Will raise debt of $100m via ECB route: Sintex Inds

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Sunil Kanojia, group president of Sintex Industries says the company will focus on conserving cash to meet FCCB redemption needs. The storage tank maker reported profits down 27% for third quarter at Rs 82 crore.

Speaking to CNBC-TV18, Kanojia said, the company has frozen future capex plans for now. "We need to raise nearly USD 100 million debt for FCCB redemption," he said.

Despite slow execution of the monolithic business, deteriorating fundamentals in the Eurozone and the FCCB concerns, Sintex shares have participated in the bull run and have gained close to 45%. On a positive note, Kanojia said issues in the monolithic business are "short-term" in nature.

Sintex has cash of about Rs 800 crore on its balance sheet, he said adding, "will raise debt of USD 100 million via ECB route."

Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.

Q: Your Q3 results were primarily impacted by the slowdown that we have seen in the monolithic business. Can you elaborate on the reasons for the slowdown and the outlook for that segment?

A: When you look at the results of Q3, they have to be seen in light of two issues that company is confronted with. One is bit of slowness in the business of monolithic in terms of execution, especially since this is government led business. Second, company also has on hand issue with regard to redemption of FCCB.

So company took this as an objective to do whatever we have to so that we can redeem the FCCBs if it comes for redemption. The primary objective of the company is to conserve cash as much as possible, so therefore we have frozen future capex at least till that time. Also we have slowed down the execution of monolithic business because that is one business where you have lot of working capital which gets stuck and we noticed that because of slowness in the government business the execution needed to be controlled to avoid any money getting stuck in larger context of the debtors and that became one of the objective.

Therefore, Q3 has seen some kind of moderation from both fronts, that is internal which is company controlled as well as external factors where we felt that government wasn't taking quick action in terms of letting us get clearances of execution and making our payments on time.

Q: Your margins in the monolithic business are pretty high compared to competitors; you do about 18-20% while others do single digits. Why is it so much better?

A: In monolithic business we are using a technology which enables us to deliver products which is much more robust, low maintenance and quick to install. It is a pure reinforced concrete cement product, but I must say that cost of material is higher here but the cost of labour is much lower because people deployed lesser than what we use in conventional method.

At the same time, what others would do probably in two years time we are able to do in six months time. So there is a difference of 1/4th of timing in terms of execution of the project. So overall when you look at the economics of the project, it turns out to be cost saving by 8-10% and that's the reason why you see our margins to be in the range of 18-20%.

Q: For investors, one concern is that along with your revenues your debt also has grown. Any steps to reverse this?

A: I think if you have to look at the balance sheet, it shows a large debt, though still in the range of 1:1. It is because of the FCCBs pending. Once the FCCBs are off the balance sheet, maximum external debt we may take is of USD 100 million or so, so USD 225 million will get replaced by USD 100 million.

The company will then focus on bringing down working capital cycle in the monolithic business. It was somewhere around 90 days, but got extended to 150 days. So we started working on it and brought it down in 2011 to 110 days or so, but again there is a slowness we are experiencing that there is increase in working capital cycle by about 10-15 days. We don't want that to happen, so we are now concerned about balance sheet and we do understand that when you are chasing demand and economy is growing at the rate of 8-9% you don't want to be left behind. I mean you will do whatever is required to see the opportunity and try maximizing your benefits to the shareholders in terms of growth on revenue as well as growth on profitability.

When you do that, then lot of money is required definitely to be invested. But India is a long-term story and I am still saying that monolithic business is only an issue for the short-term; we remain bullish on the long-term looking at the economical weaker section housing requirement the estimate of the government departments is somewhere around 5 crore houses. If that has to happen it's a huge opportunity.

Q: Can you tell us how much cash you currently have on the balance sheet right now and what kind of incremental debt do you anticipate taking on for the FCCB redemptions which are due in March 2013?

A: As of now we have cash of about Rs 800 crore or so on the balance sheet. USD 110 million is lying outside, which is naturally hedged. We have a liability of USD 225 million as the principle amount besides which we will have YTM for five years which is close to about 29%, so total liability becomes about USD 280 million. Out of USD 280 million, USD 110 million is already with us. So we will have to make an arrangement for the balance USD 170 million or so.

Out of USD 170 million, there will be cash accruals as well as some of the subsidiaries will be able to utilize their limits and be able to raise funds. So I would say about USD 70 million or so can be arranged by way of internal accruals as well as utilizing the limits of the company. So balance is USD 100 million. So in a way you can say that a debt of USD 225 million goes off the balance sheet and it will be replaced by new debt of USD 100 million which we will go through the ECB route. That's the thinking as of now, but I think we can only start acting between September 2012 to March 2013 and that's a time when we will be able to take a clear view of how we are going ahead in terms of redeeming the FCCB.

Besides, one will also have to look at whether the rally in the stock market continues and if the stock picks up and reaches a point where the trigger happens and it can be converted. So we are not leaving hope in terms of conversion. However preparing ourselves for the best or rather for the worst in terms of if at all the redemption takes place.