In an interview with CNBC-TV18, Rajesh Doraiswamy, Joint Managing Director of Salzer Electronics said the funds raised through QIP will be used as growth capital.
The 62 crore thrrough qualified institutional placement (QIP) will be used for on-going projects and new projects, Rajesh Doraiswamy, Joint Managing Director of Salzer Electronics told CNBC-TV18.
Promoter holding, which was 30 percent previously, has come down to 25 percent post-QIP.
L&T, which has been associated with the company for two decades, will hold 19.8 percent now, a decline from 25 percent held earlier, he said.
Doraiswamy expects the change in revenue mix to improve margins by 100 basis points. For the next three years, the company is targeting 25 percent revenue growth, he said adding that the industrial switch gear business will lead growth.
Salzer Electronics operates in four segments – switchgear, building segment, wires & cables and energy management.
Below is the transcript of Rajesh Doraiswamy's interview with Reema Tendulkar & Latha Venkatesh on CNBC-TV18.
Latha: How much money have you raised through your QIP and did you have any anchor investors in the QIP?
A: We have just raised QIP for Rs 62 crore by issuing Rs 26 lakh shares at Rs 235 per share. We just closed the books yesterday; the issue was fully subscribed. We have a large Indian mutual fund who is anchoring our investment and one another large FII anchoring it. The names of the funds will be public quite soon and you will be seeing it on the BSE website.
Reema: Could you tell us why have you raised this money, what will be the end use and after this fund raising what will the promoter holding stand at?
A: Actually we are looking at good growth for the next three to five years at the rate of around 25-30 percent Compound annual growth rate (CAGR). We are also working on various new projects, one of the projects we have already tied up with an Austrian company called Trafomodern for naturally cooled three-phase transformers.
The funds raised are going to be deployed on various brownfield projects that we are working on and new products that we are working on and we see a robust growth for the next three four years.
On the promoter stake, we are currently holding 30 percent and post QIP issue, we will be down to around 25.5 percent. However, we have issued warrants to ourself at around Rs 251.45 per share which will be converted in the due course of 18 months from now.
Latha: We understand that L&T holds over 20 percent stake in your company. Will they look to increase or decrease the stake or will there be any other strategic initiative with them?
A: L&T has been our business partner for almost two decades now. We have been working with Larsen and Toubro’s electrical business group from 1994 onwards. We distribute our products through Larsen and Toubro and also brand products to L&T. L&T has been very close with us and they have become and equity partner in 2006.
They currently hold 25.51 percent of our stake. Post QIP, they will be dropping to around 19.8 or 19.7 percent. The equity holding as well as the business is completely different; the business will continue with L&T. Today, approximately 40 percent of our revenue comes through L&T distribution network.
Reema: Wires and cables contributes about 40 percent of the overall revenues, but margins there seem to be under pressure. Would you look to change your business mix going ahead?
A: Our business strategy in wire and cable is only branding. We brand majority of our business, more than 70 percent of our wire and cable business is branded for L&T and the rest to various other brands within the country. We also do automotive business.
The wires and cables business gives a very low Earnings before interest, tax, depreciation and amortization (EBITDA) margin and it is dragging the overall blended EBITDA margins down.
Going forward, we see very robust growth coming from our industrial switch-gear businesses which is higher EBITDA margin products. Growing that and because of that revenue mix changing, we see at least 100 bps point increase in our EBITDA margin in the next three years.
Latha: Actually EBITDA margins have been at a constant between 9 and 11 percent, where can you see it rising to?
A: In the last four years, the Indian market has not grown for us. The Indian electrical industry has been actually degrowing in FY12-FY13. However, we have outbeaten the industry to some extent and we have grown at a nominal pace of five percent.
So, that growth was not enough to actually increase the EBITDA. Our EBITDA has been flat and more than that the wire and cable business got merged into the main company in the year 2010. From then on we have been lingering at around 12-12.5 percent EBITDA margin.
We definitely see the revenue mix changing, we see the robust growth because of our association with very large Original equipment manufacturer (OEMs) like Schneider and General Electric (GE).
Reema: So coming to the growth that you were referring to, apart from industrial switch-gear, which is the other segment where growth will come in?
A: We did a Technical Licensing Agreement with an Austrian company Trafomodern for naturally air-cooled three-phase transformers. That is one of the brownfield projects that we are going in right now and the money raised through the QIP is going to be deployed in this project as well as a couple of other projects that we are still in discussion.
Since this is the business that is going to get us growth for the next three years as well as our existing businesses which is going at a very fast pace from this year onwards at around 25 percent per year.
Latha: So, can I assume that there will be a 25 percent plus growth in sales and profits and what next one, two, three years?
A: We definitely foresee a topline growth of 25 percent for the next three years.