Analyst Meet / AGM - Analyst Meet
Increase in manufacturing and reduction in indent sale will result in higher margins
The company held its conference call on 6th Aug 2016 and was addressed by Narendranath Baliga CFO
Key Highlights
Broadly, the company's sales can be bifurcated into manufacturing, trading and indent sales. Indent sales is the one where the company acts as a broker and gets a commission only from the sale which generally happens between Parent and Indian buyers.
The aim of the company is to increase the manufacturing sale and to reduce the indent and trading business, as there is a ready buyer available. With this intention, the Dahej unit was set up.
Dahej plant reported net sales of around Rs 590 crore in FY'16 as compared to around Rs 50 crore in FY'15. The plant has a potential to generate around Rs 1200 crore of revenues with OPM of around 15%. The company has invested around Rs 1000 crore in this plant.
The plant caters to mainly Performance products segments and Functional Material segment. Broadly on user industry basis it caters to personal care, FMCG, home care, pigments, construction, dispersions and industrial coating segments.
Thus, Dahej plant will result in higher manufacturing of the products which are now sold by the company on indent basis. Further, the company has added some new product lines and variants in Dahej plant, which will in turn help in higher sales and newer manufactured products sale. The company has a strong distribution network to sell these new products. All these will in turn result in higher manufacturing sales and thus in turn higher margins going forward.
However, the company had to incur higher depreciation and interest costs which are affecting the PBT currently from the Dahej plant. Further, the incineration costs, i.e., the costs incurred by the company in testing and developing a product, which needs to be approved by the customers, also was being expensed out in FY'16, which affected the margins.
The company has a pricing power in Functional material segment and in Agricultural solution segment while for the rest, it's basically a pass through of raw material on either side.
In Agricultural solution segment, the company mainly caters to the herbicides segment of soya beans, apart from other insecticides and fungicides business. The company intends to further add more crops in its basket to leverage its vast distribution network in India.
There was an increase in competition from China especially in some major product line of company's business like Bavistin which saw a price erosion of nearly 10% in FY'16. However, with better monsoon and some reduction in competition, the margins are expected to be better in FY'17.
In June'15, the company in anticipation of good monsoon had dumped the inventory in Agricultural segment, which got hit badly in the subsequent quarters, as monsoon did not translate as per expectation. In June'16 quarter, the company sold only as per the demand and what was necessary and there were no additional stocks dumped in the market. This change in strategy has resulted in lower agri solution segment sales and profits on YoY basis.
In FY'16, the company repaid around Rs 300 crore of loans taken for Dahej plant. There will be further reduction of loans and interest going forward.
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