Margins over 16% likely; bullish on textile biz: Sintex

Sunil Kanojia, group president, Sintex Industries says the company is not holding back on capital expenditure plans as the economy starts to pick up. Kanojia’s views come on the back of the announcement of a Rs 1800 crore textile project in Gujarat.

Speaking to CNBC-TV18, Kanojia says despite the weak textile demand globally, India and China have seen a good demand in spinning. Besides that, a number of parameters are in favour of this textile capex.
“The cost of borrowing, thanks to Gujarat’s textile policy, is going to be nil. Then there is the power cost where the subsidy is available. However, more than subsidy I think we have to look at this particular project in Gujarat for reason that there is a power surplus. So our capacity utilisation is going to be very good because of the availability of power,” explains Kanojia. 
In keeping with the optimism, Kanojia believes the company can log over 16 percent margins in FY14 and says an EPS of Rs 10 is likely . Below is the edited transcript of Kanojia's interview to CNBC-TV18. Q: The biggest highlight of your Q2 results was the stability we saw in the pre-fab and the overseas custom molding business. Does the strength in performance continue into Q3 as well?
A: Yes if you look at H2, H2 is always stronger than H1 and other than just the custom molding India, we can definitely look forward to good growth coming from all the other segments especially pre-fab custom molding overseas as well as water storage tanks and the other components. They will all show good growth and overall, on annual basis we will be able to register more than 15 percent growth. Q: In the quarter gone by, the company benefited from the depreciation seen in rupee on the margin front. As the rupee reverses its trajectory, will it have a marginal negative impact on the margins in Q3 and into H2 FY14?
A: One has to look at rupee-dollar exchange rate in a mixed manner. We do get some translation advantages because of the overseas turnover but at the same time, one also has imports. And at the same time one also has outstanding foreign currency convertible bonds (FCCBs) of USD 140 million. So, there are negative impacts as well. Overall one has to look at the translation losses which will always be there. However, it might not be as high as it was in Q2 but overall turnover will go up and that will give us the advantage. Q: So by how much can we expect the dollar denominated revenues to get impacted by - post the strengthening in rupee?
A: What I am saying is that the volume of overseas business is showing positive impact. However, on the profit after tax (PAT) level since there will be also mark-to-market losses, that will also lead to a positive impact here.
Q: There is that FCCB which stand at approx USD 140 million. Of this, what portion of the FCCBs currently is unhedged and by how much will the profitability get impacted due to the mark-to-market losses?
A: Generally, we maintain about USD 50 million or so as hedged and balance we have left it to the natural hedging against the overseas business that we do. Q: The pressure areas among your business segments clearly are monolithic and domestic custom molding. Slowdown in auto sales numbers, poor social spending cues guide to a glum second half. Is the on ground state of business in these areas still as troublesome?
A: We saw monolithic business picking up in Q2. As far as business opportunity is concerned, we don't see that going down. However, we have been moderating it ourselves because we do not want too much of cash to be tied up over there. As far as this business is concerned we did about Rs 1000 crore last year. We will easily be able to do that, either the muted growth or may be addition of 8-10 percent on this turnover. If that happens, the margin improves automatically. You have to justify with the volumes. Q: One of the big concern point is the very high capex level which the company is maintaining - despite slowing financials and also that it will pressure your return ratios for a few years. Could you elaborate on the capex targets for FY14?
A: I think now we have to look at economy having bottomed out and there are good positive indicators that the growth is coming in manufacturing as well. I think the government will start spending. With that happening we need not be conservative as far as capex outlay is concerned. And capex always has to proceed the growth coming in the market and therefore we think that we should not unnecessarily hold our capex plans. We also have to look at that because we announced the textile project and with textile project there will be now capex’s coming because that is a 15 month first phase where we are likely to spend about Rs 1800 crore. So, capex will show a slightly higher number in view of the expansion project that we announced for textile. Q: You announced the big ticket capex in textile business which really got thumbs down from the investors - given the challenges this sector is facing? Are you still going ahead with that?
A: You have to look at textile biz in totality and especially the expansion that we are doing is on the spinning side. Now, when one looks at the supply-demand what is happening is that the demand of the world though may have remained static or may be growing normally 5-10 percent, but the manufacturing of spinning is happening more on the Asian side.
Europe is almost closed, I would say that there is a degrowth. So China and India have shown robust growth on that and within China- India also offlate China is going down whereas growth in India as well as expansion of margins on spinning in India has gone up. This is typically on a macro basis.
When you look at on a micro basis when you are setting up a project in Gujarat which is based on the textile policy being announced by the state government of Gujarat with central government’s subsidy as well as the state government subsidy, the cost of borrowing is almost going to be nil. Then there is the power cost where the subsidy is available. However, more than subsidy I think we have to look at this particular project in Gujarat for reason that there is a power surplus. So our capacity utilisation is going to be very good because of the availability of power.
What we also have to understand is that Gujarat also produces the maximum cotton, so we have raw material availability within the state, we have cost of borrowing which is almost nil at the same time we have subsidy on power and availability of power. Besides that the shift of manufacturing of spinning is already happening on this subcontinent, I would say China, India. China though slightly degrowing but India is growing up. Q: Give us some guidance because despite very challenging times, the company has been able to maintain margins at 15 percent level in H1. What is the outlook for H2?
A: We did 15.63 percent in Q2, we should aim at atleast crossing 16 percent barrier by the end of financial year. Also largely because H2 volumes will be higher and you will have higher growth coming in H2, that will drive the margins up. And at the PAT level, we should at least be able to deliver EPS in the range of somewhere around Rs 10.