Muthoot Capital Services Ltd. promoted by Muthoot Pappachan Group is a deposit taking Non Banking Finance Company (NBFC) registered with the Reserve Bank of India and listed on the Bombay Stock Exchange. 

Established in 1994, Muthoot Capital Services Ltd offers vehicle loans – primarily 2 wheeler and 3 wheeler loans.

Main Products/Segments

Muthoot Capital AUM (Cr)
Sales (Cr)
2 Wheeler 504.54 1.01% 386.46 96%
3 Wheeler 105.41 4.86%    6.57 4%
Blended 609.95 1.68% 403.03
Muthoot Capital FY09 FY10 FY11 FY12 FY13 9mFY14 FY09-FY13
AUM (INR Lacs) 7167 9669 17184 29578 45569  60995  58.79%
Disbursements (INR Lacs) 1044 4285 13835 28845 43117  40316  153.53%
Avg Lending Rate 24.25% 28.81% 28.74% 28.39% 28.79% 27.09%
Avg Borrowing Rate 10.72% 11.01% 11.08% 11.92% 12.83% 12.39%
NIM 13.53% 17.80% 17.66% 16.47% 15.96% 14.69%
Avg Loan Size (INR) 33405 33315 39391 43351 45139 42502 7.82%
Gross NPA 0.94% 0.81% 0.63% 0.26% 1.00% 1.84%
Net NPA 0.73% 0.63% 0.52% 0.20% 0.87% 1.61%
RoA 9.32% 8.43% 6.85% 6.24% 5.50% 3.89%
RoE 38.29% 38.29% 38.27% 26.71% 22.92% 19.51%
Cost to Income Ratio 0.44 0.38 0.39 0.42 0.45 0.46
Capital Adequacy Ratio 21.12% 20.86% 16.48% 28.56% 21.71% 19.61%
Total Customers 4343 15393 46589 99647 118568 212682 128.58%
Avg Monthly Disbursement 260 1072 2927 5545 7960 10540 135.23%
Salary Costs/Op Income 5.05% 11.15% 13.84% 18.22% 20.39% 21.90%
Sales (INR Lacs) 1712 2239 3770 6701 10664 11235 57.98%
PAT (INR Lacs) 542 717 967 1551 2176 1626 41.55%
Total Employees 55 207 505 1034 1626 2146 133.18%
Avg Employee Count 131 356 770 1330 1886
Sales/Avg Employee (INR Lac) 17.09 10.59 8.70 8.02 5.96
PAT/Avg Employee (INR Lac) 5.47 2.72 2.01 1.64 0.86

Source: Company

  • Group Branch Network: 3800 Fincorp branches -currently as cash payment collection points
  • Operations Network: 29 Hubs; 8 MCS owned and 21 shared premises with Fincorp
  • Dealer Points: – 1200 @2-3% commission; Usually 1 Customer Sales Executive (CSE) at dealerships
  • Disbursements Concentration 9mFY14 (FY13): Kerala 54% (60%), Tamilnadu 15% (14%), Andhra Pradesh 10% (9%), Karnataka 16% (13), Goa 0.6% (0.6%), Gujarat 2% (1.5%), Mahrashtra 2% (1.5%)
  • Group Customer Base: ~3.2 Mn Fincorp customers; Not much active cross-selling at the moment because of absence of unified database. (planned availability FY2015)

Main Markets/Customers

  • Strong Kerala Presence statewide – 20-25% market share. Competes strongly with IndusInd Bank and HDFC Bank. No#2 in Kerala just behind IndusInd Bank. Total Kerala market ~40,000 vehicles financed per month.
  • Muthoot Fincorp branches in Kerala are pretty much all leveraged by MCS. Fincorp has 900 branches in TN and around 600-700 branches in AP and KN each which leaves lot of space for leveraging on.
  • Nascent presence in Tamilnadu, Karnantaka, Andhra Pradesh (historical stronghold of Shriram City Union Finance?). These 3 states are traditionally huge markets for 2Wh financing. The company plans to grow Sales substantially leveraging existing Fincorp branch strength (without incurring much by way of fixed costs) – which is pretty entrenched in these 3 states.

Bullish Viewpoints

As on Mar 2013/
Dec 2013
SCUF SHTF Chola Sundaram MMFS Bajaj Finance
Size (AUM Cr) 610  15800 49700 19000 17600 27900 17100 Dwarfed when compared to Industry
Years in Business
28 (11) 35 36 60 23 27 Miles to go before proving itself
Capital Adequacy 19.61% 23.3% 19.9% 17.1% 17.7% 19.1% 20.9% Adequate; may need replenishing
3Yr Earnings CAGR 50% 45%  19%  74%  20%  39%  58% Robust growth
Cost to Income 46% 37% 26% 50% 37% 33% 45% High
Cost of Funds 13.10% 12.6% 9.8% 10.6% 10.6% 9.9% 10.3% Industry Highest
Employee cost/Avg no of Employee (Lacs)  1.66  1.75  5.36  12.19 Industry Lowest
Business Size/Avg no of Employee (Lacs)  38  92  385  553 Industry Lowest
Margins 14.69% 11.2% 7.0% 7.6% 8.4% 9.4% 12.1% Industry Highest
Yield 27.4% 22.1% 16.3% 15.4% 17.7% 16.4% 20.7% Industry Highest
Gross NPA  1.68%  2.4%  3.2%  3%  2.5% Industry Lowest
RoA 3.89%  3.2%  2.9%  2%  3%  3.4%  3.6% Industry Highest
P/B (CMP 87) 0.88   2.2  1.8  1.5  2.4  3.05  1.6 Attractive
P/E (CMP 87) 4.57   12.7  10.37  10.6  15.14  14.35  11.24 Attractive

Source: Company, Annual Reports

  • High Growth – Earnings have grown at an impressive 50% CAGR over last 3 years next only to Bajaj Finance – albeit on a much lower base. There is huge headroom to grow -provided the funding constraints get adequately addressed.
  • Highest Yields & Margins in the Industry – Again despite a declining trend, Margins (14.69%) and Yields (27.4%) for 9mFY14 are the highest in the industry, although on a much lower base compared to bigger competitors.
  • Highest Profitability in the Industry – Even with a declining profitability trend over last few years, MCS RoA at 3.89%  (9mFY14) is the highest in the industry. With the steps Management has been taking, RoA looks set to improve in near to medium term.
  • Stringent Credit Policy – As per the Management the primary reason for its strong showing and low NPAs is very strict adherence to the robust and detailed credit policy laid down by the company – extensive covering of different models and different customer segments (salaried, income-based, Asset-based, or NO docs financing with higher down-payments). Different Loan to Value (LTV) levels apply for different customer segments.
  • 85% of Loans backed by “Own House” documents – This is probably unique to Muthoot Cap that 80-85% of its disbursements follow asst-financing model – loan to folks with own-house document proof – either the borrower or the guarantor (usually close relative). This helps the company in collection/recovery process – as borrower is reluctant to run the risk of property attachment in case of default – especially for small loan sums < Rs 40,000.
  • Lowest NPAs in the Industry – Gross NPAs at 1.68% is the lowest in the auto-financing industry. All auto-financiers including Bajaj Finance have been seeing a spurt in NPAs in recent quarters. MCS has been managing the NPA situtation admirably. Collection Executives are focused on bringing down the ~15.75 Cr of likley NPAs substantially down by 31st March 2014 or, Gross NPAs to <1.5% or less. Senior Management is focused on closely monitoring stressed A/Cs (likely to become NPAs) and Collections on a daily basis.
  • Extreme Focus on write-offs recovery – MCS is again probably unique in its focus of trying to ensure recovery of every rupee that is written off. Post Arbitration (company has appointed arbitrators) 3-4% of cases vehicles are repossessed and sold off. Cases are filed and in due course company is confident of recovering loan amounts due along with legal costs and charges.
  • Big Productivity Improvements likely in FY15 & FY16 – With enterprise-wide automation being introduced and Profit Center benchmarks being established, company is embarking on a productivity linked budgeting exercise from FY15 onwards. Management opines this will help the company monitor income and expenses more granularly and modify policies for getting the best productivity – locations-wise and team-wise.
  • Cross-selling within Fincorp customer base – Fincorp has a customer base exceeding 3.2 Mn Customers today. Effective cross-selling may become possible once Fincorp group database becomes available (post automation) in FY15 and may provide a kicker to Sales growth.
  • Attractive Valuations – MCS is currently (CMP 87) trading at a discount to Book and ~4.5x PE with a 4.8% dividend yield – which looks reasonably attractive.

Bearish Viewpoints

  • Declining profitability trend – While 5 year Sales or Profit CAGR may look healthy, and FY14 Sales may register 40%+growth, FY14 PAT is likely to register flattish or negative growth. Return on Assets (RoA) have consistently declined and halved from ~9% levels 5 years back.
  • Employee Productivity bottleneck – If we examine the reasons, what strikes immediately is the nearly ~3 to 5-fold drop in Sales and Profitability per employee. The situation has got accentuated on 2 fronts. First, disbursements didn’t keep pace with recruitment leading to under-utilisation. Company was doing ~60 Cr disbursement by Mar 2013, but in 9MFY14 has managed to disburse only ~400 Cr. Secondly there is enormous duplication of excel-based data-entry work between Operation Hubs and Back-Office in the absence of enterprise-wide automation. Company has been cognizant of the second front and has been working to introduce fully-automated Loan Origination System covering Sales, Operations and Credit processes from April 2014 -planned to be fully operational by end of Q1FY14.
  • Delay in Bank Funding – Disbursements have been hampered by delayed funding availability from Banks. Typically Bank Limits are enhanced based on the current Balance Sheet. The BS gets ready by April/May with Banks taking another 2 months. So while company had a disbursement run-rate of 60 Cr by Mar 2013, it could disburse only ~40 Cr in Apr-Aug’2013 (up to 50-60 Cr for Sep-Dec’13) despite otherwise having ready sales/operations personnel – leading to under-utilisation. In earlier years this hadn’t proved a bottleneck (probably shareholders equity sufficed for first few months till enhanced bank borrowings kicked in) but it certainly has impacted disbursements and profitability significantly in FY14. For FY15 Company expects to kickstart approval process with banks within Q4FY14.
  • Deteriorating 3 Wheeler Market/Portfolio – MCS 3 Wheeler Loan market (primarily Kerala) has been steadily deteriorating. Monthly Sales at 7500 vehicles is now down to 3500 vehicles per month. Reportedly daily earnings of 3-wheelers down to 450/- from Rs 850/- earlier. The 4 wheelers Tata IRIS/ACE has also started doing well. 3 Wheeler Associations have written to prominent vehicle finance companies to stop issuing 3 wheeler loans in Kerala. Debt servicing capability of borrowers is badly dented and gross NPAs are on the rise [~5% in 9mFY14]. However, 2 Wheeler gross NPAs remain firmly under control and are probably the best in industry at ~1%
  • High Cost of Funds – MCS Cost of Funds is the highest in the industry at 13%+. Dependency on Bank Funding is high and  current A (negative outlook) rating by CRISIL (clubbed with Muthoot Fincorp) isn’t helping either. Public NCDs/other options are probably restricted till a ratings upgrade is in place.
  • A (Negative Outlook) CRISIL Rating – While the reasons and rating sensitivity cited by CRISIL in its negative outlook are mostly attributable to the Gold Loan business of Muthoot Fincorp, declining profitability on MCS count has not helped either. Senior Management is strongly of the view that they have proven in last 6 years that MCS 2Wheeler/3Wheeler Auto Financing is a successful, sustainable, and scalable business model. They have moved out completely from the Gold Loan business. They deserve a standalone MCS rating which they feel merits much better rating – that may alleviate its funding constraints in a major way. Discussions are on with ICRA and CARE.
  • Single Product dependency – MCS product portfolio currently comprises of only 2 wheeler and 3 wheeler loans. With 3 wheeler NPAs rising company is consciously cutting back on 3 Wheeler loans. Dependency is very heavy on 2 wheeler loans. Any adverse developments in the industry/economy could significantly affect the company’s fortunes. Going forward the company has to look at product diversification for better risk-adjusted growth profile.
  • Funding constraints – Tier I & Tier II Capital – Currently Capital Adequacy stands at ~19% (Min CAR of 15% as per RBI). If MCS continues to grow at 40-50% rates, it will need capital infusion in the form of Tier I or Tier II Capital pretty soon. Raising Tier I (Equity Capital) is probably not an active option for the company (cf. current valuations). For Tier II Capital MCS has options of either going the route of Sub-ordinated Debt or Preference Capital – which may get decided based on Group liquidity levels in 2015/16.
  • Hero/Honda Company Financing – MCS is hugely dependent on financing for Hero and Honda 2 wheelers. In the event that either of these start their own financing arms – and provide preferential access to financing from their dealerships – MCS prospects can be affected significantly.

Barriers to entry

  • Unique/Flexible cash payment schemes – Customers can pay from any Fincorp branch anywhere in the country. A web-based collection module of MCS provides access to customer details and payment schedules, etc. for all Fincorp branches. Customers can choose to pay the monthly EMI say Rs 1500/-, in even Rs 200/- or Rs 300/- flexi-instalments. Fincorp collects 0.5% (up from 0.2%) as collection fees from MCS from FY 2013.
  • Leveraging widespread Fincorp network – With a growing pan-india network of more than 3800 branches – this is at the heart of the efficient collection system for MCS. MCS can simply piggy-ride this expanding retail network and does not really need to set up this infrastructure of its own as it scales up. MCS does not need branch offices as sales originate primarily from Sales Executives placed at Dealer Points. [Operational Hubs are required for managing every 30-40 Dealer points – where again shared (but separate) premises with Fincorp is the norm. Out of 29 Operational Hubs only 8 are MCS-owned including the Head Office location.]

Interesting Viewpoints

  • Started taking Deposits – MCS has recently started taking 1-3 year deposits at upto 12% rates through Muthoot Exim which acts as the broker. ~40 Cr deposits have been mobilised so far. The company seems confident of mobilising ~150-180 Cr (the max limit – 1.5x Net Owned Funds) within FY15. This will go way a long way in ensuring Margin Requirements with Banks and pave the way for enhanced Term Loans availability for the company.
  • Impending introduction of Automation – As per the company major automation in Loan Origination System (LOS) – covering Sales, Operations and Credit processes – is set to be introduced across all company Hubs and Offices in 1QFY15. Part of a much larger group automation project standard operating procedures (SOPs) have been defined by IBM in consultation with functional departments over the last 2 years. 3I Infotech is the major vendor and implementation partner. Apart from providing single-source unified MIS views, this is likely to bring in huge operational efficiencies and savings in FY15.
  • Muthoot Fincorp Sales Agency model – With Gold Loan business volumes coming down, Muthoot Fincorp has started proactively sourcing customers for MCS on commission basis (2%). Started only a year back, all Fincorp branch personnel have now been trained. With Muthoot Fincorp intrinsically incentivised (low Gold Loan Sales) this is expected to be rolled out to all 3800 branches in FY15 – reducing the dependency and large costs incurred by MCS on Sales Executives at Dealer points. Model is working well and expected to start delivering ~7500 vehicles (avg 2) a month.


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

Muthoot Capital Services Management Q&A: May, 2014

Management Q&A


Muthoot Capital has chalked up a rapid growth rate only in the last 6 years or so, despite being listed from 1995. Kindly take us through the journey and the key success factors. What has changed, and how exciting is it to be where MCS is today?

As you are aware in 1994 Mr Thomas Kuruvilla (ex SEBI) was appointed as the MD & CEO of the company which was started for offering Capital Market Solutions, though the Company did not start the business. It did not have a NBFC license then. In ’95 there was a small but well subscribed Public Issue.

The company did not do well and was more or less dormant till 1997-98. It was revived in 1998 after getting the NBFC License. The company started doing business of Gold Loans. In 2005-6 the company started some 2 wheeler loans but did not succeed in making a mark – and was stopped. In 2007, 2-wheeler Loans were again started but this time only to Fincorp group customers (Gold Loan, Insurance products).

1st Mar 2008, Mr R Monomohanan joined the company as CEO. He had a Corporate Banking background – 20 yrs with SBT. He headed IndusInd Bank Kerala Operations from ‘1996-‘2003 and was with Exim Bank Tanzania from ‘2003-‘2007. The Company also brought in Mr R Balakrishnan – with over 15 years of hard-core 2-Wheeler industry experience in Operations, Sales and Collections spread over Integrated Finance and TVS. Mr Balakrishnan was given a free hand in setting up his team.

This was the time many players were vacating the 2 Wheeler financing space due to high default rates – like ICICI Bank, Citi Financials, UTI Bank. We saw it as an opportunity due to our reach and loyal customer base.

In Oct 2008 we started full-fledged operations. We started lending outside the group too. We disbursed Rs. 10 cr, Rs. 43 cr Rs. 138 cr, Rs. 288 cr and Rs. 431 cr respectively in 2008-2009, 2009-2010, 2010-2011, 2011-2012 and 2012-2013 respectively. In March 2009 we reached a loan book size of Rs.10 Cr, Rs. 40 Cr in 2010, and followed it up with ~Rs. 130 Cr in 2011. In 2012 we reached Rs. 290 Cr and ~Rs. 482 Cr in 2013.

We hope to keep the momentum going. We have laid strong foundations. We have been testing waters so far. In 5 years we have reached a level of ~650 Cr, where (we daresay) reaching 2000 Cr was not difficult.

We believe we have demonstrated a robust business model in the tough terrain of 2-wheeler financing. While we have grown rapidly, we have ensured high Return on Assets (RoA) and some of the lowest NPAs in the industry.

2Wh Loans constitute the bulk of the Loan Book. Post 2008 (2009-10) timeframes Private Banks mostly vacated this space. Also NBFCs like Fullerton (300 Cr Auto Loan book), CitiFinancial, GE Money scaled down operations drastically. Why has this business proved difficult in the past? Why were you confident of executing where others have failed before?

As mentioned before, this is a difficult terrain. There were very high defaults in 2008-9 time frames – Retail Banking was a numbers game being played out – anyone and everyone could avail of a loan – proper verification procedures were probably not in place, and credit policies were lax.

Because of our Corporate Banking background, we ensured we offered the Right Product.

And what is the Right Product?

Product that is first and foremost backed by a Robust & detailed Credit Policy. Policies that ensure a wide coverage of different models, different repayment schedules and different customer profiles – salaries based, income based financing, asset-based financing, and even a No-Docs financing (50-55% down-payment).

We started offering only for Honda and Hero vehicles – we are the preferred financiers for them today.

Secondly this is backed up by 3-level customer profiling and verification (which goes up to 5 levels in certain cases). First by the Counter Sales Executive (CSE) at dealer premises, followed up by an independent Field Investigation (FI) Verification Agency that confirms physical address proof and background check, and finally a CIBIL score elimination.

Thirdly we offer a product that is tailored just-right for its audience segment. Flexible Repayments. We do not take any Post Dated Cheques (PDCs). In what is probably a first-in-industry and unique to Muthoot we allow the customer to pay in cash – in any of the 3800 Muthoot Fincorp branches – all over the country. For an EMI of Rs. 1500/- say, he can even pay in Rs 300/- or Rs 200/- flexi-installments, any time he chooses. We call this facility “Ultimate Flexi Payment”.

Apart from these obvious Product structuring strengths, kindly elaborate on the key business tenets for MCS?

The core business tenet is “Asset Quality”. This is our primary concern for every employee of MCS. Nothing is outsourced – except the Field Investigation Agency. We follow a stringent system of concurrent audits (audits happening at the Operation Hubs concurrently with approvals).

For maintaining desired Asset Quality, we lay great stress on our people. Interestingly we do not follow the prevalent Agency model.  Unlike Direct Sales Agents (DSAs) we have a Counter Sales Executive (CSE) stationed at Dealer premises – an employee on our rolls. Every employee has been handpicked/recruited by referrals – no advertisements. Employees are assured great career advancement prospects – to ultimately retire with the company. From 15 employees in 2008 we have grown to 2100 employees today, in 7 states.

How well-placed is MCS in 2Wh/3Wh space? Who are your main competitors? Is your audience segment completely different from those served by Banks?

Our main competitors are IndusInd Bank and HDFC Bank. IndusInd Bank has higher expenses because of higher incentives for dealers at 4-5%. Their NPAs are also higher. HDFC Bank as you know has a separate vertical for Auto Finance. They are the bigger players.

We are a small player with ~2% market share. We have huge headroom to grow.

Where does MCS see itself 5 years from now vis-a-vis current competition?

We aim to become a significant player in this space in the next 5 years with atleast 10-12% market share. Major players have somewhere between 15-18% market share today.

What do you see as the biggest challenges to your growth plans?

Availability of Funds and maintaining our Yields at current levels.

How ready are you organizationally for the challenges ahead? And Why?

As you are aware, we are a small organisation. We have laid a strong foundation with the right people, right product and processes within the organisation. However in-order to enable us to scale up significantly from here, we have been taking following steps:

a) Complete Automation – major automation is being introduced in Loan Origination System (LOS) – covering Sales, Operations and Credit processes – set to be introduced across all company Hubs and Offices in 1QFY15. This is part of a much larger group-wide automation project where standard operating procedures (SOPs) have been defined by IBM in consultation with functional departments over the last 2 years. 3I Infotech is the major vendor and implementation partner. Apart from providing single-source unified MIS views, this is likely to bring in huge operational efficiencies and savings, starting FY15.

b) Productivity linked Budgeting –  Company is embarking on a productivity linked budgeting exercise from FY15 onwards – Profit Center benchmarks are being established  – this will help the company monitor income and expenses more granularly and modify policies for getting the best productivity – locations-wise and team-wise.

c) Arbitrator appointment – For speedier processing of loan recoveries appointment of Arbitrator has been started.

Muthoot Pappachan Group is a diversified conglomerate -Financial Services, Hospitality, Automotive Dealerships, Real Estate & Infrastructure, IT Services, Healthcare, Precious Metals, Global Services and Alternate Energy. Ev
en during the press release of MCS results update MD speaks about Muthoot Pappachan group and other businesses like MF, Housing, gold loan etc. – Which is the priority and how is promoter/management bandwidth?

We are a completely professionally run set-up. There is zero interference from the Promoters in day to day activities.


Back-Office/IT systems/Risk Management

Entire Back-office, New automation system for Loan Origination System and other IT facilities, Document Storage, and Risk Management Team is based out of Cochin.

Business/Operations – Front Office

Sales originate from the ~1200 Dealer Points spread across 7 states.

Operations HQ is Cochin. There are some 29 Operational Hubs. These Hubs usually handle sales origination from some 30-40 Dealer Points. Operational Hubs usually house the Credit Team, Operations Team with Tele-Callers, Collection Team and a Concurrent Auditor.

Team Sizes

Sales – ~950-1000; Collections – ~800, Operations – 115; Credit -~50; Risk Management – ~40


What is your Loan Eligibility process?

Around 80% of loan origination happens in non-metro regions – at rural location dealers.

Loan eligibility is decided on various parameters. Broadly the flexibility increases as the Loan to Value (LTV) goes down. If everything is in order, Loan Approval is sanctioned. 80% of loan disbursal is for Honda/Hero products. LTV is different for different 2-wheelers. Generally resale value for Honda/Hero 2-wheelers is higher, so there is better security.

Different combinations of LTV, proof of landed property, customer profile, income documents, guarantors, kind of 2-wheeler being financed, existing relationship with MCS/group companies and CIBIL score decides the loan amount.

More than 90% of the customers have a property in their or guarantors name. MCS takes copies of tax receipts of the property. This helps MCS in case arbitration/legal proceedings are needed for recovery of loan.

MCS can disburse a loan without income proof – where the LTV has to be lower than 50%. Less than 10-15% of accounts may be under this category. Of course 2 guarantors are signed-up for almost all cases.

When company/competition markets “100% funding” schemes – this is only smart product packaging. In such products advance EMIs of upto 5 months is collected upfront by anyone offering such schemes.

Generally 80% loans are based on assets owned by the client, 5% cases are based on his income proof, and balance are no-income/asset proof cases.

Kindly educate us on the Loan Sanction/RISK Management process?

Counter Sales Executive (CSE) does the first round of customer profiling by collecting details and documents from customers directly. The Tele-caller at Operational Hub makes the next round of residence and employment verification.

Field Invstigation (FI) agency does the address verification at customer’s residence and also does a background check by contacting neighbours, etc.

A CIBIL report is also generated.  CIBIL records are available for 30% cases. Though the score is not used directly, the repayment habits and current liabilities of clients are ascertained using the CIBIL report.

Whenever Loan to Value (LTV) is above 70% the risk team appraises the case before sanctioning. A Risk Team (stationed at HO) consisting of ~40 employees work closely with the Hubs. Risk team picks up cases through random sampling, references from credit team and on any other triggers/hints they get.

The trigger/hint may be in the form of abnormal number of defaults from a specific sales staff, dealer, area, segment of clients etc. There is a list of “negative” segments.

Flexible repayments is what is said to be MCS “real differentiator”. Kindly elaborate.

Very flexible installment payment options and various methods to evaluate credit capacity allows MCS to compete effectively. A customer can pay his installments partly or in full at any Muthoot Fincorp branch in the country. He need not give PDCs or ECS instructions.

In any PDC system 80:20 rule applies. 20% of the cases there is cheque bounce. When customers of competitors have to deal with penalties for cheque bounces i.e. defaults,  a MCS (defaulting) customer can make at least a part payment. He can pay daily/weekly or monthly.

The MCS Operations Team sends an SMS reminding them of the due date. The Collection Team then guides customers to the nearest branch for the payment.

Kindly educate us on Collection And Recovery Processes.

An SMS goes to the customer informing due date and amount for payment of installments.

If the customer does not pay in time, Tele-caller calls to check. Customer is persuaded for making the payment/even if partly, at any of the Fincorp branches.

The big Fincorp branch network ensures that collection team guides the customer to nearest Fincorp office. The flexibility to pay daily/weekly ensures collection of some amount happens.

Collection Team consists of ~800 execs with each Team Leader managing on an average 7 Executives.

What are the main advantages/differentiators vis-a-vis Competition?

Competitors employing collection agencies and using PDCs route for monthly payment are usually slower to start the follow-up as the trigger for follow-up is usually on cheque bounce being first reported.

Competitors would perhaps take around 45 days for collection process to start after the due date – once any PDCs bounce, and penalties are imposed. A large chunk of 2-wheeler customers may not be used to regular banking habits and PDC bounces might be frequent. The penalties will further irritate them.

MCS collection team works very closely with the customers and this also gives valuable information about the clients, their whereabouts, best way to collect from them etc.

How strong/influential is Customer Knowledge and the Relationship? And role of Guarantors?

With ~800 executives in the collection team and attrition being low at 1%, the long term relationship (in-place) with clients  is very important for recovery. Teams are very well versed with the area they operate in.

MCS strategy is to operate in areas around Fincorp branches, thus there is high possibility of a client being an existing client of Fincorp or being known to a client of Fincorp. Many a times Fincorp’s help is requested to know more about the clients of MCS.

Most clients do not want a collection agent to visit them, and/or interact with their colleagues, family members or neighbours. Hence in most cases recovery is successful through positive persuasion.

The 2 Guarantors usually are close relatives or friends. This also acts as a deterrent/strong persuasion point for defaulting customers. MCS can proceed with arbitration against Guarantors as well.

What is the process on payment defaults?

Whenever the customer defaults one of the first 3 EMI cheques are utilised. The Credit Team and CSE concerned are also utilised for persuading the client. This is because the client and his details/whereabouts are still fresh.

2-wheeler loans being low-ticket items most customers do not want recovery actions, especially when even their property can technically be at risk. MCS possesses the vehicle in case of default over 3 months. Some of them (25% in FY13) are released after collection of some amount.

When the company repossesses and sells vehicles, the balance un-recovered amount is written off immediately. But MCS is confident of recovering this amount through arbitration/legal proceedings.There are 550 Cases under arbitration now.

[Senior Management is very confident about the Arbitration/Legal process for recovery – due amount plus all legal fees/charges included. They opine “Every Rupee given out since 2008 will be recovered, there would not be any real “write-offs”.

MCS is very confident of its 2-wheeler loan book and gross NPAs are currently at 1%.] p>

What kind of skills-profile do you require for these jobs?

Normal graduates.

What kind of training do you equip employees to deal with – say the tough collection process?

Orientation training at HO. 1st-15th of the month training facilities are always booked. Whenever Credit Team or Operations Team visits – local trainings are conducted. Most of the learning though is on the job.

How do you create the right incentive structures? Loan growth vs profitability vs Collections?

We have an incentive structure which rewards the field level executives in both sales and collections according to their contributions. The structure also takes care of their supervisors, for keeping the field staff motivated and involved. For the senior staff, we have a flat 10% incentive structure plus a component based on quantum of disbursement. As mentioned before, we are bringing in productivity-led benchmarks that will help us to fine tune incentive structures in the near future.


What is the total market size of 2 Wheeler Autoloans? What is the market share that MCS has in Kerala & overall?

Overall we have ~2% Market share. Some 40,000 vehicles per month need financing in Kerala Market. We are able to do ~10000 vehicles per month, so ~25% market share.

30 lac customers for the group and 2.25 lac for MCS. How do we plan to tap this base?

As mentioned before, major automation/ERP systems is being introduced within the group. Both MCS and Fincorp will have Loan Origination System (LOS) operational by Q1FY15. We should be able to leverage the group database fully from the coming financial year.

Do you share branches with Muthoot Fincorp? How many branches are company owned?

As mentioned before, MCS does not need conventional branch presence – Sales originate form dealer points where we maintain a Counter Sales Executive (CSE). What we do need is what we call Operation Hubs – which on an average manage some 30-40 dealer points. We have 29 Operations Hubs. 21 of these are shared (but separate) premises with Fincorp branches, and 8 belong to MCS.

There are 20,000+ staff working in the 3800 Fincorp branches all over the country. We are uniquely positioned to leverage on this group branch network that acts as Cash collection points for us.

So what is the relationship/arrangement with Fincorp? How do you account for the costs involved?

Fincorp branches also act as our Cash collection points. We pay them 0.5% as commission from FY14 onwards (revised upward from 0.2% earlier).

Any other synergies with Fincorp/Other group companies?

Yes. Sales Promotion activities for 2-wheeler loans are regularly arranged near Fincorp branches – to leverage the group customer base.

And of late Fincorp branches have started generating sales for MCS. We have provided required training to personnel at all Fincorp branches. This will be rolled out across all branches in FY15 – we expect significant traction from this going forward – roughly 2 vehicles per Fincorp branch per month run-rate is targeted by the end-of-year.

Why does this work for Fincorp? Why would they prioritise any Sales for MCS?

As you are aware the Gold Loan business is seeing a down-cycle. So it’s a win-win situation for the group companies.

New product lines – Company mentioned LAP, second hand auto loans, lease financing, tractor loans. What is the plan and opportunity size?

At the moment we are focused on 2-wheeler/3-wheeler loans. Other avenues will become available as we attain some scale and are also able to attract substantial funding.

What is your strategy around tie ups with more players besides Hero Motocorp and Honda?

We are the preferred financiers for Honda and Hero vehicles. They are growing at a rapid pace. At the moment we are focused on servicing this market.

How is you expansion plan playing out in Goa, Gujarat & Maharashtra? Do you expect to maintain the NPAs in these markets also? You would have had a better credit history of customers in your primary market because of group/historical customer relationships. Will this be an additional risk in the new markets?

Our recovery performance and low delinquency ratio in Kerala and the other Southern States are on account of our business model, which include strict customer profiling, flexi-payment option to borrowers, doing the business with own employees instead of engaging agencies, strict and vigorous collection measures, etc. We expect to continue the same collection performance and low levels of NPA in the other States also, by continuing the same business model.

You have presence across 1200 dealers? How will this number grow over time?

Currently we have ~1200 dealer points. If things go as planned this will reach 1600 dealer points next year and 2000 dealer points by FY16.

Will it be correct to assume a similar trend for disbursements?

Yes. We certainly hope to maintain a fast clip. As mentioned before, we think reaching 2000 Cr in disbursements  is not difficult – and a good target for us to achieve within next 2-3 years.

How much contribution comes from 3 wheelers today? What is the average yield, default rates and tenure of 3 wheeler loans? Does permitting play a role in terms of what the demand is like?

3-Wheelers constitute a very small portion of our product portfolio ~4%. 3-Wheeler Loan market (primarily Kerala) has been steadily deteriorating. Monthly Sales at 7500 vehicles is now down to 3500 vehicles per month. Reportedly daily earnings of 3-Wheelers down to 450/- from Rs 850/- earlier. The 4-wheelers Tata IRIS/ACE has also started doing well. 3-Wheeler Associations have written to prominent vehicle finance companies to stop issuing 3-wheeler loans in Kerala. Debt servicing capability of borrowers is badly dented and gross NPAs are on the rise [~5% in 9mFY14]. However, 2-Wheeler gross NPAs remain firmly under control and are probably the best in industry at ~1%

What percentage of your customers would have a CIBIL record? Do you initiate a credit check for all your customers before sanctioning?

Roughly 30% of customers have a CIBIL record.

What is the competitive advantage that you have over your competitors especially in areas where you don’t have your branches and Muthoot brand does not have a strong recall?

The Ultimate Flexi-Payment facility across 3800 Fincorp branches all over the country has proven to be our key differentiator. Also being a single-product company we are certainly more focused on this segment than our much larger bigger competitors (Banks like IndusInd and HDFC). Our products & processes are probably more finely-tuned to the requirements of the customer segment we serve.

How do you handle the Trade? 2-wheeler Dealers in metro cities are known to demand huge trade advances and higher commissions?

We are a small company. We can not pay 1 Cr trade advance! We offer between 10-15 lakhs as trade advance. While competition is known to offer 5% kind of dealer commissions we offer 2-3% commissions. But we do offer the best payment terms to the dealers – payments are processed immediately without any delays. Some of the bigger competition is known to delay payments by over 2-3 months.

What is the Rural/Urban Sales mix for Muthoot?

80% Rural, 20% Urban.

What is your current organization structure? What is the average tenure of the employee? What kind of attrition levels do you deal with

Sales – ~950-1000; Collections – ~800, Operations – 115; Credit -~50; Risk Management – ~40

1% Attrition levels. There is no retirement in Muthoot group. Post 58 years employees are offered gainful engagement on contract basis – based on the skills profile.


Your borrowing costs are creeping higher over the last couple of years? What is the current cost of borrowing and do you expect it to further trend higher? How are you compensating for this rise in cost of borrow

Our average lending rate for 9m FY14 is at ~27.09% while average borrowing rate is at 12.39%. NIM is thus 14.69% and the highest in the industry. Maintaining yields is becoming a difficult task. We are in discussions with ICRA & CARE for standalone MCS ratings – that should help bring down our borrowing costs somewhat, in near future.

In the last quarterly results the Admin costs have increased from Rs 3 Cr to Rs 7 Cr YOY & Employee costs increased to Rs 9 Cr from Rs 6 Cr YOY? Why are such huge jumps happening?

There was significant scaling up on the Employee front which resulted in the higher costs. We had factored in higher disbursement rates for FY14 based on our Mar 2013 run-rate achieved.

Going forward what will your target NIIs, ROAs and expense ratios? Your expense ratios have been climbing sharply over the last 2 years?

Profitabilty was hit in recent quarters as expenses shot up but disbursements couldn’t keep pace. We expect RoAs to climb back to 4.5 to 5% levels.

How are your Gross NPAs faring? Is the incidence of NPAs increasing? What are the measures your are taking to reduce the overall incidence of NPAs?

Gross NPAs for 9mFY14 are at 1.84% levels. It has gone up significantly as compared to previous years. This is in line with the stress in the overall economy. However our NPAs are still the lowest in the industry and reflects the focus within the company to manage collections and customer relationships, identify stress areas early and work towards reducing likely NPAs.

Can you give us some sense of the increasing NPAs? Are some segments effected more than others?

As mentioned before 3-Wheelers constitute a very small portion of our product portfolio ~4%. 3-Wheeler Loan market (primarily Kerala) has been steadily deteriorating. Monthly Sales at 7500 vehicles is now down to 3500 vehicles per month. Reportedly daily earnings of 3-Wheelers down to 450/- from Rs 850/- earlier. The 4-wheelers Tata IRIS/ACE has also started doing well. Debt servicing capability of borrowers is badly dented and gross NPAs are on the rise [~5% in 9mFY14].

However, 2-Wheeler Gross NPAs remain firmly under control and are probably the best in industry at ~1%.

So how long is the pain going to continue in 3-Wheelers? Any plans of reducing/exiting this segment altogether?

We have already curtailed fresh 3 wheeler disbursements. The total disbursement in FY 13-14 for 3 wheelers was only Rs. 20 Crore, compared to Rs. 80 Crore in the previous year. The portfolio will be depleted substantially in another 2 years.

So is it correct to say 2-wheeler NPAs are doing just fine?

Absolutely, Yes. 2-wheeler (96% of the business) NPAs remain within ~1%

If the NPA recognition is reduced to 90 days from 180 days currently?

These were proposed in 2012. At the moment they remain as proposals only and we haven’t seen any indications/activity on that front.

However, if these norms do get introduced, it will affect the NPA situation significantly.

But that actually defies current trends in the 2-wheeler industry too? Why are your NPAs keeping so low when the whole industry’s/bigger player NPas are rising?

As mentioned before at the start of this discussion, this is a reflection on 3 things. Robust Credit Policy backed by Stringent Verification Norms and a Right-Fit Product flexibly tailored for the needs of the segment we serve. We have some unique differentiators in place.

At the same time, we maintain the highest focus on customer relationship and collections – tracking and helping them maintain their repayment schedules.


Raising adequate funding is probably a key challenge for MCS. There is probably heavy dependency on Bank Funding and options are rather limited? How will you ensure enhanced funding availability? Kindly comment.

We have started taking deposits recently – we have a deposit-taking NBFC License. We have reached a deposit base of ~40 Cr. Interest rates offered are upto 11.25% with a 1-3 year tenure going upto 5 years in some cases. Muthoot Exim is the broker and they are being paid a 2% commission.

We can raise a maximum of 150-180 Cr deposits as of now (1.5x Net-owned Funds). Seeing the current uptake we think reaching a 100-150 Cr deposit base is pretty comfortable. For Term Loans, Banks require us to maintain 25% with the Bank as our own Funds (Margin requirement).

Having this deposit base will take care of this margin requirement, free up tied capital and enhance our working capital limits.

You had this issue in each of the last 2-3 years – of delayed Bank Funding – sometimes by end of Q1? Why are you confident this situation will be better managed this year and will not prove another unnecessary constraint for disbursements?

We already have some sanctions from banks in place and some other facilities in advanced stages of sanctioning. We have adequate working capital for continuing operations in the first quarter of the financial year itself.

There is also the issue of A (Negative) Rating from CRISIL. Is it right to say that Public NCDs will be an option as & when (or if) Ratings improve to AA. Kindly comment

The rationale and rating sensitivity cited by CRISIL in its A negative outlook are mostly attributable to the Gold Loan business of Muthoot Fincorp. We are strongly of the view that we have proven in last 6 years that MCS 2Wheeler/3Wheeler Auto Financing is a successful, sustainable, and scalable business model. We have moved out completely from the Gold Loan business.

We deserve a standalone MCS rating which we feel merits much better outlook/rating. This will alleviate our funding constraints in a major way. Discussions are on with ICRA and CARE. We are pretty confident this will be resolved soon – even the CRISIL rating should get revisited.

Capital adequacy at 19.61% looks adequate at the moment. But you have set a fast clip in dealer point expansion and disbursements growth. You are looking at a disbursement target of probably 100-1200 Cr for FY15. Why wouldn’t you require enhanced Tier I/Tier II Capital in FY15 itself? Or would that become necessary only by FY16? Why or Why not?

We are projecting a loan book size of about Rs.1000 Crore for FY 2015. We may require enhancement in Capital for maintaining the Capital Adequacy Ratio above 15%. We are thinking of a Tier II issue of about Rs. 50 Cr during the FY 15.

What is the Management/Promoter thought on raising Tier I Capital at current valuations? And is it fair to assume Tier II Capital is the only real option in the near future?

You may be right, Tier I Capital at current valuations is not an option. For Tier II Capital we have 2 options. Either raise Sub-ordinated Debt (lock-in of 5 years and may need higher interest rates) or Preference Capital – which may get decided based on Group liquidity levels in 2015.

CFO Anil Kumar R resigned 30th Nov 2013? What were the circumstances?

He was 56 years old – had a bypass surgery. He resigned due to health reasons.


Disc: Ayush Mittal, Vinod MS, Gaurav Sud and Donald Francis were involved in this extensive Management Q&A and follow-up discussions.

Ayush Mittal – Invested; <5% Portfolio allocation, from more than 6 months

Vinod MS – Invested; >5% Portfolio allocation from Jan 2014

Gaurav Sud – Invested; >5% allocation from more than 2 years

Donald Francis – Invested; >5% Portfolio allocation from Feb 2014


Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 6 months;
Gaurav Sud: More than 5% of Portfolio in the Company; Holding for more than 2 years;
Vinod MS: More than 5% of Portfolio in the Company; Recent Entry;
Donald Francis: More than 5% of Portfolio in the Company; Recent Entry;

Avanti Feeds Management Q&A : July, 2013

Management Q&A


We have been following Avanti from about 2009 when the aquaculture industry was at one of its worst time. Its really great to see that the company had at that time talked about the development of new specie – Vannamei which could be a game changer for the industry going forward. Things played out perfectly and the company has well capitalized the opportunity and has grown its turnover from just 96 Cr in 2010 to 648 Cr in 2013. Kindly take us through this journey.

Fundamentals for Aquaculture in India have always been strong. India is ideally suited – with a suitable tropical environment, a long coastline and land with brackish water that can sustain aquaculture.

In the last two decades and more we have seen a growing preference for fish and fisheries products, worldwide. Incidences of Foot & Mouth disease (primarily in EU), mad cow, and then Bird Flu in Asian countries have caused the slow decline in consumption of red meat and Fish was back in favour. Scientific evidence for Omega-3 Fatty Acid – found plentiful in fish – started to be cited for helping control cholesterol/heart diseases. Shrimps also were considered in the same category. And global demand for fish and fisheries products surged dramatically.

In the early 90’s aquaculture technology was not so perfected. Indian Government tried to usher in what is known as the BLUE REVOLUTION with a focus on Integrated Aquaculture. In 1994-95 many public limited firms were floated. Focus was on all 4 main activities – Feed, Processing, Hatchery, Farming in the integrated aquaculture.

We scouted for a suitable partner and were lucky to find Ping Tai Enterprises, a well known company from Taiwan, primarily into Feeds. 70-80% of their business came from Aqua Feed. They advised us to focus on Feed manufacture as that is the most important ingredient for shrimp culture.

By 2002, dominance of Taiwan in aquaculture had declined. Continuous upgradation of technology in feed product substitution which is a very dynamic activity (cost vs protein content substitution – Soya & then fish meal saw other countries like Thailand taking the lead. We tied up finally with Thai Union Frozen Products, Thailand which is into Shrimp Hatchery, feed and processing and export of shrimp, fish and other marine products and Thai Union group was a very established partner. It is one of the largest marine products exporter to US & Japan. In 2002 this started as a technology collaboration, the association has grown stronger and has seen equity participation by them in 2008-9.

In 2006-07, the whole aquaculture industry suffered big setback. Most companies folded up. We have managed to keep fundamentals intact and survive that period. We have been transparent to the investors about the state of the industry, our outlook and strategies planned for coping with the same. Having survived that torrid period, today we are onto better times!

As per the reports, the current favourable change in business is due to adoption of Vannamei species v/s the earlier black tiger. Why was black tiger popular before? Why is Vannamei better? What are the differences?

Yes, the increased volume of production of Vannamei shrimp which was introduced in India in 2009, has been the main reason for the turnaround since then. In 2012 and beyond, Indian shrimp farmers were able to increase their production.  Before introduction of Vannamei culture to tropical climatic conditions, it was Black Tiger which was the native specie and fast growing.  However, by genetic improvement, Vannamei which was cold water and slow growing shrimp has been made cultivable in tropical climatic conditions, and fast growing and specific pathogen free brood stock was developed.

Though Vannamei is a native to the Pacific coast of Central and South America, one of the major reason for its popularity is due to the availability of fast growing improved quality specific pathogen free seeds. Vannamei has the potential to grow under intensive culture conditions. For the same pond area, the production/density of Vannamei is much higher than black tiger (~ 2x) and hence the cost reduces and the activity becomes remunerative for the farmer. Also Vannamei tolerates a wide range of salinities & temperatures and requires lower protein diet. It is generally considered to be more resistant to diseases and can mate and spawn easily under captivity and the survival rates during rearing are generally higher. Also Vannamei, the white shrimp variety, is more accepted worldwide.

How long do you think this current journey with Vannamei is going to last? What has generally been the history, Is this likely to change, How soon? How long can this adoption and switch to Vannamei continue? What about disease risk. etc. in this species?

4 years back in 2009, there was lot of resistance for introducing Vannamei culture in India as it was not native species and the view was that domestication may become problematic. However, seeing tremendous success stories in Thailand, Malaysia, Vietnam and China various industry bodies like Sea Food Exporters Association, Hatcheries Association, Shrimp Farmers and Feed Associations made re-presentations to Government for adoption of Vannamei – essentially arguing the case – if it has been successfully adopted in Thailand, Malaysia, Vietnam and China, why not in India. The Govt. of India after careful study decided to introduce Vannamei Culture in India.

Vannamei Aquaculture industry in India is in a strong footing today, thanks primarily to steps taken by the Government and designated agencies such as Coastal Aquaculture Agency, MPEDA which have established processes, strict enforcement, and complete traceability in the system.

1. The broodstock – sourced only from specified broodstock sources approved by Coastal Aquaculture Authority (CAA)

2. Quarantine – MPEDA – Tested for disease by Rajiv Gandhi Center for Aquaculture  (RGCA) in Chennai, and only then released

3. Hatcheries – Registered with CAA

4. Seed sales Record – To whom it is being supplied, with complete traceability

The Coastal Aquaculture Authority (under the Ministry of Agriculture) ensures very strong systems and enforcement. They do checks and have the mandate to destroy hatcheries, if found in violation/non-compliance and also order for closure of Hatcheries.

With such strong systems, disease outbreaks will be rare & certainly controllable.



Aquaculture was a fancy industry during late 90s and early 20s. But the industry self-destructed and hardly any major profitable player got left. What were the reasons and problems?

Prior to 2009, by and large, Aquaculture in India was poorly regulated. Industry was not  well organised, also there were no stringent  bio-security measures in place. Import of say specified approved broodstock to ensure shrimp quality, proper checks and balances in the system, and regulatory oversight was absent. The Industry dependent on the Black Tiger variety which was predominant, had very loose knitted policies in place for ensuring standardisation, quality and/or bio-security measures for prevention/control of disease out-breaks or rising up to any challenge collectively, by the industry as a whole.

Government support and state agencies such as the Coastal Aquaculture Authority, MPEDA, Rajiv Gandhi Centre for Aquaculture, the various industry associations as mentioned before have played a big role in taking the Industry to its robust position as it exists today.

Who are the biggest players of this industry? What is the total market size in India? Indian production of shrimps and total exports annually?

Mainly 5 players in the feed industry. CP Food Products is the No#1 player. AVANTI FEEDS comes next. Grobest, Water Base, Godrej have been other main players. In the last couple of years some 5-6 more players have emerged such as Cargill, Nexus Feeds, Growell, Unipresident Feed, etc.

AVANTI has produced 59,000 Tons feed in 2011-12, 105,000 MT in 2012-13 and expected to produce 125,000 MT in 2013-14. 20-25% growth is comfortably achievable overall in the industry.

Reports and your own figure of 150, 000 Tons in 2014-15 seem to suggest growth in line with growth in industry.

Kindly educate us on the role played by MPEDA in the growth and sustainability of this industry?

Covered before.

Cluster Farming/Contract Farming on a larger scale? Any possibilities on that front?

Yes this should eventually happen in India. We have had discussion with Micro Finance agencies. We said 10 or more farmers with small 2-3 acre land holdings can come together – they form a co-operative society, a legal entity. We told them that we will organise supply of Feed and Technical assistance to the farmers and  you provide the Finances and we will assist them in sale of their produce. The farmers can invest 20% of Seed Capital and Micro Finance can provide finance for infrastructure and operational expenses such as feed. So far these attempts have not succeeded, response has been poor.

EMS Shrimp disease – its impact and the global demand/supply game? Kindly educate us on that.

Researchers found that EMS Shrimp Disease or Early-Mortality-Syndrome is caused by a bacterial agent, which is transmitted orally, colonizes the shrimp gastrointestinal tract and produces a toxin that causes tissue destruction and dysfunction of the shrimp digestive organ.

As we understand it, EMS can occur thru infected broodstock and also can spread due to lack of  proper bio-security measures. A senior professor from Thailand, rated as one of the best Aquaculturists in the world has found that the spread of the disease has something to do with the Parent brood stock. Certain bacteria get transmitted from the Mother breed that attacks the intestines.

EMS was first reported in China in 2009, it has slowly spread to Vietnam, Malaysia and Thailand, and now causes huge annual losses in these countries. EMS outbreaks typically occur within the first 30 days after stocking a newly prepared shrimp pond, and mortality can exceed 70%.

What is the solution, then?

No specific solution seem to have not been found so far as a permanent solution. Still the research is going on.

Shrimp Info Systems (SIS) is considered to be one of the best broodstock supplier from which fresh broodstock can be drawn.

India seems to be in a happy position currently with the other big exporters floundering with EMS situation. How serious is the purported risk of spreading from country to country as it has in the Asian countries like Vietnam, Malaysia and Thailand?

Yes, in India we do not have the EMS disease problem, as of now. As mentioned before Government ensures import of broodstock only from well known suppliers. Also with proper bio-security measures in place and strict enforcement by Authorities, chances of outbreak of disease is considered remote and certainly controllable, we think.

The Coastal Aquaculture Agency plays a big role in containing the risk (check-destroy-closure powers vested in them) from rogue hatcheries or what are known as “Backyard Hatcheries”.

Do we have new markets opening up for Shrimp from India? We heard South Africa and Chinese are actively buying from India?

Yes, new markets such as China, South Africa and even Russia are developing.

How does it look for next 2-3 years for shrimp feed/processing business in India?

For India, next 2-3 years should be good. Shrimp prices have been going up, but RM has also been going up. We need to do a good balancing act.




The two main product segments -Shrimp Feed and Shrimp Processing have different characteristics. 80% of the Revenue contribution comes from Feed and 20% from Processing. Shrimp Feed segment has much faster volume growth with low margins whereas Shrimp Processing has higher margins but comparatively lower growth. Kindly educate us on the characteristics of both segments.

Shrimp Processing and Shrimp Feed industry are inter-related. If shrimp prices globally are higher and shrimp processing segment does well, the Shrimp Feed segment can also do well as the farmer is inclined to grow more shrimp – requires higher feed consumption.  However, the Shrimp Processing market is more like a “Trading” market. Margin performance depends entirely on the Global Market prices and prevailing raw shrimp prices. These price changes can be very dynamic and very sharp. Raw material availability is very closely monitored (on a global level) by the big players.

Shrimp Processing is a seasonal industry. Depends primarily on 3 factors – Raw material availability, Labour availability coupled with the Demand in the Market. Nov-Dec-Jan-Feb are the lean months. With advent of Vannamei culture, now has become effectively a 10-month season from the earlier 8 months.

Currently global prices have been rising. Seafood Exporters Association monitors raw material prices. All members generally follow this maybe with +/- Rs 10/kg. But also consider the effect of dollar volatility, rising interest costs. Freight costs have gone up abnormally. We need to ensure the farmer too gets a fair price. It’s important for him to survive. On the other hand consider big raw material price volatility on the feed front. Soya meal prices have been going up tremendously. Even Fish meal prices are also steeply rising.

We have to ensure that the farmer still is able to make money after the price hike, so as to let this trade survive/prosper.

EBITDA margins is usually in the range of 8-10%. Sometimes can go down to even 5-6%. Depends entirely on this balancing act that we have to do depending upon culture scenario. Achieving 15% EBITDA margin is considered exceptional performance.

Shrimp Feed is a manufacturing industry and consistent quality to the farmer is very important – for different seasons and water conditions. Feasibility/cost to the farmer is of prime importance. But Raw material is not in our control at all.

Please educate us on the complexities of the Feed formulation technology? How difficult it is?

Feed manufacturing is not very complex, but at the same time, formulation cannot be made easily to manufacture feed because Feed formulation differ from region to region and within regions from area to area depending upon the water, soil and climatic conditions. Technical support/ensuring proper mix in Feed is very important.

Why is someone like CP such a dominant player? And how is Avanti placed in this segment?

CP is one of the largest Feed producer in the world and has strong market presence. AVANTI has also gained market reputation on par with CP now in India.

CP has a huge lead in terms of experience base around the world. It invests a lot in R&D. One has to be on top of RM trends and ensure timely substitution – COST vs PROTEIN content. And thirdly Feed productivity is very important. The farmer will always prefer the feed that provides the best FCR (Feed Conversion ratio) – quantity of feed consumed to shrimp meat production. AVANTI has also a need-based R&D facility and strong technical staff to support the farmer.

Shelf life of Feed product? and for Processed Shrimps?

3 months for Feed. Processed shrimp can be kept frozen for upto 2 years.



Please give us an idea about your main export markets with break-ups?

80% of export business is with the United States.

Andhra Pradesh, Tamilnadu, Gujarat, Orissa, West Bengal Shrimp Feed markets. Kindly educate us more on the regional breakups?

As explained before the Feed market consumption in India by and large today is 60:40 Vannamei:Black Tiger. Andhra Pradesh is the fastest growing market with 80% conversion to Vannamei expected this year from earlier 60% levels. Gujarat with a 50/50 share last year is expected to race ahead to a 60 to 70% conversion this year. West Bengal has been 70/30 in favour of Black Tiger and will continue to remain a slow converter for Vannamei. Tamilnadu is expected to pickup in conversions this year.

Terms of the Feed Sales segment? How much is Cash sales and Credit Sales?

When we started Credit Sales used to be 90%, with 10% CASH. Today this is at 50/50. And for the 50% Credit Sales we ensure credit only in the last 60 days of culture. Typically it takes 120-130 days for the larvae to reach 40 gm size. The first 60 days cash sales ensures there is some upfront investment from farmer and progress to the 2nd phase ensures safety.

Please educate us on the the seasonality in Sales seen.

April -September (Q1 & Q2) used to be the main season contributing 60% of Sales. Now, also Q1 and Q2 continue to be major season and part of Q3 and Q4 also have culture due to Vannamei Culture.

The margins have been quite volatile in the history. What do you think would be realistic operating margins for longer term?

Anything between 10-15% EBITDA is considered exceptional performance on margin front for this industry. 5-8% margins is what is happening now. Over coming years, we see Feed and Shrimp processing segments contributing roughly 50:50 to EBITDA.

The volatility in margins comes due to raw material prices. We did a calculation of RM cost over the years. Please comment

Particulars FY13 FY12 FY11 FY10 FY09 FY08
RM/Sales % 76.38 70.30 87.56 81.01 72.31 71.71

Raw material price rise has been exorbitant last year – FY13. Soya prices rose more than 2 times in less than 6 months and hence the margins got affected. This is a major risk factor for us, where we do not have any control as mentioned before. We have increased prices marginally – that should help.

Fish meal avg prices Fy13- Rs 58/kg; fy 12 – Rs 50. Soya meal Fy13 avg – Rs 34 /kg fy 12 – Rs 22 . What are current levels? Will the industry be impacted badly from soya or fish meal pricing? What is the outlook for the year as the soya meal prices have corrected? And what about Fish meal pricing?

Though, Soya meal prices corrected back for a short period have gone up again. Similarly, Fish meal prices have also gone up dramatically from Rs 60/kg to Rs 87/kg. Fish meal likely to come down after Aug-Sep provided good catches are available otherwise expected to remain at high level.  These raw material prices are highly volatile and un-predictable.

The Shrimp Feeds business seems like a difficult business, and yet there are players like CP and Avanti which dominate the market. What are Avanti’s differentiators?

There are two main factors. First you need Top Quality product and secondly you need to be the Farmer’s choice. You can only do that by staying close with the farmer, assisting him with technical inputs and timely response to dynamic issues faced – we have discussed some of these before. AVANTI has established a good market reputation in respect of these factors.

Quality Feed is 50% of the job. There is something called FCR – Feed Conversion Ratio – 1 kg of Feed producing how many kgs of Shrimp mass. Typical FCRs vary between 1.35 to 1.5 for 1 kg of shrimp mass produced. Now if farmer gets a FCR of 2 he is going to be extremely unhappy. But if he gets to an FCR of 1.2 or 1.15 he is very happy.

There are many costs for Farmer. Feed cost followed by power costs and labour and overheads. Feed cost can be 60-70% of total costs. 

Timely technical guidance is the next 30%. Next comes Marketing skills which can account for say 20%.

Dynamically changing global shrimp prices, and Feed cost can play major spoilsports. This is a very price sensitive market.

What kind of technical staff do you employ?

150 Trained staff – mostly BSC/MSC Fisheries.

What kind of R&D do you have to engage in?

This is an ongoing process, mostly on feed raw material/substitution/technical support front. We have sufficient equipment in Lab for analysis. There is obviously no requirement for basic Genetics R&D.

You pay some Royalty to Thai Union for the Feed?

Yes we pay Royalty fees to Thai Union for their feed formulation. We also use Pro-Feed one of their brands.

Let’s talk about Shrimp processing segment. In shrimp processing Q2FY13 margins at 20 %. Kindly comment? Now since shrimp prices have gone up sharply, will it contract margins further from FY13 13% blended levels?

As mentioned before 13% operating margin is a good performance in a good year. Such margins are tough to replicate. We will be happy if we can do 10%.

Shrimp processing targets this year and next year?

6000T this year, and 8000T next year

Over last 5 years, Operating Cash flow has generally been poor and has not kept pace with Earnings, with the exception of FY12, kindly comment.

Actually 31st March figures are not indicative. Season starts in Feb, March so there is lot of Inventory build-up that starts happening in Jan-Feb-Mar for April-Sep which is our primary season. Besides there was big price volatility in fish meal, so we kept higher stocks. Our Debtors position is usually at 2 months.

There has been considerable increase in inventory and debtors this year. If Sales have increase by x, both Inventory and Debtors have increased 2x – also resulting into cash flow from operations becoming negative. What is expectation going forward?

Covered above.



The FY12 annual report was very optimistic and the company had undertaken following expansions a) Shrimp processing capacity expansion from 2700 MT to 8000 MT/10000 MT b) Shrimp feed capacity expansion from 52,000 MT to 1,10,000 MT c) Buying of new land 5 acres to set up new plant of 50,000 MT but this plant hasn’t come up till now and as per latest AR, it would be available in Jan, 14. What is the latest status?

Shrimp processing capacity is at 8000 MT. Additional Shrimp Feed capacity will come on by Nov2013/Jan 2014 timeframes. Machinery is already there.

What is the current utilisation levels? Do we see greater ramp up speed in Shrimp processing segment?

Yes, this year we are seeing a lot of demand due to EMS in other Asian countries, there is shortage globally. China is a net importer today. There is additional demand from China. Hence we are seeing good opportunity in Shrimp processing segment and hope to do 6000 MT this year if everything goes well.

As the new Shrimp Feed capacity is not available during the peak season of FY14, will capacity be a constraint for growth in FY14?

We are at about 130,000 MT capacity today and did about 103,000 MT during 2012-13. This year we can do about 120,000-125,000 MT.

Fixed Asset Turns (2.4x to 12.7x) and Capital Turns (~1x to 4.3x) have seen tremendous improvements over last 5 years. Please share the company’s philosophy, processes, and how you have gone about implementing such extraordinary productivity and efficiency improvements.

Firstly we have been prudent in setting out initial good capacities. Preventive maintenance with periodic replacements ensure longevity and life of the assets. We keep making small improvements in incremental ways – like ensuring higher productivity by upgrading the Pellet Mill, or other de-bottlenecking measures. We have kept modernising/making small incremental investments over the years.

Is this an asset-light business model? Is this sustainable?

Sustainable – Absolutely.



We came across shrimp pricing in international markets and it seems the prices have nearly doubled over last 6 months to $13 or so Is it right? If yes, isn’t this a game changer?

Steep increase in prices will have definitely impact on the market.

US Govt has recently imposed an anti-dumping duty of about 6%. How does it affect the co and long term prospects?

There are two components. First is the anti-dumping duty which is now at 3.49%.

Recently US has imposed Countervailing duties (CVDs) of 5.91%, also known as anti-subsidy duties, as trade import duties imposed under World Trade organisation (WTO) Rules to neutralize the negative effects of subsidies. It will be factored in the price mechanism.

What subsidy is the Indian Government providing?

We get 3.50% duty drawback and 5% under VKGUY – Vishesh Krishi Gram Udyog Yojana -scheme.

Because of the EMS disease spread in other exporting countries, are Indian exporters in a better position to bargain?

To some extent.

As per recent industry article, MPEDA has projected marine exports to be at $4.5 Bn vs $3.5 Bn last year and major driver for this growth is expected to be growth in shrimp exports. Does this indicate that we may see 30%+ growth in export of Vannamei in FY14?

There is possibility of 30% growth, provided, the favourable conditions continue.

When will the company go in for Value Added – Branded products/exports?

Efforts are being initiated to plan value added products but no specific date is set till now.

How strategic is the domestic value-added retail foray for Avanti?

Developing domestic market for both frozen raw shrimp as well as value added shrimps is essential in the long run for the Indian industry as the dependence on total exports is not desirable.

Is Thai Union with you for the domestic foray? Do they also believe in this?

Does TUF  have value-added processed shrimp products to offer?

Yes. They have value added products for their domestic as well as export market.

Does TUF buy processed shrimp from you in India?

Yes, sometimes.



On one hand there is volatility in raw materials, and on the other volatility in processed shrimp end-prices? Which is a bigger risk and why?

Some risks are controllable, and some are uncontrollable. On the costs front, RM cost is a major variable cost on which we have no control.  Feed pricing mechanism will take care of this aspect to some extent.

As far as end-prices of shrimp exports is concerned, that’s really uncontrollable. Pricing is completely dominated by global market.

Any long term contracts for RM sourcing in order to reduce risks

We have well known suppliers on our Vendors list and we source raw materials from them. Price depends on market rates.

This is a volatile industry. There are disease risks and there are RM and end-price risks – all of which are pretty dynamic in nature. Please educate us on how do bankers determine, evaluate and manage risks for your industry.

Till recently this was considered a Risky industry to finance by the banks.  However, now they have revised to favourable industry status for finance.



Your debt has increased? Reasons?

We don’t have any long-term debt. Only working capital requirements.

Your company has considerable investments in some power projects. One of them is doing decent but the other has been making losses. Kindly comment.

As you know the Power Sector has gone through a sea change in recent years. Market is not so good. Small projects are considered not so profitable. Only big projects are considered profitable.

What is the strategy going forward? Why don’t we sell them and get out of what looks like a non-core area?

Yes we are working on divesting this off.

Srinivasa Cystine ltd. – Subsidiary. What is the main business of this company? Is it correct that this company has announced a Biotech division catering to shrimp medicines, etc.?

Srinivasa Cystine Limited is not a subsidiary of AVANTI.  They are engaged in the business of Trading in Aquamedicines, Water sanitizers for mineral deficiencies in the water for shrimp culture.

Isn’t it true that this could be supplied to your same customers, why do this through a subsidiary?

This is not the main business of AVANTI nor is the business significant. It is only a small trading activity which we do not want to tag on to the main activities of shrimp feed and exports. It is not a mandatory requirement of the farmer to use medicines.

What is the expected size of business from this division?

8-10 Cr

Does TUF have any stake in Srinivasa Cystine as well? for what products?

No stake.

What is the reason for diminished presence in fish meal segment? How easy or difficult is it to get into related fields like Animal Feed, etc?

Fish feed is not a profitable business as of now.  Hence, no interest is evinced.

Any other market or vertical we are planning on entering? What are the sources of future growth?

Processing Plant expansion. Today we do 25-30 T/day. Plan is to go for 75 T/day in 2-3 years from a different location. And Hatchery – That has been in the planning and will be a good value addition to Farmer.

There has been lot of delays on the Hatchery front. We had got land but did not proceed? Kindly comment.

Yes, we had got very good land in Chennai but that had some legal issues, so we could not proceed with our plans. Now, we are in the process of identifying some other land.

Domestic Value-Added retail foray? How far off is that really?

No ready plans as of now.



So far we have discussed what is a very happy situation for Indian shrimp processors and feed manufacturers. This is due to a) EMS disease spread in China, Thailand, Malaysia, Vietnam and their inability to export in any bulk b) Shrimp prices going upto $8 from $6 before. The higher shrimp prices have ensured better pricing for shrimp processors from India and in turn better prices for shrimp farmers, leading to the production build-up in the country.

In our view, it is not correct to say that the happy situation for Indian shrimp culture prevailing to-day is solely on account of EMS disease spread in China, Thailand, Malaysia and Vietnam and their inability to export in any bulk. The good time for Indian Shrimp culture revived with introduction of Vannamei culture in India as the farmer was making good profit in Vannamei culture even before out break of EMS in those countries. We believe that in the long run the shrimp culture activity will be sustainable to all the stakeholders because there will always be balancing mechanism between export price and the shrimp prices.  It is important that the farmer continues with shrimp culture as long as the activity is profitable to him.

Now what happens when Shrimp prices correct back to $5-6 internationally – for whatever reasons? How does the economics of this business change and what effect does it have down the chain – profitability for farmers and hence production, feed demand, etc? Will the industry in India in general and Avanti feeds in particular, be able to grow volumes at a sustained level at these prices?

As stated in our answer to earlier question, we strongly believe that in the long run the shrimp culture activity would be sustainable to the farmer in view of the fact that the global shrimp demand will keep increasing and the price mechanism is only a balancing phenomena. The high export prices prevailing now is mainly on account of spurt in demand due to shortage of production due to EMS in some of the Asian countries which we believe will get settled in course of time and production increases will start balancing demand and supply. We strongly believe that the industry as well as AVANTI will grow in volumes both in respect of feed and exports.

Tell us something – The domestic feed market also is directly correlated to export demand/global pricing, right? So if export demand/pricing falters in a major way, its not only the shrimp processors that get affected, the local feed market will also falter, right? Isn’t that likely?

We do not foresee such a situation as mentioned by you as the demand for the shrimps globally keeps increasing and cost of production of feed as well as shrimp and also export price is dependent on dynamics of input costs and market demand from time to time and we do not believe that the export prices will crash to such an extent that the shrimp culture activity becomes economically unviable to the farmer in the long run.

Okay, understood. But if prices were to say correct tp $3-4 levels, that would significantly affect the overall economics for the industry, right? So how likely or unlikely is that event in the near-to-medium term given current visibility?

In our opinion, such a situation is most unlikely in the next atleast 3 to 5 years.

So what we are seeing is that the real issue is about aquaculture viability for Farmers. At what point does it really become unviable for the Farmer? What’s the cost of Production for the Farmer – $2.75? And could it happen again, like it did in 2008? why or why not?

The production cost would be around $2.75 to $3.00 per KG. In 2007 & 2008 India had different problems like outbreak of disease and high cost of production of Black Tiger in India compared to Vannamei in other countries which made Indian product non competitive in the global market which made the shrimp culture unviable to the farmer. However, the situation is different now and we do not foresee such a condition repeating.

But, what about a new country source emerging – what is Avanti Feeeds confident of achieving in such a scenario?

We believe AVANTI FEEDS would be able to retain its position by virtue of its quality, service and competitive pricing irrespective of new country source emerging in future.

Is there any case for a drop in buying from India/exports from India in next 2-3 years. why, or why not?

There is no reason to anticipate drop in buying from India in the next 2 to 3 years as the global shrimp demand keeps increasing and the production in other Asian countries likely to take time to recover from the effects of EMS and to regain their normal production levels. As such we do not foresee any drop in exports from India in next 2 to 3 years.


Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 2 years;
Tirumal Rao: No Holdings in the Company; ;
Davuluri Omprakash: No Holdings in the Company; ;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 1 year;

Avanti Feeds


Avanti Feeds is one of the largest manufacturer of Shrimp Feeds and Shrimp Processor and Exporter from India

Main Products/Segments

Shrimp Feed

Processed Shrimp export

Main Markets/Customers

  • The feeds are used by shrimp farmers.
  • The processed shrimps are exported to countries like US, Europe, Japan etc.

Bullish Viewpoints

  • The aquaculture industry was having a very bad time till 2007 as the quality of earlier species – Black Tiger was not good and hence un-remunerative.
  • Since then the industry introduced a new variety of shrimp – Vannamei(white shrimp), this variety though generally smaller than tigers, are more resistant to disease, have higher survival rates, cost less to feed and tolerate higher stocking densities. And they grow faster.
  • India is one of the cheapest shrimp producer and with the increasing adoption of Vannamei species, the shrimp exports from India have picked up sharply[Business Line]
  • Avanti Feeds has grown at 75% CAGR for last 3 years. The turnover grew from 73 Cr in 2009 to 393 Cr in 2012. Similarly profits have grown from a loss of 7 Cr in 2009 to a net profit of 28 Cr in 2012.
  • The industry is expected continue growing at 20-25% for next 2-3 years and if so, then Avanti Feeds can grow at 30%+ rates. The latest annual report is very optimistic and co has undertaken some major expansions
  • During the year the company has doubled its capacity by replacing old machinery with the new ones and constructed new godowns to handle increased volumes.The capacity has increased to 1,10,000 Mts p.a from 52,000 mts p.a.
  • The shrimp processing capacity has increased to 8000 Mts p.a from 2720 mts p.a.
  • As the demand anticipated by the company is slated for a big jump in a couple of years from now, further expansion would be needed as current capacities would be insufficient. Therefore, 4.94 acres of land near their current plant of Kovvur is already bought for expansion.
  • It is operating a Vannamei hatchery on a leasehold basis producing Vannamei seed to supply good quality Vannamei seed to the farmers. It is in process of buying a land near Chennai to set up hatchery in collaboration with THAI UNION for building hatcheries. This will reduce the return of export consignments due to quality reasons, reduce the risk of shrimp getting damaged due to diseases and will improve its operating efficiency as it is a significant addition in the value chain.
  • US government has raised the anti-dumping duty on import of frozen shrimps from India. The average duty has been increased  to 2.51 per cent  from 1.69 per cent. This would have little impact on seafood exports to the US as DoC has decided to calculate the weighted-average margins of dumping and anti-dumping duty assessment rates in a manner that offsets non-dumped comparisons while using monthly average-to-average comparisons in reviews. This may lead to de-minimum duty (below 0.5 per cent), which in effect carries zero anti-dumping duty on exports to the US. This decision of DoC will be effective from 2013, when the seventh administrative review completes. This is a great boost for the exporters and Avanti Feeds being the market leader will benefit significantly from it.
  • The dividend has been increased to 65% in FY 2012 from 10% in FY 2011.
  • India’s Competitive Advantage in shrimp industry is that the Competing countries now have to pay a higher anti-dumping duty as compared to India.

Bearish Viewpoints

  • Dependency on climatic conditions makes it unpredictable. Natural calamities like floods, cyclones, during the culture season can have serious impact.
  • Shrimps getting affected by virus and diseases also is a threat.
  • The margins may soften going forward.
  • Trade restrictions in importing countries can unsettle the industry as US  did in the past by applying anti dumping duty.
  • lack of diversification in the export destination.

Barriers to entry

  •  Thai Union Frozen Products PCL (the worlds largest seafood company) holds a 25% stake in Avanti Feeds. This relationship provides them the lead in terms of research and better quality.
  • The company has its own brand and distribution and farmers don’t switch the product quickly.
  • Though the shrimp cultivation is a very unorganised segment of the industry, the processing and export segment is an organised segment. The company through the technical support to the shrimp farmers and the good quality seeds has built a relationship with the farmers, which ensures a regular supply of good quality shrimp.
  • The leasing out of hatchery has added another tire to its value chain which is going to yield economies of scope. It will further strengthen its position once it builds its own hatchery.

Interesting Viewpoints

  •  Thai Union Frozen Products PCL holds a 25% stake in Avanti Feeds and hence they have access to latest research and quality requirements.
  • Avanti is one of the top three producers in India.
  • The company has low debt and strong cash flows.
  • The promoters have a good track record of being transparent and investor friendly.
  • The company also has investments of about 30 Cr in two power projects from which it gets regular dividends.


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

Balkrishna Industries Management Q&A: July, 2012

Management Q&A


You seem to be in a hurry to consolidate your position. It looks like your FY12 performance and developments/feedback from the Market has fired more ambition for BKT. Is this a sign of a more confident/more aggressive Management?

It’s been a natural normal advancement in our plans. You know that we were making small quantities of OTR Radial in FY12 from existing plants. We received very encouraging feedback from the OEMs. That led us to fast-tracking some of the plans on that front. We also saw that the Captive Power plant which we were putting up at Bhuj could now have full utilisation with this additional plant (in earlier case, we would have had to sell spare power to the Grid).

The other important aspect we were dealing with was about attracting and retaining talent. The plant is 30 Km away from Bhuj City – with no good educational facilities, etc. We realised an Integrated Township will go a long way in help addressing these.

What are the risks according to you?

Unforeseen demand crash! That’s the only risk so far as we can see.


You must be looking to draw this soon. Long-Term Debt to Equity would cross 1.4x, probably for the first time. There is also Short Term borrowings of ~750 Cr. Is the company comfortable with these figures?

Yes the new 500 Cr Loan will take the total debt to about 2100 Cr. If you take out the Working Capital borrowings, long term debt would still be at ~1.3x. We are comfortable with that, even if that figure goes up to 1.4x we are okay.

In FY13 you will be spending ~800 Cr in Capex. Do you envisage a consolidation phase in FY14 and FY15, or further capex/borrowings are pretty much the order?

There will be 600-700 Cr capex in FY13 and the balance 500-600 Cr in FY14. Any fresh Capex will not be needed before FY16.

Also you should note that we have about 280 acres of land in Bhuj. Currently we have utilised only about 125 acres. Further Capex will be at lower levels.


How are you factoring this in? To maintain its position in the EU market, BKT may have to further reduce its price advantage of 20%?

That was a general statement acknowledging the state of the economy. We are growing. We have a good visibility.

Paring prices at this stage will be an aggressive move, and not warranted. We have no such plans. We would rather be conservative.

While Rupee depreciation effect on RM may be neutralised by US$ sales, this must be queering the pitch for Euro zone sales booked in Euros. Your RM import bill is probably 15-20% higher vis-a-vis major competitors in EU. Isn’t the competitive advantage degrading fast for your comfort?

Actually no such thing. All our imports are in US$. The competitors also have to import in US$. As far as the Euro is concerned we had average realisations of Rs 63-64 to the Euro. In FY13, the average realisation is ~Rs 70 to the Euro, so we are in a better position.

All our pricing is in US$ or the Euro. Rupee has nothing to do. If we managed very well when Rupee was at 39 to the dollar, we should be able to manage much better at current levels.

We have a natural competitive hedge in Europe. With a falling Euro their imports starts going up; becomes uncompetitive for the bigger players. Yes if Euro-US$ PARITY, if that happens, we might face problems with a falling Euro as realisations will be going down. But that doesn’t seem to be happening at the moment. US $ remains strong with $ at 0.81 Euro.

In FY12 we had 40% revenue growth. 20% of this was driven by volume growth. We had taken a 6-7% price hike, so the balance is all from currency growth.

How are you looking to mitigate these effects? You have mentioned the US market making up for some of the loss from EU. Will we see a major drive to increase penetration in the US market and RoW markets?

See in 2007 we had US Sales of $15 Mn. That contributed 6-7% of our sales. In 5 years we are at 100Mn in US sales which is now ~25% of Sales. This is a natural progression. As we have more capacities, we will penetrate more markets.


FY13 may turn out to be very different? Rubber prices have corrected by some 20% in last 6 months and are expected to correct even further as mentioned by you.

Yes we may have to pass on some price reduction benefits later in the year, depending on the competitive activity. So far we have not seen any such moves. There is also the lag effect. Earlier Inventory was of 4-5 months. So this may become relevant only in subsequent quarters.

We remain confident of a revenue growth of 38-40% depending on the currency.

Where do you see price realisations stabilising in FY13? Is it correct to assume that price hikes are less likely? Better product mix may drive up realisations a bit? By how much?

Yes Price hikes are not on in the current scenario. Better realisations from Product Mix will start reflecting from next financial year. This year the new plant will only contribute probably 10-15000 MT of OTR radials and some from our existing plants – which may not be significant.


Where do you see Operating margins stabilising for the next 2-3 years?

We are pretty comfortably placed for FY13. In the coming years too we should be able to operate within our historical range 18-21% EBITDA levels.

In a depreciating rupee scenario, do you foresee the revised Schedule VI norms for Forex accounting taking a further toll on margins?

No it works to our advantage. We are a net Forex earner.

The currency fluctuations occur because we book Sales at the Customs rate when goods go out of the factory, and realisations happen at the forward contract rate. This difference was earlier attributable to Sales but now need to be recognised as Forex gains/loss in Other Income (as per Schedule VI norms).

On the other hand, the Mixing Plant at Bhuj is supposed to bring in efficiencies and savings on transportation & logistics costs. There is also a co-generation plant contributing to power savings. What order of savings is this likely to bring in?

There should be a differential of 2-3%.

Interest cost capitalisation benefits for this phase of Capex may be over soon? That will see a spurt in interest costs and exert further pressure on Net margins. Where do you see Net Margins stabilising at?

Today we have access to funds at pretty low costs. Our net cost of borrowing was only 3%. Working Capital borrowings are at 2%. We also take advantage of buyers credit.

The next tranche of loan is also at low cost 3.2 +3m Libor which is 0.45, so 3.65% or so. In FY13, the interest costs will be applicable only for half year. In FY14, interest costs for the full year will be ~60-70 Cr.

We should be able to main PAT at 9-10% levels.

Could you explain 3m/6m Libor terms?

Basically refers to the interest payment cycles. 6 month Libor would mean interest payments are due every 6 months, which are at 0.75%. 3 month Libor is at 0.45% with interest payments due every quarter.

This seems like a big advantage. Not many companies are able to manage finance costs at these levels, are they?

Actually everyone should be able to access funds at 3.5%+ Libor. So that translates to 4.25% to atmost 5% costs.

But yes, smaller loan amounts probably come at a higher cost.


Kindly tell us a little more on what this means for the company in the coming years? Are you looking at expanding the presence in this segment in a big way?

OTR -all steel radial is a technology advancement. Just like it moved from cross-ply to normal radials (Nylon cords), now the technology has moved to all steel radials.

The total demand is ~$13-14 Bn globally, growing at 4-5%. Of this $4Bn is Agri demand. The balance $8-10 Bn is non-Agri – mostly Industrial, Mining, Construction – what we call OTR (Off the Road) And these require large and ultra-large specialty OTR tyres.

As you are aware our current mix is 33% OTR, 63% Agri. So this is very big incremental opportunity for us. The results of our initial attempts have been very encouraging. We should be able to encash on that.

We had a 3.5% market share 5 yrs back. We are at 5-6% market share currently. We should get to a 10% market share by 2020 or before.

This will start contributing from FY14? What kind of realisations are possible in this segment?

These will start contributing from FY15. 30000 MT should get us a topline of 750 Cr, or ~@250

What is the total size of the land available at Bhuj facility? And how much of this will have been utilised by the new plant, mixing facility and Township?

as mentioned before, total area is 280 Cr. We are using up only 125 acres for all above.

In the interim, Agri segment remains the biggest segment for BKT. How is BKT’s Agri business affected by recession, monsoons?

Recession affects the OEM segment first. As you are aware our business model caters mainly to the Replacement market. In recession people stop buying new equipment, but they continue operating old equipment – for that they need replacement tyres!

Also Agri/Food business is recession proof. It is evergreen whether it is US, EU or rest of the globe. Someone has to produce, right? Certain countries like Israel are not monsoon dependent. Drip-Irrigation is very advanced.

We are not dependent on the Indian market for Agri segment.


Do you see this changing in the coming years in view of overall demand slow-down and capacities being ramped up at the same time?

It is a good thing if we can serve the customers in time. Order book may come down in future form the 4-5 months order book levels currently, as customers look to pare their inventory levels.

But there is a basic 45-60 days shipment time for EU/US as it goes by Sea. So customers have to book atleast 3 months in Advance taking into account the transit time.

Only someone like Michelin attempts Just-in-Time delivery models with company owned warehouses.

Why can’t BKT adopt similar models?

We have chosen to go the distributor route. In our case the Distributors play that role of warehousing.

We can chose to knock of a 15% expense difference that is attributable to the distributor-led sales model. We can also set up just in time, with company owned warehouses, but then we will end up competing with our distributors. We find no incremental gains in doing so.


What are the reasons for the downtrend this year? Is it true that there is surplus production of rubber in Thailand?

The surplus production is actually across the globe. 2004-05 had seen lots of new rubber plantations coming up. It takes 6-7 years for these to mature. This has now come into the market only from this year.

Prices are expected to fall lower. We have cut our inventory levels down to 2 months (from earlier 5 months).


US Sales currently act as a natural hedge for the raw material imports. You have guided for a 20% volume growth in FY13. Do you expect US Sales increase, say from 25% of Sales to 30% of Sales to be able to compensate?

It is not only US sales. Anywhere other than EU, it is US$ Sales for us.

Or this will need hedging on the US $ front too, apart from hedging the Euro?

Not necessary for Sales. We might require some hedging, only to the extent of the loan repayments.

The ECB repayments are starting in FY15, that will need to be factored in? What is the repayment period?

If Rupee depreciates significantly from here, we might need to hedge on this front.


When we talked about players like Alliance with similar cost advantages as BKT, you had clearly identified the ability to maintain a large no SKUs as BKT’s competitive edge. That Alliance is the closest and they will take atleast 5 years to catch up to offer any serious challenge to BKT. Has this position changed, or are you still sanguine on this front?

Alliance has a 45000 MTPA facility in Israel. They also have 30-35000 MTPA production in Chennai. Further progress in Chennai is reportedly halted due to labour problems. They have acquired some land in Jagedia near Bharuch. Israel is a high cost location so they dont get much advantage from there. So they are still 4-5 years away from catching up.

They acquired GPX which gets produce from China. The GPX acquiaition gives them the distribution access. But it’s not really a marketing challenge, it is still a manufacturing challenge. Getting to the right no of SKUs is key.

Price differential of 30-35% in FY09 with OHT majors in US and EU markets is eroding steadily. In FY11 this was down to 25%. And in FY12 we hear this is down to only a 20% differential. Will this be sustainable beyond FY15, and Why?

Well the price differential is still in the range of 25-30%. BKT is now a brand in its own right. It may come down to 20-25% in the next 5-7 years. The erosion cannot be more than 4-5%.

Promotional expenses would be up then, on the flip side?

Yes, but that’s only incremental in nature.


Is it correct to say Resources, Labour and Training are the bigger challenges before the company?

Resources – not an issue anymore. We have access to easily available funding at very good terms.

Labour and Training are issues. The ramp up happens slowly. That is the main reason our production capacity can only be ramped up to 30000 MT in a year or so. We have very good long term agreements signed with the labour force.

What is the size of the Labour force needed for the Bhuj facility? And how are you coping with these challenges?

Ultimately we will be needing about 3000 strong workforce there. We are building that up gradually in tune with the demand situation.

When you say long term agreements, kindly explain?

We have long term settlement agreements at all 3 locations. They are of 4-5 years duration.


Chrys Capital off-loaded its entire stke of 9.59% in BKT recently. It is surprising that a long-standing investor in BKT chose to exit at a time like this. Would you please comment on the circumstances and timing of this exit?

Chrys Capital invested in us from 2005. It is already 7 years. The fund that invested had a term of 5 years and it had already taken 2 extensions. Under its terms it could not get a 3rd extension, hence the exit.

Why would they choose to exit, just when the benefits of the expansions are about to kick in?

Also you may know Ashish Dhawan is exiting Chrys Capital to set up his own. He offered the investment to be liquidated rather than being taken over by new team which they accepted under the conditions.

You are also aware that bulk of it was taken up by 3 fund houses. Franklin Templeton, HDFC and BNP. Franklin Templeton took up the biggest chunk.


Ayush Mittal: No Holdings in the Company; ;
Donald Francis: No Holdings in the Company; ;
: ; ;
: ; ;

Oriental Carbon & Chemicals


Oriental Carbon & Chemicals , belonging to JP Goenka Group of companies, is one of the market leaders in the production of Insoluble Sulphur for the Tyre and Rubber industry around the world. 

It has state of the art manufacturing facilities in India at Dharuhera (Harayana) and at Mundra (Gujarat). Apart from Insoluble Sulfur OCCL also manufacture Sulphuric Acid and Oleums in the chemical complex at Dharuhera. 

Starting in 1994 with modest capacities of 3000 mt per annum capacity, The production capacity of Insoluble Sulphur now stands at 22,000 Mt per annum.

Main Products/Segments

Oriental Carbon & Chemicals enjoys a dominant market position in the domestic market by virtue of being the only local manufacturer of Insoluble Sulphur in the country.

The company also reportedly enjoys a favourable market position as the ‘Second Alternate Supplier’ in the global industry, which is dominated by Flexsys of USA.

The other products manufatured are Sulphuric Acid & Oleum which constitute less than 10% of the Sales Mix. Insoluble Sulpher contributed 90.65% of Sales in FY12.

Exports constitute ~64% of Sales in FY12.

Main Markets/Customers

Insoluble Sulphur is a key ingredient for vulcanisation of rubber and is mainly consumed by the Radial Tyre Industry. Increased Radialisation of tyres in domestic market is favourable for the company.

Strong customer base comprises major tyre companies in the world like Continental AG, Goodyear, Bridgestone, Pirelli, Kumho Tyres etc. for exports and Apollo Tyres, Bridgestone, JK Tyres, MRF Tyres, Ceat Tyres, Goodyear India, etc. in the domestic market.

Bullish Viewpoints

  • 2nd Alternate Supplier – Solutia remains the market leader with 70-80% market share. Oriental Carbon commands 8-10% market share. Shikoku Japan caters to mostly Japan & Korean markets. Chinese production is consumed in-country. That leaves Oriental Carbon in a “preferred” alternate supplier position for Europe and RoW markets. (No US presence at the moment).
  • Long Term Relationships – Most tyre majors view the relationship with OCCL as strategic in nature. The co-operation therefore extends to commercial and technological terms framed to be mutually beneficial, with a long term perspective.
  • Excellent Track record – While 5yr Sales CAGR is a healthy 25%, Net profits have galloped away at an astonishing 73% 5yr CAGR. This is on the back of Operating Margins moving up from 14-15% levels to ~30% levels in last 2 years. Please read the Oriental Carbon Management Q&A to read why this looks sustainable.
  • Higher Grade products – The company has been making investments in manufacturing of tailor made grades of Insoluble Sulphur, which command a premium over conventional grades of Insoluble Sulphur as the European markets are witnessing a shift from conventional to value-added grades of Insoluble Sulphur. The value-added grades provide economies and more flexibility in production to the tyre majors.
  • Consistently growing Exports – Exports have climbed up from ~46 Cr in FY08 to over 140 Cr in FY12 at a ~32% CAGR. This establishes growing acceptance with Tyre majors worldwide.
  • Comfortable Debt position – Long Term debt stood at 116 Cr in FY12. At a comfortable debt-to-equity ratio of 0.77x the company seems well-placed to fund its growth requirements in the near to medium term.
  • Aggressive Capex – The company has doubled capacities by completing an 11,000 MTPA green-field expansion at Mundra SEZ taking the total capacity to ~22,500 MTPA. This was completed at a cost of ~120 Cr. It has lined up another 11,000 MTPA expansion at the same premises, which will be taken up on better demand visibility.
  • Lower tax rates – The Mundra Facility enjoys MAT credit at 18% rates. The effective tax rate may come down to 20-22% for the company as production from the Mundra facility takes off. The company can offset the 18% MAT credit against overall tax liability for the company.

Bearish Viewpoints

  • Cyclical nature of the business – The demand of Insoluble Sulpher is essentially derived from demand for tyres in vehicles which remains cyclical and depends heavily on economic conditions.
  • Direct linkage of Raw material to Margins – High correlation of operating margins to raw material volatility. The time lag is 3-6 months for RM price volatilty pass-on.
  • Slowing demand situation in Europe – The company mentions some slack in demand from Europe which it hopes will be offset from demand uptake from other markets.
  • Aggressive Capex – The company has just finished doubling its capacity to 22,500 MTPA and is working at 60-70% capacity utilisation levels. It has also plans for aggressively expanding another 11,000 MTPA in 2 phases of 5500 MTPA. In view of the slowdown in demand, further expansion may have to be put on hold for longer than the company anticipates ( ~6m).
  • Slower growth in FY13 – Q1FY13 results point to a better performance on the Operating Margins front. But Sales growth is tapering off at barely 18% (FY13 Sales growth at 36%). This result is a cause for concern and may be pointing to lower volume growth of only 10-15%. This is because Rupee depreciation benefits of last 6 months (lag effect) would have contributed significantly to the volume growth of 18% for the quarter.

Barriers to entry

  • Small market size. Estimated to be ~250,000 MTPA
  • Closely guarded technology. Market Leader Solutia dominates with 70-80% market share. Only 4-5 players globally.
  • Long Term relationships with most tyre majors – preferred alternate supplier.
  • Capital intensive nature of the business
  • Long time required for getting approvals from the tyre majors, more than 2 years.
  • The tyre majors need a minimal assured supply of 2500-5000 MT for them to even consider switching vendors. Small tyre customers usually do not bet on a new vendor unless a tyre major has first approved.

Interesting Viewpoints

  • Next opportunity from US market – The company has been pursuing some tyre majors for penetrating the US market. The next big growth will come from the company’s success on that front
  • Big beneficiary of rupee depreciation – Exports contributed ~64% of Sales in FY12. Imports for FY12 ~14% of Sales (RM, CG, Spares & traded goods).


Donald Francis: No Holdings in the Company;

Atul Auto Management Q&A: Jan 2012

Management Q&A

Concall with Mr. J V Adhia, Vice President, Finance – Atul Auto

[Conducted and shared by active ValuePickr Ayush Mittal. His Value Investing blog is a prolific source of winning stock ideas in most market conditions!]

A brief background on the company shared by Mr Adhia, before taking up our questions.

Atul Auto has been in this business for almost 3 decades now and were pioneers in low cost vehicle known as “Chhakada”, introduced in year 1975. To make a better multi-purpose vehicle, they set up a plant in the year 1991. In 1992 the production had started and the vehicle was known as Mark 2. They were quick to understand the changing needs of industry and could foresee need for lighter and better vehicles – the 3 wheelers we see today. In 2000 the production of 3 wheelers of 350-500 kg capacity started and they along with Piaggio were the early players.

Questions for Atul Auto Management


Kindly take us through this journey of the last 5 years. What has the company done differently in the last 2 years? What are the main contributors to this recent success?

The right way to look at our company would be to look at it from 2001 when the actual 3 wheeler production started. During the period 2001-06 the company had been growing at about 70% p.a. Till then we were a front-engine 3-wheeler company. In 2007 we decided to go pan India and introduced the more predominant rear-engine 3-wheeler segment by sourcing engines from Lombardi.  Some things went wrong and the company faced a rough patch, and that is the reason you notice stagnant sales for the period 2007-10. However in June 2009 period we introduced Atul Gem the rear-engine vehicle (with engines sourced from Greaves Cotton), and it has been received very well in the market. The growth is back on track.


Kindly explain the dynamics of the 3 wheeler market. Why is a rear-engine 3 Wheeler preferred over front-engine 3 wheelers?

Technology wise there is not much to choose between Front Engine & Rear Engine vehicles. However there are very distinct market-specific preferences, for e.g. Gujarat, Rajasthan & some parts of UP usually have front engine vehicles while most of the other states have preferred rear engine vehicles.

It’s also a mind-set thing. There is more use of front-engine in Cargo (the payload at the rear will balance out) and rear-engine vehicles are more used for passenger vehicles. But overall 91% of the total autos are rear-engine vehicles.

If rear-engine 3 wheeler is a overwhelming favourite, why did the company work on introducing front-engine 3 wheeler (Atul Shakti)– especially when market leaders like Bajaj, Piaggio always had only rear-engine 3 wheelers?

Unlike other player in the industry, we were very small players with limited resources. We could do things, only gradually. Our home base is Gujarat, naturally first focus was Gujarat & neighboring markets, and hence we first introduced atul Shakti – the front-engine 3-wheeler.

Our rear-engine 3-wheeler Atul Gem introduced in 2009, as we expanded to other markets. It scores very well on most of the parameters when compared to competition. It has been about 2.5 years now in the market. The response is overwhelming and we have seen exploding growth in that segment.

What is the Sales mix between Passenger and Cargo Vehicles? Is it any different for front-engine and rear-engine vehicles?

About 70% is towards passenger and rest towards cargo.


What went wrong? What are the lessons learnt by the company? How did you handle the financial impact?

Yes, it was a really challenging and rough time for the company. The company had done all the initial homework like road-testing, etc on assembled vehicles with Lombardi engines. The first lot was imported from Italy and those were good engines and passed all the tests. But later with engines sourced from Lombardi’s initial local production in Aurangabad, the quality didn’t match up and there were several issues. Production volumes had to reach certain levels, before quality issues could stabilize.

What is the legal situation on the court cases filed by both sides? What’s the company’s view on risks posed by the contingent Liability of ~11 Cr?

The company has filed cases against Lombardi worth 40 Cr. The legal system, the way it is, Lombardi has also filed ounter-cases. Lombardi’s claim is of hardly 2-3 Cr (vs 11 Cr shown) due to interest cost, C form requirements, etc. We don’t see much risk on this front.

How did you solve the technology/engine sourcing problem subsequently?

Atul Gem – assembled with Engines sourced from Greaves Cotton worked perfectly!

Greaves Cotton supplies all your engines today – and Atul is on a spectacular growth trajectory – why has this alliance worked out so well?

Greaves Cotton is the best and has a sort of monopoly in these engines. Our company has a good relationship with them for over 30 years, on many products.

What is the nature of relationship with Greaves Cotton on this front? Without any binding contracts, how do you mitigate risks on this front? Are there any competing 3-wheeler manufacturers also sourcing engines from Greaves Cotton?

It’s a very good relationship. All the auto companies expect Bajaj & TVS (as they are lower payload, different category) source from Greaves Cotton. After M&M & Piaggio, we are their 3rd biggest customer. M&M & Piaggo have their own plants to manufacture engines. Atul Auto has no such potential conflict of interest. We don’t see any risks.


Apart from the home advantage in these 2 states, what are the factors that has helped Atul best competition in these 2 states?

The company has had small beginning and limited resources unlike competition since the very beginning and yet we have managed to do very well. Our focus has only been 3 wheelers unlike competition who have a basket of products. Also 3 wheelers is a small portion of their overall business.

With our single-minded focus on the 3-wheeler segment, we provide more value to the end user in terms of better products, pricing, cheaper spare parts, quality after service etc.

What are the key technology parameters that serve as Sales drivers – Load-bearing capacity and mileage? Do Atul products offer any advantage vs competing products on these 2 fronts?

Yes, mileage of Atul Auto 3-wheelers is better than competitors. The  vehicle scores better than the competitors on several parameters.

How does the company keep pace with technological advances in its field? How strong is the Pune R&D facility? Please give an idea of the quality/skill levels of the R&D team? Any new models planned for launch soon?

The facility at Pune has experts from the automobile sector who in past have been in the field of product development and improvement. It has about 12 people.


Is this correct? How long has Atul Auto been providing the 2 year warranty and what has been the experience so far?

Yes, as compared to others, Atul Auto offers 8 month manufacturer warranty and the rest is provided by insurer. The market has given a good response to these schemes.

How does Atul balance the trade-off risks?  If Insurance covers are the answer, that will only inflate the cost (known risks), why are competing companies not following suit?

Our experience has been good. So far, we have not had major liabilities on account of the extra 2-month warranty. Can’t say why Competition has not followed suit.


What are the reasons for the change in fortunes? Is it because the rural economy is growing much faster due to govt-funded schemes like NREGA, increased spends on improving rural infrastructure like better roads & connectivity?

Yes, industry has in-itself grown over the years and lot is due to the infrastructural development etc. There is need for low cost transportation for the masses.

What are the main growth drivers for Atul Auto for the next 2-3 years?

Yes, the market has enough demand and is growing. As of now, the only limitation is production. The company has been taking a very cautious approach since the 2007 debacle and hence taking every step with lot of caution. We are in process of ramping up capacities by way of de-bottlenecking. We can also increase no. of shifts to increase production, as needed.


Kindly elaborate on your Sales & Distribution model. In how many states are you present? Other than Gujarat and Rajasthan, which is your next biggest market and why?

The company leads in Gujarat & Rajasthan. We are No #1 in Gujarat with about 44% market share & No #2 in Rajasthan with about 30% market share. Kerala & Assam are our next big markets.

What are the challenges when you try to expand into a new state? Aren’t there permits/controls imposed that vary from state to state. Usually these come with political patronage, and competitors we assume are already entrenched. How do you tackle these issues when expanding into a new territory?

The company has all the national approvals and presence in the following states: Bihar, Jharkhand, Chattisgarh, Assam, Some part of UP, Punjab/Haryana, J&K, Andhra Pradesh, Kerala, Karnataka & Maharashtra.

For Cargo vehicles, national level approvals are enough. But for passenger vehicles, yes, state level permits come into play.

What is the current Dealer network strength? What are the plans for the next 2 years?

Current dealer newtwork is about 120 dealers. A year back we had 100 dealers but only 30-40% were active! Now more than 80% are active. Plan to have 140-150 dealers by this year end and 250 in 2 years.

What kind of incentives do you offer to new dealerships while entering a new market? What kind of market mapping exercise is done within the company before you take a decision to enter a new market?

Incentives are decided on market to market basis. Atul’s dealers provide all the services like arranging finance, RTO work etc so they get benefit in that work also. Plus servicing is a good area and 3 wheelers require the same due to high wear and tear.


Kindly explain your Dealer Advance Policy. Why has it shot up from 36 lakhs to 3 Crs in FY11?

100% Dealer Advance indicate strong demand and product acceptance? Are you meeting with the same success in all the new markets you have entered?

The dealer deposit/security is not high – at about 2 lac. As of now the company is seeing a very strong demand and there is a waiting period of about 10 days. As per policy the company is taking orders on advance basis only. Hence the high advances on Balance Sheet.

Do you foresee this happy situation as an established aspect of your business model from here on? Is this likely to continue for the next 2-3 years? Will the Advance base keep growing as you expand into newer markets and appoint more dealers?

The base will probably keep growing as we expand the dealer network.  But you need to keep in mind the current Advances situation is because of the waiting period! Once we have expanded capacities, this may not remain at same levels.

2Q Fy12 saw Working Capital situation turning negative. Is this sustainable?

Covered above.


Kindly inform on the progress on the same? Is this being done in existing location or this is a new location being planned?

All expansions are planned at existing location. Our plant is on 13 acres and we have sufficient spare land. As mentioned before, we are expanding capacities by ongoing de-bottlenecking exercises. We are already at 20-25% higher production and the rest of the de-bottlenecking increases should happen over next 3-6 months.  Also as mentioned before, we have options of introducing a double shift, as and when deemed necessary.

What is the outlook for FY13 on the production front? Will it be able to match rising demand from the expanded sales & distribution network? What kind of Sales growth is the company aiming for in FY13?

We can discuss on this aspect later, during March.

What is the outlook on the margins front? Are operating margins sustainable at the current 9-10% range for the next 2-3 years?

We think current margins are sustainable and can only get better as operational efficiencies kick in.


Is this a realistic target for a company of your size? What will be the main growth planks and what are the milestones to be achieved along the way?

Yes, it is quite a realistic target for us and we are gearing up to achieve the same. Majority of the growth should come from 3 wheeler space itself.

What contribution is expected to be forthcoming from your Sri Lanka and Bangladesh forays?

The initial response has been very good from both the areas. The company has already appointed a dealer in Bangladesh who has been trained over last 6 months to assemble the SKD there and sell forward. The dealer should set up a facility there soon. Sri Lanka has immense potential as a market for us, but the plans are under process.

We have often heard of the company’s LCV plans. Given that there are entrenched players in this segment – there are products like Tata Maxis, and Magic 4 wheelers –positioned well for the rural/semi urban market, what are the companies strategies for the same?

To put it simply, the company is planning 3 wheeler with one more wheel. We are targeting – Ultra low cost CV – in between Tata ACE and current 3-wheelers. We believe this will be a viable new segment. We have done our research and groundwork. This may take another 2 years for us as land acquisition has been a hurdle.

Bajaj Auto has recently launched the RE60, exactly for this segment. They are saying don’t call it a Car – It’s a 4-wheeler but not a car! Your comments, and does this require any modification of plans, especially as you say you are atleast 2 years off!

Atul’s presence is more into open heavier 3 wheelers which are used for low cost bulk transportation i.e. about 8-10 people sit in. The RE 60 can at max accommodate 3-4 people so it will cater to a totally different category. In a country like India, there is a huge demand for low cost of transportation.

Talking about company’s LCV plans, RE60 is of lower tonnage while we are targeting the commercial vehicles segment. So the right comparison would be to the likes of Tata Ace etc.

Technology collaboration would be necessary for the company’s entry into LCV segment. Has the company tied up with any technology partners? Or, is the company planning to enter this market on its own home-grown technology? How far are we from some action on the ground on this front?

Things are under process and all options are open.

What kind of Capital Expenditure will be necessary for the LCV project? How has the company planned to fund this?

As of now things are open and under-consideration. The total cost is estimated to be about 200 Cr.


As of Sep 30, 2011 the company had negligible debts of 3.75 Cr coupled with a healthy Current Liabilities (Payables) position of 32.25 Cr! Kindly explain the rationale for the rights issue.

We had applied for the rights issue in June 2010 and expected to get clearances in a couple of months.  But it took more than a year!. The cash flows and debt position were very different then from what it looks now.  We had almost 15 Crores in debt as on 30 Sep 2010!

So after getting the approval as most of the work had already been done and it was a small issue, we decided to go ahead. In a way it was also to reward the small shareholders.

This is a substantial 20% dilution for just Rs. 4 Cr (which the company did not need at the time of offer). This is a very expensive deal for any company. You could have chosen to defer/scrap the rights issue. Kindly comment

From a strict financial standpoint, you are right. Would we have gone for a rights issue in the current financial situation, at these terms? Absolutely not!

However you may like to see it in the right context. When we applied for the rights issue in June 2010, it made sense. The company had debts of ~15 Cr, we were thinking of raising money for Capital Expenditure. The prevailing share price of the company was ~40-50, and we offered the rights issue at a discounted price of Rs.30. You can’t find much fault with this, right?

Now when the approvals came a year late, one point of view was to scrap the rights issue. The other viewpoint that also emerged was that it is good for small shareholders, especially as the share price had appreciated a lot since then. That the company should keep in mind small shareholders who have stayed with the company for several years. We did sample surveys with small shareholders in Ahmedabad. The results seemed to indicate that they welcomed the rights issue.

The company decided to go ahead with this option.


Ayush Mittal: Less than 5% of Portfolio in the Company; Recent Entry;
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Indag Rubber Management Q&A: Nov, 2011

Management Q&A


Kindly take us through this journey- what changed, for the company? Tax incentives leading to tax free status for first 5 years was a major contributor no doubt, but even at the operating level there was a big shift, isn’t it?

Yes, there were a number of tax-duty incentives. 10 year excise exemption, with a 5year income tax holiday, and 30% tax exemption for another 5 years.

Retreading is a labour-intensive operation. The Himachal plant was a completely new plant set up in 2006 with a number of technological improvements brought in. We brought in new staff, productivity, morale and efficiencies were all up. Marketing intensity was cranked up to take advantage of all the improved operating efficiencies from the new plant.

We started investing significantly in R&D in developing new cost-effective material and tread patterns. These R&D Investments have now started paying off, and these has been evident from the results of the last 2 years.

Was it that Labour issues at the Bhiwadi plant being put behind, was the major spur? While Bhiwadi plant was closed in 2006, just when were all the plant/machinery shifted to Baddi?

The Bhiwadi plant was already 14 years old. Small plant with 82 MT/month capacity.  And yes, the labour issues were behind us for good.

How was the Bandag Association? And why did it end?

Indag introduced the cold retreading process in India with Bandag technology in 1982. The technology was superior to existing hot retreading process. There was nothing new added to the technology in the 20+ years since introduction. The association ran its course and ended when the promoter family bought over Bandag’s stake in the company consequent to Bandag’s worldwide operations being sold off to Bridgestone in 2006.


Kindly give us a little background of the Promoter group and their involvement in the running of the company. Promoter Group stake need to come down to 75% by FY13 – any moves on that expected soon? When did the current Management take charge? 

The promoter family are Khemkas. They have sizeable overseas interests in Russian and CIS markets in Oil & Gas, and some other sectors. Indag Rubber is a very small operation in the overall scheme of things.

The company is run by professionals led by CEO Mr K K Kapoor who has been steering the company for the last 10 years or so. He is assisted by a professional team who have also been around for a number of years. The Promoter family attends Board meetings and is around for strategic decision-making, but do not need to be there for day-to-day operations.

No idea about transactions for bringing stake down. Will happen in due course.


Kindly comment. What are the factors that have contributed to increasing realizations for Indag over the last 5 years? Increasing RM costs being passed on, better performance and acceptability vis-à-vis competition, brand building efforts, what?

Indag as a brand has got fairly established. A certain segment of quality conscious customers do ask for Indag brand. We have made sure that our products are always available. There is not much price difference between products from organised sector.

Higher price realisations have accounted for much of the growth achieved. We have been able to pass on our Input costs – RM, power, fuel, etc.


Please take us a little bit through the competitive scenario how it was 5-10 years back and the position now?

Elgi and Indag both started around the same time and followed similar exclusive retreaders business model. And offered a support network. Midas went a different route and appointed dealers and scaled that up aggressively. They did not offer any support.

Post 2006 Indag stopped exclusive retreaders. Market competitiveness remains the same. Indag is more established as a brand now, we have increased our distribution reach, and are growing at a faster pace. Price points vary within 150-200 Rupees among leading brands. There are 5-6 organised players and rest from unorganised sector.

Most/All of these have been in the business for 25-30 years plus, right – what has Indag done right, that its rated almost at the top of the pack – in margins & profitability, at the least. How much of a difference/contribution did the Bandag JV bring to the table?

In 1982 Indag introduced the cold retreading process in the country with Bandag technology which is superior to the hot process, but requires higher 10-15 Crs capital investment. Hot retreading is used by unorganised sector mainly. The technology has remained the same over the years – not much change.

Our quality has stood out over the years. For example we are the only retreader who can collect advance payment from some State Transport Units (STU) like the UP STU. The STUs have years of retreading experience and data with them. They have organised and evaluated that data to come out with a cost/km rating for all manufacturers. Indag stands out in those ratings and is thus able to do good business with the STUs. Currently about 200 MT/month is accounted for by STU segment.

We have introduced newer materials and more effective tread patterns that have started paying off in the last couple of years. We have started growing at a much faster pace now.

Kindly comment on the Chinese cheap tyre threat. What’s the current outlook?

New tyres at 6000-8000 Rs was a novelty difficult to resist. But the quality and mileage achieved was poor. So these poor quality chinese imports have not affected us significantly.

How do you rate the smaller players like Vamshi Rubber and Eastern Treads?

They are there for a number of years. Yet to be significantly big players.


Kindly take us through your sales and Marketing set up.

We have about 365 retreaders on a countrywide basis up from about 150-200 retreaders in 2006. We have started appointing dealers in the South and West belts. There are some 20 dealers appointed in the Southern region and looking to scale up in Maharashtra. Our direct sales force about 55 people engages and looks after this setup.

Do the retreaders buy retread material from company owned depots/franchisee (C&F Agent) stores.

We have about 25 depots/C&F Agents. Of these 2-3 are company owned. Rest are operated by Franchisees. Retreaders are supplied from the depots.

If it’s basically a stocking operation at depots (C&F Agents), how do you manage the retreader relationship well? Is this on an exclusive basis? How is end-product quality assured/monitored?

Well Elgi and Indag started at around the same time and with similar business model of appointing exclusive retreaders. Over time market forces have ensured that this could not be sustained. Post 2006, there are no exclusive retreaders with anyone. We ensure that we support the retreaders well. Our support team visits, inspects and offer them free maintenance on their equipment every quarter.

Are there completely different retreader segments – ones that cater to organized sector players, and other segment that caters to unorganized sector? Is there cannibalization in sales within the organized segment between different brands. If not, and every retreader maintains retreading options say at different price points, how do you manage the sales & marketing objectives?

Retreaders stock material at every price point and from every manufacturer. They need to, that’s the nature of his business. He may push some products depending on the incentives from manufacturers. Indag as a brand is established. So our sales force needs to track sales and ensure ready availability from any of our depots. Availability is the main criteria after the price point and brand. We have ensured that we have a depot in every state.

Is there any kind of customer pull or brand preference, at play? Why would a customer prefer a Indag retread over say an MRF retread? What kind of sales promotion and brand building activities, if any, does Indag participate in?

We hear bigger transporters, quality conscious customers asking for Indag retreads by name. There is a certain segment that understands the difference in quality and the impact on a cost/km basis, but that’s niche.

Our direct sales force engages with local transporters, educates them about the quality and performance standards, shares with them Indag data, and gives them samples to test and use before purchase decisions are made.


Kindly share your understanding of how the numbers stack up in the retreading industry. Let’s say a 100 tyres reach end-of-useful-life, how many are replaced by new tyres, how many are retreaded, and how many are sold off as scrap?

Well as per our data, almost 55-58% of the used CV tyres cannot be retreaded. Its probably to do with consumer education – trucks are almost always overloaded, road conditions are bad, and most of the tyres are driven till the stage that the base becomes so weak as not fit for retreading. And some of the tyres genuinely go burst, cut and otherwise worn out to end up as scrap.

Only 2% go for New CV Tyres! So roughly 40% go for retreading.

And Globally, how would the percentages be?

Globally things are pretty different. Retreading is a pretty established trend in commercial vehicles. The road conditions are much better. Overloading is not allowed, tyre pressures are maintained. All the tyre majors have retreading arms and the quality of the retreads available are superior. And there exists a well-established franchisee network that periodically collects tyres for retreading.

If a new CV tyre costs Rs. 18000, what is the range that retreads sell at 4000-6000? Where is Indag positioned/priced in this range vis-à-vis a Midas, a Vamshi, or a MRF retread?

Retreads typically sell at 4500-4800 range. Not much difference between different brands. Hardly Rs 150-200 at the most.

Please share with us some perspective on the total market size. How much is Unorganised? Please give us some idea on the scale of operation, current production capacities say at Midas, MRF, Elgi, JK Tyres, Vamshi and Eastern Treads. Have you seen any significant scaling up by Competition recently?

We can’t say about installed capacities. But from whatever figures we hear, Midas used to produce about 2200 T/month which they say they have scaled up to 4000MT/month so they are producing about 45000-50000 MT/year from some 15-20 units. Indag is at 800 MT/month. MRF, JK Tyres are not producing significantly. Vamshi and Eastern may be producing lower than 500 MT/month, while Elgi may be slightly higher – their production is difficult to track/estimate because of overseas factory/markets.


Kindly take us through the reasons for this cautiousness/approach so far? Are we going to see a little more aggressiveness at play from here on?

You need to understand that the Himachal Facility was a greenfield facility set up from scratch. As explained before there was a complete change effected in productivity and plant efficiencies achieved. We have always tried to grow without stretching the balance sheet too much. We have also tried always to be a little ahead of the demand curve. Expansions when undertaken have to be done in 300-400 MT increments, whereas your demand scenario might not be keeping the same pace.

The last expansion undertaken in FY10 was also to take the maximum benefit that we could take for the excise duty exemptions angle.

With the emphasis on setting up dealer networks, especially in the South and West, we expect to grow faster.

In the last AGM it was mentioned that company will not need any further Capex till reaching 300 Crs in sales? When is the next capex cycle planned? And by when?

If the business keeps growing at the pace we are seeing, we will need to initiate some capital expenditure next year during Oct-Dec time frames. Now whether that’s an incremental expansion of 300-400 MT or  upwards of 500-1000 MT, that remains to be seen.


This is a sizeable asset lying idle for the last 5 years. What are the plans going forward?

There are some plans for utilisation of the same in partnership with some interested parties. various options are being considered.

Operating Cash flows if sustained seem more than enough to fund future capex requirements and working capital, so why not dispose of this land, and return some money to shareholders?

As mentioned, there are no plans for disposal in the near future, for sure. The utilisation plans are big and may take some time to take concrete shape.


Kindly elaborate on the Dividend Policy followed by the company. Why is it not increasing somewhat in tandem with earnings. Post FY11 and the recent 1HFY12 earnings, we were expecting higher dividends after being stagnant for the last 2 years!

There is no enunciated dividend policy in place. Well interim dividend has been declared at the same level as last year. The company is considering some OTR retreading expansion plans for which ~5-7 Cr may be required to be kept aside.

10.   1HFY12 RESULTS

Kindly give us some perspective on the sales growth achieved? How much is on account of volume growth and how much from higher realizations? What is the outlook for 2HFY12? Is it likely to be as robust?

Well we produced 4678 MT in 1HFY12. In FY11 we had produced some 8560 MT, so if we consider on half year basis, the volume growth has been of that order 9-10%. The rest of the growth has come from higher realisations.

We expect to grow at similar rates in the second half of the year. Demand is robust, we have not seen any slowdown in demand for retreads, with manufacturing or industrial activity slowing down.


In developed markets, every tyre major has a retreading arm. With MNC tyre majors taking an increasing presence in India, do you see any moves from the tyre majors at acquiring retreading arms? How far are we from that kind of consolidation in Indian markets?

Retreading is not yet a serious business in India for any of the Tyre majors, yet.  MRF, JK Tyres have a presence but not on any significant scale. We are some years away from seeing consolidation efforts.

Michelin has announced its plans for India. And there are some radical changes/products proposed. For example, we usually see 10-12 kg retreads being offered in the Indian industry. But Michelin has said they will be launching the 15 Kg treads in India.

End of the day a retreaded Michelin tyre has to do 80-90% of the mileage that a new tyre gives. A regular 10-12 kg retread on a well-preserved Michelin tyre base should do the same job


What would you say is your biggest challenge or vulnerability as the company attempts to scale up and go to the next level. Where do you see Indag by 2015?

Indian retreading market had been fairly steady in the last several years. The unorganised sector continues to play its role. The organised sector has seen the entry of the tyre majors like MRF, JK tyres but that did not make for any significant impact. With the entry of Michelin and its plans of heavier, costlier 15 Kg retreads, we will see some changes and new challenges.

Indag should continue to do well and grow at our normalised rates for the next few years.


Ayush Mittal: No Holdings in the Company; ;
Donald Francis: No Holdings in the Company; ;
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Indag Rubber


Indag Rubber Limited (IRL) was incorporated in July 1978 as a joint venture between Khemka group and M/S Bandag Incorporated, USA, one of the biggest players in the US retreading industry. The company was listed on the Bombay stock Exchange in 1984. In 2006, the above joint venture was terminated with Bandag’s 38.3% shareholding taken over by the Khemka Group.

Manufacturing plant is at Baddi (Himachal Pradesh) with a capacity of 13,800 MT for tread rubber, 1,800 MT for rubber strip gums and 300 KL for rubber cement. The company had one other plant at Bhiwadi (Rajasthan), which is shut since 2006.

Main Products/Segments

The company manufactures precured tread rubber, un-vulcanized rubber strip gum, universal spray cement and tyre envelopes for the tyre retreading industry.

Close to 90% of the company’s revenue is generated from the sale of precured tread rubber.

Main Markets/Customers

Indag Rubber caters largely to LCVs and Trucks & Buses segments.

Midas Treads, Vamshi Rubber, Elgi Rubber International, MRF Ltd, JK Tyres and Indag Rubber are the significant players in the organized sector. These players supply their tread material to unorganised players who retread tyres.

Retreading is a process in which a new tread is applied on top of worn out tyres. In the precured retreading process, a precured tread strip is applied to the surface with a thin layer of bonding gum. Indag Rubber sells its products through its own depots/franchisees (C&F agents) appointed all over the country while the actual retreading operation is carried out by the retreaders. This apart, it also routes its sales to State Transport Units on a Tender-ed basis. Nearly 10-15% of Sales comes from this lower-margin tender business.

The company has ~25 depots pan India, which sell to retreaders. Some of these depots are owned and operated by Indag Rubber while the rest are operated by franchisees.

Bullish Viewpoints

  • Decent growth record – In the last 5 years Indag Rubber has clocked a 25% plus CAGR in Sales. Sales touched ~150 Cr in FY2011 from ~60 Cr in FY07. Profits have grown along similar lines with a ~26% CAGR growing from 4.2 Cr in FY07 to 10.75 Cr in FY11. In the same period book value has compounded by over 35% CAGR growing to ~44 Cr in FY11from ~13 cr.
  • Superior Margins & Returns – Indag Rubber enjoys industry beating margins and returns. RoE and RoCE have generally been in the 25%-30% plus range beating competitors by a wide margin. Similarly operating margins have been in the 12-15% range. FY11 was an aberration year for Indag as it had to pass on price hikes as high as 30% to partially offset the abnormal hikes in raw material prices, suffering volume and margin pressures. This was impacted further with tax free status changing to a 22% tax rate in FY11. To its credit H1FY12 has seen margins climbing back and volume growth kicking in.
  • Strong Balance Sheet – Indag Rubber has a robust balance sheet. Debt has been progressively brought down from ~13 Cr in FY07 to about ~7 cr in FY11, with debt-to-equity ratio standing at a low 0.16 in FY11. For the last 3 years Indag has only been securing working capital requirements through loans from Banks, not needing any Term Loans. Capex requirements between ~2-6 Crs have been funded through internal accruals.
  • Strong Free Cash Flows – Indag has been generating stronger free cash flows over the last 5 years recording a  CAGR of over 54% . Free Cash Flow has increased from ~0.57 Cr in FY07 to about 3.22 Cr in FY11. FY10 was the only exception when the company decided to go in for aggressive expansion in order to take advantage of tax and duty exemptions valid till 2015. With no expansions needed/foreseen in next 2-3 years, the company will is set to continue generating free cash for some years.
  • Robust recent financial performance – The first half of FY12 has seen Indag clocking an excellent growth track. While Q1 had seen a 33% sales growth with a 90% Net Profit growth, Q2 results have made everyone sit up and notice the exemplary 51% growth in sales and a 135% growth in Net Profits! Margins have been helped along by the softening in raw material (natural rubber) seen in Recent months.
  • Good dividend payouts – Starting in 2008, the company has been gradually increasing dividend payouts. Dividend per share has increased from Rs 2 to Rs 4 per share with dividend payouts increasing from ~13% in FY08 to ~20% in FY11.
  • Attractive Valuations – at CMP of 140, the stock is quoting at <7x trailing and <5x 1 year forward. Dividend Yield at ~2.86% adds to the comfort.

Bearish Viewpoints

  • Limited presence outside North India: The company’s limited presence in alternative growth belts of Southern and Western India can be a limiting factor in the company’s growth attempts. Some of the companys competitors are better entrenched in these markets – e.g. Midas, Vamshi Rubber and MRF in the Southern belt.
  • Intense Competition – The retreading sector is highly fragmented reportedly with over 10,000 players in the unorganised sector and ~6 players in the organized sector. Midas Treads, Vamshi Rubber, Elgi Rubber International, MRF Ltd, JK Tyres and Indag Rubber are the significant players in the organized sector. These players supply their tread material to unorganised players who retread tyres. Nearly 70% share of the total retread industry (hot and cold) is accounted for by the unorganised sector.
  • Cheaper Chinese Imports – Cheaper Chinese tyres are a source of competitive challange to the Retread industry, especially in times of slowdown in economic activity. In 2007-08, this shift from retreading to buy cheaper Chinese tyres had garnered lot of momentum. However with the government imposing a duty on Chinese tyre imports and customer experience with low product quality has meant these have lost much of the sheen. Demand for quality retreads from players like Indag is expected to remain firm.
  • Lower-Margin State Transport Retreading business: Sales to State Transport Undertakings (STU) account for a significant 15% of the company’s sales. Gujarat, Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, Uttar Prradesh and Himachal Pradesh are some of the states where IRL has significant salesto STUs. Tender based competitive bidding can erode margins, if the proportion of STU sales increase.
  • Low Capacity utilization: Historically capacity utilisation has been low. FY06 had seen a capacity utilisation of only 42%, which has only gradually moved up. Only once in the last 5 years has capacity utilisation touched 60%. The FY2010 expansion to 13800 MT capacity from ~9000 MT capacity again has meant utilisation falling below 60% to ~56% levels. However this should be seen in the context of availing tax exemptions on the entire exempted capacity completed by FY2010 for the next 5 years. This also means that IRL can scale up production with demand as needed, without incurring any significant capex for the next 2 years or so.
  • Volatility in raw material prices: Raw material constitutes between 70-75% of Sales. Natural and synthetic rubber account for 60-70% of raw material, both of which are vulnerable to global supply and demand, and crude movement. To its credit, Indag Rubber has been seen to be able to pass on the price increase to its customers, with a lag effect.

Barriers to entry

  • Strong distribution network – Indag has set up a strong distribution network over the years in its stronghold northern and eastern markets. And slowly expanding its presence in the Southern and Western belts. It has 25 depots and some 350 strong franchisee retreader network.
  • Strong State Transport Undertaking business – The company sells its products to State Transport Undertakings (STUs) via a tender system. Gujarat, Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, Uttar Pradesh and Himachal Pradesh are some of the states where IRL has significant sales to STUs. Sales to STUs have been increasing, now accounting for ~15% of the company’s total sales.

Interesting Viewpoints

  • Land at Bhiwadi, Rajasthan: IRL’s Bhiwadi plant located near Alwar in Rajasthan is shut since 2006 when the Himachal Pradesh (HP) plant went on-stream. All workers at Bhiwadi have been relieved. The Plant & Machinery has been shifted to the HP plant and there are no plans of restarting this plant. The possible sale of this land or putting it to alternative use could unlock value going forward though the timing of this is uncertain at this point.
  • Ability to pass on price increases – With severe spikes in Natural rubber prices seen in FY11, Indag Rubber was forced to effect a 30% hike in retread prices. The company could manage a 34% hike in sales revenues with margiunal erosion in profits. This is testimony to the company’s ability to pass on price increases and protecting profitability to that extent. ICRA has upgraded the rating of Rs.14.50 crore fund based facilities of Indag Rubber Limited (IRL)† from [ICRA] A (pronounced ICRA A) to [ICRA] A+ (pronounced ICRA A plus) rating on long term scale. The rating has been assigned a stable outlook.
  • Stake sale by promoters: Promoters presently hold 77% stake in the company. As per SEBI regulations, they will have to bring down their stake to 75% by March 2013. This could create some uncertainty and consequently have an impact on the share price.


Donald Francis: No Holdings in the Company;

Atul Auto


Incorporated in 1986, Atul Auto is a leading manufacturer of 3-wheeler commercial vehicles based out of Gujarat. Passenger auto rickshaws (3-6 seaters), pick-up vans and delivery vans (diesel, cng and lpg) are manufactured in a large number of variants.

Atul Auto’s Manufacturing plant situated at Shapar, 18 Kms. away from Rajkot has a production capacity of 24000 vehicle per annum on single shift basis. It is equipped with CNC machines, fabrication shop, high quality paint shop and test house. Atul auto’s R&D center is based in Pune.

Atul Auto has wind turbine generators of 1.25 MW capacity at Village Soda, near Jaisalmer, Rajasthan and another of 0.6 MW at Village Gandhavi, Jamnagar Gujarat.

Main Products/Segments

The Rear-Engine 3-wheeler Atul Gem is its fastest growing platform comprising ~57% of Sales in FY11. The front-engine 3-wheeler Atul Shakti is the other main platform bringing up ~42% of Sales in FY11. Atul Smart is a new brand of front-engine 3-wheeler launched in FY11.

Main Markets/Customers

Autorickshaw operators, transport operators and Corporates

Bullish Viewpoints

  • Growing 3-wheeler segment – This is a segment that has many growth drivers going for it. The government’s focus on road infrastructure development, restriction of heavy vehicles in the city, and the growing rural economy are important growth triggers. Over the years, Atul Auto has developed itself as a one-stop source for all 3-wheeler needs. It has made it’s versatile platform highly customizable to suit almost every kind of need and budget.
  • Impressive Growth -In FY11 Atul Auto registered a 68% growth in Sales and over 107% growth in Net Profits. 1QFY12 has seen the growth momentum continuing with both Sales and Net Profits registering ~56-60% growths. The company has guided for 40% growth in sales for FY12.
  • Reducing Debt – Debt is down to just 6 Cr in FY11 from ~23 Cr in FY10. That such stupendous growth is being achieved while reducing debt is heartening to note. Debt-to-Equity stands at just 0.15. With the ongoing rights issue proceeds, the company intends to repay its term loans and become a DEBT-FREE company in the near future, as per its 2011 Annual Report .
  • Reducing Working Capital requirements – Working Capital/Sales reduced to an astonishing 3.38% in FY11 as compared top ~15% of Sales in FY10. This is achieved on the back of increasing dealer advances and is a positive trend.
  • Increasing Cash Flows – Atul Auto has been increasing its cash flows handsomely in recent years. Cash flows from Operations grew to 16.72 Cr in FY11 from 9.58 Cr in FY10. With Bulk of the Capex undertaken in FY07-09 (~8 Cr each year), the company has been registering good levels of free cash flows. Capex requirements for existing platforms looks to be easily funded from current cash generation levels.
  • Increasing Dealer Network – With a current market share of less than 3% of total 3-wheeler market in India, Atul Auto is striving to increase its distribution reach beyond Gujarat. The company is expanding its presence in Andhra Pradesh, Rajasthan and Maharashtra while entering new markets such as Kerala, Karnataka, Bihar and Assam.
  • Export Foray – Atul Auto Ltd has started exports in Nigeria, Kenya, Egypt, Tanzania and some other African countries. It has also recently introduced Atul Gem Diesel & CNG variants in Bangladesh. Exports touched 3.2 Cr in FY11.
  • Expansion Plans – Atul Auto has been actively exploring expansion plans. It is in the fray to acquire the ailing Scooters India Ltd which also manufacturers front-engine 3-wheelers. It is also actively looking for technology partners for manufacturing 4-wheeler LCVs.
  • Strong sales in Q2FY12- Atul Auto Ltd has informed BSE that the Company has recorded total Sales of 6794 Vehicles in the quarter of July -September 2011, as against 4814 Vehicles of July-September 2010 Quarter, or a 41% growth in number of vehicles sold. This is on the back of the ~60% sales growth registered in Q1FY12.
  • Increasing dividends & yield – The company has consistently increased dividends in the last 2 years leading to a 5yr dividend CAGR of over 44%. At CMP of 98, the dividend yield is 3.27% (post rights capital basis).

Bearish Viewpoints

  • Heavily dependent on Suppliers – Atul Auto sources its engines from Greaves Cotton. Although this has been a long-term relationship, this complete dependence on one supplier can be a big risk.
  • Aggressive expansion plans – Although nothing concrete has yet been announced but the company’s expansion plans are a source of concern – whether it is acquiring the ailing Scooters India or investing into greenfield 4-wheeler LCV manufacturing, a much more competitive and technology intensive segment. There are big execution and market risks associated.
  • Litigations against the Company – 67 cases of litigation is filed against the company totaling 12.83 Cr. Of this 11.17 Cr is against one case filed by Lombardini, Italy with whom the company had entered a technical collaboration in 2006. To be fair, the company itself has filed a litigation against Lombardini for 43.08 Cr. The company had suffered heavy damages and had to recall and replace eventually some 8500 engines by 2009, due to this ill-fated venture.

Barriers to entry

  • Entrenched Players – The 3-wheeler market is dominated by entrenched players like Bajaj and Piaggio. Setting up manufacturing and a country-wide dealer network from scratch is an uphill task for new players.

Interesting Viewpoints

  • Strong Dealer Advances – As on 31st March, 2011 the company has 3.37 Cr as advances from dealers against 36 lacs in the previous year. This reflects good acceptance of Atul’s products in the market and is a very positive development for the company. If sustained, this could be key to reduced working capital needs of the company.
  • Rear-Engine 3 wheeler growth – India is pre-dominantly a Rear Engine 3-wheeler market. Atul had started with Front-Engine technology (Atul Shakti) and introduced rear-engine 3 wheelers in 2007-08 in collaboration with Lombardi which faced trouble with the engines (Read this case study for a great backgrounder on the company). These problems seem to have been bested and the rear-engine 3-wheeler Atul Gem (recorded a 144% growth in Sales in FY11.


Donald Francis: Less than 5% of Portfolio in the Company; Holding for more than 2 years