Astral Poly Technik Management Q&A: Dec, 2011

Management Q&A

Questions emailed to Astral Poly Technik CFO Hiranand Savlani. Telephonic Update

1. FOREX FLUCTUATION IMPACT ON OUTSTANDING ECB BALANCES. AS ON SEP 30, TOTAL DEBT IS 53 CR.

How much of this is ECB? And what are the interest costs and repayment terms. 

5 years with quarterly repayment instalments at roughly Libor +3%.

And what is the quantum of this ECB?

Majority of the debt is ECB.

That’s more like close to 50 Cr?

Yes

2. YOU HAVE MENTIONED A M2M LOSS OF ~8 CR FOR 1HFY12 – LOSS ARISING ON FOREIGN EXCHANGE RATE FLUCTUATION ON OUTSTANDING BALANCES, WHICH WILL BE ACCOUNTED FOR AT THE END OF THE FINANCIAL YEAR.

This can at best account for 4-5 Cr of loss on ECB loan outstanding balances. Does this mean the 8 Cr loss includes losses from the Payables as well, how much?

Yes, this is on account of M2M accounting for both ECB loans outstanding as well as on the Payables front, because of the steep Rupee depreciation. Together the M2M loss has been put at 8 Cr.

So is it right to say ECB Loans would have accounted ~5 Cr and the balance would be on account of Payables?

Roughly, it should be around that.

3. AS PER AS-30 ACCOUNTING NORMS, ASTRAL WOULD ALSO HAVE THE FLEXIBILITY TO CAPITALISE THIS (INCLUDING INTEREST OUTGO). MANY COMPANIES SPENDING ON CAPEX EXPANSION HAVE DECIDED TO CAPITALISE THIS – BALKRISHNA INDUSTRIES, PI INDUSTRIES, FOR EXAMPLE.

Why is Astral not considering capitalising this part – Is that not an option at all?

We are also thinking considering on those lines as majority of the expenses is related to Capital Expenditure. The options are open. We will take a call at the year end.

Is partial hedging also an option? Why, or why not?

We do take near term hedge. So 1 year equivalent of installments are hedged. So till March 2012, we are safe. Beyond March 2012, we will have to see what measures to take.

If that is the case that you are hedged on installment repayments, why was there exceptional items (1.22 Cr) loss due to changes in Forex rates on repayment of borrowings accounted for in Q2FY12?

That was on account of payments due…Buyers Credit dues. You see the Buyers Credit rollover is in 6 months.

We thought your credit terms with Lubrizol was 120 days, not 6 months?

Lubrizol credit terms are 120 days. But we had switched to 6m Buyers Credit. Current borrowing costs are 13-14% to take advantage of that.

Why the shift from 120 days Lubrizol credit to 6m Bank Buyers credit? What’s the advantage?

Well we get another 2 months extra credit isn’t it? Isn’t it better to extend the payment for 2 more months and have more funds available for Working Capital requirements. We need to pay 2.5%-3% for the buyers credit in lieu of the current 13-14% interest norms. We end up saving a flat 10%!

So, why don’t we hear more of the 6M Buyers Credit facility? Why is it not that common?

It is very popular. Out of 100, 95% of the companies will be taking this route.  In a Rupee stable situation, the flat 10% gain works to everyone’s advantage. And everyone is prepared for temporary spikes. Not for steep hikes.

But now the Rupee has depreciated by 16% meanwhile?

Yes, it doesn’t look so good now. Look, this is an extreme situation that has happened. You do business planning based on normal business forecasting. Normal forecasting or what anyone was prepared for was 4-5% moves. No one could have been prepared for a 10% plus or 16% plus depreciation, and that too in so short a duration!

We do business planning based on normalised situations. We can’t plan for extreme situations, can we?

Even from here if the Rupee remains stable at 52 to a US$, it will work out very well.

4. Q2 CONCALL MENTIONED RAISING ANOTHER 15-20 CR ECB AT LIBOR +3%.

What further tranches has the company drawn in Oct, Nov and so far in Dec? and at what rates respectively?

We raised $2 Mn in Dec and maybe we will raise another $2 Mn in Jan 2012.

And you did not draw any money earlier? In October, November?

$1 Mn in November

So totally some $5mn more has been drawn since September 2011?

Yes.

5. THE RUPEE HAS SINCE APPRECIATED TO 52 TO US$.

Is it correct to surmise that if the Rupee remains at ~52 to US$ till the year end, there will be additional liability of another ~4cr that will need to be accounted for by 31st Mar 2012, on the loans till Sep 30 alone?

See the situation is very dynamic. Everyday the positions change. Payments need to be made in between. We made some payments $1-2 Mn at 51.70 a couple of days back, and today when I check it has changed to 52.40.

Instead of trying to take a call on the direction, we try to participate at every level. So we participated at 51.40, 51.70, and we had participated at 51.20 levels too.

Now that the Rupee is at 52 to US$ and assuming that it remains there till Mar end 2012, is it fair to say that another 4-5 Cr liability will acoount both on payables and ECB loan outstandings?

Its very difficult to give exact figures, situation is too dynamic.

But given that $ has moved from 50-52 since Sep, i.e  a Rs 2 difference, and in September there was a Rs 4-5 differential, isn’t an additional 4-5 Cr a fair ball park estimate?

That is correct.

6. FOREX FLUCTUATION IMPACT ON PAYABLES. LIABILITIES AS ON 30 SEP 2011 – 136.88 CR

Forex paybles were at what levels on 30 Sep? 50-60 Crs?

Don’t have exact figures, right now.

But is it roughly in the 50-60 Cr range, or higher?

No, it will probably be higher.

7. 120 DAYS CREDIT TERMS WITH LUBRIZOL. THIS NORMALLY WOULD WORK TO ASTRAL’S ADVANTAGE. BUT IN THE FACE OF THE RAPIDLY DEPRECIATING RUPEE THIS MIGHT BE POSING A CHALLENGING SITUATION.

Kindly explain the hedging policies followed by Astral on Payables. Do you hedge fully your net outflows, or partially? How much?

(missed this totally, TBD)

8. RUPEE HAS DEPRECIATED ONLY STARTING SEP 2011. IMPLICATIONS ON FOREX LOSSES IN FY12 ON ACCOUNT OF UNHEDGED PAYABLES.

Since 120 days credit terms are in place, is it right to say that in Oct-Dec FY11, you will be paying for payables of Jun-Aug FY11? And since rupee had not depreciated till August, there is no impact on this front? Does this mean there will be a big impact in Q4 as the full impact of rupee depreciation from Sep till date will need to be accounted for?

Already covered above.

9. ACCOUNTING NORMS

As per accounting norms, aren’t you required to account upfront -even if the payables are due months later? If so, what is the likely impact respectively in Q3 and Q4 FY12?

As discussed Payables that become due need to be paid as and when they become due. But M2M accounting for the same has to be done on a regular basis. We have taken the decision that we will take a final call at the end of the year how to account for the same, depending on the situation prevailing then.

10. THE RUPEE HAS SINCE APPRECIATED TO 52 TO US$

Is it correct to surmise that if the Rupee remains at ~52 to US$ till the year end, there will likely be another hit of ~6-8 Cr on the payables front (if fully unhedged)?

(TBD)

11. MARGIN PRESSURES FROM RUPEE DEPRECIATION. RAW MATERIAL IMPORTS FY11 146 CR. THIS IS ~50% OF RM AND ~36% OF SALES. RUPEE HAS DEPRECIATED BY MORE THAN 16% SINCE SEP 2011.  ASTRAL HAD TAKEN A 3.5%-4% PRICE HIKE IN Q2. IN OCT YOU HAD TAKEN A 2.5% HIKE AND EXPECTED 3-3.5% IN NOV.

What is the cumulative price hike effected by the company in FY12 till date? Is it already at ~10% price hike levels!

Actually we have taken another 5% price hike in December.

So cumulatively is that a 15% hike effected so far in FY12?

Whatever that adds up to. See we are very clear that ultimately input price hikes have to passed on. Maybe with some time lag, but we have to pass that on, else our survival will be at stake.

But how do you take the price hike decisions? Do you wait to see what the market is doing, competitors like Ashirvad what steps they are taking?

Well we take our own decisions based on our business situation. We dont look for cues from others.

Can’t that be used by the competitors to gain/wrest away market share from you in certain markets, say where they are not dominant?

Well if someone wants to pick up business at a loss, that is their call.

If Astral made sale of 100, Its RM import would be 36. Depreciated 16% (~42) would mean your margins reduce by 6%.  Since you have affected a 10-15% price hike spread over Q2 & Q3, does this mean you are more or less protected on the margins front from the rupee depreciation effect so far? (Margins may well slide for other operational issues)

Given the current situation, we feel we will be more or less covered on that front.

Should the Rupee depreciate further, is there room for more hikes, how much can you really pass on? Have you taken any more hikes beyond the 10% already?

Like we discussed before a 5% hike is taken in December. This is a business reality – we got to pass on the hikes, there are no two ways about it.

12. STABLE MARGINS IN FORESEEABLE FUTURE. MARGINS HAVE BEEN ON A DECLINING TREND OVER THE LAST FEW YEARS. FROM 18%  IN 2008 TO 13-14% IN FY11. AND FY DOES NOT LOOK TO DELIVER MORE THAN 12%

Where do you see margins stabilizing in the near to medium term?

18% days were in those days when we were not growing this fast. Growing at 40% in these times is not an easy task. In recent times, we have been prepared to shed a couple of percentage points in pursuit of higher growth. But we hope to see uptrend in margins as we start producing at full capacity utilisation. Operational efficiencies will go up as economy of scale effects kick in.

So in the medium term, where do you see margins stabilising at?

It will probably be in the 12-14% range.

13. COMPETITION. SUPREME TIE UP WITH KANEKA. MEGHAMANI JV/FACTORY WIH KANEKA FOR 20000 MT

Please give us your sense of market developments. Who do you see as your most significant competition, and why? How’s it on the pricing front with Kaneka sourced products? Do you see any margin pressures developing due to heightened competition?

Well the Kaneka plant is not coming up before 2014, probably 2015. By year-end we will be at 65-70000 MT levels. And we will not be staying still till then. We will be making our own plans. We will also be somewhere else.

See there is a problem with the sourcing of CPVC compound from non-Lubrizol sources. Otherwise things would have changed long back. Competion plans, our business plans are never static. Everybody assesses the situation and takes measures appropriate to ensure survival and growth.

We read somewhere, Kaneka’s global production of CPVC is 46000 MT is that correct?

Well I don’t have those details. But this is for sure, Kaneka’s commitments in other markets will not allow it to significantly change the dynamics in India atleast in the next 2-3 years. 

Nothing remains static, right. By that time ….Lubrizol will also take some steps, isn’t that likely.

So you don’t see any significant competition in the next 2-3 years?

I didn’t say that. Competition is a part and parcel of life. There is no monopoly, right. But everybody is growing, there is enough room for everyone to grow…the market is big enough for more. Forget CPVC, look at the PVC market. In every small nook and corner they are making PVC. Despite that everybody is growing.

By 2013-2014 we will also be a certain size. We will be much stronger. You can put your own numbers if we continue to grow at current rates.… We will be able to dictate certain terms.

14. REALTY/INFRASTRUCTURE SLOWDOWN

Have you seen any impact on the ground so far? 

Look we are getting our Orders regularly and without any interruption. Supplies are being made. Uptil now we have seen no discernible effect on the ground.

So, how confident are you of delivering 30-35% growth in the coming 2 years?

We are certainly hopeful of maintaining the growth trends. The interest rate and credit availability cycle reversal may start sooner than later. If we go by the recent statements from RBI, these is coming soon.

And when that happens, demand will start groing faster. Because the main hindrance to this sector, is the finance rates. 

15. PROMOTER SHARES CHANGING HANDS. MR NIMISH DALAL SELLING HIS STAKE TO MR ENGINEER IN OPEN MARKET TRANSACTION.

Mr Nimish Dalal had also earlier tendered his resignation as a director of the company. Is this a fallout of the Lubrizol relationship? Kindly explain the reasons behind the transaction and the timing of these transactions.

Not at all. Why should Lubrizol be in the picture? Se they are family members. They have a family understanding within which the stakes have changed hands within the family. See Mr Dalal is Mr Engineer’s Uncle. The family will be together for a lifetime.

But Mr Nimish Dalal is employed with Lubrizol, right?

No, Mr Nimish Dalal is not with Lubrizol. He is a Doctor!
Mr Girish Dalal, who is Nimish’s father was with Lubrizol. Kabka retire ho chuke!
In the market people will talk all sorts of things without verifying back with the Management!

But Mr Nimish Dalal also resigned as a Director from the Board? Why did he need to do that?

Well these are not related. Mr Nimish Dalal is a US resident and was not very active.

16. Lubrizol relationship

Do you have anything to report on developments on this front? When can we expect a formal announcement of progress on this front?

The relationship is strong and progressing well. What do we have to report on that

We meant, the proposed investment from Lubrizol taking the relationship to the next level?

That’s and ongoing thing. Negotiations going on…studies going on from Lubrizol side…there is no formal agreement.

Moreover, we have already said that we signed an NDA with them on project confidentiality. It’s not that we don’t want to share any progress, we can’t. Till there is any formal agreement signed, there can be no clarification form Astral. This is to protect the interests of the company.

Things may or may not happen. That is why we had to issue a formal clarification that look these things are very far away. There is nothing material at the moment. If investors took a call on the basis of that Lubrizol announcement that would have been sort of misleading. In order to protect the interests of the investors in our company, we issued that clarification – that don’t make an investment call based on any announcement like that, it will be entirely misleading to do that.

So, do we take it that no news is good news?

We would like the long-term investors in the company to take conservative calls on the company. As and when things happen we will come up with appropriate announcements, at the right time. If something does not happen, then also we have to make the appropriate announcement!

One appeal to long-term investors in Astral. Don’t listen to market rumours. People will say all kinds of things. If you have any questions or want to understand anything about the company, please approach us directly. Talk to us, we will be happy to provide you all the details that we can share.


Disclosure(s)

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

Leave a Reply