See consumption led recovery in industry: Carborundum

Industrial ancillaries have seen a demand pick up in recent days and K Srinivasan, MD of Carborundum Universal sees this as a consumption led recovery.

In an interview with CNBC-TV18, Srinivasan said that the demand pick up is significantly better in this fiscal and the company's capacity utilisation is also scaling up, which is expected to be around 80 percent for the second quarter.

There is a boost in demand from international geographies as well, he added.

In the same interview, Nitin Menon, JMD of Menon Bearings also shared his views and outlined his company's revenue target going forward.Below is the verbatim transcript of Nitin Menon and K Srinivasan’s interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Latha: What is the sense you are getting? Is your capacity utilisation improving, more orders in your order book?Srinivasan: There is clearly a bottom up demand pick up. We are not seeing any big projects getting started but clearly there is a bottom up demand pick up, retail construction, retail consumption have all picked up. So, our capacity utilisation is inching up, we were at about 55-70 percent but clearly we will be slowly pushing more than 80 percent in Q2.Clearly, there is a demand pick up and as we all know in our space of addresses etc Q2 is always a big quarter because we have always the pooja holidays and always coming up and people tend to do all the home improvements and all that during this period. So, there is definitely a demand pick up. That is on the domestic side.On the international also there is no great slowdown that was anticipated - didn't happen either in Europe or in America or even in Russia. So, clearly there is an overall definite demand pick up.Sonia: Your view on whether there is a genuine demand pick up that you are seeing and I also wanted to ask you why your revenues have not scaled up to the proportion that many of your peers have seen. For example four years back your revenues in 2012 were about Rs 90 crore and today it is about Rs 110 crore per annum despite having such marquee clients in your list. What is the reason for that?Menon: I would like to clarify that we are not into manufacturing of ball bearings or bearings like NRB or SKF. So, we are basically an engine component manufacturer, heavy duty diesel engine manufacturer and in engine bearing in India, there are four or five major players and we are one of them. So, we are supplying to basically an engine part like transmission or an engine bearing where a crankshaft fits. So, basically our principal clients are like Tata Motors, Cummins, John Deere, the tractor segment, the heavy duty truck segment.Anuj: If you could give us your market share, your current market share because this is a bit new for our viewers. If you could tell us what is the current market share and do you have plans to scale it up?Menon: At present, we are among the top three engine bearing companies in India and with most of my customers, we enjoy at least 60-70 percent share. In some of the parts we are single source supplier for past many number of years. For example a tractor manufacturer who we have started supplies maybe in 2004, we are still even today single source for India as well as for those parts in southern France.Latha: You spoke about revival. Can you compare it to previous years? You were referring to more festival season and stuff like that which would be seasonal. Is the demand recovery better than a year ago, a year before, it is comparable to the, probably now, golden era of 2011?Srinivasan: The demand pick up is significantly better than last year. It s a bottom up demand pick up. So, even during the season it is higher than what it was in the last couple of years, but it is not comparable to the best years. If you look at what we had in 2011-12 those are outstanding years but this is definitely better than the two years after that.Latha: You see an industrial recovery or is it a consumption lead recovery?Srinivasan: It is a consumption, bottom up recovery, consumption driven recovery. There is more money at the hands of a lot of people, the rural, urban everywhere. That is a bottom up. It is no big projects, nothing big, top down.Latha: And if this is coming in a situation of lower commodity prices should we expect outsized margins and net profit returns?Srinivasan: Like I said Carborundum is about Rs 2,000 crore and half of it is in India and half of it is outside India and this is across the board. We are seeing the same situation even in Europe, Russia, America and others. So, in a sense it is going to be volume pickup and consequent margin pick up as well.Sonia: Apart from the diesel engines that you work for you also supply to compressors for air conditioners and refrigerators. Wanted to understand what kind of potential growth do you see from that part of the business?Menon: We are seeing revival in every segment. That is why in Menon Bearings you see a consistent growth. Maybe from 2012-13 onwards we have grown at an average of around 22-25 percent every year. We supply our components to engines, electrical components, to the transmission, to the brakes. So, about electrical, we have three-four suppliers who are making small compressors and we are the major suppliers to them.And the previous question you asked me why is the growth of the company very slow or why we are not a Rs 500-1,000 crore company. We have reached a turnover of Rs 130 crore. We work at an earnings before interest, taxes, depreciation and amortisation (EBITDA) of around 28-29 percent. My profit before tax (PBT) is around 23 percent. So, I would rather -- in another two years time -- have a Rs 250 crore with a 20 percent margin. Rather than having a Rs 1,000 crore with a 4 or 5 percent margin.Latha: Are you saying that revenue is the wrong way to look at it because commodity prices are probably pulling revenue down but you are doing fine as far as margins and volumes are concerned?Menon: On revenue side also we are not showing 50 percent or 100 percent growth. Every year there is a consistent growth of 25-30 percent and that graph is going to keep on increasing. We have so many customers in pipeline.Latha: Where is your best demand springing from and does it look sustainable and improving to you?Menon: Yes, my segment wise distribution will give you an idea. Indian original equipment manufacturer (OEM) we are around 50-52 percent. Exports at present to America, Brazil, China, Korea and all these companies constitute around 25-30 percent. We are selling in the replacement market under the Menon brand name. That is the aftermarket what you call. So, that is around 9-13 percent and the electrical business is another nine percent. So, from all areas we are finding that there is growth and we are into a product, which requires a lot of validation and testing at our end and customers end and hence the entry level into the business is very high.