms since the last 15 years.

Gujarat Government has evolved even more stringent norms. There is online monitoring of air stream and water streams.

So how significant are the Pollution control/Environment Management Risks for your business?

We are at risk only if a) we are not adhering to Norms b) not investing to manage pollution/effluent levels. Environment Management is the largest component of our Costs.

—————————————-END OF DISCUSSION—————————————————————————————–


Ayush Mittal: No Holdings in the Company; ;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years;
: ; ;
: ; ;



Shriram City Union Finance (Shriram City) established in 1986, is part of the nearly four decade-old Shriram Group, and has its origins from the needs of the Chit Funds customers. The company started operations with truck financing. In October 29, 1988, the company became a public limited company and renamed as Shriram Hire Purchase Finance Ltd. In March 1990, City Union Bank Ltd. acquired shareholding 200,000 shares at par. Consequently, the name of the company was changed to Shriram City Union Finance Ltd. The company registered as a deposit taking asset financing NBFC with RBI and went public in 1994.

Prior to 2002, the company was exclusively engaged in transport finance with special emphasis on financing pre-owned commercial vehicles to small road transport operators. In 2002, the company discontinued the truck financing business (except for trucks > 10 year old) as that business was consolidated in its sister concern (viz. Shriram Transport Finance Ltd) and started as a separate business unit in year 2002 as Shriram City Union Finance Ltd.  Listed on BSE in 2003.

Today Shriram City offerings comprise finance for Two Wheelers and Three Wheelers, Four Wheeler Finance (both new and pre-owned passenger and commercial vehicles), Personal Loans, Small Business Loans, and Loan against Gold. This has made Shriram City the only NBFC to offer such a wide range of products under one roof.

Vision: Serving the under-served. Creating value at the bottom of the pyramid.

Main Products/Segments

  • Niche Diversified Product Portfolio
As on Sep 2013 MSME Loans Gold Loans 2 Wh Loans Auto Loans Personal Loans
Inception Dec 2005 Oct 2006 Dec 2002 Dec 2005 Jan 2006
% Loan Book  49% 22% 15% 10% 4%
Avg Yield 18-22% 14-18% 24-26% 22-24% 24-27%
Avg Ticket size 700,000 40,000 35,000 150,000 75,000
Avg Loan to Value NA 55% 70% 60% NA
Branches offering  493 (1021)  714 (1021)  832 (1021)  359 (1021)  396 (1021)
Gross NPA  1.4%  1.6%  3.8%  3.7%  4.8%
Net NPA  0.3%  1.4%  0.8%  0.4%  0.0%

Source: Company, CRISIL

  • Branch Network – 1021 Total branches, 724 Owned Branches, 297 Shared Locations
  • Geographic Concentration – AP [48%], TN [32%], MH [9%], KN [2%], OTHERS [9%]
  • Group Customer Base – ~4 Mn Chit Fund customers; 95% of MSME customers referred by Shriram Chits

Main Markets/Customers

  • Strong Positioning for the Niche Addressable Under-penetrated Market – primarily the Self-Employed – without formal credit history and/or future cash flow signature – primarily feeding-off the Chit Business and concentrated in AP, TN, MH – hugely scalable – completely protected (?) market – may continue to grow nicely
    • MSME Loans, Gold Loans, 2 Wh Loans and Personal Loans
  • A piece of the MSME Non-Chit action – primarily concentrated in North India – primarily leveraging regular credit worthy customers with credit history and adequate documents – Max 1 Cr loans – Avg Ticket size 20-25 lakhs – may see cautious growth – as this is untested market/untested models
  • Nascent Niche presence in the under-penetrated Housing Finance segment – focusing on Tier 2 & Tier 3 Cities and the under-banked – Avg ticket size 10 lakhs – insignificant currently, but growing rapidly – may become significant within 4-5 years

Bullish Viewpoints

As on Sep 2013/ Jan 2014 SCUF SCUF
(Dec ’13)
SHTF Chola Sundaram MMFS Bajaj Finance
Size (AUM) 15800  14937 49700 19000 17600 27900 17100 Small
Years in Business
28 (11) 28 (11) 35 36 60 23 27 SHTF, MMFS have also grown AUM fast
Capital Adequacy 23.3%  24.26% 19.9% 17.1% 17.7% 19.1% 20.9% Industry best
3Yr Earnings CAGR  45%  45%  19%  74%  20%  39%  58% Robust
Cost to Income 37%  38.68% 26% 50% 37% 33% 45% Industry Median
Cost of Funds 12.6%  11.74 9.8% 10.6% 10.6% 9.9% 10.3% Industry Highest
Margins 11.2%  12.35% 7.0% 7.6% 8.4% 9.4% 12.1% One of Industry highest
Yield 22.1%  21.19% 16.3% 15.4% 17.7% 16.4% 20.7% Industry best by far
 RoA  3.2%  3.36%  2.9%  2%  3%  3.4%  3.6% One of Industry highest
 P/B  2.2  1.8  1.5  2.4  3.05  1.6
 P/E  12.7  10.37  10.6  15.14  14.35  11.24
  • Huge under-penetration in Target customer base – With only 9-10% penetration of the ~4Mn Shriram Chit Customer base, there is huge headroom to grow in its niche with virtually no competition
  • Improving Product Mix – With Gold Loan share coming down (expected to stay within ~20-25%), Product Mix decisively tilting towards higher tenure, higher yields
  • Strong Growth Drivers – Deeper Product Penetration into existing branches especially in high-yielding MSME, 2wheeler and Personal Loans will keep driving growth.
  • Dominant position in MSME Loans – As per a Frost & Sullivan study SCUF share in overall MSME Loans disbursals in FY11 was a dominant 53%. Shriram City concentrates on ticket sizes comprising Very Small Loans (sub Rs. 1 Lac), Small Loans (Rs. 1 Lac – Rs. 10 Lacs) and Medium Loans (Rs. 10 Lacs – Rs. 50 Lacs), with the bulk of its MSME book constituting Small Loans – 42% market share as per 2013 AR.
  • High Capital Adequacy – With the recent Capital Infusion, CAR at ~23% is the highest in the industry. Tier I Capital is at a comfortable~18%. This should be adequate to fund growth for next few years
  • High growth trajectory -While FY14E AUM growth will be muted – partly due to Loan Book recast and partly due to disruption in normal business in AP due to Telengana protests, next 2-3 years could see 25% CAGR growth
  • High Yields look sustainable – SCUF has the highest yield among similar NBFCs at ~22%. Given improving Product mix, yields likely to stay high
  • Operating Costs likely to come down – SCUF Cost to Income ratios had been climbing up mostly due to Employee expenses shooting up over last 3 years – from ~6% of Expenses in FY11 to over 13% in FY13. This was largely due to integration of Shriram Chit Employees into its fold (From ~3000 to just over 19000 in 2QFY14). With the process getting completed and conservative branch expansion targets hereon, this is likely to stabilise and head downwards in next 2-3 years
  • Valuations – Given the strong positioning in its niche, SCUF appears to be trading at reasonably attractive 2.2x P/B valuations (CMP 1030)

Bearish Viewpoints

  • Concentration of business in AP & TN – 80% of business currently comes from these 2 states with AP (48%) and TN (32%). Any disturbances and/or policy change in the key states could impact business significantly. The ongoing Telengana issue and protests had seen disruption in normal business activity and had affected disbursements to MSME customers. The impending bifurcation of AP and likely protests means SCUF remains vulnerable to disruptions again – and that may impact growth
  • Asset Quality seemingly deteriorating (Advancing recognition Norms)
SCUF SHTF Chola Sundaram MMFS Bajaj Finance
GNPA 2.4 3.2 1.0 1.0 3.0 1.5
Recognition Norm 150d 180d  180d 120d 150d 90d
  • SCUF’s NPA’s are on the higher side. This should also be seen from the context of significant share of Gold Loans (with low NPAs) in Loan Book. However to be fair, Recognition norm at 150d is conservative and keeping ahead of RBI stipulations/timeline.
  • Advancing Recognition Norms/Standards Asset Provisioning may be raised – As per Usha Thorat Committee DRAFT Guidelines, NBFCs may have to move to 120-day NPA recognition norm from April 1, 2014 and 90-day norm from April 1, 2015. Also Standard Asset provisioning may be raised to 0.40% from 0.25% effective March 31, 2014. This may lead to higher costs on provisioning impacting earnings. Eventual write-offs though could be lower (nature of customers/business). As per Management, in the entire 28 years history actual delinquency is <1-1.5%.
  • Gold Loan remains a significant portion of Loan Book. Gold price volatility may impact growth possibilities

Barriers to entry

  • Chit Model – 90% of the current business/addressable market is mostly insulated from competition. For its target segments a Shriram Chit customer will go out of the group only if SCUF is unable to meet the customer requirement
  • Strong Brand Equity – “Shriram Brand” has high brand equity within its target segment – leading to low spend on advertising in both existing and new geographies

Interesting Viewpoints

  • Leveraging/Piggy-Riding on parent/group – Shriram City Union completely leverages the groups strengths – Customers, Database, home-grown systems and processes for the self-employed, and IT systems. Expansion to newer geographies can be incrementally calibrated by piggy-riding on group ecos-system and branch network, with minimal capital outlay
  • Regulator view of NBFCs turning favourable? – Even 2 years back regulatory risk may have been cited as a key risk for NBFC businesses. However of late RBI is seen to be shifting its hawkish stance (as evidenced in say the recent Comprehensive Financial Services for Small Businesses and Low Income Households Report chaired by Nachiket Mor, Central Board Member, RBI) and acknowledging the key role and value-added contribution that NBFCs could make towards financial inclusion in India. Also recent 23 Jan 2014 Speech Non-Banking Finance Companies: Game Changers, by P. Vijaya Bhaskar, Executive Director, RBI
  • Only 7% of MSMEs seek external sources of credit, the rest managing with self-financing or with funding from informal sources. MSMEs have a total finance demand of Rs. 32.5 trillion, of which only 36% is widely considered as addressable by financial institutions. The remaining 64%, ordinarily considered unviable because of inadequate/poor credit profiles, preference for debt from informal sources, reliance on self-financing etc. presents a rich potential for NBFCs if adequate safeguards can be built in to protect asset quality[Source: Ministry of Micro, Small and Medium Enterprises, Company AR, MSME FInance in India IFC Report]
  • Shriram City for the most part caters to the Micro Enterprises segment. Their research indicates that in the event of the GDP growing between 4% – 5%, the MSME sector should see a long term growth of between 15% – 20%. [Source Company AR]
  • Shriram City Housing Finance – Incorporated as a fully owned subsidiary in Nov 2010. Currently 76.5% owned by Shriram City and 23.5% by Valiant partners. Focusing on Tier 2&3 cities and the under-banked with average ticket size of 10 lakhs, this business is at a nascent stage with Asset size of ~340 Cr as on Sep 2013. Growing rapidly with disbursements crossing ~215 Cr in Sep 2013 up from 40 Cr in Sep 2012 – a building block being laid for future disproportionate growth?


Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 6 months

Pharma Sector Investor FAQ

DRAFT Work in progress document. To be revised. Needs approval before wider circulation (Donald)

Pharma Sector FAQ

1. Overview of the Indian Pharmaceutical Industry

The Indian Pharmaceutical industry is highly fragmented with about 24,000 players (around 330 in the organised sector). The top ten companies make up for more than a third of the market. The Indian pharma industry accounts for about 1.4% of the world’s pharma industry in value terms and 10% in volume terms.

Besides the domestic market, Indian pharma companies also have a large chunk of their revenues coming from exports. While some are focusing on the generics market in the US, Europe and semi-regulated markets, others are focusing on custom manufacturing for innovator companies.

2. Indian Domestic market – Acute and Chronic Therapies – breakups.

India is primarily a retail-based branded generic market with 80% dispensed through pharmaceutical outlets. As in most emerging economies, acute therapies dominate and account for close to 70% of the market. Acute Therapies – target short duration diseases – cough & cold, fever, pain – such as anti-infectives, analgesics, pain-killers.

Chronic therapies – target lifestyle diseases and/or recurring in nature – such as diabetes, cardiovasculars, ophthalmology, and products used to treat central nervous system ailments, are growing faster than acute therapy.

3. There is a lot of policy overhang recently on the Sector. The Indian Drug Price Control Order (DPCO) and the US GDUFA being two instances. Kindly Comment?

The drug price control order (DPCO) continues to be a menace for the industry. There are three tiers of regulations – on bulk drugs, on formulations and on overall profitability. This has made the profitability of the sector susceptible to the whims and fancies of the pricing authority. In connotation, with pricing policy of 354 drugs, NLEM (National list of essential medicines) was released, which covered the list of the drugs which the authority intends to put under price control. The policy has been stiffly opposed by the pharmaceutical industry.

How would you qualify the impact on Indian pharma companies?

a) Companies having lower proportion of domestic sales vis-a-vis exports are obviously less affected
b) Companies that derive significantly higher proportion of Sales from Chronic therapies (Specialty segment) are unlikely to be affected much

International Generics Pharma business is pursued successfully by many Indian companies. Kindly demystify jargons like ANDA filings, Para IV, Para IV FTF, NDA and 505 (b) 2 filings.

Para I,II, II, and IV pertain to what is called ANDA filings – Abbreviated New Drug Applications

Para III – Actually Para I, II and III filings all pertain to patent-expired drugs. Non-Litigation category

Para IV = These are allowed to be filed – post 5 years of a NCE patent grant by USFDA for a generic version of the Innovator drug

Para IV FTF = 180 day exclusivity = Para IV First to File is another category where even before the first five years are over a company can challenge. If approved that company gets an 180 days exclusive approval to market its generic version of the Innovator drug. This can prove very lucrative for the challenger if granted. On the other hand there are Litigation Risks where the Innovator tries to prove that the challenger has infringed on its patent/process while developing the generic version.

Then there are what are called NDA filings – under which 505 (b) (2) falls.

505(b)(2) = larger period exclusivity = These are meant for a bio-similar, but completely new product. It’s made from a different salt and/or a totally different process. The FDA in its discretion (depending on the benefits/costs of development) awards a higher exclusivity period. For example for our NDA Desvenlafaxine Base Extended Release (bioequivalent version of the innovator drug Pristiq by Pfizer) was approved with a 21-month exclusivity.

How are Indian Generic companies affected by GDUFA?

Introduction of GDUFA (Generic drug user fee Act passed into Law July 2012) in US. As per this act, the generic companies are required to pay user fees to USFDA, for application of drugs and manufacturing facilities. This fee will be utilized by USFDA to engage additional resources in order to reduce current and pending applications and speed up the approval process.

This will probably lead to some escalation in ANDA filing fees. Time will tell how significant an impact this will have and whether this will affect the pace of filing of Abbreviated New Drug Application (ANDA).

4. What is the difference between terms like API, Bulk drugs, Intermediates, Finished Dosage, and Formulations that are common jargons in the Pharmaceutical Industry?

API – Active Pharmaceutical Ingredient – is the basic drug itself with the desired medicinal (pharmaceutical) properties. Also referred to as Bulk Drugs.

Intermediates – Most chemical reactions are stepwise, that is they take more than one elementary step to complete. An API is a result of a complex chain of chemical reactions in several steps. Intermediates are stable forms a few steps away from the final API e.g. API -3, or API-5.

Finished Dosage or Formulation – is the form in which the drug is consumed by us. A dosage form of a drug is usually composed of two things: The API, which is the drug itself; and an excipient, which is the substance of the tablet, or the liquid the API is suspended in, with other masking, stabilising and binding agents/material that is pharmaceutically inert.

APIs are supplied by Pharmaceutical manufacturers to Formulations players or for own consumption for in-house Formulations. Intermediates are supplied to API manufacturers for reducing time-to-market.

5. What kind of regulations govern the marketing of APIs, Formulations and Intermediates?

Pharmaceuticals are a heavily regulated sector. API manufacturers need to file a document known as Drug master File (DMF) with regulatory bodies. DMFs are filed with USFDA, MHRA UK, Japan and other country specific bodies for receiving a marketing authorization grant. A DMF provides the regulatory authority with confidential, detailed information about facilities, processes, or articles used in the manufacturing, processing, packaging, and storing of one or more drugs.

Typically, a DMF is filed when two or more firms work in partnership on developing or manufacturing a drug product. The DMF filing allows a firm to protect its intellectual property from a potential partner while complying with regulatory requirements for disclosure of processing details.

A Formulations player can only use APIs from sources with approved DMFs. Formulation players have to submit samples and documentation for product registration such as ANDA (Abbreviated New Drug Application) using an API source with approved DMFs. It’s difficult to change API partners as it involves a lot of paperwork and re-submissions.

Use of Intermediates by API suppliers are not regulated.

6. We have heard Oncology APIs command higher margins than other APIs. Is that true, why?

There are broadly 3 streams – Oncology, Hormones & Steroids that command higher margins.

This is basically because it costs a lot to put up manufacturing facilities for these streams, usually 5-6x than normal, as these drugs require specialized handling. These facilities require stringent entry procedures and isolation chambers/procedures to reduce risks of product contamination, cross-contamination and also protecting people from hazards and toxicity. These are as mandated by the regulatory Authorities. Scaling up proves very costly and barriers to entry are strong.

Consequently, there is less competition and hence more margins.

7. With Many drugs going off-patent in 2013-2015 timeframes, API Players with listed US DMFs stand to gain. Is there a way to guage the potential business a listed DMF API player can access?

You can get a rough estimate of the market size for a drug API. Potential market sizes of popular brands going off-patent are common knowledge. Any small investor can get that info with a little bit of searching. For e.g. you will easily find Gemcetabine had a US$1350 annual market size before patent expiry. Prices crash roughly 70% post patent expiry. So US$405 Mn is the total market size for a Gemcitabine Formulations player. Usually the player who gets the 180 days exclusivity corners 60% of this market as his brand gets established, and Distributors play a very strong role to ensure that others don’t get in subsequently. Other formulation players have to ply their Generic brands at much lower levels.

The API market size for that drug would be ~10%, or $41 Mn. The ANDA registered Formulations players will have tied up with respective API players with approved DMFs. It depends on the existing tie-ups, how much business the API player can target. So the only way you can know how much business is forthcoming is if the API player chooses to disclose that!

DMF Approvals come with a Submit date. Gemcitabine had approved DMFs starting 2005, with some registrations coming in as late as April 2011. Can we take it that those listed earlier in general have a greater chance at securing more tie-ups?

Well in general that may be true. But there are other scenarios. There are Dossier players who file ANDAs and sell them to someone interested in manufacturing. They are not interested in taking it beyond R&D to manufacturing.

Then there are CRAMS players contracted by Innovator drug companies for Formulations. These CRAMS players are usually at liberty to choose API players of their choice. Sometimes the CRAMS player itself is also the API manufacturer.

The new manufacturer or CRAMS player may choose to go with their own API suppliers.

Will this not entail substantial time and costs in re-submission of ANDA documents with the new API sources?


8. Please demystify some other jargons like CCS, Custom Synthesis and CRAMS and their importance in the Pharma outsourcing space.

There are three broad outsourcing opportunities available to India – Custom Chemical Synthesis or CCS, clinical trials and contract manufacturing or CRAMS. The most scalable business opportunity for Indian players would be contract manufacturing or CRAMS. This is because:

  • CCS would typically involve supply of material at gram or kilogram level, while CRAMS involves supplies in tons.
  • CCS supplies are linked to the success of the partner’s R&D pipeline and are, hence, volatile. CRAMS supplies, on the other hand, are linked to the success of a product post commercialization and can provide relatively stable revenues (since probability of success post commercialization is higher than that at the R&D level).

However, custom synthesis or CCS skills are important from the following perspective:

  • CCS assignments give Indian players an opportunity to lock-in into MNC relationships very early in the product lifecycle. This augurs well for the partnership approach that lays the foundation of the outsourcing business.
  • CCS projects demonstrate a company’s ability in process innovation. CCS skills can help a company to graduate from only a ‘supplier’ to a ‘preferred strategic partner’.
  • CCS projects are characterized by high margins but low scale, but CRAMS projects offer scale plus reasonable margins. Hence, a proper mix of CCS and CRAMS projects is a prerequisite for success in the outsourcing space.

Given the above discussion it would appear that a CRAMS player who is also a substantial API player can enjoy very good profitability

Yes, absolutely. Look at Divi’s Labs – their secret of such high margins is probably this API+CRAMS combination.

9. Can you please elaborate on the key factors that help win Outsourcing Contracts?

Time and quality: Time and quality are of extreme importance to the innovator companies. In R&D, time is very important to save on the limited patent life, and in manufacturing, it is a matter of reputation for innovator companies to market the drugs during the entire patented period. Also, high quality products are essential to win contracts. Due to the nature of pharmaceuticals, threat of product contamination or excess impurities is enough to scare the potential customer. Also, the drug quality has significant implication on the reputation of the innovator and financial liabilities of the company.

Availability of manufacturing capacity: Just as timeliness of supply is critical, sufficient capacity is key to the new business especially for contract manufacturing. Innovator companies generally request rapid turnaround time. Existing manufacturing capacity is critical for time-sensitive projects. However, where supply relationships already exist, the ability to plan for projected new capital needs can be jointly accomplished.

Reputation and track record: If the CRAMS player was the service provider for the innovator company in the past, and had delivered satisfactory services, the customer will most likely opt for the same CRAMS player for similar or new projects on the basis of the trust that has been built. Also, innovator companies will generally prefer big CROs and CMOs due to available infrastructure and service quality.

Array of services offered: Generally, innovators like to get maximum possible services from same contract research company due to ease in administration and effective communication regarding requirements. For example, if a company has synthesized a chemical, it might be a good choice for other services such as process chemistry too.

Reliability and flexibility: Suppliers should be reliable in terms of dedicated management team, financial stability, strong track record of supply, manufacturing, logistics, etc. Flexibility is also extremely important to innovators, as CMOs often collaborate with them to develop a new drug. In particular, the ability to adjust manufacturing schedules to meet deadlines, adjust manufacturing processes, and meet critical timelines is very important.

Scalability: Pharmaceutical customers prefer suppliers who have the ability to increase their scale of production, as products move from early stages to later stages of drug development. In general, this means suppliers should have ready availability of CGMP capacity as products pass through FDA hurdles, or the means to rapidly build additional capacity in conjunction with the anticipated product launch. In addition, it requires a scalable process used to manufacture the molecule. In other words, the contract manufacturer must develop a process that can effectively and affordably manufacture commercial quantities of the molecule. This ties closely to contract-manufacturing process chemistry skills. We believe that these skills are critical, yet very difficult to assess (other than increased contract wins).

Cost: Our discussions with various CRAMS players suggest that before the advent of Asia as the outsourcing destination, cost was not a major selection criterion, as the western CRAMS players had almost the same cost structure as innovators. Rather, it was the relationship and expertise which mattered. This is still true in the case of contract research work, where timeliness and proximity of the service provider is more important than cost. However, entry of Indian and Chinese companies in the space has changed the rules of the game and has made costing a major consideration for innovator companies, as the Asian CRAMS players can deliver the same quality as European players in a timely manner and at considerably lower cost due to structural advantages. Cost is of significant importance for awarding manufacturing contracts especially for products going off-patent.

10. China is not a threat yet?

China is a manufacturing powerhouse in sectors like Textiles, Metals and Commodities, where it derives significant cost advantage through economies of scale. By its very nature, pharmaceutical manufacturing is a batch-process industry, wherein economies of scale are relatively less important and do not result in significant cost advantage. Though China’s labor costs may be less than India’s, the latter enjoys a lead over China in critical determinants like chemistry skills, compliance to strict international regulatory norms, scientific skills, MNC comfort, etc. For instance, India has the largest number of US-FDA approved facilities outside USA, while China has very few such facilities. India accounts for 25-30% of global DMF filings while Chinese companies contribute a minuscule percentage. Hence, we do not expect China to be a major threat to India in the CRAMS space in the next five years despite having the advantage of lower labor costs.



1. Interview with Shri Rajesh Joshi – VP, International Marketing with a leading Pharma company

2. Motilal Oswal CRAMS Sector Report March 2011

3. Equitymaster Pharma Sector Report

Alembic Pharma Management Q&A: Jan 2014

Management Q&A

Alembic Pharma Management Q&A


AR 2013 – “We climbed the filing value-chain – Para III to Para IV, Para IV FTFs and 505(b)(2) filings in the US”. Kindly demystify the jargons for us.

Para I,II, II, and IV pertain to what is called ANDA filings – Abbreviated New Drug Applications

Para III – Actually Para I, II and III filings all pertain to patent-expired drugs. Non-Litigation category

Para IV = These are allowed to be filed – post 5 years of a NCE patent grant by USFDA for a generic version of the Innovator drug

Para IV FTF = 180 day exclusivity = Para IV First to File is another category where even before the first five years are over a company can challenge. If approved that company gets an 180 days exclusive approval to market its generic version of the Innovator drug. This can prove very lucrative for the challenger if granted. On the other hand there are Litigation Risks where the Innovator tries to prove that the challenger has infringed on its patent/process while developing the generic version.

Then there are what are called NDA filings – under which 505 (b) (2) falls.

505(b)(2) = larger period exclusivity = These are meant for a bio-similar, but completely new product. It’s made from a different salt and/or a totally different process. The FDA in its discretion (depending on the benefits/costs of development) awards a higher exclusivity period. For example for our NDA Desvenlafaxine Base Extended Release (bioequivalent version of the innovator drug Pristiq by Pfizer) was approved with a 21-month exclusivity.



505 (B) (2) 1 1 1 NIL

What we understand is that Para IV, Para IV FTF and %05 (b) 2 filings are the most lucrative. They also carry Litigation Risk. Can you give us a sense of the proportion of Para IV and above filings among your cumulative ANDA filings?

Initially there were Para II & III also but increasingly this mix is in favour of more complex Para IV filings.

Any of the Para IV FTF are Solo?

None, at the moment.

Why have you chosen/not able to commercialise some 30% of your approvals?

Most of them due to API issues (not available/changed) or another DMF is now used. In one case product was found to be unviable.

How are you able to comment that future mix of filings is skewed towards Para IV and above ?

Well things like Sample Seeding for the products, preparing batch stability files, etc have to start ~3 years before filing. We are already working on the pipeline for FY 16-17-18-19

NDA Desvenlafaxine Base Extended Release – 21-month exclusivity, approval received in record 10 months. Congratulations for this super-achievement. What is the progress on this launch through Ranbaxy partnership?

What is key here is doctor conversion. Doctors are currently used to prescribing Pfizer’s Prisitiq – they have to be educated about the availability of our generic version. It happens faster when our product starts appearing in the approved product lists of some of the large insurance companies. It will take 4-5 months before an on-the-ground assessment can be made.

What kind of price erosions are expected? is it true that you will see a 40-50% price erosion immediately?

For the Succi Desvenlafaxine product there were 11 FTFs approved. However for Desvenlafaxine Base Extended Release product we are the only one with 21 month exclusivity. We should not see more than a 20% price erosion in 1st year.

And in next year?

May be 30% price erosion.

Can you share the revenue share arrangement with Ranbaxy for Desvenlafaxine?

No comments.


What’s the update now on Desvenlafaxine {Jan 2014}?

It is ramping up. But not upto expectations.

What are the issues?

Well we found out that patients using the innovator drug Pristiq on a regular basis – which is indicated for the treatment of major depressive disorders – are very reluctant to change the drug (generic version, even if cheaper). Someone (suffering depression before) who is now able to lead a normal life with regular Prisitiq medication isn’t going to risk lapsing back.

So what are the learnings from this whole episode? You had such a blockbuster technical breakthrough, but seems like not too much will come out of it.

We have taken it in our stride. These things happen. We have moved on. 

On the other hand we have seen a 100%+ growth in this segment in 9mFY14 with Sales doubling to ~329 Cr. What is this attributable to?

This is a result of a 2 pronged strategy. Building up on Contracts/Order Book and scaling up on manufacturing. We had a bulging orderbook, but were seriously short on manufacturing. Augmented capacity started becoming available only post July last year. The swift ramp up is on account of that.


You had decided to set up your own Marketing Network in the US? How difficult is it going about this?

This is now the biggest challenge before the company. We are galvanised behind making this a success. This whole effort will take us the next 2-3 years. The first results are atleast 1 year away. 

This is a major effort. What will be the costs? Will it be around 10-15% of Sales or higher?

What are the costs? Mostly salaries and the sales+distribution costs. You should see it like this. Most of the Profits were being given away to the ANDA guys. Compared to that we will be incurring a fraction of the cost.

Kindly give us a sense of the leadership behind this strategic PUSH into US Market and the success in the International Generics business that we are seeing.

The whole International Buisness initiative is driven by Mr Pranav Amin our Director and President International Business. He is very dynamic and is pushing everyone forward with aggressive plans. He has not hesitated to bring in the right people with high salaries.

We have an US CEO who has been with us for last 5 years and assembled together a top Team in International Generics business. Success has come because of Product Identification ability. Year-wise market-wise plans are drawn up till 2024. We have to create very detailed Product Identification Files or PIFs. 8-9 people get to sign off – IP guys, Marketing guys and Strategy guys. And we believe next 10 years success will also because of this.

What about Litigation? How confident are you in handling the attendant Litigation Risks that come with an aggressive ANDA filing strategy?

We have built a strong IP Culture/Team over last 5 years or so. This Team comes up with identified products. Multiple Legal opinion is taken from 4 specialised Large US Attorney firms. Only if it is considered safe, we proceed.

Despite this caution if Litigation comes up?

There are always other options. If we subsequently find risks are high we need not go for a confrontation route. We can offer our product with royalty/other options.

Alembic has always been known as a pedigree company. But this aggression is new-found? While this culture may now be top-driven, what about the Team? How will the old Teams adapt?

Technical Team is 100% new – All IP/Research Team are new imports form other large organisations with relevant experience. On the strategy/marketing side there are a few top people who are new and a mix of folks like us.



Kindly take us through the International Branded business. Does it cater to the ROW Markets?

Products are the same as our domestic branded formulations. Yes this segment caters to the ROW Markets like Russia & Africa.

Is there a country specific branding/sales strategy or it’s the same brands across geographies?

It’s the same brands being marketed in every country.

Competition must be intense in these countries as most Pharma companies from India have a significant presence in these markets?

Yes there is lot of competition. But we have formed a new team focusing on this segment.

We have seen a ~48%+ growth in this segment in 9mFY14 with Sales reaching ~46 Cr. Is there any focus to make this segment a significant contributor to topline and bottomline?

This is a 50-60 Cr Annual market. There is more focus. More filings – which also means more investment. Earlier filings cost $5000 , now these cost as much as $25000-30000.

What is a sustainable growth rate for the next 2-3 years?

We should see 25-30% kind of growth or 100 Cr in next 2-3 years.


3.  API

As we understood from you last, this is a segment that is completely fragmented, intensely competitive, and if weI remember correctly you planned to get out of this segment. However this is the segment showing highest growth by 20% over FY12. And thus increased contribution to Sales from 7 to 8%. Kindly comment

The API segment (Acute therapy) that we were present in is very competitive – it is in turmoil. Chinese products have flooded markets world-over and India is no exception.

We have done 2 things a) Shift Focus on our own products – increase Captive use b) Shift focus to cater to large pharma company ANDA API requirements – become their first or second source. We have seen successes on both these fronts.

So move has also been away from domestic market API requirements to developed Markets?

The focus is 95% geared to servicing our ANDAs (captive use). At the same time we are able to utilise this to service large pharma company requirements for EU and emerging markets also.



India Branded formulations 1HFY14 Sales
1HFY14 Sales Alembic Market
Alembic Annual
Alembic Growth Therapy Growth Alembic FY16E
FY16E Contribution
 Anti-Infective  36%  157.2  3.99%  314  3%  2%  334  28%
 Gastrology  18%  78.6  2.50%  157  16%  9%  212  18%
 Cold & Cough  12%  52.4  5.08%  105  11%  11%  129  11%
 Cardiology  11%  48.0  1.43%  96  38%  13%  183  15%
 Gynaecology  9%  39.3  2.08%  79  29%  7%  131  11%
 Orthopaedic  5%  21.8  1.14%  44  8%  7%  51  4%
 Anti Diabetic  5%  21.8  1.32%  44  31%  24%  75  6%
 Opthalmology  2%  8.7  1.67%  17  51%  8%  40  3%
 Nephro / Uro  2%  8.7  1.84%  17  37%  14%  33  3%

It looks like fast growing Specialty segments like Cardiology and Gynaecology are set to overtake the earlier dominant segments in a few years. Kindly comment

Ealier Anti-Infective and Cold & Cough segments used to account for 80% of domestic sales. Now this is down to 50%. Yes Cardiology and Gyneacology are growing fast and will contribute bigger share in coming years and will overtake some segments like Cold & Cough pretty soon. But the Investments needed are high.

What kind of investments? Is it correct to say this is a Marketing driven game and not so much on the technology side?

Absolutely, all investments are in Marketing. We need to ensure Quality and availability/mind share with Doctors. Form a very low base we have started growing the specialty segments. Fortunately Alembic enjoys a very very good brand equity with Doctors.  Brand recall is very high, so we are trying to cater to higher margin lifestyle disease segments. This strategy is paying off, as doctors are ready to accept new drugs quickly due to brand name and trust.

India Generics- some 86 Cr in 9mFY14? Why do we need domestic generic Sales? Is this profitable?

Well this is a ~100 Cr annual market for us. Some of the products here are negative margin to upto 10% kind of margins. Instead of the brand name drug, it is sold in the generic name. There is a big enough market for this in smaller towns. In a way it takes care of some of our fixed costs by generating additional sales. If we don’t sell it, somebody else will and take this.


Operating Margins have seen a consistent uptick? What are the main sources of profitability?

The uptick in profitability is due to a few things.

1. Improving Product Mix – As mentioned before, we decided to shift focus and get out of Domestic API which was acute therapy focused and volatile. Anything less than 15-18% EBITDA we decided to get out of.

2. Shifting focus on Formulations – Both Domestic branded and International Generics

3. Process/Efficiency improvements

The depreciating Rupee also helps to an extent

How sustainable is this going forward?

This is set to continue for the next few years. Product mix improvements are already significant. We are able to leverage economies of scale with new plant. We are at ~20% EBITDA levels. There will be 1 to 1.5% margin improvements every year for a couple of years. In a few more years we could be in a different orbit.



What in your opinion are the major risks?

Regulatory Compliance. We are taking this very very seriously. When we were small it was easy to manage. But as we scale up we need to ensure systems and processes that take care of ensuring quality.

Kindly give us a sense of how seriously this is taken by Top Management?

The normal practice in the industry is to employ 1:2 Quality:Product personnel. At Alembic we are maintaining a 1:1 Quality: Product personnel ratio. We ensure everything is on the SAP ERP system. We have built a strong Quality Team.

When the Board meets, the first item on the Agenda is USFDA Compliance. And usually it takes 3-5 hours.

USFDA Inspections? Is this like a sword now hanging over Indian Pharma companies having/attempting a presence in US markets?

Not really. Some reactions/rumours spread that this time USFDA folks are coming to shut down 20 plants – that’s all nonsense. US has to rely on Indian manufacturing plants – we have the largest base outside of the US. Yes, they have very objective, very detailed worksheets. If there are some observations that come out, well they are not going to suppress them.

When did you have your last inspection? Were any queries raised?

1.5 years back. No queries were raised.


Likely to stay around 6-7% of Sales 


27% sales to 20% of Sales, to 17% of Sales? Debtors 62 to 47 to 56 days?

This is mostly on account of the API shift.

While Inventory levels haven’t changed much – implies that Payables also has improved significantly. What are the reasons?

Driven by Operations team focus. Some KRAs (Key Result Areas) demanded are to increase 30 days payables to 45 days and 45 days to 60 days.


Till when will current capacity suffice – FY15? When Next? Quantum

Actually we should be able to see through FY16 on current capacity. We are introducing a lot of automation at an initial cost of ~40 Cr.

What kind of Outsourcing do you resort to? What is the quantum?

India branded – Roughly 40% 


Simple 3/6 month forward contracts.




30-35% Payout.


 Next 2-3 years it is the US Marketing Challenge that will consume us.  


Ayush Mittal: Less than 5% of Portfolio in the Company; Holding for more than 6 months;
Vinod MS: No Holdings in the Company; ;
Hitesh Patel: More than 5% of Portfolio in the Company; Holding for more than 6 months;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 6 months;