Dear All, I have compiled the notes for Management Q&A done for Mazda and posting
here.
Ayush/Donald/Ankit/Janakbhai, please suggest additions/modifications wherever
necessary
**1). **JOURNEY
Great track record from 2001 to 2009 with turnover growing from just 10 Cr to 80 Cr in 8 years. But since then the growth has stalled. Kindly share your journey and the challenges.
Company has maintained growth of 15-20% CAGR over last 15 years and has grown its revenue 10 times. Growth has slowed down due to slowdown in the world market impacting exports. Recently, domestic business also has stagnated and de growth is expected due to challenging economic environment in the country.
In 2010-11, the company sold the valve division. Kindly share details on the same.
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**2). **PRODUCT SEGMENTS
Product Mix
Vacuum Systems 50% contribution? How do we see this market for next 2-3 years?
Current contribution to revenue is 20% evaporators/10% food business/70% vacuum & allied system (surface condensers and some balance of plant equipments for power sector). Product mix drives the margin performance in a given year. Vacuum system commands highest margins due to long standing reputation of the company in the market and significant portion of revenue is derived from exports. Evaporators command relatively lower margins. Similarly, food business also is a low margin business and significant improvement in margins from current level (for food business) is not expected.
Multi effect evaporators market? 25% contribution, but growing faster.
Target customers? Technology tie up or is the technology developed by the company?
Collaboration with âIven Absorption GmBHâ for design and manufacture of Vapour Absorption Machines
Chemical/Agro chemical producers are major target customers. Any industry that produces substantial liquid effluent can be target customer. Though there is some technological/engineering element in the product, it is largely fabrication work. Company does not have any technology tie-up with any company for this product.
Absorption chiller- the tie up with Iven is in early stages and product development has just started. It will take some time before revenue to flow from absorption chillers.
Product Development cycle/Technical Collaboration
Company is looking for new product developments especially for export market in collaboration with Croll Reynolds. However, it is still in exploratory stage and it will take time to freeze on new products to be developed/marketed.
For technical collaboration, company has been exploring such opportunities, in general. However, no specific tie-up is in sight in near future.
End-User Industries
Vacuum: Any industry that needs vacuum to be generated will be target customer. Major end user industries include: power/pharma/edible oil/ petrochemical & Refinery. Major customers have been: ABB/Siemens/Alstom/Alpha Laval/TD Power/Triveni
Evaporators: mainly chemical and agro chemical industry where liquid effluent is generated and needs to be treated before discharging it to environment.
Product Lifecycl
Typical life cycle for vacuum systems is 8-10 years and that of evaporator is 6-8 years
Service/AMC Revenues
Not significant
Sales Model/Revenue Recognition
Product Sales vs Turnkey Sales
Vacuum system/condensers/balance of plant equipments: only product sales
Evaporators: Turnkey sales supplying complete systems
Vaccum system: the order size is relatively smaller than that of evaporators. Order size for vacuum system can be as low as 25,000 and as high as 40,00,000. For evaporators, the order size is much larger ranging from 2-7 crores.
Profitability Mix
Steady decline in margins - last 5 years, declined from 33% to 23%, steadily. Increased competition? Outlook on margins going forward?
Profitability is a function of product mix. Vacuum system has the highest margins amongst all the products. Evaporators have lower margins due to higher competition. As the product mix changes, the margin profile of the company will change. Higher contribution of evaporators to revenue may decrease the margin profile further.
Evaporator is a high volume- relatively lower margin business. Same is for food business.
New Product Lines
Company has been mentioning about providing solutions for zero discharge for Agro Chemical industries etc. These industries have been doing well and are needed to invest more due to tightening of Gujarat Pollution Control board. How has the co done?
Company has been actively exploring new product developments and some activity on this front has started. However, it will take 2-3 years before new products start contributing to the top New product development is done through technical collaboration with some established foreign player.
**3). **EXPORTS
Croll Reynolds Relationship/Equity/Orderflow
22 Cr vs 38.5 Cr
Association with Croll started in 1993. Company had technical collaboration for designing vacuum system till 2000. Under this agreement, company was to pay royalty to Croll for vacuum system sold. However, the collaboration ended in 2000. Thereafter, there is no formal agreement with Croll. Croll acquired 12% stake in the company in 1995 and continues to hold 6% stake in the company. There is one nominee director of Croll on the board. Croll is a known name in vacuum systems; however it is not very large in size. Its top line is in the range of USD 20-30 million.
However, company shares an excellent relationship with Croll and continues to supply to Croll for some of the orders from overseas market. In the markets where Croll has siginificant presence, Company largely relies on Croll winning the order and passing on some of the orders to the company instead of actively marketing its products on its own. As of now the strategy seems to be working well due to strong relationship enjoys with Croll.
Company received orders worth USD 4 million from Croll in FY 13. This is roughly, 25% of the top line of Croll.
Company is working with Croll to develop new products for export market. However, this is likely to take some time.
Balance Exports
Large portion of export comes through Croll. Even though, company has been supplying to other customers in overseas market like ABB and Alpha Laval, contribution is not likely to be very significant going forward. One of the reasons for less traction with other players is that many MNCs now source supply from a country through their global subsidiary hence not giving away higher margins. E.g. Company used to supply directly to Alpha Laval, Sweden till few years ago. However, recently Alpha Laval India procures the system from Mazda and supplies it to Alpha Laval Sweden thus making this a domestic trade and not export trade.
Higher Margin Picture
Profit margins increased from 27% to 37%.What is this margin improvement attributable to? How much is attributable to rupee depreciation, and how much to other factors?
Typically 5-7% margin gap is there for vacuum systems. However, export is largely dependent on orders from Croll.
Sustainability/Repeatability
Croll Reynolds purchased goods worth 22 Crores from the company as compared to 12 crores in FY 12
This is slightly difficult, considering the slow demand in developed countries and key markets for Croll. Croll had some one-time large orders from few players in the market which led to higher orders. This is not likely to be repeated and sustained.
Scalability
Export revenue contribution grown steadily in last 5 years from 18.5% to 31%. How sustainable is this trend? Is this a result of deliberate strategy by management? What are the plans going forward?
Company, has steadily scaled up exports in few years and it is realizing its importance. However, at present company is largely relying on Croll on export front.At present, It does not have any marketing team dedicated to exports. Company is developing some new products with Croll for export market. However, it is still at exploratory stage.
**4). **COMPETITIVE LANDSCAPE
Vacuum system: 4-5 major players. Most of them are unlisted. Company has track record in this product has supplied system to many large players. Hence seem to be in good stead. Company has one its kind testing facilities which none of the competitors have. Hence, reliability and performance of the system can be tested before supplying. This is one of the USP of the company
Evaporators: Very fragmented industry with many players
**5). **FOOD BUSINESS
Company has scaled up the food business pretty well. Revenue has increased from 3 Crores in FY 09 to 9 Crores in FY 13 while profit has increased from (0.013) Crore to 1.08 Crore. How scalable is this business from here on? What is aspirational targets for top line and bottom line for food business in next 5 years?
As of now, the scale of food business is not very significant. Management mentioned that it is a high volume- low margin business. Moreover, there is high competition in the market and entry barriers are low. Hence, company is not focusing currently on scaling this up in a big way. However, if any such opportunity for large scale up arises in future, company may be willing to scale it up.
Food business is 100% export oriented business. Company has made investment of only 40-50 lakhs hence return on investment seem to be good.
What is the business model for food division? Does large part of its revenue come from private label or through sale of âBcoolâ products? What will be approximate mix between revenue from private label and âBcoolâ sales?
A large part of business is derived through private label sales and is likely to be so in future as well.
**6). **NEAR TERM OUTLOOK/WORKING CAPITAL
33 Cr Working Capital on 120 Cr Sales ~25% of Sales
Inventory build up has always been challenge as many a times after placing an order, customers do not off take the products due to project not taking off or delay in the projects. Hence, inventory shoots up many a times. However, mostly, the inventory gets converted into revenue, with a time lag. However, company has faced situations in the past that after building up inventory, the order got cancelled.
Inventory build up and subsequent order cancellation is one of the major risks for the company. Typically, company manages this risk by taking appropriate advance from the customer and setting the payment terms to match with product build up expenses. In case of order cancellation after inventory build up, company tries to re-use/re-deploy the product to in the best possible manner.
The performance has been poor in H1FY14 with turnover dropping 20% and profitability dropping 35%. How is the order book now and expectation going forward?
Management acknowledged that the growth has slowed down due to overall slow down in the industry. Company performed well last year due to good order book that it had built during FY 12. Management indicated that this year company will not be able to achieve top line equivalent to FY 13. They indicated FY 14 top line to be around 100-105 crore.
Companyâs current order book stands at around 17 crores. This order book is to be executed in 3-6 months.
However, in last 2 months, overall business environment seems to have improved as company has started getting more inquiries.
**7). **DIVIDEND POLICY
Company has a good dividend track record â 3.5 in FY11, 4 in FY12 and 5 in FY13. What is the dividend policy followed?
There is no formal dividend policy. However, management expects to increase the dividend consistently going forward. This year too, the dividend is likely to be increased marginally.
**8). **PROMOTER SHAREHOLDING
Low promoter shareholding, but has been going up consistently. Kindly comment (37.69%)
Management acknowledged that promoter holding is low. It indicated that promoter has intention to increase stake through creeping acquisitions going forward. Recent purchase by promoter from market is in line with this strategy.
**9). **INVESTMENTS
Company has almost 25-40 Cr of liquid funds. What are the plans going forward?
Company intends to address capacity constraint problems by setting up new facility in one of the industrial zones near Ahmedabad. It is in the process of purchasing land and has already paid advance. Land purchased by the company is sufficient to accommodate 3 time current capacity. However, currently company is considering to build facility which can accommodate existing capacity spread across 4 different units.
This project is likely to cost around 17 crores in all including shade/land/equipments and machinery. It will take 2-3 years to complete this facility. After completion of new facility, existing units will be moved to new facility. Some of the newer existing machinery/equipment will be relocated to new facility while old equipments will be disposed off.
This will address the issue of capacity constraints at existing location. Further capacity addition (on top of current capacity) at new location will be considered nearer to the start of new facility depending upon business environment and order book.
**10.**LONG-TERM VISION
Management seems to be conservative and expects to achieve historical growth rates of 15-20% going forward as well. Management prefers not to be too aggressive on growth at the cost of compromising quality of growth. Company will keep its focus on quality of growth and limiting its exposure to undue risk. In next 5 years, they may achieve turnover of 300 odd Crores however same is contingent on successful development and commercialization of new products. In absence of new products, company will grow at 15-20% CAGR.
