Sharing the notes I made for Q2 FY17 con-call. Please note that there may be some mistakes here and you’re requested to check the following link to verify details:
* EBITDA 29.7 crores, 18% growth
* Sales 220 crores, 2% growth
* 12900 tonnes, 3% decline over Q1-17 and slight increase
* EBITDA margin - 23,000/tonne over 21,000/tonne
* PAT numbers flat - 1% shrinkage
* Net debt 200 crores - includes both loan and short term net of cash, D/E ratio of 1.72 - plan to bring this down
* Debtors at 55 crores, increase 23 crores over March 2015, stopped discounting LCs. Debtors above 90 days 4.6 crores - less than 10% of total debtors.
* Calibrated capex - old projects almost completed. Fund projects by internal accruals. Continue to hold debt levels at 200/220 crores. Don’t want to increase debt at this time because the capex will not contribute to topline growth.
* Another round of capex expected after project 5. Estimated to be unproductive; barring external factors, top line growth to remain muted for next 4-6 quarters.
* Apparel project on hold; important to work on current business before entering additional field.
* Growth stagnant; but important time to consolidate business; trying to enter better businesses and new products with higher quality requirements/higher barriers to entry; will weed out low margin businesses; new
* No impact of developments with Welspun India. Last quarter was actually one of the highest sales to Welspun India. So business as usual on that front.
Concerns raised by management
* Next 2-3 quarters look bleak; probably drop in profits - Nylon area remains worrisome; catch up by competition with increased capacity; Nylon prices have topped
* Emergency in Turkey hit us hard - business at standstill there in last 2-3 months - dyed yarn business; no idea when we will reach normalcy
* Cauvery issue had some impact due to hindrance to truck movement; expect situation to normalise in this or next quarter.
* Issue in Kashmir affected carpets business; slow down in orders.
* These issues listed above may remain concerns in the next few quarters and although development of new products has been slow; this will give added impetus to company to speeden development of products and diversify product mix.
* Overall direction of company remains positive.
* No immediate plans to use cash of approx. 25 crores. Saving for rainy day. Net debt adjusted for cash is 200 crores. Plan to keep debt at this level.
* Rakoli plant - BCF heat-settling, cabling, texturing, spinning (multiple businesses) - totally out of space - will have to get more building for all businesses. Plan for 5-7 years for all businesses to add capacity.
* By next quarter - breakup between innovation, specialized products might be possible to give. Current business divided between commodity business and high margin businesses. Can’t disclose products because not all may succeed. Also working on exports because outside clients have high quality requirements without pricing competition - both BCF and textile based.
* No projected figure for margins in future. Nylon business remains tough but management will not predict.
* Margins of competition have expanded in FCY/Nylon/Polyester businesses, so should not margins in value added businesses (non-commodity)? - there may be no direct correlation between commodity businesses and value added businesses. So hard to project this way.
* Export based sales - 18% of total. This quarter was 38 crores compared to 42.9 crores last quarter. 196 crores export in 2015-16.
* Innovation products just executed - trial/sample orders. Bulk orders started but still small in comparison with total topline.
* New customers added on BCF side. Textile side also some customers added.
* As volumes increase in value added businesses, will weed out low margin businesses. At this time, no plan to add lines or capacity in very large way. Need to ensure value added products are doing good before
* Some new innovative products (e.g. Comfeel, Beleaf) - sample/trial orders. B2B brands, not consumer.
* With new products - first mover advantage esp. in India, so margins expected to be better. Very small volume right now. Once acceptability is there, this will be good.
* Challenges - proprietary know-how to develop product, product has to be relevant to costumer’s needs, need to convince customer about price benefits - don’t want to give guidance because these products are in nascent stage.
* Capacity utilisation - almost 85-90% in almost all businesses.
* Palghar sales - 10/15% affected by Turkey. Rakoli plant not so much - currently management does not share revenue breakup between Rakoli/Palghar plants.
* Management does not give guidance because some products are in unchartered waters.
* R&D expense in 2015/16 - 20 crores
* Bounce back of oil prices - automatic correlation with oil prices due to raw material. Only in some cases may have affect on margins with respect to oil price.
* Overcame some issues with BCF quality - hope to add business there. Global market is challenging also but hope to add new customers. Palghar issues also resolved compared to last quarter.
* Legacy issues -
* Machines: some of them are pretty old; invested in European/German machinery which may be old but will last; in some cases small concerns; may have to take call regd. that but nothing major. 9-10 crores for repair and maintenance will continue and will be expensed in P&L.
* Culture of company - Much progress made on that issues. Mindset affected by commodity business of past (which was all about controlling costs). New direction requires to not focus on entirely on cost but put quality as no. 1 aspect. Need to gain business which values quality. Good progress in mindset change and new talent is being recruited. Vision is shared with employees for 5 year plan. Increased awareness leading to positive change - but long (emphasis by management here) way to go esp. with Palghar plant (also with Rakoli but less so).
* Breakup of R&D expenses between balance sheet and P&L?
* Small part of headwinds (with respect to competition and decreasing margins) seen in quarter gone by but will see more dip in coming quarters.
* Increase in personal expenses and other expenses in last 1 years but management sees this as short term blips and will not sacrifice long term vision to overcome these short term impacts on profitability.
* Product selection for innovation - Running process (red queen effect), trying to commercialise products which will give long term competitive advantage based on difficult in copying the product or company has proprietary know-how or customers have specific requirements which cannot be easily satisfied. Some products can be copied in 1-2 years, but lead time can be greater for competitors because they don’t have necessary processes/infrastructure to take the leap.
* Inside-out approach or outside-in approach to product development - Is the customer requesting an application or does the company foresee an opportunity. Currently large part of business is commodity based so don’t have the liberty to decide product development on basis of opportunity size - anything and everything is welcome because some order sizes of current products are low.
* Management did not share ratio of nylon products to total sales (as per company policy to not share revenue break-up between businesses) but made the limited point that it is one of the four majors revenue contributors.