Suprajit Engineering Management Q&A: June 2011

Management Q&A

1.     WE ARE IMPRESSED BY SUPRAJIT’S LONG-TERM TRACK RECORD AND ESPECIALLY THE TURNAROUND POST FY2008. FY11 WAS ANOTHER STELLAR YEAR AFTER A STUPENDOUS FY10. CONGRATULATIONS!

You had once talked of Suprajit’s vision of a Rs. 1000 Cr in annual sales. That’s about 3x current size. What are the important milestones on that journey? Where will that kind of growth come from, considering you practically dominate the 2-wheeler cables industry. How easy or difficult is it to scale up a high-volume, low-value (per unit) business?

I don’t remember I ever shared that kind of a turnover target. Um!, I really need to think back, did I? What I have always been sharing is our confidence in our track record – that Suprajit has always grown faster than the auto-industry growth in India. We will continue to grow at 5-10% higher than the Industry growth. And that you can easily extrapolate to arrive at figures for yourselves.

But isn’t there an Ambition, a target, some goals?

Sure there is, and we ARE very ambitious. But these are for sharing internally, not outside the organisation. What we share externally is that we are very confident of growing 5-10% higher than the Industry and will keep doing that. We will also maintain our EBITDA margins above normalised historical EBITDA levels.

The confidence stems from the quality of our growth sources. The strongly growing domestic replacement market, and an equally strong growth in non-automotive exports, and our ability to add new marquee OEM brand names to our customer list every year.

2.     THE 2-WHEELER CABLES SEGMENT IS STILL SOME 60% OF SALES. YOUR BIGGEST CUSTOMER STILL CONTRIBUTES SOME 18-20% OF SALES. TOP 3 CUSTOMERS ACCOUNT FOR OVER 50% OF SALES!

These figures are astonishing and considered by some senior investors as risky. Also these are some factors cited by rating agencies like ICRA as constraints from assigning higher debt ratings to Suprajit. What’s the Management view on this? Is it business as usual or are there risk mitigation measures necessary & underway?

Our top 3 customers TVS, Bajaj, and Hero Honda contribute on an average some 15% of our sales each. So yes, there’s a heavy concentration there.

But, that’s really a reflection on the nature of our markets. Consider this, the country saw ~13 mn 2-wheelers sold last year, and some 2-2.5 Mn 4-wheelers. So the 2-wheeler market is 5x the size, that’s our bread-n-butter segment and that’s also the segment that continues to grow strongly. Inflation and rising petrol prices may push down/defer 4-wheeler sales but as you might have seen from monthly sales figures, 2-wheeler sales are robust. We are more than happy to flog our biggest segment:)

Having said that, we keep striving to grow 4 wheeler segments, automotive and non-automotive exports as well. Infact Exports on a consolidated basis is 20% of our sales today. So 2-wheeler segment may remain the dominant segment, the scale may get tempered a bit as we make more progress on others.

3.     SEVERAL MARQUEE BRANDS HAVE GOT ADDED THIS YEAR. BMW, VOLKWAGEN, NISSAN TO NAME A FEW, APART FROM THE JOHN DEERE WIN LAST YEAR.

Kindly elaborate on what these wins mean for Suprajit, and your plans to get a greater share of the customers spend.

These are very important wins. John Deere was added last year, we have been able to execute on initial orders and have significantly strengthened the relationship. Others are at initial order stages. We are executing them to the best of our ability and we see no reason why we cannot penetrate each of these accounts much deeper. We have been successful in getting their attention after pursuing (some of them) for 5 years!

Look at this also from the point of view of these marquee OEMs. They are also not interested in entertaining a vendor relationship unless it is expected to reach a certain size in the next 5-10 years, its simply not worth their while. Why are they seriously looking at emerging market players like us. The reasons are threefold.

 

a) Geographical de-risking – while developed markets are flat, growth is coming from emerging markets like China, India – if they are to have a long term presence and strong growth from these markets – they want local players in emerging markets as partners

b) Lower costs – even though something like automotive cables are a very small fraction in the overall vehicle cost (and hitherto ignored), many of these OEMS were bleeding – under tremendous pressure to cut costs – and small cost savings all add up!

c) India Plan – Most OEMs now have an India presence or India Plan up their sleeves. We are seen as part of that India Plan!

International players like Dura, Ficosa, Samyong, Ning Bo, Pangio and Hi-Flex in the exports market. What kind of competition you face in these accounts and from where? If possible kindly indicate the level of competitive/pricing advantages you enjoy over these global suppliers?

Ning Bo and Pangio are Chinese players and strong competition. Dura is also very strong in their markets. They have also set up factories in China and other emerging markets. Competition is strong, we are all competing. They win some and we are winning some.

4.     CABLE SPENDS OF MAJOR CUSTOMERS VS SUPRAJIT CURRENT VS SUPRAJIT POTENTIAL

Customer Annual cable Sales Suprajit current potential in 2-3 yrs
  ($mn) ($mn) (%) (%) ($mn)
John Deere 20 0.5 2.50% 10% 2
GM 60 2 3.33% 10% 6
Ford 30     10% 3
Suzuki 30     10% 3
Nissan 30     10% 3
Vokswagen 15     10% 1.5
BMW 15     10% 1.5
          20

Each of these Global majors’ annual cable buys must be in several tens of millions of dollars.
Kindly give us a sense of the potential from these marquee customers in the next 2-3 years. What are your expectations of Suprajit’s share of the customer spend?

John Deere and GM are probably having annual cable spends as you mention, at least that much if not more. We really don’t have figures for the others. But our estimates tell us Global annual automotive cable spends are in the region of ~2.5 Bn.

So yes, there is huge potential to tap. But it happens slowly, it takes time. A cable for a new platform from concept stage (and we typically get involved some 2 years before a new platform launch) takes 15-18 months of engagement and design & development! Then we need to execute successfully trial orders.

The good part is, this is also our opportunity. The relationship gets nurtured during this time, it’s also time consuming and difficult to change vendors, so unless we fail to execute we are in, strongly.

But isn’t it typical for these OEM majors to use 2-3 multiple vendors on a project?

Depends on the size of the project. If its a global launch for a new GM platform say, yes it will involve multiple vendors right from project conception.

[ValuePickr.com take: Suprajit’s entry point into these marquee OEMS typically are small non-critical projects, with small order sizes. They hope to execute well and penetrate deeper into these accounts, as they have done successfully with John Deere]

What is the potential really that you see from these marquee OEMs? What are your targets in terms of penetrating into these accounts 2-3 years down the line?

We would love to penetrate to 50%, laughs:)

But give us a sense really, Is it just 10%, or more like 20%?

Well, if we do only 10%, I would say we haven’t done justice to the potential, we have done a poor job!

We were told in one of the concalls last year that a full-fledged John Deere Team was coming to negotiate bulk order sizes? Did that come through?

Yes, we have a new deal. By the time we fully execute on this deal, it may see us crossing 10% already of John Deere global annual cable spends. As you know we have built whole 2 new floors dedicated to non-automotive exports. We have told them, you can have the whole facility, go ahead and take it:)

5.     EXPORT MARKETING SET-UP. DONALD J ULRICH ASSOCIATES, GLOBAL SYNERGIX, LEARS CORP AND TEXTRON WERE SALES ASSOCIATES.

Are export sales still driven by distributors, or has this picture changed with recent wins. Do you maintain marketing offices other than UK. Kindly explain your exports marketing strategy.

We do not have marketing offices as of now. We haven’t needed to. Global Synergix continues to remain our Sales Associate for non-automotive exports. We have a new associate for the automotive exports in Detroit (in place of Donal J Ulrich). Please refer our Investor presentation fro details.

6.     WE HAVE HEARD CAPACITY IS BEING ENHANCED FROM 75 MN TO 110 MN CABLES BY SEP 2010. YOU HAVE NOW ANNOUNCED ENHANCING THIS TO 150 MN CABLES, OR CAPACITY BEING DOUBLED WITHIN 12-18 MONTHS.

You have always talked about growing at a 5-10% plus higher than Industry growth, like that achieved in FY11. But these plans seem to be running much ahead (despite tempered domestic industry growth forecasts for FY12). Kindly take us through the reasons for this optimism or aggression. Have you made major progress with any of the existing global OEM accounts like John Deere??

We are at 100 mn capacity already. Our capacity utilisation was over 90-95% in FY11. If you examine our record our capacity utilisation has always been very high – certainly over 80% in all these years. [ValuePickr.com data over last 10 years does show capacity utilisation ~80% except for a still respectable 73% in 2006]

So we are always running ahead of capex cycle! We have to work extremely hard to achieve that -flog our sales, flog our capacities, flog our people, but we are doing that consistently.

110 mn capacity => ~450 Cr Sales; 150 mn capacity =>600 Cr Sales
That’s more like a 41% CAGR over 2 years??

The data needs some correction. Essentially 150 mn capacity will be ready in phases by Sep 2012 (not Sep 2011) and will be available for the full year the year after. So its spread over 3 years, and not 2 years.

Also if you take FY11 numbers, the rough ball-bark figure is more like Rs.30 per cable. We did What 300 cr sales on roughly 100mn cables capacity.

7.     MOST INVESTORS, WHEN THEY LOOK AT SUPRAJIT ENGINEERING, CLUB IT ON THE SAME LEVEL AS OTHER DOMESTIC AUTO ANCILLIARY BUSINESSES. THEY FEAR ANY CYCLICALITY IN THE AUTO INDUSTRY GROWTH MAY HURT SUPRAJIT BADLY.

The seemingly ambitious capex plans underway are cited as being too risky. Suprajit did not come out unscathed from the last recession in 2007-08, they point out. If domestic and export OEM markets together face a slowdown, where will that leave Suprajit?

Well 2007-08 it was not only Suprajit who fared badly, but so did all the Auto ancillaries including the majors like Bosch and the battery majors like Exide. Many suffered losses. Suprajit to its credit held its topline growth, and took a hit on EBITDA -think it came down to something like 12% from 18-20% levels. But if you take a closer look at all auto-ancillaries of comparable size during that period, or the long term record, we are probably better off than all of them except for the Bosch and the Exides. Infact we would be in the top 5% of auto-ancillaries in India at any given time. We had done some studies on competitors, we can share that with you later. Suprajit business has not been well understood by the market.

How soon can after-market and non-automotive sales contribute something like 25-30% of Sales?? Will new customer additions from global majors save the day?? What exactly is Suprajit banking on that makes it confident that it is better-prepared today to face any slowdowns??

We didn’t have de-risked sources of growth built in in our business model. A lot has changed since then. Our after-market sales is doubling every year now. We did ~25 Cr in FY11, and we will do 50 Cr next year. we have a distributor in every state and a marketing person following this up in every state. 2-3 dealers in every district. We have a equally strongly growing non-automotive segment , ~13-14 Cr in FY11. This will also double next year. Between Suprajit Automotive and Gill Cables (now Suprajit Europe) again we did automotive exports of ~60 Cr in FY11. That segment is also growing.

We are adding marquee Global OEMs every year. Apart from the 5-7 wins this year we are pursuing another 5-7 major names.

But the real question is, what happens if there is a major slowdown again like 2007-08? Why will Suprajit not get caught on the wrong foot again (in the backdrop of these aggressive expansions)

That answer is simple. We did close to 100 mn cables in FY11. Do I see a de-growth happening in FY12? Certainly NOT. 2-Wheelers are registering strong growths as reflected from monthly industry sales figures in April-May. Given the rising inflation, petrol and rising interest rates scenario, what is/will get deferred is probably the 4-wheeler sales as the “family” reasons hey, we need to be cautious, lets manage for another 2 years; they will still probably go ahead and buy a new 2-wheeler maybe.

The indications are pretty clear that growth will be atleast 10-15% in FY12 over FY11. Suprajit will manage to grow atleast 5-10% better than Industry. So where does that leave us? Suprajit will easily do 115-120 mn cables then. And that will still be 80-90% capacity utilisation!

Now tell me, how many businesses won’t be ready to take that scenario? I think we are pretty strongly de-risked against any eventuality for the next year atleast -even in a de-growth situation!! We think we are going about it in a very measured way, and capacity will get tweaked/added on nimbly in response to market situation over the next 2 years, rest assured.

8.     WE LOOKED AT 10 YEAR TRACK RECORD OF SUPRAJIT ON GROSS BLOCK ADDITIONS, SALES AND CAPACITY UTILIZATIONS, CASH FLOWS & FUNDING TO GET A BETTER IDEA ON BUSINESS GROWTH. THAT’S A GREAT RECORD, CONGRATULATIONS!

It looks like roughly you need to put in 10-12 Cr for every 10 Mn cable capacity. That would mean an outgo of 35-40 Cr (for reaching 110 Mn) and 40-50 Cr (for reaching 150 Mn). Given that these investments typically spread over 2 years, the annual Capex may not exceed 25-30 Cr in the next 2 years?? What was the Capex in FY11? Or will buying land (if needed) skew this picture?

Land acquisition may skew the picture a bit but yes, ball-park figure wise it must be in that region – 10-12 cr for every 10 mn cable capacity. We have land at most of the existing locations. The new Rajasthan location land cost was about 1-1.5 Cr or so and for the new Banagalore location we paid some 3-4 Crs.

The next phase of the expansion so will take 35-40 Cr and that will again get spread over 2 years. So yes, in any year Capex is unlikely to cross 25 Cr.

9.     SUPRAJIT MUST BE EYEING A PLACE IN THE TOP GLOBAL CABLE MANUFACTURERS? INORGANIC GROWTHS MUST BE PART OF THE PLANS, ESPECIALLY AS YOU LOOK TO INCREASE YOUR SHARE IN THE GLOBAL CABLES SUPPLY PIE.

When you look at acquisitions today, what kind of ticket size/funding requirement are you looking at typically?

There is no ideal ticket size we are looking at. Let me make it clear any international acquisition will only be for the Cables segment. It also should make sense to us strategically/ does it makes sense for me to have a German plant today?

Where does China figure as a market in your plans? What’s your current engagement in China?

China is a big market, but so far nothing has come along. We have a MOU with a local Chinese company. Yes, If anyone of our major customers want us to set up a plant in China, sure we will go ahead and put it up. But they haven’t asked us so far.

Are there plans to diversify into auto-ancilaries other than cables? There was a specific Advt. in Business India in May 2010 for an auto ancillary with 100 cr annual sales!

Yes, we were at one time considering some 5-6 proposals seriously. But none of these businesses fit our business model expectations. As a company, we want to operate at nothing less than 16% EBITDA levels. Now if we are evaluating something and we cant see reasonable hope of upgrading a 12% EBITDA business to our levels, what do we do. We have to let those go.

10. CHINESE AND OTHER EASTERN MARKETS/COMPETITION. THE LOW CAPEX COSTS AND LOW AUTOMATION COSTS FOR CABLE MANUFACTURING ARE POSSIBLY NOT UNIQUE TO INDIA.

There were some reports earlier on tie-ups with Chinese and/or Korean companies, even a plant in China? What’s the Management view on Chinese/Korean cable manufacturers – allies or competition?

How significant is the threat in domestic markets in future? And how strong are these in Export markets and your strategies for countering them??

China poses both opportunities and threats. As mentioned before Chinese players like Ning Bo and Pangio are very strong internationally. But they too have their challenges. China is no more a cheap labour market, as it used to be 10 years ago. Certainly China is a costlier labour market today than India, we too are getting costlier but we are relatively still far better off. I keep telling our fellow auto ancillary companies in India, that we can be cost competitive with Chines players, and we can be.

China as a market, I have already mentioned that nothing of scale has fructified so far. The moment someone nudges us towards a $5mn opportunity, I am ready to go and set up shop anywhere. It must make strategic and incremental business sense.

11. YOU HAVE IMPLEMENTED ORACLE ERP ACROSS ALL LOCATIONS, ISO/TS 16949 AND OTHER QUALITY CONTROL MEASURES. YOU BOUGHT OUT CONTROL CABLES TECHNOLOGY FROM TAIWAN AND IMPROVED ON IT OVER THE YEARS.

Tell us more on what makes Suprajit as it is today. What role has ERP played in real-time information flow, productivity and cost control measures? Quality being a given, you have often cited cost, delivery (locational advantages), and new product development as your competitive strengths.

How & why will your competitive advantage be sustainable? Why do players like Remsons manage only half your margins at the operating level??

Why are competitors not able to manage growth like us? Well I looked at Remsons figures and they have done about 90 Crs this year, so they have grown, but they simply haven’t kept pace with our levels of growth. Today we are 4x their size. One main reason has been our ability to stay focused on the opportunity. Come what may, we do not disappoint the customer. Hero Honda wanted us to double our production overnite some 5 years back, while faced with a crisis situation from their leading vendor. We did not ask then how much EBITDA margins will you ensure us, how much guaranteed business will come our way. We just focused on where we could increase capacities, did everything we could to deliver, we even air-shipped cables from other locations, but we did not let Hero Honda’s production line stay idle. This kept on for a few months, it would go up and down for a few months. At the end of it, I went to the Purchase Head and said, so who proved to be a better supplier for you? And if it us, why are we still at 40% of our cable buys?

Today we have economics of scale working for us. Thats the major competitive advantage. Initially in the 2-wheelers we had better technology (knowhow from Taiwan) than competitors like Remsons and Shah Concabs provided. Our cables were slightly better in that we could satisfy 100% the Japanese makers requirement, while these companies were giving an alternative match not 100% meeting their specs. Today everyone has started producing the same cables. Also we are strategically located close to all our customers. Its been difficult for competitors to match us on quality, timeliness of delivery, new product development, and cost. The 4 pillars of our success. Reason why you see the EBITDA margins of our competitors are probably half ours!

12. NEW PLATFORM PRODUCT DEVELOPMENT CYCLE FOR AN OEM TAKES 18 MONTHS. EXISTING PLATFORM NEW SOURCING TAKES 6-9 MONTHS CYCLE.

What role does technology play in product development for a major OEM platform, and how does Suprajit keep abreast? How difficult or easy is it to keep abreast with new technology?

As mentioned earlier, initially we got the technogy know-how from Taiwan (assisted by TVS sources who helped us identify the right fit partner for Japanese models), transferred that completely, worked on improving and tweaking it and became completely self sufficient. Initially I was handling that function and there must not be any major cable plant in the world I would not have visited or looked at the technology. Today we have a complete in-house engineering team working on new platform products. We have grown much bigger than that Taiwanese company, but we remain good friends. Also Gill Cables (now Suprajit Europe) have added more professionals into the engineering teams.

13. THE PICTURE AHEAD LOOKS VERY PROMISING FOR SUPRAJIT. OUR BEST WISHES.

What are the big challenges and the main threats in this promising journey for Suprajit?

[ValuePickr.com : We had completely run out of time, and were actually eating into the next appointee’s time – by more than 20 minutes or so and two gentle nudges, so we had to let this one go:), but most of it was covered in essence, right?]


Disclosure(s)

Nagabrahma: No Holdings in the Company; ;
Donald Francis: No Holdings in the Company; ;
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