Transcript
Conference Call of Sanghvi Forging & Engineering Limited
Event Date / Time
:
22
ndNovember 2012, 04:00 PM IST
Event Duration
:
43 min 55 sec
Presentation Session
Moderator:
Good afternoon ladies and gentlemen. I am Moumita,
moderator for this conference. Welcome to the conference call of Sanghvi Forging &
Engineering Limited. At this moment, all participants are in a listen only mode. Later,
we will conduct a question and answer session. At that time, if you have a question,
please press * and 1 on your telephone keypad. Please note this conference is
recorded. I would now like to hand over the floor to Mr. Sunil Mudgal. Please go ahead
sir.
Sunil Mudgal:
Good afternoon ladies and gentlemen. On behalf of Kirin
Advisors, I welcome you all to the conference call of Sanghvi Forging & Engineering
Limited to discuss the company’s results and future plans. We have with us today Mr.
Jayanti Sanghvi, Managing Director at Sanghvi Forging & Engineering Limited. I will
now hand over the call to Mr. Jayanti Sanghvi to give the overview of the company and
the development during the particular quarter. Over to you sir.
Jayanti Sanghvi:
Good afternoon everybody. I am Jayanti Sanghvi, Managing
Director of Sanghvi Forging & Engineering Limited. I welcome all of you to our
conference call to discuss the results of September and our future plans. First of all I
would like to go through our results. Our quarterly sale for September 2012 is 903.03
lakhs and our profit after tax of 113.71 lakhs. Our half yearly total results as compared
to last year, September 30
th2011 sale, total sale for six months was 20 crores, 9 lakhs
and in September 2012 that is 18 crores, 91 lakhs. Our profit after tax for September
30
th2011 was 185.96 lakhs. Our profit after tax for September 30
th2012 is 212.96
lakhs, which is increase of around 15%. Our EPS for half year September 30
th2011
was 1.61. Our EPS for September 30
th2012 is 1.68. Overall our sales has reduced by
5% on six monthly basis. In last quarter we had received few orders. And overall the
scenario and sentiment for getting new orders is relatively weak, which we feel that will
improve in another couple of quarters.
Now about the major developments what has happened in our company in last quarter is
that we have completed our expansion program and we have commissioned our new
Open Die Forgings plant. The new plant has added a total capacity of 16,000 tons per
annum. Our existing capacity is 3600 tons per annum. So, now our total capacity has
become 18,600 tons per annum. Now, with the commissioning of this plant, which is just
under stabilizing period, in another one or two months it will be fully operational, fully
stabilized. So, you will have a good effect of numbers from the last quarter onwards.
Now, in our forging business, lots of business is dependent upon the various approvals.
Already we have various key approvals in place, like we are approved by Engineers
India Limited, ISRO, Bhabha Atomic Research Centre, Nuclear Power Corporation,
BHEL, Siemens etc. But, now already with our new plant operational, we have
requested all these customers to enhance our existing approval. And in last quarter we
had received few another major approvals from companies like ABB, Voith,
Boving
Fouress for our new plant also. We had received small orders for new plant. But, once
it is stabilized we are expecting a good amount of orders. And with the help of this new
plant, we will be now substituting lot of imported items in India. Most of these big
forgings are currently imported in India from various countries like Italy, Germany and
Korea. So, with the commissioning of our plant, we are targeting the customers who are
importing this item and the customer also wants to have an indigenized product due to
various reasons like currency fluctuation, longer lead time etc. So, in next couple of
quarters, once things are streamlined and new order booking is in place, we think there
will be a huge and good amount of growth in our __05:18__. And all the machines
whatever we have installed, the key equipments are purchased from the leading
companies from the world, for example forging press which has a capacity of 4500
metric tons has been purchased from Italian company Danieli Breda. Another key
equipment is forging manipulator, which we have purchased from German company,
Dango and Dienenthal. And all the forging furnaces, which are just fired, have been
purchased from German company Schlager. Due to gas fire furnaces we will have a
very good heat control and our cost will be optimized. Yes, Sunil.
Sunil Mudgal:
Yeah. We can start the Q&A.
Question and Answer Session
Moderator:
Ladies and gentlemen, we will now begin the question and
answer session. If you have a question, please press * and 1 on your telephone keypad.
The first question comes from Mr. Srinath Krishnan from Sundaram Mutual Fund.
Please go ahead.
Srinath Krishnan:
Thanks a lot sir. Sir, you mentioned that this year the
increase in capacity, you will be able to manufacture about piece of about 40 to 50 tons
as against 4 tons which you have currently. So, would you be able to quantify the order
backlog which you have in this 40 to 50 tons category. And also you mentioned the gas
fire furnaces which you would be having. The total number of furnaces, how many
would be gas fire furnaces sir?
Jayanti Sanghvi:
The total we have five furnaces in the new plant. And all five
furnaces are gas fired. And for gas, we have tie ups with the GAIL and the gas has
been connected, given to us through pipeline by GAIL.
Srinath Krishnan:
Okay. What is the approximate cost benefit which we would
be having because of these gas furnaces?
Jayanti Sanghvi:
Around, as compared to other suppliers, we will be around
20% to 25% of our energy cost will be lower than them. And for the new order booking,
for the new plant we have only few orders at the moment, because most of the
customers have given us the trial order initially for the new plant. So, once we execute
the trial order, then we will get the bulk order basically. So, that will take around three to
four months time to execute these trial orders successfully and then to get the bulk order
from the customer.
Srinath Krishnan:
Okay sir. But, with the trial order, you must be having some
sort of insides on how, where this can be scaled up to in this category. So, for your own
personal use, I am sure, I am not asking for guidance, but where can this go from here,
like what is the order book you are expecting for 2013?
Jayanti Sanghvi:
I will tell you. Right now our existing pending order book is
around 25 cr that is mostly for the existing plant. But, once the things are streamlined for
the new plant, our pending order backlog will go in the range of 75 to 100 cr.
Srinath Krishnan:
Okay, this is what you are expecting for 2014?
Jayanti Sanghvi:
Yeah, for the next year basically.
Srinath Krishnan:
Because, it will be fully operational then.
Jayanti Sanghvi:
Yeah, fully operational and we will be proven with the
customers basically.
Srinath Krishnan:
Okay sir. But, in the 40 ton category, which industries will
be, mainly you will be in?
Jayanti Sanghvi:
Mainly we will be focusing on four different industries. First
is oil and gas, so they buy big amount of forgings for their various projects. And another
is power equipment, like companies who make the power turbines etc. any type of power
generation equipment needs big amount of forging. Third is ship building sector, they
also need big amount of forgings. And another is defense applications. So, these are
the four major segments what we are focusing. And into these also, suppose in power
there are some sub segments, nuclear power, thermal power, but we club into the same
segment basically.
Srinath Krishnan:
Okay sir. Sir, currently you have 15,000 tons, but you have
about five furnaces and we have scaled up and with this the capacity will also be
doubled. Has there been any thought process of increasing the number of furnaces with
visibility?
Jayanti Sanghvi:
Already we have that in the thought process. But, for doing
that first we should get the full amount of booking for the first five furnaces. So, once we
have enough orders for five, then definitely we will add another five as per the
requirement grows.
Srinath Krishnan:
How long does it take for those five furnaces to get
delivered?
Jayanti Sanghvi:
Another five, another five furnaces it will take eight months to
twelve months basically.
Moderator:
Thank you sir. The next question comes from Mr. Ameen
Pirani from Deutsche Bank. Go ahead please.
Ameen Pirani:
Yeah, thanks sir for taking my questions. Sir, just I joined a
little late, so pardon me if I am repeating some questions. Within the segments that you
have mentioned, could you also give us examples of the products that you would be
doing, so that we can get a sense? Like in power equipment, are you doing components
for the turbine, as in are you doing the rotor shaft?
Jayanti Sanghvi:
For power segment, we are fortunate enough that first order,
for the new plant we have got from the power industry and that too from one of the very
good German customers, a company called Voith. This is the company which is the
world leader in hydro turbine technology. And we are manufacturing hydro shaft for the
hydro turbines now, for them.
Ameen Pirani:
The hydro shaft.
Jayanti Sanghvi:
With different companies in power segment will need
different items, but we also need to develop our track record for supplying the items. So,
initially we had just got some small, small different customers in different segments, but
power we have got current orders from two-three different companies. One is Voith and
another is Boving Fouress, they are also in hydro turbines.
Ameen Pirani:
Sir, can you repeat the name?
Jayanti Sanghvi:
Boving,
Boving Fouress. It is a UK based company, but they
have a plant in Bangalore. They are also into hydro turbines.
Ameen Pirani:
Okay. And all of this would mostly be exports, right; I think
none of this is?
Jayanti Sanghvi:
These are for the Indian projects what they are doing.
Ameen Pirani:
Okay understood. Sir, and on the oil and gas side, can you
give some examples if possible?
Jayanti Sanghvi:
Oil and gas we are working with IOCL, Reliance, they need
lot of big forgings. Now, Reliance big project is coming up. So, we have been already
qualified for the new plant also, for general expansion. So, they will need lot of big
forgings like flanges for the piping, connections etc.
Ameen Pirani:
Okay. And are you doing anything on the exploration side as
in, are you doing stuff like blow out the entire…?
Jayanti Sanghvi:
There are also we are __12:30__ till now we have not
received any confirmed orders from that segment. And we are under approval in various
stages with companies like Cameron,
Halliburton and Schlumberger etc. Still confirmed
order is yet to be received by any of these customers to us. But, in two-three months
definitely we will receive good orders from these companies.
Moderator:
Thank you. The next question comes from Mr. Nilesh Karani
from Magnum Equity. Go ahead please.
Nilesh Karani:
Good evening sir.
Jayanti Sanghvi:
Good evening.
Nilesh Karani:
Yeah, this is Nilesh Karani from Magnum Equity. Sir, my
question was regarding your raw material basically. For forging I think the fluctuations in
metal prices, I have seen from last two-three quarters have been more and also your
forex, basically the fluctuations. So, what kind of impact does it put on your top to
bottom line, whatever or wherever, can you be little bit define on that?
Jayanti Sanghvi:
I will tell you. See, till now there was not much impact due to
forex, because most of our raw materials were indigenously procured. But, for new plant
now most of the materials we will be importing for the bigger ingot. So, definitely there
will be an effect on our profitability due to the currency fluctuation as well as the raw
material price fluctuation also. And in percentage terms, it is difficult to quantify,
because it depends upon size of material, grade, weight etc. But, normally good thing is
we are always able to pass it on to our customers basically.
Nilesh Karani:
But sir have we tied up with any raw material vendors or
something?
Jayanti Sanghvi:
We have already tied up. Suppose for example, from India
we have tied up with couple of companies like Remi Metals and
Mepco from Bombay.
Similarly for international sources we have tied up with internationally good companies.
But, then also tied up, it doesn’t mean that it is a fixed price contract.
Nilesh Karani:
No, no, that is okay. And sir, regarding your forex basically,
any fluctuation, hit due to forex fluctuations?
Jayanti Sanghvi:
Yeah, for our new project we have taken various loans in
foreign currency also like ECB etc. So, there we have some, since because our dollar,
whenever it goes up, we have to pay a higher price. But, our tenure for loans are longer,
like seven, eight years period is there for paying the total loan. So, over a period of time,
we feel it will gradually get stabilized. But, at this moment definitely we are hitting hard
due to the currency fluctuations.
Nilesh Karani:
Okay. Thank you sir.
Moderator:
Thank you sir. The next question comes from Mr. Srinath
Krishnan from Sundaram Mutual Fund. Go ahead sir.
Srinath Krishnan:
Thanks sir. Sir you spoke about import substitution for 40
ton category, my basic question, I just want to understand the current price differential
which we might have from our production from your end from the import substitution?
Jayanti Sanghvi:
There are two criteria for import substitution. One is the
price and another is the lead time what we offer to our customers. Normally a 40 ton
piece, if anybody wants to order and import from any of the countries, from Europe or
Korea, it takes for customers five to eight months to receive the goods into their factory,
from order. And the first, our proposition is we will be, increasing the lead time for our
customer at least by two to three months for our customer. So, they will get the same
forging from three to five months, depending upon the size and material to the customer
that is first point. Second is price wise, generally we will be 10% to 15% lower as
compared to the international sources basically.
Srinath Krishnan:
Okay. But, 10% to 15% lower at Rs.55, if there is rupee cost
at about Rs.45, then the price differential will not be…
Jayanti Sanghvi:
Then also, then we will also become competitive because of
our raw material is also imported in some of the cases.
Srinath Krishnan:
Okay. What percentage of our RM?
Jayanti Sanghvi:
In our existing plants, our 100% purchase was made within
India. For our new plant, at least 40% raw material we will be importing from various
sources.
Srinath Krishnan:
40% is imported here.
Jayanti Sanghvi:
Yeah, because in India nobody makes the bigger ingots up
to weight of 50 ton, 40 ton like that.
Srinath Krishnan:
Sir, what is the, again a basic question, what is the average
realization per ton or which you might think for the 40 ton capacity?
Jayanti Sanghvi:
That we cannot justify at the moment, because normally
average per ton realization is justifiable into the automobile forging type of things,
because you do same composition repeatedly. In our industry everything is customized.
So, we may make one piece, five pieces, different material, different width, it is difficult to
give. But, on an average it is slightly more than the auto, but forging whatever people do
like that.
Srinath Krishnan:
Okay. When compared to your 6 tons earlier, the one you
manufacture at this point of time, so will it be __17:44__?
Jayanti Sanghvi:
Average what we manufacture at this point in time, average
of our price is in the range of around 10%. So, we are hopeful that that we will go,
increase to at least 12% by doing the bigger forging.
Srinath Krishnan:
10% in the sense?
Jayanti Sanghvi:
Our average PAT for the small forging is around 10%. So,
that we are expecting to increase by around 200 basis points for the bigger forging.
Srinath Krishnan:
Okay. And also in terms of this, you are confident of only
doing this only for the replacement of the domestic is it or are there any plans of
exporting?
Jayanti Sanghvi:
No, already 25% we are exporting on an average. And
similarly we are expecting to continue with the increased capacity also. And we are
already approved as a global vendor with General Electric, USA. So, we are supplying
to their various plants and they are one of the very large customers who buy lot of big
forging also.
Srinath Krishnan:
Sir, I understand your difficulty in quantifying the realization
per ton in the 40 tonnage category. But, if you want to break it up, just to give some kind
of idea in the power segment or ship building segment or oil and gas segment, what is
the average; because you would have had some…?
Jayanti Sanghvi:
That is at least the moment premature to say from my side,
but definitely I can say 10% is the average PAT for the small forgings and big forging it
will be around 12%.
Srinath Krishnan:
Okay sir. Thanks a lot.
Moderator:
Thank you. The next question comes from Mr. Ameen Pirani
from Deutsche Bank. Go ahead please.
Ameen Pirani:
Yeah, thanks for taking my question again. I just wanted to
ask you for your this new plant, will you be requiring specialty steel for this? Just wanted
to understand if in India is the availability enough or what are the sources in India that
you acquire the steel from?
Jayanti Sanghvi:
For few critical components, for various industries we need
good amount of specialty steel. In India we have tied up with MUSCO. Recently
MUSCO, recently have been acquired by Sanyo Steel, Japan. So, now that is part of
the Sanyo Steel. MUSCO is a Mahindra group company which has been recently
acquired by Sanyo Steel of Japan. And Sanyo is very good in specialty steel worldwide.
We have tied up with them, whatever range is available with MUSCO, we will be buying
and sourcing from them. And for another item which is not available through them, we
have good sources in Europe, who can supply us the required quality of steel.
Ameen Pirani:
Okay. Thank you sir.
Moderator:
Thank you. The next question comes from Mr. Pritesh Vora
from Equanum. Go ahead sir.
Pritesh Vora:
Hello, good afternoon sir. My question is this 15,000 tons
per annum capacity, what would be the utilization in FY14? Will the plant be fully utilized
or what is it?
Jayanti Sanghvi:
In FY14 we are expecting average utilization of around 55%.
Pritesh Vora:
Okay and FY15?
Pritesh Vora:
Okay. So, do you have some sort of, when your customers
are giving such big orders, are they also qualifying you before they give the order or
what is the procedure?
Jayanti Sanghvi:
In our case, 95% of the customers qualify us before giving
the order.
Pritesh Vora:
So, what is the qualification pipeline, how it is, when it will
be…?
Jayanti Sanghvi:
I will tell you, that is one of the major advantages what we
are having, because of our existing plant; we have around forty such qualifications
already in place. We are already qualified as a vendor for these companies like Nuclear
Power Corporation, ISRO, BARC, EIL, BHEL etc. And now what we are doing is, we are
enhancing our existing qualification with these customers. And average lead time for
qualification is, if it is new approval, then it takes from six months to two years depending
upon the procedure by each customer. But, the enhancement will take approximately
three to six months with these customers.
Pritesh Vora:
Okay. My second question is you are relying mostly in
present plant, relying on process industry, be it be oil and gas industry or power or
fertilizer or whatever it maybe. So, now this industry has lot of volatility in terms of its
orders coming through. Do you have any plan to go into automobile forging or any
de-risk model on the auto forging or anything?
Jayanti Sanghvi:
No, we are not planning to enter into auto segment. And we
will be focusing on these segments like ship building and power equipment only. But,
what we are doing for these is, we are not directly associated with the power plant. We
are working with the OEM’s basically, companies like BHEL, Siemens, Alstom, GE.
They have normal order backlog of two to three years time. So, we work with these
several customers in different segments, so we try to deal it that way, not by entering
into the auto segment or something like that.
Pritesh Vora:
And the new forging machine which you have bought for 40
ton capacity, this is only one piece of equipment, right?
Jayanti Sanghvi:
Yes, yes.
Pritesh Vora:
So, where do you compete in the similar range? Like Bharat
Forge also has enhanced in the non-auto side, they have also come in the bigger
forging, so who are the people who compete on that particular machinery?
Jayanti Sanghvi:
In India it is, up to 10 ton segments there are three to four
different other companies. But, above 10 ton forging, we have to mostly compete with
the Bharat Forge and the imported companies, foreign companies basically.
Pritesh Vora:
Okay. L&T also has a plan to put up a forging shop.
Jayanti Sanghvi:
L&T has already put up the plant, but they are targeting the
forging above 100 ton segment. So, they have put up a forging press to do a single
piece forging up to 200 to 250 tons. So, their setup to make a small forging is not
economical for them actually.
Pritesh Vora:
Okay, they are doing above 100 ton is it?
Jayanti Sanghvi:
They are focusing to do that. So, their plant setup is
designed to do forging up to 300 tons single piece.
Pritesh Vora:
But, although the design will be 300 tons, they might be
taking a smaller available order, available up to 40 tons.
Jayanti Sanghvi:
It doesn’t become economical, because the furnace is if you
design for 300 tons and if you heat the material for 20 tons, then you are losing lot of
money on heating basically.
Pritesh Vora:
Okay. So, basically in total you compete only with Bharat
Forge unit, right?
Jayanti Sanghvi:
Bharat Forge and lot of forging companies who are selling
forgings in India basically.
Pritesh Vora:
Okay, alright. Thank you very much.
Moderator:
Thank you sir. Ladies and gentlemen, if you have any
questions, please press * and 1 on your telephone keypad.
The next question comes from Mr. Ameen Pirani from Deutsche Bank. Go ahead sir.
Ameen Pirani:
Thanks for taking my question. Sir, just wanted to know for
my understanding, you said that L&T is doing forgings above 100 tons. So, what would
be the segments or products that are targeted by those large forgings and are they
different segments completely compared to the 40 tons?
Jayanti Sanghvi:
They will be mainly focusing on nuclear front and big rotor for
super critical boilers. So, normally nuclear reactors you need big shaft of 200 tons, 300
tons like that. And the super critical power plants, there is the turbine capacity of 600
megawatts and above, you need very big rotor forging basically.
Ameen Pirani:
So, your rotors which you make, which are up to 40 tons,
they will only be going into sub critical, below 660 megawatt.
Jayanti Sanghvi:
We will be able to make mainly up to 220 megawatts and for
some item up to 440 megawatts, that will be our maximum range.
Ameen Pirani:
Okay. So, for super critical you need higher than 100 tons
basically?
Jayanti Sanghvi:
Higher than that, yes.
Ameen Pirani:
Okay. And just one more thing, you said that you were
competing in that up to 40 tons space with Bharat Forge and other foreign, so as a
country are we, do we import forgings or those companies have setups in India and are
they selling forgings?
Jayanti Sanghvi:
No, most of these forgings are currently imported in India
basically. What happens is, all the customers who import the forgings, they import under
their item code. They don’t import it as a forging. For example, steel plant will import as
a roll or power Equipment Company will import as a rotor. They import the forging, but
you don’t know it is a forging, it is like that.
Ameen Pirani:
Okay sir, thank you sir.
Moderator:
Thank you sir. The next question comes from Mr. Pritesh
Vora from Equanum. Please go ahead.
Pritesh Vora:
Sir, as you said that you will be utilizing the plant, 55% by
April. How you can be, because lot of trial has to, as I questioned earlier, lot of
qualification has gone, so how you are so sure that you can predict that whether the
plant will be utilized that much, I mean how is the prediction?
Jayanti Sanghvi:
There are two reasons for that, because in forgings there are
two-three different types of market. One is the very critical component like the power
component or oil and gas segment. But, there is some __28:96__ market, where the
margins are little bit less, but the commodity type of items like the round bar forging,
which are used for general engineering applications or die block forging, which are used
by various induction molding companies or forging companies, that is the die block. So,
there is some simpler application which can speed up our capacity to start with. As we
are presently qualifying with the steel customers, steel components, we will be mainly
focusing to that segment basically.
Pritesh Vora:
So, round bar forging and die block forging, there is enough
demand is it, we are exporting die block?
Jayanti Sanghvi:
Because, we can export also to various consumers, already
we are exporting, so we have reasonably good market. That is reason we export also.
In India also there is reasonably good demand.
Pritesh Vora:
Okay. And this generally, what is the end use industry for
engineering, this round bar forging?
Jayanti Sanghvi:
Round bars are mainly for all type of machine building
basically. Mechanical machine buildings or bearing applications, various different
applications they have it. And for die block, it is used in injection molding, which is as a
die block for plastic moldings basically.
Pritesh Vora:
Okay. But, for this kind of commodity forging as you
mentioned, your margin will remain that high.
Jayanti Sanghvi:
No, in that case margin will be low.
Jayanti Sanghvi:
That depends from time to time, but it will be generally low
than the engineering forging.
Pritesh Vora:
Okay. Lower than the engineering forging.
Jayanti Sanghvi:
Yes, yes, sure.
Pritesh Vora:
Okay, alright sir. Thank you very much.
Moderator:
Thank you sir. The next question comes from Mr. Pritesh
Vora from Equanum. Please go ahead.
Pritesh Vora:
Sir, one more question. You have concluded 130 crores of
CAPEX by putting up this facility. What can be the asset turnover ratio typically if it is
utilized fully 100%? What kind of revenue we can see out of this particular project?
Jayanti Sanghvi:
Fully utilized it will be around 2.5 times to 3 times asset
turnover is possible.
Pritesh Vora:
2.5 times to 3 times?
Jayanti Sanghvi:
3 times, yes.
Pritesh Vora:
Okay, thank you very much.
Moderator:
Thank you sir. Ladies and gentlemen, if you have any
questions, please press * and 1 on your telephone keypad.
The next question comes from Mr. Pravesh Rawat from CRISIL Limited. Please go
ahead.
Pravesh Rawat:
Hello. Thank you sir for taking my question. Sir, my
question is first of all what is your guidance on sales for this year sir, FY13?
Jayanti Sanghvi:
FY13, our earlier prediction was, we will be growing at a
good rate, but it will be little bit less than our earlier prediction, but we will be growing, as
compared to the last year in the range of 20% to 30% basically.
Pravesh Rawat:
Okay, because the first half has been little sluggish, so far in
the first half we have done close to 19 crores. And as you told, as you informed that we
still have 24-25 crores of executable order book, so do you expect any further more
orders in the next H2 or are you in the verge of…
Jayanti Sanghvi:
We are already expecting some good orders, but it will come
in next couple of months, we are expecting some good orders. And basically for the new
plant and new plant we will get good orders basically.
Pravesh Rawat:
But, new plant will take some time, because as you told it will
take three months for stabilization and you are still in the process of, in the prototype.
Jayanti Sanghvi:
But, prototype also, there are customers who have given the
orders for prototype also, that will also go for sales only. Our overall guidance has been
reduced. But for next year we are reasonably bullish, next year will be a much better
year, because all the stabilizing and everything will be completed by that period
basically.
Pravesh Rawat:
Okay. Second thing I want to understand, during the call you
informed that in the new plant, in the heavy forging plant, 40% of the raw material would
be imported. And you told that because heavy forgings, up to 40 tons, 50 tons no one
manufactures in India. So, my question is, because you will be operating plant and all
the material which you will be producing for the plant, it will be heavy forging, so why
only 40% of the raw material would be imported? What about the rest?
Jayanti Sanghvi:
Our maximum piece forging capacity is 40 tons. We can do
20 tons, 25 tons, 5 tons like that. So, in India below 30 tons are available.
Pravesh Rawat:
Okay, 30 tons and 30 tons below is available.
Jayanti Sanghvi:
Yeah. So, above that only we have to import. Whatever is
available, our first choice is to buy it from India. But, whatever is not, there are few
particular grades which are not available, then you have to import it. It depends upon
the grade, approval, our customer approval. Suppose sometimes I want to make
forgings for GE, they asked me to buy the raw material from their approved source. So,
if it is not in India, I have to buy from their source, it is like that.
Pravesh Rawat:
Sure, sure. So, when you put up a number, like 40%,
strategically you are saying that 40% of the production you will do for 40 tons, 40 tons
and above and 60% of the production you will in the range of 20.
Jayanti Sanghvi:
Not like that, sometimes 15 tons raw material also I have to
import if my customer’s approved vendor, supplier is not available in India. So, it
depends upon the customer also, who are the approved vendors for raw material
basically.
Pravesh Rawat:
Right, right, so it will depend on the product order mix.
Jayanti Sanghvi:
Yeah, product. It will depend on production and end users in
that specifically.
Pravesh Rawat:
Okay. Sir, my last question is on the margins, because this
quarter margins improved significantly and probably this is because of the execution of
high orders. So, I would like to know about from you that in the next H2, how the
margins will move? Do you expect any further order from those clients who will give you
high margin?
Jayanti Sanghvi:
We expect that these are all basically defense and
Government plans. So, we never can confirm when they will be releasing the orders,
because it will depend upon their internal process and approval. We have quoted big
amount of quotations, but we are expecting orders in next one quarter basically from this
customer.
Pravesh Rawat:
Okay. So, the customer is the same, the high margin
customer of which you have executed the orders in Q2 FY13?
Jayanti Sanghvi:
Yes, yes.
Pravesh Rawat:
Is it the same customer?
Jayanti Sanghvi:
Yes.
Pravesh Rawat:
Okay. So, I think your margin would again; your EBITDA
margin would be…
Jayanti Sanghvi:
EBITDA would increase and the PAT would decrease,
because now fully plant has been operational, so depreciation and everything will come
into effect.
Pravesh Rawat:
Depreciation and interest cost will take your PAT.
Jayanti Sanghvi:
Yes, yes.
Pravesh Rawat:
Sure sir, that was it. Thank you. Thanks a lot.
Moderator:
Thank you sir. The next question comes from Mr. Ameen
Pirani from Deutsche Bank. Go ahead please.
Ameen Pirani:
Sir, as far as your steel price is concerned or raw material
price, do you get a pass through from your customer, especially when you have to
import the raw material?
Jayanti Sanghvi:
No, normally our orders are fixed price contracts. And what
we do is, when we take an order, we book the raw material with our supplier also. So,
the price is generally fixed basically.
Ameen Pirani:
Okay. So, in case if there is any forex fluctuations that has
to be borne by you completely?
Jayanti Sanghvi:
So, that is we either hedge that also or we keep it open, then
that we will take, it is like that.
Ameen Pirani:
Okay. So, your customer doesn’t, your competition, some
company mentioned that steel price is a pass through and any increase or decrease in
steel price, the cost as well as the…
Jayanti Sanghvi:
It is true for auto components basically.
Ameen Pirani:
Okay, it is not in the non-auto.
Jayanti Sanghvi:
Because, non-auto most of the products are customized
products, so every time we have to negotiate the price for each piece basically,
depending upon their requirement.
Ameen Pirani:
Okay. So, you are saying in more standardized products,
such pass throughs are allowed.
Jayanti Sanghvi:
Yes, correct.
Ameen Pirani:
Okay, thank you sir. Thanks.
Moderator:
Thank you sir. The next question comes from Mr. Sonal
Shrivastav from PhillipCapital. Please go ahead.
Sonal Shrivastav:
Sir, I had two aspects to understand. One, you mentioned
that because of using gas furnace, you will be saving around 20% to 25% cost. Second
aspect what I wanted to understand was, when you mentioned that these products being
import substituted and they are imported under item code, what would be the implication
if you are on the duties basically, if you are importing say power equipment and the duty
is under power equipment, both are reduced, so are we competitive for these like to like
basis on these kind of products?
Jayanti Sanghvi:
First, I will answer the first question, we have five gas
furnaces. Normally most of the furnaces in India are fired through the furnace oil or LDA
basically. And you cannot have a very automatic, sophisticated control for that type of
furnace. Gas is easier to control full on fully automatic parameter basis. And heating
time for the furnace is, because of the gas, all the lining material is more light, what the
furnace manufacturer uses for that type of furnace. So, with oil gas furnace, you have to
heat the bricks and everything, here you have to heat only the ceramic. So, gas
consumption is low basically. So, your energy cost is less, that is my reply to your first
question. Second is, for the imported forgings how will be the competition. Now there
are two aspects to this. There is one segment of customer who wants to import big
amount of forgings, but they are not able to import it due to various reasons. Like for
example, Nuclear Power Corporation wants to import big amount of forgings, but no
country wants to give them the forgings. Similarly, ISRO wants to import the forgings,
but the developed country don’t wants to import, because ISRO is competing with them
in satellite launching business, so they don’t want to give. So, that segment of
customers, where the availability is very important, if it is available in India and its cost is
5%-10% higher also, they are willing to pay. That is one type of customer. Now, to
answer the other question, whether we will be competitive enough if the power
equipments are given zero duty for import or exemption? Now, we are working with the
companies who are global players, like companies like General Electric or Voith or
Honeywell or ABB, they all have global manufacturing locations as well as global
sourcing capability. So, if I am able to supply to GE’s two or three, four plants, that
means I am competitive enough to supply them the same product in India as well as for
the international market. So, competition wise, we feel that we will be reasonably
competitive as compared to any other supplier and as compared to imported suppliers;
definitely we will be 10%-15% cheaper than them also.
Sonal Shrivastav:
Okay. Just one more aspect I wanted to understand was
with regard to the gestation period with regard to winning the order. How is the gestation
period, when you start discussing with regard to being able to manufacture these
products, subsequently when you achieve 65% or 55% utilization, at that point of time
you will have to look at spare capacity available? And if you are taking one big single
order, then it will be very difficult to give that kind of delivery schedule. So, what is the
time taken to bag an order and what is the time usually taken to manufacture the
product?
Jayanti Sanghvi:
Normally in India for the Government sector it is three to six
months for getting the order. And for private sector it is around two to three months for
getting the order.
Sonal Shrivastav:
Right. And how much it takes to deliver these kinds of
large?
Jayanti Sanghvi:
For executing the order, it depends upon the product, but it
starts with minimum two months and it can go up to six months.
Sonal Shrivastav:
Okay, right sir. Thank you very much.
Moderator:
Thank you sir. The next question comes from Mr. Srinath
Krishnan from Sundaram Mutual Fund. Please go ahead.
Srinath Krishnan:
Sir, just one clarification, if I look at your gross margins, it
has been consistently improving last few quarters, just want to understand in terms of
product mix, what has been changing?
Jayanti Sanghvi:
The product mix, we have different components in different
segments where we are operating. In last few quarters we have very good amount of
business from the Indian defense sector, which is slightly more lucrative as compared to
the other sectors. So, that amount of business is picking up with us, so due to that main
reason, the margins are improving basically.
Srinath Krishnan:
What is the contribution sir from the Indian defense sector?
Jayanti Sanghvi:
At this moment that will be around 40%.
Srinath Krishnan:
40% of your sales come from…
Jayanti Sanghvi:
Yeah, that is mainly, normally it is not that, but recently we
have good amount of orders from that only.
Srinath Krishnan:
What is the order backlog sir in the defense sector?
Jayanti Sanghvi:
The total order backlog at the moment is around 25 cr.
Srinath Krishnan:
Okay, it is the total, inclusive of this.
Jayanti Sanghvi:
Including all, everything.
Srinath Krishnan:
Okay. Thanks.
Moderator:
Thank you sir. The next question comes from Mr. Kaavya
Subramanian from Capital Market. Please go ahead.
Jayanti Sanghvi:
Go ahead sir. Go ahead with your question.
Kaavya Subramanian:
Yeah. I missed out the guidance you have given for FY13,
could you please repeat it sir?
Jayanti Sanghvi:
I said we are expecting a growth of around 20% to 30% as
compared to last year.
Kaavya Subramanian:
20% to 30%?
Jayanti Sanghvi:
Yes.
Kaavya Subramanian:
Okay. Thank you.
Moderator:
Thank you sir. Ladies and gentlemen, if you have any
questions, please press * and 1 on your telephone keypad.
Ladies and gentlemen, if you have any questions, please press * and 1 on your
telephone keypad.
There are no further questions. Now, I hand over the floor to Mr. Sunil Mudgal for
closing comments. Please go ahead sir.
Sunil Mudgal:
I thank you all on behalf of Kirin Advisors for participating in
this teleconference. If you have any further queries, please drop in your mail at
[email protected]
,
. Once again thank you very much.
Jayanti Sanghvi:
Thank you everybody. Thanks.
Moderator:
You are most welcome sir. Ladies and gentlemen, this
concludes your conference for today. Thank you for your participation and for using
Door Sabha’s conference call service. You may disconnect your lines now. Thank you
and have a good evening.
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Note: 1.This document has been edited to improve readability.
2. Blanks in this transcript represent inaudible or incomprehensible words.
