Poly Medicure Management Q&A: Oct, 2012

Management Q&A

1. FOREX DERIVATIVE CONTRACTS – OUTSTANDING?

Please explain the current situation on Forex derivative contracts.

This is over. We have paid back all outstanding. 15th October was the last payment tranche. This was a significant drag on the performance of the company with almost 3Cr/month of losses. Now this will add straight to the bottomline.

2. MAIN PRODUCT SEGMENTS

Kindly tell us more on your main product segments.

IV Cannula account for 50% by Quantity. Rest 50% is from other products. We are manufacturing as many as 93 different products.

In Value terms IV Cannula (45%), Safety IV Cannula (6-7%), Blood Bags (10-12%).

How much do you expect Safety IV Cannula to contribute eventually?

Eventually this segment should contribute 10-15% of Sales

3. US CONTRACTS

What is the current status of the US contracts bagged by the company?

There are actually two contracts. The first one is for Blood Bags and that is going on as scheduled. The 2nd one is for Safety IV Cannula. This needed some design change and the project was pushed back by 6-8 months.

This is back on schedule now. Supplies should commence from Q1FY14.

How much this likely to start contributing?

About 20-30 Crs

4. MARGINS/PROFITABILITY IMPROVEMENT

If we were to remove the effects of the Forex derivatives losses, there seems to be big jumps in operating margins? Is it the right picture?

In previous years the company implemented measures for improving growth and profitability through backward integration and cost cutting mechanisms.

This year the company focused on plugging leakages and cutting wastage. There was a big drive in FY12 in improving profitability, driven mainly by the pressure from the losses on derivative contracts which was significant. But because of the drive there are now long term benefits.

We identified Raw Materials (RM) as a big area for cost-savings. We improved our sourcing significantly (from China and the sourcing knowhow from there), plugged leakages.

In our plant we used to have 6-7 hour powercut at times. The moulding material in the moulding machines would get stuck. There was wastage as well as delays due to this. So we invested in heavy-duty UPS (25-30 lakh) systems for uninterrupted operations. Earlier we had 32 cavity moulds. We have replaced them with 64 cavity moulds. We made big investments, but these will come with long term benefits.

Are the higher margins sustainable?

Like I said before, there are long term benefits. Should be sustainable because of operating efficiencies coupled with economics of scale. We are investing significantly on automation front.

Any new expansion will have significant automation. For example the next expansion at this plant (Faridabad) is an expansion cum automation plant. From 40 operators/line this will be down to 20/line. We will also be setting up a fully automated IV plant. from 53/line this will come down to 3/line. This will not only add capacities, reduce variable costs, but also increase consistency & quality.

5. LITIGATION WITH B. BRAUN – SAFETY IV CANNULA

What’s the latest status? Have there been significant costs?

Cases have been filed in many countries. Its moving through the legal/Appeals process. Everywhere we have won. We have won in Germany Apex Court. We have won in Italy and Malaysia. There have been significant costs yes, but at some places we have got back with costs.

As you are aware the Safety IV Cannula cost us some 5-6 Cr in development costs. RM addition is just 20 paise per unit. But Safety Cannula we are able to sell at Rs 15-17 per unit versus Rs 5.5 per unit of normal IV Cannula. The needles used to be imported earlier, now we make them here at 1/4th the cost. RM is still imported.

6. DOMESTIC BUSINESS THRUST

From recent announcements/expansion plans we are seeing some focus on the domestic market? Kindly elaborate.

Yes, we are expanding capacities to cater to the surging demand in domestic market as well. You see the ROMSONS group altogether (6 group companies) is doing a Rs 300 Cr Turnover in India. In contrast we hardly do 50-60 from this market, so there is a lot of scope.

So what are the new initiatives?

We used to mainly participate in Tendered business. NACO (National Aids Control Organisation) and other Tenders. There are few players in blood bags, not huge competition.

In the last 6-8 months, we have now appointed some Super Distributors, some 10 in the country. These are working well.

7. LOCAL COMPETITITION

Kindly give us a sense of the competition in the domestic industry?

Hindustan Syringes – This is the pioneer and 50 year old company in the medical disposables business. Primarily (90%) into Syringes. So some 10% of our products are common

Eastern Medikit – This company 5 yrs back was doing very well at Rs 250 Cr turnover. we were only 100 Cr then. There were some labour problems, and there were questions/ qualifications on balance sheet. This company has closed down recently.

ROMSONS – This is also a 50 year plus company, actually 5-6 group companies in the disposable medical & surgical devices segment in India. They currently have combined gropup turnover of ~300 Cr.

8. JAIPUR FACTORY

Kindly explain the move to Jaipur?

Well as you might be aware there is no space for expansion at Haridwar or Faridabad plants. We have applied for another plot in HSIDC, Faridabad. The Jaipur facility allows us some diversification (plant+labour and other fronts). Senior Management is already present in Jaipur managing 2 group companies so adequate management bandwidth is already available. Besides Rajasthan has a few companies in medical disposables space like Ahlcon Parenterals (catering to Blood Bags) recently acquired by B Braun.

What will the Capital expenditure required?

Roughly 20-22 Cr. 6-7 Cr for land and 15 Cr plant & machinery.

There was an announcement of Rs 100 Cr Capex spend?

That is for the overall Capex envisaged spread over next 1.5 to 2 years. The other locations will also see expansions/additional spends. As mentioned before we have another plot applied for in HSIDC, Faridabad.

9. PATENTS

There are so many manufacturers of products like IV Cannula and other such disposable products, and each have claims to 100s of patents? What’s the real use of these patents?

We use patents worldwide. We apply for patents only if we are having sales in that country. These serve the purpose of only a restrictive mechanism – so direct identical copy of any product cannot be made & sold; some redesign will have to be done before selling in the same country a similar product.

10. ENTRY BARRIERS

So what really are the entry barriers in your business?

a) There is heavy upfront capital investment. 95% of machines are imported
b) Huge focus on innovation – You have to keep innovating to survive
c) Regulations are becoming stricter

So what is your unique selling proposition (USP)?

In one word “Innovation”. We have been continuously investing in R&D. R&D spend in FY2012 was ~3Cr, up from ~70 lakh levels a few years back.

11. FOREX AND HEDGING POLICY

Kindly explain the Forex derivative contract, due to which you faced such heavy losses. Now that is behind us, what is the current hedging policy?

You see last 2 quarters, US$ – Rupee has been at ~52-57 levels. As per our derivative contracts, delivery was at 40-to the US$. Hence the big losses.

Current hedging is on Net Exposure. 60% is open and 40% hedged.

12. EXPORT BUSINESS

Kindly give us a sense on the Export Business. How much of it is based on long term contracts, and how do you ensure payments/receivables?

Yes, long term contracts work best for us on the payments front. In countries with geopolitical RISKS, we work only on advance payment/cash basis. Rest of the countries, its regular LC basis.

What is the effect of Europe region slowdown?

You will be happy to know we are in a different business. There is no effect in a slowdown/recession scenario. Medical sector does better sometimes.

13. US MARKET

When are we going to see Poly Medicure’s entry in the largest Medical market, the US?

We have some ~95 products. As of now the Safety feature is incorporated only in 3-4 products. And as you are aware, you can’t sell in the US Market w/o safety features. We are looking to incorporate safety feature in a few more products, then introduce as a basket – may be after a year or so.

You had acquired an US subsidiary/factory? what are the plans?

No plans of operations. May be use that company for Marketing set-up.

14. EGYPT SUBSIDIARY

What’s the status on this subsidiary? How is it doing?

This JV is doing well. We have an equipment supply arrangement with the company. Currently we do ~20 Cr worth of supply annually with assured margins.

15. MEDIUM TERM OUTLOOK

Kindly give us a sense where the company is headed in the medium term?

We should do well and keep growing at 20-25%. Margins will improve. Cash Flows will improve significantly. In 2-3 years we should be in a happy cash-surplus situation.

Disclosure(s)

Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 1 year;
Donald Francis: No Holdings in the Company; ;
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