See EBITDA margins to be around 10-12% in FY17: Thirumalai Chem

The EBITDA margins for Thirumalai Chemicals trebled to 16.9 percent in the fourth quarter of FY16. R Parthasarathy, the managing director of the company, said that Indian markets did well owing to uncertainty in other Asian economies like China, Taiwan and South Korea. However, Parthasarathy maintained that such high EBITDA margins may not be sustainable in FY17, but he expects a moderate figure between 10 and 12 percent. Measures taken by the company like paying off debt, reducing energy costs and working costs, have also helped the commodities, as a result of which the fine chemicals company posted strong numbers in Q4. He expects volume growth to be around 20 percent and revenue to grow by 15 percent in FY17. Below is the verbatim transcript of R Parthasarathy’s interview with Reema Tendulkar on CNBC-TV18. Q: Margins at 16.9 percent in quarter four was there any element one-off and do you believe these margins are sustainable? A: The markets were good for the last quarter mainly because there was some blips in the international or rather the Asian scene where there was some turnarounds taking place. There is a lot of uncertainty over the situation in China and then associated uncertainty in Korea and Taiwan. However, I would not say such EBITDA margins are sustainable but a lot of improvements that the company did internally in paying off all the debts that we had in the last few years, reducing interest, reducing energy etc and working cost have all started paying results. However, I would expect that the EBITDA margins would moderate somewhat during the course of this year. Part of our business is commodities and therefore that has cyclicity and that was greatly affected by the weakness in the Far East. Q: We do remember, we had spoken to many of the speciality chemicals companies after the news came in that several of the firms or factories in China have shut down on account of the stricter green emission norms. What is the situation in China now should the good time continue even in the coming quarter? A: Our problem with China is really twofold. Though there has been some, let us say on the pollution front, on the environmental front there has been a lot of corrections it is more I think of a short-term nature what you see in the dyes and dyes intermediates and speciality intermediate businesses. It will last for about three or four months and then I am sure for a variety of reasons they will come back on stream. The shortages will moderate. In our own business because the big part of the business is commodity both in India and Malaysia, the Chinese weakness is affecting Korean and the Taiwanese seriously who are major producers so they turned around and India becomes the natural market. India also has Free Trade Agreements with the Asian and with Korea which are affecting the whole industry deeply. On the second one, on our specialities which is mainly our food ingredients and speciality derivatives while we are very strong one of the problems that we have seen is some of the food ingredients that we make and export worldwide and in India are being imported into India from producers who produce it from carcinogenic raw materials like benzene which we are not allowed to in India and nowhere else in the world. So, they are able to produce it at a much lower cost and that is causing some distress in the market. Q: You said that margins are not sustainable what will be the sustainable margins? A: I am not saying that margins are not sustainable, I am just saying that the margins will moderate compared to quarter four. Q: What could be average margins say the company could enjoy? A: I would say that the EBITDA margins of about 12 percent -13 percent is sustainable in our industry. However, we are a mixture of commodities and fine chemicals, speciality chemicals but on the other side there has been a lot of work done in the company on reducing cost and improving internal efficiencies and that is paying off. So, while EBITDA margins will still be around 11-12 percent, I am expecting that our final profit before and after tax would be fairly healthy. On annual basis it would be sustainable because you can’t take one quarter and project it for the whole year. Q: What about the revenue growth, while it has picked up this quarter to about 8 percent? A: Prices from the previous to this year prices are halved. While our volumes went up, the prices went down from let say typically Rs 90,000 or 1,00,000 per tonne it went down to Rs 50,000 in the middle of the year. On an average I would say it is only Rs 55,000, so along with other commodities and other materiel’s prices of these products, all chemicals products went down sharply. So, while we have significantly greater volumes and we will do much better next year or the current year. The problem is compared to the 2014, 2015 had a very sharp drop in prices. So, this more reflect the topline not the bottom-line. Q: It is a little obvious even in FY16 where your revenues were down to 12 percent what is the outlook looking on revenues then for FY17 considering the price pressure? A: FY17, if you look at average revenues it is very difficult to project in a very volatile price environment but I can say that FY17 volumes will be comparable with about a 10 to 15 percent growth in revenues. Volumes will grow as I said by about 20 percent but revenues will grow only by about 10 percent and that is only a guess. What happens to oil prices, what happens to other commodity prices and food prices we do not know, we cannot guess. So, we don’t concentrate on prices, we concentrate on the gross margins and the internal costs. Q: Talking about internal cost what about interest cost? As per the annual report you had indicated that you will look at reduction in your fixed cost, reduction in your interest as well as finance payments? A: We will see the full results in the coming year because we have no terms debts at all in the books, it is a few lakhs a rupee compared to when we had Rs 250-300 crore earlier few years ago. Our interest cost have come down and continuing to come down. Our energy costs are coming down they have come down much better this year. Our logistics cost will come down we are working on logistics and supply chain. Overall almost every cost is under control except probably salaries and wages which will definitely go up.