AYM Syntex has set itself in motion to transform from selling commoditised products to differentiated products and thereby choosing not to slug it out with the competition.
I really appreciate single-minded focus of the co. to build levers for a sustainable and profitable long term growth, in large part thanks to Mr. Abhishek Mandawewala.
But a big concern on my end is how successful the co. will be at commercialising new products and more importantly keeping the competitors at bay from imitating the same. The good thing is that co. is also aware of this predicament and not shooting in the dark, it realises that products in synthetic yarn mature rapidly and to be ahead it needs to churn out newer products time and again.
As an investor, I’m wondering if constantly churning out new products, commercialising the same, maintaining a healthy product portfolio mix and thereby maintaining the margins can be sustainably done? I am reminded of the Red Queen Effect.
Again, the co. is doing commendable job to create a new identity and firing on all fronts, Capital Efficiency, Capacity Expansion & Capability Enhancement, Cost Rationalisation, Operational Efficiency, R&D, Talent Acquisition & Skill Development. But will this all go in vain?
Views Invited.
P.S. I can’t gauge the repercussions of Welspun India fiasco on the co. fully but I was tempted to take initial position in the stock post the fall given valuations viz-a-viz business as of today and a chance of co. being successful in its initiative.
@ayushmit@desaidhwanil@margin_of_safety - I have heard you guys previously on the AYM concalls. If any of you or anybody else on this forum is attending the concall then could you please get management’s views on the above proposed expansion plan.
I have had the same concerns as you on how long can a commodity play remain specialized. For me if we look at the very basics of how these products are manufactured its a fairly simple process. You can obviously tweak some part of chemistry in process to improve properties, but that is easily replicable. I think that is the challenge of this business.
The competitive advantage thus AYM needs to create is not just being innovative but also market it to take a large share. The marketing bit i am not so sure of.
A good proxy is to study 3M and how they not just invented new products in old processes but also marketed them brilliantly.
With the recent fall in price, this space looks interesting. The Annual report is interesting reading especially the Directors report.
Is there a structural reason for the fall in price last few weeks ? or is it just the recent volatility in markets and the Welspun saga. To me looks interesting at this price. I couldn’t find any issues with the business model or recent changes in it or any terrible news.
Any insights from people following this company ?
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:
Overview
* 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.
Q/A responses
* 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.
I was looking at the most recent shareholding pattern data. The “public” shareholding has an entity called “MGN Agro Properties Private Limited”. When I looked this up, I see that the promoters of AYM Syntex are also Directors in this company. Isn’t this misleading - shouldn’t this be considered part of the promoter group shareholding, rather than public shareholding?
this quarter was impacted by demonetization reulting in lower sales, 20 percent decline in sales compared to previous quarter.
sales volume was 10, 324 tonnes.
EBITDA dropped to 18,000 per ton from 23,000.
Debt stands at 208 cr. Expected to be in this range going forward.
R & D expense was 2.8 cr for the quarter part of it is relfected in the P &L.
15 -20 cr capex to be there every quarter. this will be a non volume growth capex.
capex is to bring in more lines , expand capability .
will be talking about a project 6 after a couple of quarters. But no expected volume growth for the next 1 year atleast.
yet to understand how GST impact plays out.
due to high fixed cost structure of the company profit de growth was much worse than sales de growth.
-they dont face any competetion from China as they offer a different set of products. Chinese offer more of a high volume commmodity product, plus wages in China are on the rise
in the next one year 70 -75 percent of sales to Welspun group expected to go down as the latter is backwardly integrating and setting up its own yarn capacity.
Nylon business
nylon business was greatly affected by demonetization, RM prices were up 45 percent.
most of the business caters to Surat and North India
customers dealing with cash were shut for half of novemeber and complete December.
there is excess capacity in the market in this busness
in this business they are trying to find customers with more stringent quality requirements , who can yield better margins.
polyester business was as usual.
BCF business
suffered from a 15-20% capacity loss for 45 days ( manufacturing defect).
quality issues have been resolved now.
the barriers to entry in the BCF business is quite high.
the customers are quite quality conscious in this business
customers normally don’t entertain new suppliers
Palghar business
faced export issues in Turkey. Issues expected to continue for atleast 2 quarters in Turkey.
the business here is dyeing business and texturising first and then dyeing .
quanitty is low , but service required is fast, consistent supply is required
general outlook has been given as negative , and profitabilty is expected to be muted.
i have tried to cover major points from the concall. all the questions were answered in an honest, transparent and a very detailed manner. But i am not quite convinced with the amount of Capex being spent every year which does not generate any volume growth. The positive impact of this capex on long term sustainable growth is to be understood.
Thanks for con-call summary. I had kept this Co under investigation, and with my previous experience with similar business (OR due to?), I was little apprehensive. With new details you have shared, especially regarding Capex, in my opinion, risk has increased for the company.
Few pointers:
(1) Apart from new lines (volume growth) capex, AYM is also propose to spend 50 to 60 Cr p.a. on “non-volume growth” capex, doesn’t this seem to be too much? The Company’s TTM PAT is ~45Crs while yearly op cash generation is ~90 to 100 Crs for last two years. In earlier years, op cf was less than half of this amount. With 200 Crs of debt, I think mgmt would have too much on their plate to handle
(2) In my limited understanding, AYM’s BCF business and part of Nylon business are specialty while others are commodity type. This reminded me of Warren Buffett and Berkshire’s textile operations - that capex in new/higher efficiency machinery in a commodity business is a misnomer, as the benefit goes to the customer and not the company. And here we are talking about non volume + volume growth capex
Request people who are tracking this Company to correct me or remind me if I’m missing something.
Disc: Tracking, not yet invested
Nylon business - RM prices went from 1600 to 2500 dollar in just 90 days. RM Prices continue to be entrmely volatile and have dropped to 1750 dollar. In terms of prices of RM, it seems its bottom. The margins continue to be muted. They were impacted during the rise. As the prices have come down, the margins continue to remain low. We are reducing focus on this area and reduce our exposure. We continue to convert our lines. New players continue to come into this area. This should continue to put pressure on margins which are already almost nil. Some positive delelopments - some new customers have been added where the products are differentiated and niche but volumes are very small and not meaningful. But important development for the company.
Palgarh - the volumes have improved but margins are down. The reason is that the power costs have increased. Cost have increased dramatically due to power. Plant is at 2/3rd utilization. Capacity is 1800 but we are at 1200. It will be a long journey and may take 2 years to reach full utilization. Lot of sampling is taking place for some prestigious customers.
BCF - The strength of the business has increased dramatically. All quality issues have been resolved. Many prestigious customers have started working with us and some very good customers have started meeting us. Bulk of the hard work has been done and its now time to encash the opportunity. It was tough to get meeting for 2 years. Finally customers are coming to us. One extremely imp development - we have signed an exclusive agreement with Dupont for marketing their Sanora brand. This is very important as Dupont doesn’t partner with anyone - they took an year. This is not a business which we will realize immediately…it may take 2-3 years for material nos to happen. It will be a high entry barrier and exclusive business for us. US player is Mohak and Grofreyers in Australia in Dupont business.
After 3 years we have been successful in solution dyed nylon BCF business and this is very important for us. All these things are very small in overall things but we have achieved important milestone. There is a long journey to go.
On POY side - lot of product sampling and trials taking place. Lot of improvement in quality and product development. There is still some distance between top players and us. But in couple of qtrs we should be closer.
Mr. Kale has taken retirement from our co.
Co is expecting a significant loss on the chips the co had procured in last qtr but the prices have fallen.
Dupont product - just the agreement has been signed. We are starting to explore. They have other partners - a significant EU carpet player and a australian player. Here we have the advantage of being tied up with Dupont but it will also take time before some sizable business comes. Overall 15-20% of our BCF volumes can come. This association is very important. We come on the map. Sarona is a RM, we will manufacture BCF on their behalf. In India we will be the exclusive partner.
Margins will remain muted and may go down further in Nylon business for next 6 months to 1 yr.
We keep about 1 month of cash for liquidity needs.
Vol is 10890. For year its 45000 vs 50000 last year.
New products are very less in total contribution to sales as of now.
We have made significant progress in BCF now almost 6 out of 7 lines are towards specialized products.
How do you incentivise - everybody we have on the board is committed to making it a better co. Mr. Khire - we don’t look at incentive, we are more committed to co growth and not individual growth.
Capacity will only increase where we have developed some level of specialization.
Overall volumes and profitability may continue to remain muted for couple of quarters to an year - we don’t want to give any guidance on future.
Any thoughts how GST might impact the company? From a cursory analysis it seems that synthetic yarn manufacturers seems to be disadvantaged due to high GST rate of 18%
Anyone have any idea on the reasons for the poor result? Seems the cost of materials consumed has increased and the company has not had the ability to pass it on. Also are the dates of the conf call out?
the bcf collabartion with dupont for sanora brand has been approved and also there is a new product exclusively developed for dupont which is better than the grofreyers australia apart from that the turkey buisness with carpet sales revival is turning around can expect a good announcement can give a decent return from here given a good entry point
Anyone tracking this company? Though Quarterly results were poor, the extent of fall seems to be far more than just poor results. I suspect maybe something is amiss or going behind the scenes. Please share if anyone has insights or updates on this company.
* nylon
* depressed selling prices but high priced inventory
* RM prices have stabilized and again started inching upwards
* high prices inventory has started to come down
* 75% utilization last q and then 60% now in august
* certain incentives got expired (in nylon and ) after GST implementation
* significant increase in competition; margins have come down
* very low entry barrier business, a pure commodity
* Palghar
* samplings were taking place with some prestigious accounts which are now materialized, volumes can come but first need to prove our reliability, consistency and quality
* both are very tough customers, internal compliance is very stringent, existing vendors replaced in one case and we become additional vendor in one
* fair amount of progress on manpower side
* GST impact of 18% (earlier taxes were 0%); but thats for every company
* BCF
* Utilization lower because of internal issues, sorted now. some machinery transfer also took place within same campus
* order book is healthy and new line is commissioned and capacity is booked, it will run at full capacity whenever it starts; took one year to set up this one line
* Issues in last 12 months - demon, GST (6-8Cr impact), nylon prices, nylon RM prices, electricity charges (7-8Cr impact), incentives curtailment
* Margins subdues in some of the category
* High cost inventory will have some impact in July and Aug P&L
* Steady state EBITDA - can't comment as last 12 months have been very crazy, need to wait for 1-2 quarters and then see
* lower utilizations than usual
* electricity costs will come down from next quarters as some of the initiatives will help reduce power costs
* Monthly 50-70 lacs of hit because of GST in nylon and polyester - yearly impact of 6-8Cr
* Net debt of 270Cr
* net debt levels shall increase in next few quarters
* working in all 4 areas to improve value added mix - of these 4 units, BCF has shown most improvement and Nylon least
* 6 out of 8 lines @ BCF are matured
* rest 3 businesses have very small % of matured profile
* Internal benchmark for ROCE is 20% but could not achieve las year
* Business with Welspun continues, it will stop in future in coming quarters once they are ready with their capacity
* R&D team associated with each line of business
* EBITDA/ton = 13000/ton, 19000/ton yoy, 20000/ton qoq
* 3000 metric tons sold
* Outlook -
* hopefully by Q4 things shall start looking better
