Manjushree Technopak Management Q&A: Sep, 2010

Management Q&A

1. WE HAVE SPOKEN AFTER THE EXCELLENT 1ST QR RESULTS. CONGRATULATIONS, AGAIN!

How does it look from here? Have you added any new clients? Tupperware??

Thanks. Business outlook remains good. Tupperware is an existing client, it has been with us for over a year now. GSK consumer division is a significant new client we have added, for which we have set up additional dedicated capacity.

2. EXTENDED MONSOON HAS DAMPENED BEVERAGE SALES IN Q2 IN NORTH INDIA. THE 20-25% GROWTH FIGURES ARE DOWN TO SINGLE DIGITS, AS PER NEWS REPORTS.

How does Q2 look for Manjushree? Is it also badly affected?

Yes, North India sales is badly affected. But there has not been that much effect in the South. As you are aware, Q1& Q4 are Manjushree’s best quarters while Q2 and Q3 are slightly dull. To that extent sales will be lower in Q2. But nothing out of the ordinary has happened in Q2 for MAnjushree.

3. OF LATE MEDIA ACTIVITY HAS PICKED UP. SHRI VIMAL KEDIA HAS BEEN ON SEVERAL CHANNELS. THERE WAS A BUSINESS INDIA ARTICLE TOO. WE HAVE HEARD A FIGURE OF 200 CR FOR EXPANSION PROJECTS.

Seasoned investors are speculating that perhaps Manjushree will be looking to raise funds through the equity route, and is beefing up its profile in the media. Tell us more on the expansion plans. How will this be funded?

You know how Media exposure plays out. A set of good results, one channel interviews you, then others also get interested in the story. Nothing more than that, we certainly are not thinking of diluting equity in the near future.

The 200 Cr expansion figure is spread out over the next 3 years. One thing is certain, the industry we are in calls for continuous investments in capacity. you have to keep pace with your customers growth, if you cant business will go elsewhere. Rs. 60 Cr capital expenditure is planned for FY11, while Rs. 80 Cr is envisaged for FY12. Funding will be through debt and internal accruals. Our Balance sheet can be leveraged for that.

Of the Rs.60 Cr capital expenditure in FY11, half will go towards plant & machinery and the other half towards land & building.

4. AMCOR PLASTICS, THE GLOBAL RIGID PLASTICS PACKAGING MAJOR HAS SET UP MANUFACTURING IN PUNE. ALCAN, KLOCKNER, PENTAPLAST, CAN PACK, BOSCH PACKAGING ARE ALSO GETTING ACTIVE IN INDIA.

What is the level of competition activity? Isn’t Amcor Plastics, a big threat? Are the other players ramping up on capacity?

Amcor Plastics is one of 3 players in PET Preforms. But we have not seen them augmenting capacity in a big way. Perhaps Indian market is still not a focus area for the Australian major.

Among the domestic competition Futura and Sunrise, again we have not seen any significant augmentation in capacity. By the end of the year we will be far ahead of competition.

5. LETS SHIFT FOCUS TO MARGINS AND PROFITABILITY. OPERATING MARGINS HAVE JUMPED TO 19% (16% FY09).

Is this sustainable? What are the contributing factors? Is preforms jobworks going up the main reason?

What you are seeing here is simple economies of scale. With higher volumes, our fixed costs are getting spread over a larger base. Operating margins should be sustainable at these levels. Even without jobworks, we would have seen margins trending higher.

6. NET MARGINS HAVE NOT MOVED UP! 7.08% (7.09% FY09)

Depreciation costs have gone up to 7% (4.5% FY09) of Sales, and Interest costs have climbed to 2% (1% FY09). what is the picture likely for FY11?

We expect to record higher net margins for FY11 on the back of increasing Operating margins, which will be offset to an extent by the higher depreciation (increased capex) and interest cost ( increased debt).

7. WORKING CAPITAL HAS SEEN A BIG SURGE. WORKING CAPITAL/SALES IS AT 35% (21% FY09 AND ROUGHLY THE AVERAGE IN PREVIOUS YEARS)

Debtor days has gone up by 20% to 66 days (55 in FY09). Inventory Days is more or less at same levels at 64 days (67 in FY09). Payables days has shot up to 30 days (12 in FY09). Whats the likely trend in FY11?

Our debtor days are normally around that 2 months figure. Sometimes it may go up or down by 5 days. Inventory days will also be similar. 1 month Payables days is likely.

8. PREFORMS CAPACITY IS ROUGHLY 22000 MTPA. CONTAINERS CAPACITY IS 7000 MTPA.

You have announced capacity enhancement upto 36000 MTPA in FY11. How much will be Preforms and in Containers?

Preforms capacity will go up by ~5000 MTPA, and containers by ~2000 MTPA.

9. MOVING ON TO THE EXCELLENT QUARTERLY RESULTS. NET MARGINS AT 9.2%!!

While Depreciation and Finance costs have gone up, there is improvement in all other expense fronts/Sales – raw material, power & fuel, employee costs, other manufacturing sales & administration. Is this sustainable??

We touched on this before. We are reaping the benefits of economies of scale. yes we expect net margins to settle down at slightly higher levels than the past 2 years. We may see a drop of 500 basis points from Q2 levels, at 8.5% or so.

10. DIVIDEND PAYOUTS HAVE SLIPPED FROM 18% TO 13% IN FY10

Your dividend policy seems to be stuck at 10% of FV. One would expect dividends to keep some pace with the increase in earnings.

Well, at this stage of our growth, our business requires all the funds that we can plough back in the business. We believe our shareholders are reaping a greater return from the business results and stock performance. Having said that, yes we should see higher dividend payouts in future.


Disclosure(s)

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