Expanding capacity; optimum capacity utilization; brand building:
Visaka Industries (VI) plans to expand its V-board capacity by 50000 tons and reach
full capacity utilization during FY18. The company’s domestic sales of yarn are
expected to pick up this year. The company also expects volume growth in its fibre
cement segment and cement sheet business this year. VI has increased its advertisement
spend to build its brand in the domestic market.
Growth Potential in V-Board:
Plywood demand is currently estimated at Rs. 20,000 crores. This product is expected
to make significant inroads resulting in potential for exponential growth. The company
has laid a strong foundation in this segment and is ready to capitalize on this
emerging opportunity. These products can be used for nearly any application in a
V-board – capacity expansion and optimum utilization:
V-board is a cement-based product (fibre cement board), which is fire, termite and
water resistant. V-boards can sustain fire up to 2.5 hours; this has been approved
by Fire rating Agency. Fibre cement board is catching up in both domestic and international
markets due to its strength (stronger than cement) and durability (a better product
than wood). Fibre cement boards also have a wider usage than plywood.
Using V-board in construction is 2-3 times quicker than using conventional methods,
while offering uniform quality. Since V-boards are thinner than convention material,
they provide the advantage of extra floor space with the additional advantage of
better acoustic properties.
The V-board segment is currently running at 70% capacity utilization and is expected
to reach full capacity utilization in the current financial year. The company proposes
to add 5,0000 tons of capacity to its current capacity of 1.20 lakh tons for a total
outlay of Rs. 69 crores; this additional capacity will give the company additional
revenues of Rs. 50-60 crores per year. The company can add further capacity of 15,000
tons by debottlenecking its Pune plant. We expect the total capacity by FY2020 to
reach to 4 lakh tons. This will offer the company immense opportunity for growth
resulting in an EBITDA margin of 12-14%.
Capacity expansion of yarn:
VI manufactures yarn using Twin Air Jet Spinning technology from Murata, Japan.
With its current capacity of 41 MTS machines equivalent to 82,560 spindles, it produces
over 12,500 metric tons of yarn per year and exports about 3,000 tons to countries
around the globe. The company is a niche player in its space and has a range of
products which includes Melange yarns, High Twist yarn and specialty yarns with
different blends. The company has earned recognition as the largest MTS installation
in the world with highest productivity, efficiency and quality. VI has added capacity
at a cost of ~Rs. 70 crores, resulting in a 26% increase in its total capacity.
Domestic business from this segment is expected to pick up and the total capacity
utilization would reach to 100%.
Cement sheet – volume growth:
The company is the second largest cement sheet manufacturer in India. It has 8 factories
spread across the country with a total capacity of about 8 lakh tons and is currently
running at 80-82% capacity utilization; we expect utilization to shoot up to 90%
due to higher demand for the product. The asbestos sheet cycle is picking up after
4 years of slack. Expected volume growth in the fibre cement segment is about 6%
in FY18; better capacity utilization will lead to better operating leverage and
thus a healthy margin of 12%.
The company is building its brand in the domestic market through advertisement campaigns
on television and radio; it incurred Rs. 3.5 crores as advertisement expenses in
the last financial year. The benefit of this initiative would be visible in the
current financial year. The company also plans to increase its distribution reach
and is incentivizing the distributors to hold inventory of its products for sale.
Change in Mix:
The company has been concentrating more on value-added business which is clearly
visible in its concentration of revenue flow in the last 5 years. The cement asbestos
business has decreased from 75% to 67% in the last 5 years and during the same period,
the V-board business has grown from 7% to 15%. The textile business has shown no
change in contribution and stood at 18% of total revenues. We expect revenues from
the V-board segment to grow in the future.
Strong business economics:
Total cash generation during FY17 was Rs. 183 crores compared to Rs. 77 crores in
FY16. With the V-board business on a growth trajectory, the company started generating
healthy cash flows which helped reduce debt by Rs. 115 crores and also add capacity
worth Rs. 65 crores in FY17 without significantly impacting the cash balance. We
expect this operational efficiency to continue going forward.
Better Capital Allocation:
VI plans to concentrate more on non-asbestos V-board branded business going forward
due to its huge growth potential. The company will henceforth deploy additional
expansion only in its V-board business and retain the same capacity in its textile
and traditional asbestos sheet business, thus ensuring better capital allocation.