Modison Metals Management Q&A: Mar, 2011

Management Q&A

1.   DEMAND FOR LOW-VOLTAGE SWITCHGEAR IS DRIVEN BY ELECTRIFICATION OF RESIDENTIAL AND COMMERCIAL ESTABLISHMENTS, WHEREAS MEDIUM AND HIGH VOLTAGE ELECTRICAL CONTACTS DERIVE THEIR DEMAND FROM INCREASED SPEND ON TRANSMISSION AND DISTRIBUTION INFRASTRUCTURE.

Kindly give us some idea on the current market size, your revenue mix and margin realizations from low, medium and high voltage electrical contacts segments and Modison’s share in the domestic market. What is the share of unorganized players in both segments? What is the global market size for electrical contacts?

Electrical contacts is a high-precision and complex manufacturing business. Modison Metals enjoys about 60% market share in the low voltage contacts segment. The balance is spread between Hindustan Platinum and Choksi Heraeus. In medium & high voltage contacts business we are the sole players. We supply to the switchgear manufacturers and not the end customers, so cannot comment much on the share of unorganised players. Revenue mix is more or less equal between the two segments, though it fluctuates from quarter to quarter between the two. Medium & High voltage segment has higher margins (upwards of 25% or so) while low voltage segment has lower margins (downwards of 15% or so).

2.      MODISON IS AN APPROVED VENDOR FOR MAJOR SWITCHGEAR MANUFACTURERS LIKE L&T, CROMPTON GREAVES, AREVA, ABB AND SIEMENS.

Kindly give us an idea of your top customers. Does the company service the same customers in different segments or are there major players in each segment? Does any customer account for over 10% of Sales, leading to over dependence on any account?

L&T is our biggest customer in the low voltage segment. Havells is the other customer in this segment. In medium & high voltage segment we have Areva, Crompton Greaves, and Siemens which are big customers. L&T is one customer which accounts for over 10% of Sales.

3.      SOME OF THE CLIENTS SUCH AS AREVA HAVE A GLOBAL SOURCING SYSTEM HELPING MODISON ENTER NEW MARKETS. MODISON EXPORTS ELECTRICAL CONTACTS TO DESTINATIONS SUCH AS EUROPE, JAPAN, RUSSIA AND CHINA.

Please explain the sales/distribution model for export sales. Exports currently account for some 12 % of Sales. Is there going to be an increasing focus on exports in the near future? Are export realisations higher than domestic realizations? Who are your top export customers? Any other global sourcing successes on the lines of the Areva model?

Electrical contacts are made to order custom products. Sizes range from 10 gms to 10 kgs or more. It does not lend itself to a distribution led sales model. All our sales have to be direct sales. We are dealing with our main customers since several years, we are known for our quality. We participate in international trade fairs like in Hanover, which is an yearly event. There is good opportunity in the domestic markets and not much to differentiate in terms or margins or realisations from exports. In the coming years exports will probably continue at similar levels.

4.      CHINESE SUPPLIERS HAVE BEEN REPORTEDLY SUPPLYING LOW-VOLTAGE ELECTRICAL CONTACTS AT A PRICE WHICH IS AT PAR OR BELOW MODISON’S RAW MATERIAL COST. ALSO REPORTEDLY SMALL-SCALE MEDIUM- AND HIGH-VOLTAGE SWITCHGEAR ASSEMBLING FACTORIES ARE GAINING MOMENTUM IN INDIA WHO ARE IMPORTING COMPLETE SWITCHGEAR SUBASSEMBLIES MAINLY FROM CHINA AND KOREA.

How big are these threats? Are they taken seriously by your major customers? Are you currently supplying to any customers who are also sourcing their requirements from Chinese/Korean imports? When we say Chinese imports are of low quality, is it the reliability of contacts, purity of the contact material, or something else?

We have not faced any serious threat from the Chinese players. As mentioned before we do not supply to the end customer e.g. State Electricity Boards or contractors who may or may not be buying chines products. We supply to the switchgear manufacturers and there we have not faced any issues or threats from Chinese substitutes. We cannot comment whether switchgear manufacturers are entertaining Chinese electrical contacts or complete sub-assemblies.

5.      MODISON’S RAW MATERIAL COSTS CONSTITUTE ABOUT 65% OF SALES. WITH SILVER ACCOUNTING FOR CLOSE TO 70% OF RAW MATERIAL COSTS, THE COMPANY IS SUSCEPTIBLE TO MARGIN PRESSURES ON SHARP MOVEMENTS IN PRICES.

Despite rising silver prices in Q2 & Q3 FY11, we have curiously seen raw material/Sales going down from ~67% to 65% or less, adding directly to operating margins. Please explain the linkages between raw material purchases and billing rates. And what are the strategies employed by the company for mitigating price volatility –escalation clauses, hedging, etc.?

We have price escalation clauses in our contracts which allows us to pass on any sharp changes. If there is a sudden drop in prices, there may be some pressure on margins. Some 50% of our raw material (semi-finished state) is procured from group companies, where we may have a little bit of flexibility. The cost of electrical contacts is some 2-3% of total switchgear costs, and hence we do not find our switchgear customers too sensitive to the price variations. Having said that, any dramatic or continuous rise/fall is bound to affect. We are pretty hopeful of being able to maintain our margins.

6.      ELECTRICAL CONTACT MANUFACTURING IS REPORTEDLY A TECHNOLOGY-INTENSIVE BUSINESS. MODISON HAS HIGH-PRECISION MANUFACTURING FACILITY AND SKILLED WORK FORCE WHICH ENABLE IT TO CONVERT METALS (SINGLE OR A COMBINATION) SUCH AS SILVER, COPPER AND TUNGSTEN INTO ELECTRICAL CONTACTS.

Please explain a bit on the manufacturing technology, machinery and processes involved. The technology-sharing agreement with Doduco expired in 1997- some 14 years to date. How has the company managed to keep pace with the technologies involved and compete effectively with Doduco itself in the Medium/High voltage segment? Is there a great difference in the technology involved for low and medium/high voltage contacts?

Can’t comment on the manufacturing technology myself. Electron beam welding machines are used. Lead time for these kind of machines is some 10 months. We were able to absorb the Doduco technology completely. Our investments in-house R&D has enabled us to keep pace with any changes/upgradations in technology -processes, machinery or alloys. We have to keep investing in new machines every year.

7.      INSTALLED CAPACITY IN FY09 AND FY10 IS SHOWN AS 450 MT. PRODUCTION QUANTITY HOWEVER WAS ~36,000 KG (FY10) AND 41,000 KG (FY09). CAPITAL EXPENDITURE (FIXED ASSETS) IN THESE 2 YEARS HAS BEEN ~7 CRORES EACH.

Reportedly capacities have been expanded at Vapi over the last couple of years. Kindly explain the linkages in capital expenditure with installed capacity and actual production. Kindly give us an idea on the kind of expansions envisaged in the next couple of years and what will be the capital expenditure spends for the same. What is the kind of maintenance capex that is needed to be incurred? Is the 450 MT installed capacity indicative of future production scalability in any way?

Currently we are spending about 5-7 crores every year on Capex. This is likely to be the pattern in the coming 2-3 years as well. Like we said before the investment is in new machinery, etc. It is very difficult to provide any figures on capacity utilisation as we deal with custome proiducts and custom sizes -every order is different. While current premises are adequate for the immediate future, we have to expand capacities within the next 2 years. We are looking for land around our existing facility.

8.      IN LOW-VOLTAGE CONTACTS APART FROM MODISON, COMPETITION IN THE ORGANISED SEGMENT IS FROM PLAYERS LIKE HINDUSTAN PLATINUM AND CHOKSI HERAEUS. IN MEDIUM-AND HIGH-VOLTAGE CONTACTS, IT FACES STIFF COMPETITION FROM FOREIGN COMPANIES SUCH AS AMI DODUCO, ELECKTRO METALL AND LOUIS RENNER.

Kindly explain competitive advantages enjoyed by Modison metals in both segments. Please give an idea of the scale of Modison capacities as compared to the nearest competitors. How strong are the customer relationships? What are the factors that keep Modison ahead in the game?

We enjoy 60% of the market share in the low voltage segment, the balance being shared by 2 other players. We are roughly 2-3 times the nearest competitor. Hindustan Platinum for example does not see electrical contacts as their only focus like we do. In medium and high voltage segment there is no effective competition. Imports lead time is too high so players like Doduco, Electro Metall, or Louis Renner cannot effectively service our domestic customers. Our main and only business is electrical contacts. We keep abreast of the latest technology, processes or advances in alloys, etc.  And there lies our competitive edge. We have had long-standing relationships with our customers who trust us to deliver quality.

9.      RECENTLY CHANGES HAVE BEEN MADE IN ANCILLIARY CLAUSES OF MOA TO INCLUDE NEW BUSINESS ACTIVITIES LIKE POWER GENERATION, OIL & GAS, MINING ETC.

Are there any material developments expected in the near future? How does the company plan to fund such capital intensive businesses?

Well we tried to bid for a Solar energy project of NTPC. That required the change in MoA. We were unsuccessful in the bid. While the expectation was that bids will be entertained at some Rs. 17 per unit, actual bids got placed at less than Rs. 9. We did not find these levels attractive and were unwilling to revise the terms. Oil & Gas or Mining are just generic extensions made for cover as we cannot make changes to MoA everyday.

10.   MODISON PVT. LTD AND MODISON COPPER PVT. LTD. ARE GROUP COMPANIES. THE FORMER IS INVOLVED IN SILVER REFINING AND MANUFACTURING OF SILVER ALLOY SEMIS, BI-METAL AND SOLID SILVER CONTACTS. THE LATTER MANUFACTURES COPPER ALLOYS TO MAKE FLATS, ROUNDS, SEAMING DISCS, RODS AND PROFILES.

Related party transactions with Modison Pvt Limited and Modison Copper Private Ltd. are worth ~18 Cr and 12 Cr respectively in FY10, roughly 50% of total raw material requirement of the company. How does the company ensure that these trabsactions are conducted at arms length?

All these transactions are conducted at arms length. The promoters are the same in the companies, so there is no apparent conflict of interest.


Disclosure(s)

Manish Kulkarni: No Holdings in the Company; ;
Donald Francis: No Holdings in the Company; ;
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