Manjushree Technopak Management Q&A: Jan 2010

Management Q&A

1. MANJUSHREE HAS MADE SOME RAPID STRIDES IN THE LAST 4-5 YEARS. YOU HAVE TRIPLED SALES AND CROSSED THE 100 CR MARK IN FY09. EPS ON AN ADJUSTED BASIS HAS GONE UP 8X IN THE LAST 5 YEARS.

Plastic Packaging is a hugely competitive industry. Although this is on a low base, the track record is great. The Balance sheet too looks strong. Congratulations! what do you attribute this growth success to?

Management’s focus on investing everything we can back into the company is probably the number 1 factor – and this permeates everything that we do, our conservativeness in spending, etc. Our steadfast commitment to Quality and our ability to think differently, be the first to introduce new technology into the country, would come a close second.

2. YOUR OPERATING MARGINS ARE AT 16% LEVELS OVER LAST 2 YEARS. THIS IS MUCH HIGHER THAN INDUSTRY OPM AT AROUND 10-11%. EVEN GLOBAL MAJORS WORK ON 8-9% OPM.

What are the reasons for this superior operating performance? What are you doing differently than say 4 years back? And is this sustainable?

Unlike some others in the industry, we are completely focused on our niche –rigid plastics packaging. Some years back we had a division catering to flexible plastics packaging (intensely competitive), which we have since discarded. We have found we can compete better by focusing all our energies into our specific niche, we can track global trends better, we can bring the latest technologies into the country in tandem with customer needs, and try and keep a step away from competition.

Again unlike others, we have chosen to cater 100% to the Instituitional customers and do not have a retail presence at all. This requires a higher level of commitment and responsiveness to changing customer requirements in a completely dynamic environment, but is equally rewarding (growth, volumes) if you are upto the challenge. At any point of time we have 5-6 different joint-customer design projects going on!

These are some things that help us keep the edge. But the single biggest factor is probably our superior handling of raw material/inventory management, followed closely by a relentless watch over operational efficiencies.

We do not foresee any drastic declines in our margins, though we might see a 1-2% fall from time to time, it’s possible due to raw material price volatility, or other external factors.

3. YOU HAVE EXPANDED/STILL EXPANDING CAPACITY AT A RAPID CLIP. FROM 9120 MTPA IN 2008 TO 21740 MTPA IN 2009. FURTHER ADDITIONS DURING THIS YEAR IS LIKELY TO TAKE THE CAPACITY TO 28640 MTPA BY MAR 2010.

That’s 3x the capacity in 2 years! The Coke contract was for 6500 MTPA, with a 50% increment in FY2010, that would be ~10000 MTPA. FY 09 production was ~7000 MTPA. What other contracts have you signed/in the pipeline that justifies the continuous expansion? What is the current capacity utilisation?

We are operating in a very dynamic environment. Growth is not really a constraint, the challenge is not to falter on delivering consistent quality, and on time.

So far we have had an excellent track record. We have completed our expansion projects ahead of time. The latest expansion is on schedule, the machines are already installed, the logistics & support facilities are coming up and will be ready in the next 3-4 weeks and will certainly be on-stream by March 2010.

4. YOU HAVE MENTIONED THE COKE CONTRACT IS A JOBWORK. WE ASSUME THAT MEANS RAW MATERIAL PET RESINS, ETC ARE SUPPLIED BY COKE. THOUGH RAW MATERIAL VOLATILITY WILL BE OUT OF THE WAY, THAT WOULD ALSO MEAN THE JOBWORK CONTRACTS WOULD SURELY BE AT LOWER PROFITABILITY TO MANJUSHREE.

Given high capacity additions, there is the risk of low capacity utilisation. Besides if you take on more jobwork (currently 50% of capacity?), there is the possibility of further squeeze on margins. Looks likely that Returns and Profitability will be dented. What are Management’s plans on sustaining current levels?

This is something that we will have to see as it plays out. There is always that risk you have to take on in a dynamic business environment. If I am unable to commit and deliver on customer volume growth requirements, the business will simply go elsewhere. We have to take on these risks which are inevitable if we have to play in this industry, that is how the game is played! We have to be nimble on our feet; deliver on time, and deliver consistent quality; we can’t afford to fail on any parameter…we just have to find a way out to meet customer requirements.

At the same time we take comfort from seeing a natural hedge getting built in into our business-model as the proportion of jobwork (raw material volatility goes to customer account) in production goes higher. While corresponding Topline will certainly be lower (when jobwork proportion is higher) you see the proportion of raw material costs as a percentage of Sales will keep going down, and this will add distinctly to the bottomline, as volumes drive growth. We are quietly confident that we will make it up on superior volume growth.

5. MANJUSHREE BOASTS OF A MARQUEE CLIENT LIST, COKE, PEPSI AND OTHER MNCS. APART FROM RAW MATERIAL VOLATILITY, THESE SAME MNCS ARE QUOTED BY OTHER PLASTICS PACKAGING COMPANIES AS BEING RESPONSIBLE FOR THE DREADED MARGIN SQUEEZE PREVALENT IN THE INDUSTRY.

Is Manjushree doing anything differently? What are its competitive advantages? Why will they be sustainable, since entry barriers are pretty low. Whom do you count among your strongest competitors?

We are proud to be associated with some of the biggest names in the FMCG and Beverages space. All our customers have remained with us from the start and we have been able to consistently build on the relationships.

It’s not easy to penetrate into any of these accounts. It takes atleast 1.5 -2 years for a customer to evaluate you as a company (stability), your products and sustained quality. A 10 Cr investment in say Husky machines may seem a small investment –but actually its huge when you compare the per unit cost of the product (a coke bottle, e.g.). Where are you going to get the volumes to justify that investment – I can tell you, no newcomer to this industry can even think of that kind of investment, they will simply run away.

Having said that, this is a very competitive industry. You have to be on your toes all the time, to be close to your customers, work with them jointly on current/future requirements, and deliver consistently…if you fail the business will simply go elsewhere. We are happy with our customer relationships and they have been extremely supportive too.

Pearl Polymers, Futura are some of the players that are catering successfully to the same customers.

6. INDIAN PLASTIC PACKAGING FOR BEVERAGES IS SLATED FOR A 13% CAGR GROWTH TO REACH 8555 MILLION UNITS BY 2013, AS PER A EUROMONITOR REPORT. ALTHOUGH MANJUSHREE HAS DONE WELL FOR ITSELF OVER THE LAST FEW YEARS, IT’S STILL A VERY SMALL PLAYER.

What are your longer term plans? Apart from Beverages, what are the most attractive customer segments for you? Any plans to tap other packaging (plastic flexible packaging, metal beverage cans, paper) segments?

We are completely focused on our niche of rigid plastic packaging. At the moment there are no plans to look elsewhere. As you mentioned, the growth opportunities are tremendous. It remains in our ability to stay focused, and our ability to scale up on a consistent basis, without sacrificing any of our strengths. If we can execute well, there is no reason for us not to do reasonably well in the next 5 years.

We are confident of seeing a 30% CAGR in our business, for the next 5 years.

7. CAPITAL EXPENDITURE HAS BEEN DOUBLING EVERY YEAR FROM LAST 3 YEARS. FROM 8 CR TO 16 CR, TO 32 CR IN FY09. YOU HAVE ANNOUNCED A 64 CR TERM LOAN FOR ACQUISITIONS OF FIXED ASSETS IN THE CURRENT YEAR.

Sales or Profits have not kept pace with this capacity expansion. How scalable is this business? Will you be in a position to register some free cash flows anytime in the medium term? How will you fund future Capex requirements- further equity dilution, or is there room for leveraging the balance sheet by taking on more debt?

We have been investing all we can back into business expansion. We are a small company and we will need to keep investing more in business expansion for a number of years. Yes the pace has been fast, but we need to capitalize on the opportunities we are getting. We see nothing wrong with investing more in the business for a steady 30% CAGR growth for the next few years.

Coming to funding future capex question. We do not foresee further capex requirements for a year or two, possibly. With this fresh 64 Cr loan, debt-to-equity levels will be around 1.5 which is reasonable for our industry. The Balance Sheet is strong and there is room for further leveraging as we will keep bringing debt levels down.

However if there is a significant opportunity down the line, that needs us to dilute equity, we don’t rule that out.

8. MANY MULTINATIONAL FIRMS ARE ENTERING THE INDIAN MARKET DUE TO ITS LOW COST ADVANTAGES AND READILY AVAILABLE HUGE DOMESTIC MARKET. THE GLOBAL PLASTIC PACKAGING MAJOR ALPLA GROUP SET UP A 74:26 JOINT VENTURE COMPANY – ALPLA INDIA PVT. LTD AT BADDI, HIMACHAL PRADESH. SIMILARLY, KLOCKNER PENTAPLAST HAS PLANNED A UNIT IN AURANGABAD.

How are you gearing up to handle the threat from multinational players with better technology and global customer relationships that they are sure to leverage on?

We have not found this a threat till now. We are predominantly a south based player and currently do not cater to the North belt at all. The freight costs will be enormous! By the way, The southern region (Kerala, Karanataka, Andhra, TamilNadu) comprises 60% of the total demand for beverages in the Indian market.

At the moment we haven’t done enough to cater to just this region.

9. TOTAL DEBT HAS MORE THAN DOUBLED FORM RS. 13.25 CR IN FY08 TO RS. 29.42 CR IN FY09. HOWEVER INTEREST COSTS HAVE ACTUALLY COME DOWN FROM ~13% IN FY08 TO ~4% IN FY09

Appreciate if you can comment on the above so we can understand the picture better.

Firstly, if you exclude the unsecured non-interest bearing loans (husky machines, sales tax credits), the interest costs are in the 7% range.

Secondly what you are seeing is a snapshot of the Balance sheet on that day, right. What this does not reveal is the period for which the Rupee Cash credit limits were utilized. It was availed only for a limited period and not from the start of the year.

10. YOU HAVE SEVERAL MARQUEE BRAND NAMES IN YOUR CUSTOMER LIST.

For a smaller player how difficult is it to service these customers? How do you manage the customer relationship and engagement process? Please name your top 3 customers. What percentage of revenues comes from them?

As we have mentioned before we are happy servicing our prestigious customers and their demanding business requirements. They too have been very supportive of our issues, whenever we have asked them for any help.

We work closely with all our customers. At any point of time 4-5 joint customer design projects are on. We are always engaging with them on current and future requirements.

No single customer business exceeds 10% of our sales.

11. REAL LIQUIDITY ON DAY-TO-DAY BASIS SEEMS MUCH MORE STRAINED THAN THE RATIOS REVEAL? FY08 POSITION WAS BETTER BECAUSE OF THE FD OF XX CR. MARGIN MONEY ON LC & BG ALSO MAY NOT ABLE FOR ANYTHING ELSE.(CASH -5.28 LAKHS, CURRENT ACCOUNT -28.6 LAKHS, MARGIN ON BG & LC -10 LAKHS)

How do you view this situation? Are things going to be different this year, or?

Yes, we had things a little tight towards the end last year, but we managed without any hiccups. This year hasn’t been a problem as we have managed to take care of most of the requirements.

12. SUNDRY DEBTORS MORE THAN 6 MONTHS – OVER 1 CRORE; THIS HAS NOW INCREASED TO 7% OF TOTAL SUNDRY DEBTORS –THIS IS STILL CONSIDERED GOOD?

With your kind of client list, are you really squeezed on this front? Any bargaining power??

Yes that will come good. With our regular clients we do not face any such problems. As you would have seen we have a pretty healthy debtor days position. Infact most of our clients are happy to oblige us when we face any short-term issues.

13. FY 10 9MONTH RESULTS.

While the growth has certainly been impressive, we see much higher depreciation and much higher interest costs. What intrigues us most is Operating margins shooting up to 21% (from ~16%). What’s going on?

We covered this ground before. This is a direct result of job work volume growth adding directly to the bottom line in these 9 months. Its possible this will get tempered a bit in the coming months.

14. MPHINITE TECHNOLOGIES – YOUR ASSOCIATE COMPANY IS INTO PRODUCT DESIGN SERVICES.

Is Mphinite a source of any competitive advantage for you. Are you able to offer something more to your customers having in-house design capabilities?

Yes certainly that’s helping us win and retain our customers. Our ability to respond to changes in customers design requirements is certainly better.

15. FINALLY ONE LAST QUESTION.

~ 9 lakhs per year for MD and ED? Though its good to see conservative management, but isn’t that a bit too low?

That goes back to the first question you asked. We believe we have been successful because we have managed conservatively. We want to plough back everything we can into the business – we have a much bigger journey to traverse -we are not looking to take out form the business!

16. I AM MAKING BOLD TO ASK ANOTHER FINAL QUESTION, THAT I HAVE BEEN ADVISED TO AVOID BY SENIORS!

Your auditors share the same surname A.K Kedia or Atul Kumar Kedia?

That’s exactly what it is. A shared surname coincidence. Nothing more, certainly no relations!


Disclosure(s)

Donald Francis: Less than 5% of Portfolio in the Company; Holding for more than 1 year;
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