Manjushree Technopack Management Q&A: Aug, 2011

Management Q&A

Transcript of discussions with Executive Director, Surendra Kedia

1.     EXCELLENT 1ST QR RESULTS! SALES & PROFITS UP BY OVER 60% AGAIN JUST LIKE 1QFY11.

Congratulations! With such a tremendous quarter behind you, how does the rest of the year look?

Yes we had a good 1st Qr. We should have a reasonably good year in FY11. There is some slowdown in growth in the business on the FMCG side. The high interest rates and inflation is having its affect on discretionary budgets of middle class Indians. Some customers projecting 20% growth are seeing growth in 12-13% levels.

Any major clients added? Besides Coke as your major client, have you been able to penetrate deeper into Pepsi account?

We have grown the Coke relationship. As you are aware we are their #1 supplier. We are also very proud of becoming the #1 supplier for Bisleri. This account started from low levels and as we kept delivering and winning the customer’s confidence we have been successful in penetrating deeper. Pepsi business has also grown over the years, but as you are aware, the dynamics of Coke and Pepsi businesses does not allow the same dominant supplier. We are very hopeful of concluding a significant business on the Containers segment from a major player, shortly.

What about the promising “Beer” segment?

There is some development there. Sab Miller has introduced PET 1 Lt and 1.5 ltr beer bottles. They are experimenting with this for the last 4-5 months. They initially imported the Preforms, and have also used some local suppliers. Volumes coming from this segment is some 1 to 1.5 yrs away still, as this involves major re-investment by the bottler in separate PET lines from the Glass lines.

We will be there surely to pitch in as and when some momentum kicks in.

What about Liquor sales in PET bottles?

This has been going on for last 3-4 years, but we were not targeting that market. Now with additional capacity we have started targeting and now count Radico Khaitan, Khodays and a couple of other players as customers.

2.     PRODUCTION CAPACITIES

What has been the progress on the capacity expansion program? What is the current capacity available and what was the Capex incurred in FY11 for the same. What is the capacity utilization currently? 

As on 31st March we had 36000 MTPA capacity. About 27500 is for Preforms and 8500 for Containers. Capex incurred in FY11 was ~25 Cr. Capacity utilisation has been at 90%. Plan for FY12 is to reach 40000 MTPA.

3.     PRODUCT SEGMENTS – PREFORMS AND CONTAINERS ARE THE MAIN SEGMENTS.

Could you share the production/Sales break-ups between the two segments for the year? Is it correct that Container Sales are more or less stable from Quarter to Quarter while Preforms segment has major seasonality being driven by CSD segment in the hot summer months.?

Today its roughly 60:40 between Containers and Preforms business in Value terms. Preforms production share is more like 70% as a significant chunk of that is through jobwork basis. Container business is steady and does not see the seasonality like in Preforms.

4.     SEASONALITY IN SALES –Q1 & Q4 ARE YOUR BEST QUARTERS

Looking at the results over last year and this year, it is very clear that Q1 & Q4 are your best quarters – demand-wise. And this is mainly driven by the CSD segment –hot summer months.

The Sales slowdown is usually more than 25% from peak sales in Q4 or Q1. How have the last 2 months been? Is the same pattern likely to repeat in Q2 & Q3?

As you are aware Q1 and Q4 are better quarters for us. Q2 and Q3 are dull quarters. Coke and Pepsi are seeing slower growths.

On the other hand, if we look at the demand surge in Q4 & Q1 it looks like it could absorb any capacity. Something like 3x existing capacity may also get absorbed?? What is the peak demand from say Coke and how much is Manjushree currently supplying?

What I can say is that between the quarters supply requirements fall by as much as 50%. We are a bit better off being in the South where the weather extremes are not as harsh. The players in Northern India must be seeing supply drops of 60-70%. Manjushree is today supplying probably 15% of the total Preform market.

5.     COMPETITION

Amcor is unlisted and so is Sunrise. Futura has been making losses since last 3 years. But AMD Industries has been doing well. For last 2 years they were at similar OPM as Manjushree but lacked slightly behind at NPM levels. They had a very good 1Qr and registered NPM at ~16%!

Kindly elaborate and help us understand the competitive scenario better. How serious is AMD as a competitor, with ramped up Preforms capacity. What about competition in the Containers segment? How is Pearl Polymers doing? Any other significant player?

There are 2-3 new players in Preforms. National Plastics with factory at Baddi and operations in North India. Chemo Plastics in Baroda, and another Hyderabad based player ramping up capacities. We have not seen AMD Industries ramping up aggressively. Pearl Polymers is not into Preforms and it has been registering only marginal growth.

6.     OPERATING MARGINS – SUSTAINABILITY

The most noticeable and remarkable performance is in constantly improving Operating margins – from 16% to 19% to 22% in the last 3 years. You had mentioned last year that this is simply economies of scale at play. What is the picture for FY12? We now have new facilities catering to the enhanced capacity? What are sustainable Operating Margins for FY12 and beyond?

We feel the operating margins are largely sustainable. There may be a fall of 100-150 basis points at the most. We should manage 20% plus OPM levels.

7.     CAPEX AND FUNDING.

What are the Capex plans for the next 2 years and how much funding would you need to tie up for the same in FY12 & FY13? Would this be totally through debt or are there any chances of equity dilution?

We will need about 40-50 Cr for FY12. Our new location and plant should be ready for shifting in by Dec 2011. This will be managed from internal accruals and debt. As mentioned before we are trying to secure ECB Term Loan on a long term basis. We are also exploring buyers credit from our machinery suppliers.

8.     WORKING CAPITAL MANAGEMENT

One of the pains in your seasonal sales demand is to keep producing and storing during the leaner Q2 & Q3 to deliver for bumper requirements in Q4 & Q1. This is perhaps reflected in the huge rise in Working Capital requirements in FY11. from 22% of Sales in FY10 to 38% in FY11, mainly due to rising Inventory. Kindly share what the company is doing to manage burgeoning Working Capital needs.

As you know Q1 and Q4 are our best quarters. But we keep producing and storing in the leaner Q2 and Q3 quarters so as to be able to do justice to the requirements in Q4 and Q1. Yes Inventory levels will be higher as the business grows. It will need better and proactive handling from our side to reduce this burden.

Infact our total funding requirement has been going up substantially as we need to keep expanding for growth. We have recently inducted a CFO to focus on improving our financials. 

The Interest burden has come down from Rs 3 Cr levels in 4QFY11 to 1.9 Cr in 1QFY12. How has this figure come down?

We had to account for additional Banking & Finance charges in Q4 FY11. Bulk of the charges were confirmed by the bank in the last Qtr and accordingly were accounted in the qtr.

Have you tied up any loans through the ECB/FCCB route for lower cost funding on both long term debt and working capital front? Could you give us a sense of the likely Interest range for FY12?

Yes, we are trying for ECB Term Loans and hopeful of concluding some arrangement in the next 2 months or so.

9.     NET MARGINS – SUSTAINABILITY

You had exactly the same situation in FY11. A stupendous first quarter with Net Margins crossing 9% for the first time. Management had sounded very confident of maintaining Net Margins at 9% levels for FY11, but ended up at ~7%. Please comment on what are sustainable Net Margin levels for FY12 and beyond?

We should do better than FY11 on the Net Margins front. We are focused on achieving better profitability.

10. MAJOR OPPORTUNITIES & CHALLENGES

Where does Manjushree Technopack see itself in the next 5 years? What is the size of the opportunity in its niche? Can we see Manjushree Technopack reach 500 Cr Sales, by when? What are the major challenges before the company and where are the big opportunities?

500 Cr in Sales by 2015 is a good target to work for. We need to achieve a few milestones on the way – still a long way to go. Meanwhile we are hopeful of touching 300 Cr Sales in FY12.

I think we have demonstrated that we are able to execute fairly well for our prestigious customers. We have kept growing the business with all our clients and are penetrating deeper.

As you know, ours is a very difficult industry. As we scale up, the main challenge before the company is better financial management.


Disclosure(s)

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

Suprajit Engineering Management Q&A: June 2011

Management Q&A

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Disclosure(s)

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

Manjushree Technopak Management Q&A: Sep, 2010

Management Q&A

1. WE HAVE SPOKEN AFTER THE EXCELLENT 1ST QR RESULTS. CONGRATULATIONS, AGAIN!

How does it look from here? Have you added any new clients? Tupperware??

Thanks. Business outlook remains good. Tupperware is an existing client, it has been with us for over a year now. GSK consumer division is a significant new client we have added, for which we have set up additional dedicated capacity.

2. EXTENDED MONSOON HAS DAMPENED BEVERAGE SALES IN Q2 IN NORTH INDIA. THE 20-25% GROWTH FIGURES ARE DOWN TO SINGLE DIGITS, AS PER NEWS REPORTS.

How does Q2 look for Manjushree? Is it also badly affected?

Yes, North India sales is badly affected. But there has not been that much effect in the South. As you are aware, Q1& Q4 are Manjushree’s best quarters while Q2 and Q3 are slightly dull. To that extent sales will be lower in Q2. But nothing out of the ordinary has happened in Q2 for MAnjushree.

3. OF LATE MEDIA ACTIVITY HAS PICKED UP. SHRI VIMAL KEDIA HAS BEEN ON SEVERAL CHANNELS. THERE WAS A BUSINESS INDIA ARTICLE TOO. WE HAVE HEARD A FIGURE OF 200 CR FOR EXPANSION PROJECTS.

Seasoned investors are speculating that perhaps Manjushree will be looking to raise funds through the equity route, and is beefing up its profile in the media. Tell us more on the expansion plans. How will this be funded?

You know how Media exposure plays out. A set of good results, one channel interviews you, then others also get interested in the story. Nothing more than that, we certainly are not thinking of diluting equity in the near future.

The 200 Cr expansion figure is spread out over the next 3 years. One thing is certain, the industry we are in calls for continuous investments in capacity. you have to keep pace with your customers growth, if you cant business will go elsewhere. Rs. 60 Cr capital expenditure is planned for FY11, while Rs. 80 Cr is envisaged for FY12. Funding will be through debt and internal accruals. Our Balance sheet can be leveraged for that.

Of the Rs.60 Cr capital expenditure in FY11, half will go towards plant & machinery and the other half towards land & building.

4. AMCOR PLASTICS, THE GLOBAL RIGID PLASTICS PACKAGING MAJOR HAS SET UP MANUFACTURING IN PUNE. ALCAN, KLOCKNER, PENTAPLAST, CAN PACK, BOSCH PACKAGING ARE ALSO GETTING ACTIVE IN INDIA.

What is the level of competition activity? Isn’t Amcor Plastics, a big threat? Are the other players ramping up on capacity?

Amcor Plastics is one of 3 players in PET Preforms. But we have not seen them augmenting capacity in a big way. Perhaps Indian market is still not a focus area for the Australian major.

Among the domestic competition Futura and Sunrise, again we have not seen any significant augmentation in capacity. By the end of the year we will be far ahead of competition.

5. LETS SHIFT FOCUS TO MARGINS AND PROFITABILITY. OPERATING MARGINS HAVE JUMPED TO 19% (16% FY09).

Is this sustainable? What are the contributing factors? Is preforms jobworks going up the main reason?

What you are seeing here is simple economies of scale. With higher volumes, our fixed costs are getting spread over a larger base. Operating margins should be sustainable at these levels. Even without jobworks, we would have seen margins trending higher.

6. NET MARGINS HAVE NOT MOVED UP! 7.08% (7.09% FY09)

Depreciation costs have gone up to 7% (4.5% FY09) of Sales, and Interest costs have climbed to 2% (1% FY09). what is the picture likely for FY11?

We expect to record higher net margins for FY11 on the back of increasing Operating margins, which will be offset to an extent by the higher depreciation (increased capex) and interest cost ( increased debt).

7. WORKING CAPITAL HAS SEEN A BIG SURGE. WORKING CAPITAL/SALES IS AT 35% (21% FY09 AND ROUGHLY THE AVERAGE IN PREVIOUS YEARS)

Debtor days has gone up by 20% to 66 days (55 in FY09). Inventory Days is more or less at same levels at 64 days (67 in FY09). Payables days has shot up to 30 days (12 in FY09). Whats the likely trend in FY11?

Our debtor days are normally around that 2 months figure. Sometimes it may go up or down by 5 days. Inventory days will also be similar. 1 month Payables days is likely.

8. PREFORMS CAPACITY IS ROUGHLY 22000 MTPA. CONTAINERS CAPACITY IS 7000 MTPA.

You have announced capacity enhancement upto 36000 MTPA in FY11. How much will be Preforms and in Containers?

Preforms capacity will go up by ~5000 MTPA, and containers by ~2000 MTPA.

9. MOVING ON TO THE EXCELLENT QUARTERLY RESULTS. NET MARGINS AT 9.2%!!

While Depreciation and Finance costs have gone up, there is improvement in all other expense fronts/Sales – raw material, power & fuel, employee costs, other manufacturing sales & administration. Is this sustainable??

We touched on this before. We are reaping the benefits of economies of scale. yes we expect net margins to settle down at slightly higher levels than the past 2 years. We may see a drop of 500 basis points from Q2 levels, at 8.5% or so.

10. DIVIDEND PAYOUTS HAVE SLIPPED FROM 18% TO 13% IN FY10

Your dividend policy seems to be stuck at 10% of FV. One would expect dividends to keep some pace with the increase in earnings.

Well, at this stage of our growth, our business requires all the funds that we can plough back in the business. We believe our shareholders are reaping a greater return from the business results and stock performance. Having said that, yes we should see higher dividend payouts in future.


Disclosure(s)

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

Manjushree Technopak

Background

Manjushree Technopack Limited is a rigid plastic packaging solution provider which specialises in the packaging of consumer goods. 


Main Products/Segments

Plastic Containers for packaging, PET/PP Jars & bottles, PET Preforms, Multilayer Containers, Hot fillable PET bottles, Injection Moulded Products


Main Markets/Customers

FMCG, Pharma, F&B, AgroChemicals


Bullish Viewpoints

  • Best Margins & Returns in the business – Operating Profit Margin (OPM) stands at 16% vs industry median at~10%; (global majors like Rexam Plc and Amcor operate at less than 9% OPM); both returns and margins have been trending up over the years in a very competitive industry
  • More than tripled its sales in last 5 years while earnings per share (EPS) has gone up 8x (on an adjusted basis) in the same period
  • Top marquee MNC clients in FMCG & Pharma space – Coke, Pepsico, Bisleri, Nestle, P&G, GlaxoSmithkline, Pfizer, Britannia, Kraft
  • Capacity expansion up from ~9000 metric tonnes per annum (MTPA) to ~22000 MTPA in FY09 and further upto ~29000 MTPA in FY10 on the back of strong long term job work contracts
  • Nice clean balance sheet – strengthened progressively over the years with adequate liquidity, very decent inventory and debtors management, and low debt to equity (<0.5). However FY10 D/E is slated to go up (> 1) due to fresh Term Loans for ongoing Capex .

Bearish Viewpoints

  • At 150 Cr Sales Turnover in FY10 Manjushree is still a pretty small company. Execution risks are probably significant as the company tries to attain scale.
  • Highly competitive and fragmented industry – the unorganised sector also plays a significant hand
  • Raw material price volatility – PET resin the key raw material is linked to crude prices
  • Environmental Regulations & Compliance stipulations of Regulatory bodies on Plastics remains a concern
  • Entry of MNC Plastics Packaging companies in the domestic market can be a threat

Barriers to entry

  • While Investments in Capex may seem low; of the order of 5-10 Cr per machine, passing stringent business and quality requirements and forming successful relationships with MNC clients usually takes upwards of 2 years

Interesting Viewpoints

  • Signed long term 3 year contracts with Coke
  • Management is confident of maintaining a 30% YoY growth record for next 5 years
  • Designs and Customer Acceptance trials ongoing for catering to Liquor Industry. Beer Consumption is 50 lakh bottles a day in India!

Disclosure(s)

Donald Francis: No Holdings in the Company;


Manjushree Technopack

Company Background

Founded in 1977 by technocrats, Manjushree started as a small umbrella manufacturing unit in Guwahati, Assam. In 1984 it forayed into manufacturing of Plastic Flexible packaging and came up with its IPO in 1995 to diversify into PET bottles manufacturing with a unit in Bangalore.

Today it has carved out its own niche in the PET bottling industry. It boasts of a marquee client list the likes of Coca Cola, Pepsico, Bisleri, P&G, GSK, Nestle, Cadbury and Unilever and has emerged as the supplier of choice. With two manufacturing units in Bangalore, installed capacity in FY10 is ~30,000 metric tonnes.

Main product lines include PET jars and bottles, PET preforms, PP and Multilayer containers.


Growth Snapshot

We can’t just look at a series of past growth rates and assume that they will predict the future – if investing were that easy, money managers would be paid much less, and this stock analysis would be much shorter. It’s critical to investigate the Sources of a company’s growth.
Variable FY06 FY07 FY08 FY09 FY10
Sales Turnover (Rs. Cr.) 65.32 79.97 85.18 118.79 160.05
Sales Growth Year on Year 25.55 4.80 43.21 41.13
3yr Average Sales Growth 24.52 29.71
3yr Sales CAGR 14.71 22.51 42.16
5yr Average Sales growth 28.67
5yr Sales CAGR 27.70
Profit After Tax (PAT) (Rs. Cr.) 1.37 2.83 4.40 7.49 10.57
Adjusted EPS 1.01 2.09 3.25 5.53 7.80
EPS Growth Year on Year 106.57 55.48 70.23 41.12
3yr Average EPS growth 77.42 55.61
3yr EPS CAGR 79.21 62.69 54.99
5yr Average EPS growth 68.35
5yr EPS CAGR 66.66

Manjushree Technopack has made steady progress over last 5 years. Sales have grown at ~25 percent CAGR while EPS on an adjusted basis has grown at over 60 percent CAGR.

Sources of Growth

1. Carbonated Soft Drinks (CSD) market is growing at over 30 percent CAGR. For Coke and Pepsi India has emerged as the fastest growing market in FY09 with both announcing huge investment plans. Coca Cola says its $250 Mn India investment plan is on track while Pepsico India had announced a Rs 1,000-crore investment for 2009.

2. Product Mix has shifted in favour of PET Pre-forms which bring in enormous efficiencies in storage and transportation (1/5x fully blown shapes) and benefit both the packaging company and the beverage manufacturer. All major beverage manufacturers have installed Pre-form blowing machines at their bottling plants.

Manjushree was early to spot this trend and has now emerged as the largest organised player in PET Pre-forms. Huge capacity expansion from ~9000 MT in FY2008 to ~21000 MT in FY09 to ~30000 MT in FY10. For a company of its size, this is pretty aggressive expansion but seems to have paid off, as it has quietly become a dominant player in its niche, becoming Coke’s largest PET supplier.


Profitability Snapshot

Profitability is the second, and in many ways, the most crucial, part of our Analysis framework. How much profit is the company generating relative to the amount of money invested in the business – the returns? This is the real key to separating a great company from average ones -the higher that return, the more attractive that business. Net profit Margins and comparing cash flow from operations to reported earnings per share are good ways to get a rough idea of the company’s profitability (because cash flow from Operations represents real profits!). But neither account for the amount of capital that’s tied up in the business, and that’s something we cant ignore. We need to know how much economic profit the company is able to generate per dollar/rupee of capital employed because it will have more excess profits to re-invest which will give it an advantage over less-efficient competitors.
Variable FY06 FY07 FY08 FY09 FY10
Operating Profit Margin 12.28 12.48 16.08 16.43 18.94
Net Profit Margin 2.44 4.02 5.97 7.09 7.09
Fixed Asset Turnover 3.10 3.43 2.33 1.82 1.62
Asset Turnover 1.71 2.29 1.10 1.19 1.07
Return on Assets 4.19 9.20 6.59 8.43 7.58
Financial Leverage 2.82 2.21 1.25 1.49 2.04
Return on Equity 11.82 20.30 8.22 12.60 15.44
Return on Capital Employed 10.89 19.79 13.11 14.51 13.60
Debtor Days 57.58 48.50 69.79 54.82 65.93
Inventory Days 58.21 45.63 80.58 76.77 64.42
Cash from Operating Activities (Rs. Cr.)
Operating Cash Flow to Sales
Capital Expenditure 5.19 14.46 31.22 43.83
Free Cash Flow
Free Cash Flow to Sales
Equity Dividend (Rs. Cr.) 0.48 0.48 0.49 1.35 1.36
Dividend per share 1.14 1.14 0.36 1.00 1.00
Adjusted DPS 0.35 0.35 0.36 1.00 1.00
Dividend Growth Year on Year 0.00 2.08 175.51 0.74
3yr DPS CAGR 1.04 67.71 66.60
5yr DPS CAGR 29.74
Dividend Payout 35.04 16.96 11.14 18.02 12.87

 

Over the last few years Manjushree has shown steady improvements on Net Margin front going upto over 7 percent in FY09. Operating margins have similarly climbed upto over 16 percent. These are pretty decent numbers for the highly competitive Plastics Packaging industry.

The record on Return on Equity and Return on Capital Employed at ~13 percent and 15 percent may seem nothing to write home about. But compare these over the industry and one can see these are again industry-beating returns and margins.

The company’s performance on Debtor days and Inventory days over the years has shown a gradual improvement and speaks well of management focus on operational efficiency.

Manjushree has a good track record on Dividend payment. It has been regularly paying dividends and current Dividend Payout ratio stands at ~21 percent. The company has been increasing dividends in tune with profitability and 5 year dividend CAGR is at a healthy ~35 percent.

Overall Manjushree appears to be a well-run company in a highly competitive industry.

 


Common size P&L Statement

Can we dig deeper to see what else we can understand about how this company makes money? A good way is to look at the common size profit and loss statement. Common size statements are great tools for evaluating companies because they put every line item in context by looking at each of them as a percentage of Sales.
Variable FY06 FY07 FY08 FY09 FY10
Common Size Sales 100.00 100.00 100.00 100.00 100.00
Common Size Raw Material 54.34 57.76 54.31 53.93 54.84
Common Size Power & Fuel 6.66 5.26 5.83 5.73 8.10
Common Size Employee Cost 3.96 4.43 6.08 5.86 5.60
Common Size COGS 77.09 77.08 72.92 72.89 76.37
Gross Profit Margin 22.91 22.92 27.08 27.11 23.63
Common Size Depreciation 6.03 3.91 4.56 4.68 6.54
Common Size Interest Cost 2.55 2.46 2.70 1.36 2.27
Common Size SG&A 11.42 9.68 13.52 11.43 11.02
Operating Profit Margin 12.28 12.48 16.08 16.43 18.94

While on most parameters there is gradual improvement, Cost of Goods Sold (COGS) shows good improvement coming down to to about 74 percent from 77 percent in FY05. Operating margins are sustaining at over 16 percent for last 2 years showing a big uptick from ~12 percent levels 3 years back.

Manjushree Technopack seems to be getting better at managing its operations as it scales up.


Financial Health Snapshot

Once we have figured out how fast (and why) a company has grown and how profitable it is, we need to look at its financial health. Even the most beautiful home needs a solid foundation, after all.
Variable FY06 FY07 FY08 FY09 FY10
Financial Leverage 2.82 2.21 1.25 1.49 2.04
Debt to Assets 0.65 0.55 0.20 0.33 0.51
Debt to Equity 1.82 1.21 0.25 0.49 1.04
Interest Coverage 2.49 3.52 4.40 8.96 5.59
Interest Cost to Total Debt 6.78 10.28 15.02 4.89 4.78
Current Ratio 4.29 1.84 5.60 4.80 3.68
Quick Ratio 2.82 1.36 4.07 2.89 2.63
Cash to Assets 1.96 8.71 13.86 0.50 5.69

In its bid for growth Manjushree seems to have used Financial Leverage judiciously to its advantage, in the last 5 years or so. From a relatively high financial leverage (Assets/Equity) of 2.79 in FY05, Manjushree has brought this down to more conservative levels of 1.49 in FY09. It is when we see financial leverage ratios of 4, 5, or more that companies start to get really risky.

Manjushree has maintained comfortable levels of Interest Coverage. FY09 figure stands at a comfortable ~9x Interest expense. In fact Interest Coverage figures have grown 3 times in the last 5 years, steadily climbing year on year from about 2.5x levels in FY05. This points to a steadily improving financial health condition. Debt to Equity at 0.49 in FY09, is also at comfortable levels after hovering on the higher side in FY05 and FY06.

Manjushree has been maintaining healthy liquidity levels more or less consistently. FY09 Current Ratio at 4.8x and Quick Ratio at ~3x, indicate that Manjushree can always raise enough cash, if it had to say, pay off its liabilities all at once. However such high levels of Current Ratio might also suggest Manjushree Management is retaining too much cash on hand and is not perhaps putting that to the best use.

Manjushree Technopak Management Q&A: Jan 2010

Management Q&A

1. MANJUSHREE HAS MADE SOME RAPID STRIDES IN THE LAST 4-5 YEARS. YOU HAVE TRIPLED SALES AND CROSSED THE 100 CR MARK IN FY09. EPS ON AN ADJUSTED BASIS HAS GONE UP 8X IN THE LAST 5 YEARS.

Plastic Packaging is a hugely competitive industry. Although this is on a low base, the track record is great. The Balance sheet too looks strong. Congratulations! what do you attribute this growth success to?

Management’s focus on investing everything we can back into the company is probably the number 1 factor – and this permeates everything that we do, our conservativeness in spending, etc. Our steadfast commitment to Quality and our ability to think differently, be the first to introduce new technology into the country, would come a close second.

2. YOUR OPERATING MARGINS ARE AT 16% LEVELS OVER LAST 2 YEARS. THIS IS MUCH HIGHER THAN INDUSTRY OPM AT AROUND 10-11%. EVEN GLOBAL MAJORS WORK ON 8-9% OPM.

What are the reasons for this superior operating performance? What are you doing differently than say 4 years back? And is this sustainable?

Unlike some others in the industry, we are completely focused on our niche –rigid plastics packaging. Some years back we had a division catering to flexible plastics packaging (intensely competitive), which we have since discarded. We have found we can compete better by focusing all our energies into our specific niche, we can track global trends better, we can bring the latest technologies into the country in tandem with customer needs, and try and keep a step away from competition.

Again unlike others, we have chosen to cater 100% to the Instituitional customers and do not have a retail presence at all. This requires a higher level of commitment and responsiveness to changing customer requirements in a completely dynamic environment, but is equally rewarding (growth, volumes) if you are upto the challenge. At any point of time we have 5-6 different joint-customer design projects going on!

These are some things that help us keep the edge. But the single biggest factor is probably our superior handling of raw material/inventory management, followed closely by a relentless watch over operational efficiencies.

We do not foresee any drastic declines in our margins, though we might see a 1-2% fall from time to time, it’s possible due to raw material price volatility, or other external factors.

3. YOU HAVE EXPANDED/STILL EXPANDING CAPACITY AT A RAPID CLIP. FROM 9120 MTPA IN 2008 TO 21740 MTPA IN 2009. FURTHER ADDITIONS DURING THIS YEAR IS LIKELY TO TAKE THE CAPACITY TO 28640 MTPA BY MAR 2010.

That’s 3x the capacity in 2 years! The Coke contract was for 6500 MTPA, with a 50% increment in FY2010, that would be ~10000 MTPA. FY 09 production was ~7000 MTPA. What other contracts have you signed/in the pipeline that justifies the continuous expansion? What is the current capacity utilisation?

We are operating in a very dynamic environment. Growth is not really a constraint, the challenge is not to falter on delivering consistent quality, and on time.

So far we have had an excellent track record. We have completed our expansion projects ahead of time. The latest expansion is on schedule, the machines are already installed, the logistics & support facilities are coming up and will be ready in the next 3-4 weeks and will certainly be on-stream by March 2010.

4. YOU HAVE MENTIONED THE COKE CONTRACT IS A JOBWORK. WE ASSUME THAT MEANS RAW MATERIAL PET RESINS, ETC ARE SUPPLIED BY COKE. THOUGH RAW MATERIAL VOLATILITY WILL BE OUT OF THE WAY, THAT WOULD ALSO MEAN THE JOBWORK CONTRACTS WOULD SURELY BE AT LOWER PROFITABILITY TO MANJUSHREE.

Given high capacity additions, there is the risk of low capacity utilisation. Besides if you take on more jobwork (currently 50% of capacity?), there is the possibility of further squeeze on margins. Looks likely that Returns and Profitability will be dented. What are Management’s plans on sustaining current levels?

This is something that we will have to see as it plays out. There is always that risk you have to take on in a dynamic business environment. If I am unable to commit and deliver on customer volume growth requirements, the business will simply go elsewhere. We have to take on these risks which are inevitable if we have to play in this industry, that is how the game is played! We have to be nimble on our feet; deliver on time, and deliver consistent quality; we can’t afford to fail on any parameter…we just have to find a way out to meet customer requirements.

At the same time we take comfort from seeing a natural hedge getting built in into our business-model as the proportion of jobwork (raw material volatility goes to customer account) in production goes higher. While corresponding Topline will certainly be lower (when jobwork proportion is higher) you see the proportion of raw material costs as a percentage of Sales will keep going down, and this will add distinctly to the bottomline, as volumes drive growth. We are quietly confident that we will make it up on superior volume growth.

5. MANJUSHREE BOASTS OF A MARQUEE CLIENT LIST, COKE, PEPSI AND OTHER MNCS. APART FROM RAW MATERIAL VOLATILITY, THESE SAME MNCS ARE QUOTED BY OTHER PLASTICS PACKAGING COMPANIES AS BEING RESPONSIBLE FOR THE DREADED MARGIN SQUEEZE PREVALENT IN THE INDUSTRY.

Is Manjushree doing anything differently? What are its competitive advantages? Why will they be sustainable, since entry barriers are pretty low. Whom do you count among your strongest competitors?

We are proud to be associated with some of the biggest names in the FMCG and Beverages space. All our customers have remained with us from the start and we have been able to consistently build on the relationships.

It’s not easy to penetrate into any of these accounts. It takes atleast 1.5 -2 years for a customer to evaluate you as a company (stability), your products and sustained quality. A 10 Cr investment in say Husky machines may seem a small investment –but actually its huge when you compare the per unit cost of the product (a coke bottle, e.g.). Where are you going to get the volumes to justify that investment – I can tell you, no newcomer to this industry can even think of that kind of investment, they will simply run away.

Having said that, this is a very competitive industry. You have to be on your toes all the time, to be close to your customers, work with them jointly on current/future requirements, and deliver consistently…if you fail the business will simply go elsewhere. We are happy with our customer relationships and they have been extremely supportive too.

Pearl Polymers, Futura are some of the players that are catering successfully to the same customers.

6. INDIAN PLASTIC PACKAGING FOR BEVERAGES IS SLATED FOR A 13% CAGR GROWTH TO REACH 8555 MILLION UNITS BY 2013, AS PER A EUROMONITOR REPORT. ALTHOUGH MANJUSHREE HAS DONE WELL FOR ITSELF OVER THE LAST FEW YEARS, IT’S STILL A VERY SMALL PLAYER.

What are your longer term plans? Apart from Beverages, what are the most attractive customer segments for you? Any plans to tap other packaging (plastic flexible packaging, metal beverage cans, paper) segments?

We are completely focused on our niche of rigid plastic packaging. At the moment there are no plans to look elsewhere. As you mentioned, the growth opportunities are tremendous. It remains in our ability to stay focused, and our ability to scale up on a consistent basis, without sacrificing any of our strengths. If we can execute well, there is no reason for us not to do reasonably well in the next 5 years.

We are confident of seeing a 30% CAGR in our business, for the next 5 years.

7. CAPITAL EXPENDITURE HAS BEEN DOUBLING EVERY YEAR FROM LAST 3 YEARS. FROM 8 CR TO 16 CR, TO 32 CR IN FY09. YOU HAVE ANNOUNCED A 64 CR TERM LOAN FOR ACQUISITIONS OF FIXED ASSETS IN THE CURRENT YEAR.

Sales or Profits have not kept pace with this capacity expansion. How scalable is this business? Will you be in a position to register some free cash flows anytime in the medium term? How will you fund future Capex requirements- further equity dilution, or is there room for leveraging the balance sheet by taking on more debt?

We have been investing all we can back into business expansion. We are a small company and we will need to keep investing more in business expansion for a number of years. Yes the pace has been fast, but we need to capitalize on the opportunities we are getting. We see nothing wrong with investing more in the business for a steady 30% CAGR growth for the next few years.

Coming to funding future capex question. We do not foresee further capex requirements for a year or two, possibly. With this fresh 64 Cr loan, debt-to-equity levels will be around 1.5 which is reasonable for our industry. The Balance Sheet is strong and there is room for further leveraging as we will keep bringing debt levels down.

However if there is a significant opportunity down the line, that needs us to dilute equity, we don’t rule that out.

8. MANY MULTINATIONAL FIRMS ARE ENTERING THE INDIAN MARKET DUE TO ITS LOW COST ADVANTAGES AND READILY AVAILABLE HUGE DOMESTIC MARKET. THE GLOBAL PLASTIC PACKAGING MAJOR ALPLA GROUP SET UP A 74:26 JOINT VENTURE COMPANY – ALPLA INDIA PVT. LTD AT BADDI, HIMACHAL PRADESH. SIMILARLY, KLOCKNER PENTAPLAST HAS PLANNED A UNIT IN AURANGABAD.

How are you gearing up to handle the threat from multinational players with better technology and global customer relationships that they are sure to leverage on?

We have not found this a threat till now. We are predominantly a south based player and currently do not cater to the North belt at all. The freight costs will be enormous! By the way, The southern region (Kerala, Karanataka, Andhra, TamilNadu) comprises 60% of the total demand for beverages in the Indian market.

At the moment we haven’t done enough to cater to just this region.

9. TOTAL DEBT HAS MORE THAN DOUBLED FORM RS. 13.25 CR IN FY08 TO RS. 29.42 CR IN FY09. HOWEVER INTEREST COSTS HAVE ACTUALLY COME DOWN FROM ~13% IN FY08 TO ~4% IN FY09

Appreciate if you can comment on the above so we can understand the picture better.

Firstly, if you exclude the unsecured non-interest bearing loans (husky machines, sales tax credits), the interest costs are in the 7% range.

Secondly what you are seeing is a snapshot of the Balance sheet on that day, right. What this does not reveal is the period for which the Rupee Cash credit limits were utilized. It was availed only for a limited period and not from the start of the year.

10. YOU HAVE SEVERAL MARQUEE BRAND NAMES IN YOUR CUSTOMER LIST.

For a smaller player how difficult is it to service these customers? How do you manage the customer relationship and engagement process? Please name your top 3 customers. What percentage of revenues comes from them?

As we have mentioned before we are happy servicing our prestigious customers and their demanding business requirements. They too have been very supportive of our issues, whenever we have asked them for any help.

We work closely with all our customers. At any point of time 4-5 joint customer design projects are on. We are always engaging with them on current and future requirements.

No single customer business exceeds 10% of our sales.

11. REAL LIQUIDITY ON DAY-TO-DAY BASIS SEEMS MUCH MORE STRAINED THAN THE RATIOS REVEAL? FY08 POSITION WAS BETTER BECAUSE OF THE FD OF XX CR. MARGIN MONEY ON LC & BG ALSO MAY NOT ABLE FOR ANYTHING ELSE.(CASH -5.28 LAKHS, CURRENT ACCOUNT -28.6 LAKHS, MARGIN ON BG & LC -10 LAKHS)

How do you view this situation? Are things going to be different this year, or?

Yes, we had things a little tight towards the end last year, but we managed without any hiccups. This year hasn’t been a problem as we have managed to take care of most of the requirements.

12. SUNDRY DEBTORS MORE THAN 6 MONTHS – OVER 1 CRORE; THIS HAS NOW INCREASED TO 7% OF TOTAL SUNDRY DEBTORS –THIS IS STILL CONSIDERED GOOD?

With your kind of client list, are you really squeezed on this front? Any bargaining power??

Yes that will come good. With our regular clients we do not face any such problems. As you would have seen we have a pretty healthy debtor days position. Infact most of our clients are happy to oblige us when we face any short-term issues.

13. FY 10 9MONTH RESULTS.

While the growth has certainly been impressive, we see much higher depreciation and much higher interest costs. What intrigues us most is Operating margins shooting up to 21% (from ~16%). What’s going on?

We covered this ground before. This is a direct result of job work volume growth adding directly to the bottom line in these 9 months. Its possible this will get tempered a bit in the coming months.

14. MPHINITE TECHNOLOGIES – YOUR ASSOCIATE COMPANY IS INTO PRODUCT DESIGN SERVICES.

Is Mphinite a source of any competitive advantage for you. Are you able to offer something more to your customers having in-house design capabilities?

Yes certainly that’s helping us win and retain our customers. Our ability to respond to changes in customers design requirements is certainly better.

15. FINALLY ONE LAST QUESTION.

~ 9 lakhs per year for MD and ED? Though its good to see conservative management, but isn’t that a bit too low?

That goes back to the first question you asked. We believe we have been successful because we have managed conservatively. We want to plough back everything we can into the business – we have a much bigger journey to traverse -we are not looking to take out form the business!

16. I AM MAKING BOLD TO ASK ANOTHER FINAL QUESTION, THAT I HAVE BEEN ADVISED TO AVOID BY SENIORS!

Your auditors share the same surname A.K Kedia or Atul Kumar Kedia?

That’s exactly what it is. A shared surname coincidence. Nothing more, certainly no relations!


Disclosure(s)

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