Pre-fab, custom moulding to help push 10-15% growth: Sintex

Sintex Industries intends to reduce execution of orders in the monolithic business going forward, says group president Sunil Kanojia. Though business was growing in topline and was yielding results in terms of operating margins at 18-19 percent, but interest costs because of extended working capital cycle especially on the debtors stock did not make much sense, he explained to CNBC-TV18.

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With degrowth expected in monolithic business, the company hopes to grow through its pre-fabricated and custom moulding businesses. It is looking forward to a growth of more than 30 percent in pre-fabricated business, while it expects the custom moulding business to grow due to improvement in the PMI index in US and Europe.
Kanojia continues to maintain guidance of 10-15 percent growth on an annual basis despite its Q1 numbers falling below street expectations. He says going by track record, Q1 and Q2 are always weaker than Q3 and Q4. In FY13, the company had covered up a lot in Q4, he says. Below is the verbatim transcript of Sunil Kanojia’s interview on CNBC-TV18 Q: We haven’t had the chance to interact post your Q1 numbers and your results were also lower than street expectations. In this context, do you still maintain your 10-15 percent topline revenue growth for FY14?
A: We are still maintaining the guidance of 10-15 percent growth on an annual basis. If you go by the previous track record, you will see Q1 and Q2 are weaker than Q3 and Q4. We do cover up. See the last year results. We did cover up a lot in Q4. As of now, looking at the various segments visibility, we are sure that we will be able to maintain 10-15 percent of growth. Q: You indicated post Q1 earnings that going forward the company intends to reduce execution of orders in the monolithic business and consequently you have guided for much lower revenues for the monolithic business in FY14. Could you tell us the reason behind the shift in focus after all when we used to speak earlier you always said that monolithic business was a big promise area of sorts for the company?
A: This is basically a six year old business and we had been growing about 35-40 percent in previous years and by the time we reached the fourth-fifth year, we realized that debtors were mounting. Some cases, even the customers had not paid for last one year. Some of the sites were getting sticky.
So the business though was growing on topline and was still yielding results in terms of operating margin flows to 18-19 percent, before the interest was looking quite profitable but when we look at the interest cost because of extended working capital cycle especially on the debtors stock, it was not making much sense and unless we collect our payment within 120-130 days, the business does not make much sense.
This is again going to be a year where politically we think that because of the impending elections, there will not be much of decision makings. So there are two things which are affecting. One is that we don’t want to grow if our debtors are not going to be in controlled limits of 120-130 days and two, politically also I feel that this will unnecessarily become a messy business.
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Therefore, we think that for the time being, especially for this year, let us not unnecessarily chase growth from the topline, but rather focus on the other segments and see that we still realize our growth of topline and bottomline close to 10-15 percent. Q: Given the pressures in the economy, if the company is accounting for contraction, degrowth in a segment which is almost 20 percent of your business then focus will have to shift to different business units to maintain growth. Which segments, where will growth come from?
A: You are absolutely right that if you are going to degrow the monolithic, growth has to come from somewhere else. Pre-fabricated is one segment which is being growing year-on-year (Y-o-Y) basis close to 20-25 percent. This year we should look forward to have a growth of more than 30 percent. We did deliver this growth of 34 percent even last year. So going by the visibility especially with new orders coming from Maharashtra, Madhya Pradesh as well as Bihar and looking at the visibility, the segment is likely to grow phenomenally.
As far as custom moulding is concerned, we grew about 22 percent last year on overseas. We still feel that we can grow that way as far as the overseas business is concerned especially looking at the macroeconomic situation in the US and Europe that have slightly shown a positive trend especially when you look at the PMI index. We feel that we will be able to count on it.
Over and above we have for example an acquisition that we made last year, which will contribute towards the growth and custom moulding India though in Q1 did not show that kind of result, but on a full year basis, I do not see that should be a problem. So all these together, including textile and water tank, we should be able to do 10-15 percent growth. Q: Another concern that you have highlighted, much higher capex for FY14 Rs 350-400 crore that is higher than you had set out earlier, the rationale behind much of the higher capex guidance was in the backdrop of slowing financials, wouldn’t that be a concern?
A: If you look at the segments that we are talking about for example custom moulding pre-fabricated segments, which we are accounting on especially from the higher growth front, both these businesses require capex in terms of line balancing as well as setting up new capacities for new customer acquisition.
Take a typical case of custom moulding business. If you are in Chennai, you can only feed customers who are based out of Chennai, but if your customer in Pune is growing, you cannot supply from Chennai. You have to put a capex in Pune to be able to feed customers from Pune. So this is typically a very geography-centered kind of a business.
As far as pre-fabricated segment is concerned, it also requires a lot of logistics. There is about 30-35 percent cost of logistics. You can make profit only if your plants are within vicinity of let us say 500 kilometers radius and that is where you can make about 19-20 percent margin. So we keep on having capex especially with regard to these geography-centered plants which are pre-fabricated and custom moulding.
So we have given a guidance of Rs 350 crore or so for the full year basis. Out of which generally we have Rs 80-100 crore coming from the maintenance and repair, the balance is in terms of balancing of the lines and adding new technology or capacities especially to feed for example, if the business is coming from Bihar and Maharashtra and Madhya Pradesh suddenly if these are new states and showing positive results, we will have to see that we get our capacities in line towards the new fronts from where the businesses are coming. Q: We understand the intend behind higher capex and given the geographical presence but this additional capex will increase the stress on your balance sheet and will also put the company behind on its return ratio’s target, what would you have to say for that?
A: When you try balancing few things together, there is always a trade-off that you need to make, especially, when we are seeing that monolithic business is going down, we need to still chase 10-15 percent growth on an annual basis and there is going to be pressure on custom moulding and pre-fabricated and there if your capacities are not available in particular geographies where you are going to grow, the capex is required.
Therefore, for a short period, we might have to forego that kind of growth on ROC, which we intended to. However, this is like investing cycle. If you have put in capexes and you show growth on topline as well as it contributes to EBITDA margin in the range of 18-20 percent, obviously, the ROC in the mid-run to long-run will definitely improve.