20 Questions for Astral Poly Technik Management
1). Astral has had a blazing run over the last decade. Sales and profits have grown at over 40% CAGR. APL will probably do over 400 Cr in FY11. Thatâs a super achievement. Congratulations!
What are the future plans? Where does the company see itself in the next few years? We have heard the company talking of maintaining a 30%+ growth rate and a 1000 Cr turnover â Kindly explain what it will take to achieve this and what are the important milestones in this journey?
2). CPVC Resin seems available from multiple sources; CPVC Compound available from Noveon USA & Akrema, France. Noveon patents are set to be expiring/expired.
Please demystify this market for us. What is really patent protected, and for how long? Apart from Noveon and Akrema are there other licensors of CPVC compound? Are people able to make CPVC pipes with CPVC resin and indigenous compound knowhow??
3). GI Pipes & Steel Pipes are still the mainstay of plumbing and fittings market in India. Some studies estimate GI Pipes continue to hold over 50% market share, while the PVC/CPVC market is still something like 5% of the market.
Kindly give us your estimate of the current Indian market for plumbing & fittings. How do you see CPVC/PVC market growing in the next 5 years? Is CPVC likely to replace PVC totally or both will continue to co-exist.
4). Export market Potential. 30% in Kenya JV. Lubrizol licensing policies.
Exports are a very small market for Astral today. Are there any ambitions to scale up this segment? Tell us more about the Kenya JV, Is there any strategic intent, and why Kenya? What is Lubrizol licensing policy for markets other than India? Do you have any leeway for south asian and middle-east markets or are they subject to separate licensing?
5). Other Noveon licensees in India include Ajay Industrial Corp and Ashirvad Pipes Pvt Ltd. Ashirvad Pipes has over 50,000 MT capacity and a 2008 recipient of National Award for Outstanding Entrepreneurship in Medium Enterprises. Ajay Industrial Corp has outstanding group companies like Precision Pipes (largest supplier of automotive extruded parts) and Ajay Poly (largest supplier of extruded refrigeration sealing systems).
These are pedigree companies. How serious is the competition? Is it head-to-head in Flowguard Sales, or do you/they have an edge in some segments within Flowguard range. If you have any competitive advantage over these two, what would those be? Does your/competition distribution network play a significant role? Are there any regional markets that you/competition dominate?
6). CPVC licensing and manufacturing.
Kindly explain the role that Lubrizol & Specialty process LLC plays. What is the kind of relationship that you enjoy with them, and are you deriving any competitive advantage from the strength of these relationships today? Why arenât say established PVC/GI players moving fast in CPVC? What prevents them from approaching Lubrizol with bigger plans than yours? What about manufacturers setting up plants in say Nepal and target Indian markets?
7). Blazemaster Fire Sprinkler system â You have the Lubrizol license since 2008. Despite having the NSF & UL certification, local BIS certification is yet to be received, for which APL has been doing the groundwork for last 2 years.
Kindly explain the importance of Blazemaster to product plans and future growth of the company. Realistically when do you see a pan-India launch? While this will give you an edge over other Noveon licensed CPVC manufacturers, how long do you expect to sustain this first-mover advantage? All your groundwork in getting local approvals actually works to the advantage of the guy moving in next after you! Lubrizol must be aware of the situation - what kind of guarantees do you have from them for protecting you on this front for the Indian market.
8). New products SWR Pipes, Underground DrainagePipes, Foam Core Pipes, Manholes and Inspection Chambers.
Kindly explain the process of new product introductions in the Indian market. Do you require to take specific BIS/ISI approvals for each of these products. What is the status on pan India launch for all these products? Currently what is the revenue contribution from new products?
9). Product Segments, Geographical segments, Replacement markets.
Kindly give us an idea of the revenue contribution & margins from major product segments, also rural and urban markets, and replacement market. Which segments are expected to drive growth in next 2-3 years, where is the companyâs focus and why? How much do the brands Flowguard and Corzan contribute today to revenues and going forward whatâs the scenario? How big is the lead free PVC segment?
10). Customer segments âTop customers & repeat business.
What is the revenue split between residential and commercial projects currently, and how is it expected going forward? Does this business lend itself to deeper relationships with reputed builders/contractors? Who are your top customers in FY11?
11). Competition Strategies.
Sooner or later bigger players with stronger brands (like Finolex, Supreme) will move into the CPVC market. Itâs quite possible that these brands will have much stronger customer acceptance & pull than first-mover Astral. Kindly explain the companyâs current thinking, brand building exercises undertaken and future plans.
12). Capital Expenditure. To grow sales, Astral needs to continually invest in capacity expansion. We have heard capacity expansion plans to 60000 MT for FY12.
What kind of capital expenditure will be required for this latest expansion. Some of the private players like Ashirvad Pipes Pvt Ltd. reportedly have expanded capacities to 70000 MT. How strong is the demand position? Is there a likelihood of overcapacity in the short to medium term?
13). Backward Integration. In Oct 2010, APL bought 85% stake in Advanced Adhesives Pvt. Ltd. The subsidiary company will manufacture Solvent Cement in India.
What are the plans on this front? Is this only for captive use or for generating additional sales as well? What kind of capex will be required going forward?
How much was the expense incurred in Solvent cements RM as a percentage of Sales? Is it mainly used for pipe fittings? What will be the contribution towards margin expansion, if any, on account of this?
14). Margins â sustainability. There has been a slide in margins every quarter for the last 4 quarters. Operating margins (excl other income) has actually slid from over 16% to just over 11% in Q3FY11 â a significant contraction of over 5%! (Raw material/Sales has remained between 64%-66.5% roughly).
Kindly explain the circumstances leading to this. Is this a short-term scenario and have we seen a good reversal in Q4 given that historically this is your best quarter? What levels do you see margins sustaining in the next 2-3 years?
PVC market is a highly crowded space and the OPM levels are not more than 8-10%. Itâs a sort of a commodity business now. With more acceptance of CPVC and competition coming in, would it happen for CPVC market also…if not why? Where do you see margins sustaining over the next 2-3 years?
15). Raw materials â CPVC compound, PVC resin. Risk Management.
With a rising crude prices scenario, raw material pries must be a cause for strain. Kindly explain how the company manages raw material price volatility risks. Does it get any advantage from sourcing majority of RM from Lubrizol? How often does it revise prices? Are you able to pass on price increases? How often have you resorted to price increases in FY11? When crude had crossed $150 in 2008, were you able to raise prices? What is the outlook for FY12?
How much is CPVC compound as a percentage of total RM? Do you see any risks in being tied to a single supplier (Lubrizol) for majority of RM requirements? Where do you source your PVC requirements from â RIL?
16). Foreign currency â Imports & FCNR loans. Risk Management.APL had incurred a loss of Rs.13.44 Cr on exposure to forex derivative contracts. In FY10, the FCNR loan stood at 23.5 Cr and imports at 104 Cr.
What is the current FCNR loan position? Have all forex derivative contracts expired in full? After the FY09 experience, can you confirm that forex risk management practices adopted by the company are more conservative now?
17). Sales Distribution network. Distribution Policy. 250 distributors, 5500 dealers. Typical other expense spends are 12-15% of sales.
How strong is the dealer/distribution network today? How important is the distribution network to sales growth for Astral? How does the company support this distribution network? Typically what kind of budgets do you allocate for Sales & Marketing spends?
18). Dividends. Dividend Policy. Payouts.
The company has started distributing dividends since 2008, Dividend payouts as a percentage of net profits has been rising, but still pretty low at ~8%. Kindly elaborate on the dividend policy followed by the company.
19). Warren Buffets takeover of Lubrizol.
Any likely impact on the relationship? Please comment.
20). Challenges before the Company.
Kindly elaborate on the main challenges faced by the company in view of the huge opportunities that lie ahead. How confident are you of reaching the turnover of Rs 1000 Cr an by when?
