Poly Medicure Management Q&A: Sep 2013

Management Q&A

1. OVERVIEW

Your company has had a spectacular journey. Kindly give us a sense of how you see the Medical devices business, and Poly Medicure’s place in it.

There is a huge opportunity still to be tapped. From our participation/co-charing in several industry bodies like the CII we are siezed that medical benefits/availability is constrained near the top. Yet to percolate down to the masses.

Non Communicable Diseases (NCD) is a 6 Trillion $ market for next 20 years. NCDs like Diabetic/Cardiac/Cancer care will be a focus area. There will be a shortage of Services and Service producers (Doctors & Nurses) for next 40 years.

80% of medical devices are still imported. Generic devices that can be manufactured are still not being manufactured in India. While custom duty on imported devices is low, ironically duty on imported RM (plastics) is being hiked. Manufacturing in India is not highly incentivised like in China where you can have all approvals/agreements in place within 3 days.

Give us a sense of the Medical Devices/Technology Business, and opportunity from India? And Poly Medicure’s place in it?

Medical technology is a $3 Bn annual market and that includes MRI machines, Xray machines and even Stents.

All leading OEMs are looking at manufacturing out of India. There are huge distribution networks that are looking at outsourcing manufacturing from India. These people are looking at Polymed – as a leading manufacturer of a basket of products – IV Cannula, Safety IV Cannula, Blood Bags, Catheters. We are manufacturing something like ~95 different products, today.

Even if 1% of that global market is outsourced from India that’s a $300 mn market (as compared to $25 Bn of China).

Kindly educate us on your business segments? Given what you have shared above, OEMs must be a big focus area?

We have 3 verticals. Domestic, Exports and OEMs.
We are among the Top 3 in local market. We have recently invested in expanding the Haridwar facility for the domestic market and focusing more on the local market. Domestic business currently is only about 50-60 Cr, rest is Exports. We plan to scale up domestic business significantly.

OEM vertical is our focus area. We plan to scale up this vertical significantly. As mentioned before there is interest being shown by lot of global players. Let us see what emerges.

Kindly give us a sense of globally how we are placed. Who are the main competition?

B Braun, BD, Hospitec, J&J, 3M and Poly Medicure are among the main players. By next year we could be among the Top 3 after B Braun & BD.

2. SAFETY DEVICES

One of your major successes has been the patent challenge with B Braun on Safety IV devices. Kindly educate us on the challenges and opportunities that this throws up? How significant is this for Poly Medicure?

B Braun is one of the largest players in the Medical devices/disposables field. Safety IV devices itself is globally a $300-350 Mn annual market size today. This was a 20 year patent granted in 1999, so is valid till 2018.

We developed a novel process/mechanism for manufacturing the Safety IV Cannuala which we believe is non-infringing. We have been successful in the patent challenge in many markets like Germany and India. We have also lost in some like Malaysia and injunctions have been placed against us in Spain, recently.

There is a big opportunity to grow globally with that product range. We don’t have a foot on the ground abroad in many important markets. We will have to grow cautiously, step by step – our pockets are not deep.

So what percentage of Sales is Safety Devices likely to grow to?

10% of Sales is where we are – can go upto 25% of sales eventually, in next 4-5 years

3. OEM RELATIONSHIPS/LEARNINGS

You have been supplying to OEMs and pursuing the OEM relationships in a big way now. What has been the learnings?

There has been big learnings in terms of Knowledge acquired and the approach followed by the major OEMS. Learning on knowhow – how to improve systems and processes have been huge. There is much to learn from how the global majors go about developing Vendors. With more exposure we are incorporating Global Best Practices in the organisation.

4. INCREASING AUTOMATION

You have been making significant investments in Automation. Given the labour situation is this a likely trend we are going to see going forward too?

Yes, we have recently invested about 50-60 Cr in automation that should serve us well for next 10-15 years. There are several advantages to increasing automation. We can maintain 24/7 product lines with ease. As human intervention reduces, we are able to produce a better consistent product each time. Process and output monitoring is very high with automatic alert/escalation mechanisms that get built in. All of these result in higher quality.

At the same time, increasing automation may decrease your cost arbitrage/competitiveness with major players like BD?

We will still be far more competitive than BD. Much of the automation has been achieved through home-grown machinery.

5. ORGANISATION BUILDING

Kindly throw some light on how the organisation is gearing up for the challenges ahead. What kind of structures/processes are you putting in place?

We are fortunate to have a Core Management Team that is exposed to best practices in the world. We had engaged E&Y for improving on our processes. They have completed a study of all our processes and delivered complete SOPs (Standard Operating procedures) for all the departments. And are now engaged in creating proper DOA (Delegation of Authority) and Management by Objectives procedures.

The next 50 leaders in the company are being prepared.

6. CONFIDENCE – AT ALL TIME HIGHS?

As the company has started turning in Stellar results, there seems to be huge confidence all round. You are shrugging off the shackles of the recent past. Kindly comment

Yes. Last few years we walked with heads  low as we struggled to come out of the forex derivative contracts issues. We managed to successfully put that phase behind us by focusing on things within our control – bringing in process improvements and  cost-efficiencies wherever possible, plugging leakages and cutting wastage.

Consequently as you would have noticed, our margins are much higher. We expect good cash flows for next 2-3 years. We are actively looking at JVs and/or acquisitions.

7. PREPARED FOR THE MEDIUM TERM?

While the organisation seems quietly confident and gearing up for a promising future, how prepared would you say you are – for harnessing the opportunities before you?

We are fully prepared on all fronts. as you know the biggest factor in India currently is Land/Infrastructure – this is something that can be a real dampner for growth if not available, at the right time. We are fortunate that with our Jaipur facility and the additional land available at IMT Faridabad, we are secured on this front for the next 5-6 years.

We can do a 20-25% Organic growth easily for the next 5 years.

8. THE CHINA FACTOR

What about the China vs India manufacturing Edge? How do you see us placed today, especially in the context of your industry?

The main difference is in Raw Material and Labour situation prevailing in the two countries. Raw material (plastics granules) are today more or less at global parity. However while China Labour rates have crossed $300, in India Labour is still available at $100 levels.

Also with the recent Rupee depreciation going from 45 to 65 vs $, that’s a 40% plus depreciation. We should retain a 50% cost-arbitrage situation for next 2 years atleast.

9. LONG TERM FUTURE

How do you see the Future for Poly Medicure?

10 years from now, we will be selling Products/Knowledge/Patents. We will be much higher in the value chain. Even with higher escalations on the costs side – manufacturing + RM – we will still be making good money.

10. NEAR TO MEDIUM TERM OUTLOOK

Jaipur SEZ completion – by Mar 2014. Is everything on schedule?

Yes. We should be ready by March 2014.

What has been the impact of recent hike in Duties on plastics granules RM?

We also get RM import at concessional rates because of our exports. So there isn’t really much of an impact.

What is the current debt level and where do you see it for FY14?

Total debt should be below 50 Cr levels around March 2014

Given that much of Jaipur Capex has been funded through internal accruals, Interest costs for the year, likely to go up only marginally above last years 6 Cr levels?

Yes. Should be around 7.5 – 8 Cr

What about Depreciation spend for FY14,?

Should be below 16 Cr, or so.

Disclosure(s)

Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 2 years;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 6 months;
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