Transcript of discussions with Executive Director, Surendra Kedia
1. EXCELLENT 1ST QR RESULTS! SALES & PROFITS UP BY OVER 60% AGAIN JUST LIKE 1QFY11.
Congratulations! With such a tremendous quarter behind you, how does the rest of the year look?
Yes we had a good 1st Qr. We should have a reasonably good year in FY11. There is some slowdown in growth in the business on the FMCG side. The high interest rates and inflation is having its affect on discretionary budgets of middle class Indians. Some customers projecting 20% growth are seeing growth in 12-13% levels.
Any major clients added? Besides Coke as your major client, have you been able to penetrate deeper into Pepsi account?
We have grown the Coke relationship. As you are aware we are their #1 supplier. We are also very proud of becoming the #1 supplier for Bisleri. This account started from low levels and as we kept delivering and winning the customer’s confidence we have been successful in penetrating deeper. Pepsi business has also grown over the years, but as you are aware, the dynamics of Coke and Pepsi businesses does not allow the same dominant supplier. We are very hopeful of concluding a significant business on the Containers segment from a major player, shortly.
What about the promising “Beer” segment?
There is some development there. Sab Miller has introduced PET 1 Lt and 1.5 ltr beer bottles. They are experimenting with this for the last 4-5 months. They initially imported the Preforms, and have also used some local suppliers. Volumes coming from this segment is some 1 to 1.5 yrs away still, as this involves major re-investment by the bottler in separate PET lines from the Glass lines.
We will be there surely to pitch in as and when some momentum kicks in.
What about Liquor sales in PET bottles?
This has been going on for last 3-4 years, but we were not targeting that market. Now with additional capacity we have started targeting and now count Radico Khaitan, Khodays and a couple of other players as customers.
2. PRODUCTION CAPACITIES
What has been the progress on the capacity expansion program? What is the current capacity available and what was the Capex incurred in FY11 for the same. What is the capacity utilization currently?
As on 31st March we had 36000 MTPA capacity. About 27500 is for Preforms and 8500 for Containers. Capex incurred in FY11 was ~25 Cr. Capacity utilisation has been at 90%. Plan for FY12 is to reach 40000 MTPA.
3. PRODUCT SEGMENTS – PREFORMS AND CONTAINERS ARE THE MAIN SEGMENTS.
Could you share the production/Sales break-ups between the two segments for the year? Is it correct that Container Sales are more or less stable from Quarter to Quarter while Preforms segment has major seasonality being driven by CSD segment in the hot summer months.?
Today its roughly 60:40 between Containers and Preforms business in Value terms. Preforms production share is more like 70% as a significant chunk of that is through jobwork basis. Container business is steady and does not see the seasonality like in Preforms.
4. SEASONALITY IN SALES –Q1 & Q4 ARE YOUR BEST QUARTERS
Looking at the results over last year and this year, it is very clear that Q1 & Q4 are your best quarters – demand-wise. And this is mainly driven by the CSD segment –hot summer months.
The Sales slowdown is usually more than 25% from peak sales in Q4 or Q1. How have the last 2 months been? Is the same pattern likely to repeat in Q2 & Q3?
As you are aware Q1 and Q4 are better quarters for us. Q2 and Q3 are dull quarters. Coke and Pepsi are seeing slower growths.
On the other hand, if we look at the demand surge in Q4 & Q1 it looks like it could absorb any capacity. Something like 3x existing capacity may also get absorbed?? What is the peak demand from say Coke and how much is Manjushree currently supplying?
What I can say is that between the quarters supply requirements fall by as much as 50%. We are a bit better off being in the South where the weather extremes are not as harsh. The players in Northern India must be seeing supply drops of 60-70%. Manjushree is today supplying probably 15% of the total Preform market.
Amcor is unlisted and so is Sunrise. Futura has been making losses since last 3 years. But AMD Industries has been doing well. For last 2 years they were at similar OPM as Manjushree but lacked slightly behind at NPM levels. They had a very good 1Qr and registered NPM at ~16%!
Kindly elaborate and help us understand the competitive scenario better. How serious is AMD as a competitor, with ramped up Preforms capacity. What about competition in the Containers segment? How is Pearl Polymers doing? Any other significant player?
There are 2-3 new players in Preforms. National Plastics with factory at Baddi and operations in North India. Chemo Plastics in Baroda, and another Hyderabad based player ramping up capacities. We have not seen AMD Industries ramping up aggressively. Pearl Polymers is not into Preforms and it has been registering only marginal growth.
6. OPERATING MARGINS – SUSTAINABILITY
The most noticeable and remarkable performance is in constantly improving Operating margins – from 16% to 19% to 22% in the last 3 years. You had mentioned last year that this is simply economies of scale at play. What is the picture for FY12? We now have new facilities catering to the enhanced capacity? What are sustainable Operating Margins for FY12 and beyond?
We feel the operating margins are largely sustainable. There may be a fall of 100-150 basis points at the most. We should manage 20% plus OPM levels.
7. CAPEX AND FUNDING.
What are the Capex plans for the next 2 years and how much funding would you need to tie up for the same in FY12 & FY13? Would this be totally through debt or are there any chances of equity dilution?
We will need about 40-50 Cr for FY12. Our new location and plant should be ready for shifting in by Dec 2011. This will be managed from internal accruals and debt. As mentioned before we are trying to secure ECB Term Loan on a long term basis. We are also exploring buyers credit from our machinery suppliers.
8. WORKING CAPITAL MANAGEMENT
One of the pains in your seasonal sales demand is to keep producing and storing during the leaner Q2 & Q3 to deliver for bumper requirements in Q4 & Q1. This is perhaps reflected in the huge rise in Working Capital requirements in FY11. from 22% of Sales in FY10 to 38% in FY11, mainly due to rising Inventory. Kindly share what the company is doing to manage burgeoning Working Capital needs.
As you know Q1 and Q4 are our best quarters. But we keep producing and storing in the leaner Q2 and Q3 quarters so as to be able to do justice to the requirements in Q4 and Q1. Yes Inventory levels will be higher as the business grows. It will need better and proactive handling from our side to reduce this burden.
Infact our total funding requirement has been going up substantially as we need to keep expanding for growth. We have recently inducted a CFO to focus on improving our financials.
The Interest burden has come down from Rs 3 Cr levels in 4QFY11 to 1.9 Cr in 1QFY12. How has this figure come down?
We had to account for additional Banking & Finance charges in Q4 FY11. Bulk of the charges were confirmed by the bank in the last Qtr and accordingly were accounted in the qtr.
Have you tied up any loans through the ECB/FCCB route for lower cost funding on both long term debt and working capital front? Could you give us a sense of the likely Interest range for FY12?
Yes, we are trying for ECB Term Loans and hopeful of concluding some arrangement in the next 2 months or so.
9. NET MARGINS – SUSTAINABILITY
You had exactly the same situation in FY11. A stupendous first quarter with Net Margins crossing 9% for the first time. Management had sounded very confident of maintaining Net Margins at 9% levels for FY11, but ended up at ~7%. Please comment on what are sustainable Net Margin levels for FY12 and beyond?
We should do better than FY11 on the Net Margins front. We are focused on achieving better profitability.
10. MAJOR OPPORTUNITIES & CHALLENGES
Where does Manjushree Technopack see itself in the next 5 years? What is the size of the opportunity in its niche? Can we see Manjushree Technopack reach 500 Cr Sales, by when? What are the major challenges before the company and where are the big opportunities?
500 Cr in Sales by 2015 is a good target to work for. We need to achieve a few milestones on the way – still a long way to go. Meanwhile we are hopeful of touching 300 Cr Sales in FY12.
I think we have demonstrated that we are able to execute fairly well for our prestigious customers. We have kept growing the business with all our clients and are penetrating deeper.
As you know, ours is a very difficult industry. As we scale up, the main challenge before the company is better financial management.
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