Kwality has moved 22 percent this week, after the company released an ambitious expansion strategy for the future, in their investor presentation. In an interview to CNBC-TV18, its CFO Sunit Shangle discusses their expansion strategy and the company's future plans.
Below is the transcript of Sunit Shangle’s interview with Reema Tendulkar and Mangalam Maloo on CNBC-TV18.
Mangalam: In you investor presentation you have said that you will be increasing the milk chilling centres by 25-30 over the next two years however the company has 24 already so how do you plan to double it in such a short span?
A: We started procuring from milk collection centres (MCC) models from 2012 so in three and a half, five years that we have worked and collected milk from farmers we have already transferred to our chilling centres. We have worked a lot, we have already done a study where we have to open new milk chilling centre so we are confident of opening another 30 centres in next two to three years time.
Reema: Not just that, the company has also indicated that you want to launch various value-added products like flavoured milk, ice-cream, lassi etc. so overall can you walk us through what the capex is going to be for the company in FY16 as well as in FY17?
A: Total capex that we are planning for next two and a half years is almost Rs 300 crore.
Reema: And how will you fund it?
A: That would be a mix of debt-equity and internal accruals.
Reema: And can you give us a break up, in this Rs 300 crore how much of debt you plan to raise?
A: Debt would be around Rs 200 crore.
Reema: You will raise Rs 200 crore of debt?
A: No, have not raised as of now. We are already talking to our bankers. What we have raised is we have come out with a preferential issue, a part of that has already been done, part of that has been raised so we are speaking to bankers.
Reema: So you will raise Rs 200 crore more of debt for your capex plans of Rs 300 crore?
A: Yes, right.
Mangalam: You had a plan to get about 50 percent of your milk requirement directly so, how will that affect the margins, what will be the incremental benefits on the margins?
A: What is on the value-added products that we are planning can only be made from the milk that is being prepared from farmers. So, margins would be in the form of better contribution to these value added products that we will be making from this milk from farmers.
Mangalam: Currently 15 percent of the milk is directly procured from the company from their MCCs. You indicate that you will want to increase that proportion to 50 percent. So, how will that benefit that benefit the margins, what will be the incremental benefit on the margins?
A: That is what I am trying to point out is that this milk can be utilised only for the value added products that I am planning to come out in next two years time. So, the margins would be coming in the form of better realisations of margins in these value-added products.
Reema: So give us a sense, your current margins would be in the range of what six percent on an average, six six and a half percent may be at the earnings before interest, taxes, depreciation, and amortization (EBITDA) level?
A: EBITDA level is around six percent.
Reema: So, your current EBITDA is six percent. For value-added products like flavoured milk, ice-cream, what could be the EBITDA margins you hope to enjoy?
A: It would be very difficult to predict right now but then it would be much higher than what we are doing right now.
Mangalam: Also a word on competition because a lot of the other companies are also going into the premium milk segment, how would you tackle that?
A: Products like flavoured milk have a huge market. Flavoured milk is capped at around Rs 1,000 crore this time growing at the rate of almost 30 percent so there is a scope for everybody to sell these products in the markets. Even overall if you see the market, it is claimed to be between three lakh crore, milk market is there so I don’t think competition would play a very important role. Everybody will be able to sell what they are producing.
Mangalam: I asked that question specifically because I also wanted to know your view on selling and advertisement expenditure, how much would that be as a proportion of your revenue going forward?
A: We are launching these products in a very staggered manner so our advertisement spend would be spread over a period of next two years. The initial plan is to first launch these products, have a feel because once you go in for a budget you need to have a bucket of products on which you can spread these advertisement cost. So, once these products are there in the market—we are working on our budget though we have already tied up with ad agencies but then we will be finalising in another month’s time.
Reema: So, give us a sense say after two and a half years once you incremental MCC or milk chilling centres come on board and you manage to double which will be used for your value added products so what proportion of your revenues will come in from your bread and butter milk segment and what proportion of your revenues will come in from the value-added services?
A: Milk will always remain our principal product because even other companies that are doing, there is almost 60 percent liquid milk only. S0, milk on volume basis will always remain the principal product but yes what we are having is if we are able to sell almost 25 percent of our total product from these value-added products, it would be a great achievement.
Reema: So you target 25 percent of your revenues in a few years to come from value-added products?
A: Right.
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