AUDIO CONFERENCING SERVICE TRANSCRIPTION REPORT

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1 TRANSCRIPTION REPORT 1-1 -

2 Operator: Conference Company Tube Investments Date: July 30, 2010 Thank you for standing by and welcome to the Q1 FY11 earnings conference call for Tube Investments hosted by Enam Securities. At this time, all participants are in listen-only mode. There will be a presentation followed by a question and answer session at which time if you wish to ask a question, please press *1 on your telephone. Please be advised this conference is being recorded today. I would like to hand the conference over to Mr. Sahil Kedia. Over to you, sir. Thank you. I would like to welcome all of you on behalf of Enam Securities to the Q1 post result conference call of Tube Investments. We have with us the senior management of the firm represented by Mr. L. Ramkumar, the Managing Director, and Mr. K. Balasubramanian, Chief Financial Officer. I would like to hand over the call to the management for their opening comments, post which we will take Q&A. Over to you sir. Thank you and good afternoon to all of you who are on the call and thanks for taking time off to be with us this afternoon. I am very pleased to mention to you about the results of our company for the first quarter I am sure all of you must have seen the published results. Just to quickly give you an update and little more explanation on the numbers which you might have gone through and analyzed. Sales for the company went up by 31%, standalone I am talking about. In terms of profitability, our EBIDTA grew by 26% and our EBIT grew by 42%, which is better than the sales growth, and the same increase in terms of the PAT as well

3 Coming to specific divisions, all our divisions showed growth. Start with in the case of the engineering division, you would see that we have grown in the tube sector, which is linked to the automotive sector. We supply various tubes for two wheelers, four wheelers, trucks etc. We have benefited from the growth of this sector during the first quarter. The auto industry growth has been in two wheelers 32%, motorcycles in that specifically 30%, passenger car 32%, and commercial vehicles 57%. Our market shares have been held, slightly improved over last year, and in the case of the volumes we grew by 22% in the case of tubes, we also improved our working capital cycle in terms of better management of receivables. Going forward during the second quarter, we see the outlook to be good with the auto sector projecting similar volumes and currently you know there is a tight situation as far as capacity is concerned, and we are looking forward to continuing the momentum of the first quarter in this division. Coming to bicycles, again we had a strong growth in this division, we grew by 16% in volumes terms, and the profitability is also kind of maintained. There were pressures of cost during the quarter, we were able to manage this by judicious mix of operating efficiencies and product mix. We had a good growth in some of our newer sectors, though small in number. Fitness equipment, we grew by more than 200%. We also had a good contribution from retail, which has been one of our thrust areas, meaning out of the total bicycles sold percentage of bicycles sold through retail sector went up from 20 to 24%. We also concluded a labor settlement in one of our plants. We see going forward, the demand continues to be strong, our emphasis will continue to be on the new initiatives of introducing new products, retail, as well as promoting cycling. We are having a major event of cyclathon at Delhi on 29 th of August. We had a similar one in Bombay in February and Bangalore last year, there has been overwhelming response in terms of 9000 to 10,000 people participating, this happens on a Sunday over 4 to 5 hours. In the other part of this business we grew in terms of volume in the electric scooters. We continue to be the #1 player in South, we are #2 all India, we are concentrating only in the Southern markets and the Delhi market, which is quite favorable in terms of pricing, the government subsidies etc. We are focusing on new products, one of them will be launched in a couple of months which we believe will be a break through in the industry in terms of power and range etc. We are also working on a couple of more products which will come out in 6 to 9 months after proper validation and testing. The next division of ours is metal formed products, this consists of 2-3 verticals. One caters to the auto industry in terms of door frames. This business has done well and we have had a growth of 36% in terms of the volume. We also have vertical of railway products. In the case of railway products, it has been behind last year mainly because the government has taken time to release the orders for the railway wagons, which they should have done some time in April-May, so the wagon manufacturers have not got much orders and we don t have the orders for the downstream products, but we expect this to happen by middle of August. The quantum is not likely to come down as to what was projected in terms of something like 10,000 wagons of all types, but definitely the timing has eluded us but this is going to happen. I am sure this will be made up in the rest 3-3 -

4 of the year. The other part of this business is chains. Again, a very strong growth because of the auto growth. We grew 37% overall in chains in the domestic market, good news is our exports which came down after the meltdown of 2008 October has been picking up, and compared to the same quarter last year we grew by 100% in terms of quantum. We have smaller businesses like engineering class chains catering to cement industry and infrastructure business. The fine blanking business catering to the auto sector which has also grown upwards of 30% and our fine blanking products has grown by something like 100% over last year. Overall, all the businesses have grown and we have also tried to hold onto the margins. There has been cost pressure, because the steel prices went up. We have been concentrating heavily in terms of getting more throughput from our existing plants. One plant of ours has completed the wage settlement, the other two will do shortly. In all the settlements we are looking at productivity increase of 25-30%, which means without investing more we should be able to get 25-30% more output, which would definitely have an impact in terms of servicing the customer as well as our margins etc. Coming quickly two of our subsidiaries Cholamandalam Investment and Finance, which was not a subsidiary last year, but which has now become a subsidiary of the company due to our share holding and the recent investments we have made, has turned in a good performance. You might have seen the results of this company separately, here you would see that the profitability has gone up to 23 crores, this is after providing for certain provisions for personal loans. Soon, within a couple of quarters, that will be behind us. Before providing for the personal loans our profitability was even better. So, here, having gone back to this asset backed financing, we are seeing a good growth, and we see all of our customers coming back and we see the trend to continue in the quarters to come. In the case of Insurance, again it is a tough business, which all of you know. There has been marginal increase in terms of gross written premium, which has gone up by 5% over last year. We just held on, in terms of profitability. As against 12 lakhs operating PBT loss last year same quarter turned in a profit of 40 lakhs for the first quarter this year. Now, if you see the consolidated results of Tube Investments of India Limited, I think we have given a note there, the figures are not comparable because last year the results of Cholamandalam represented only 31% of our shareholding and was consolidated as a JV, this time it is consolidated as a subsidiary, to that extent you will see the figures are not really comparable, but I think if you took a look at Cholamandalam Finance and Insurance separately definitely you will get a feel of what kind of improvement has taken place which has impacted the results of TI

5 Now, during the quarter we had capital expenditure on regular replacement and debottlenecking etc. to the tune of something like 30 crores and we are looking at debottlenecking and investing more in the chain and tube business as required in the next two three quarters. Plans are on to meet the requirement of the automotive companies as well as the new verticals we want to get into. We did improve in the quarter, our share of business in all the value added produces be it in metal form or bicycles or tubes with tubular components or with engineering class in chains. Overall, I think it has been a good quarter for us, and we look forward to the trend to continue in the second quarter. I would think that I have broadly summarized the key points pertaining to our performance, and be very glad to answer any specific questions that you may have. Thank you. Moderator, can we start the Q&A session please? Operator: Okay sir. At this time, participants who wish to ask a question, please press *1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press hash or the pound key. Once again, if you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. I repeat, if you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. At this time there are no any questions from the participants. Sir, if I may ask a couple of questions myself please? Yes

6 Sir, can you explain to us why the employee cost has gone up in this particular quarter, and additionally what is the reason for the interest cost also going up rather substantially? In the case of employee cost, one is we did have to increase the manpower to some extent to meet the higher volumes in all the businesses, they are of temporary nature not necessarily permanent. The second is we have changed the policy regarding the gratuity. As you know the government has enhanced the maximum limit for gratuity to 10 lakhs from what it used to be at 3.5 lakhs earlier. Now, our company has adopted our group policy of having a ceiling up to 25 lakhs instead of 10 lakhs for people who are retiring. This meant that we had to make a specific one time provision during the quarter which is coming in the employee cost of Rs. 3.5 crores. Okay. In the case of finance charges, our borrowings have been high, partly due to the higher investment which we have made in our subsidiary companies last year and early part of this year, and this has impacted our finance charges. Sir, can you give us what would be the gross and net debt on books sir? Mr. Balasubramanian: The overall debt is around 820 crores. This is on the standalone or consolidated? Mr. Balasubramanian: Standalone only

7 Okay. And what would be the cash on books? Mr. Balasubramanian: The cash on books is more of a temporary nature. Liquid funds and end of the month the collection, which would hardly be 20 odd crores. Okay. Sir, in the opening remarks you mentioned that there are some constraints that you are facing in terms of production. Are these supply related issues and if you can just throw some light where or in which product segment you are seeing these constraints? See we are having constraints in two product groups. One is in chains and other one is in tubes. I would not say as much of supplier related, supplier related is partly, because sometimes we don t get steel the kind of quality we want at the right time, but more in terms of our in-house capacities. The capacities have been increased by 30-35% in the last one year, and there seems to be a need for increasing by another 15-20%. So, we did not estimate that the demand will grow like this. In the case of chains we have already taken action in January, so the capacities will start going up from August-September now, which would cater to the needs and it will go up by 10-15%, and we are also working on the next level of capacity increase. So, this opportunity lost I hope would not be there or very much minimized during the second quarter in chains. In the case of tubes, we had wound up our Chinese plant and brought those equipment here. We are placing them in the respective plants, we have three plants, one each in the north west and south, and by this and with the productivity going up in one of our major plants we expect the production to go up by 30-35% in the next three to four months. This should help us to tide over this capacity gap. Sure. That was question from my side. Operator, can you just check if you have more questions please? Operator: Yes sir. First question comes from Mr. Kashyap Pujara from Enam Direct. You may go ahead sir

8 Congratulations for a good set of numbers. Thank you. Actually wanted to basically understand from you on our cycle division, I mean what is the volume we have done in terms of number of units? Cycles number of units, we did something like 11.2 lakh cycles as against 9.8 last year. Fair enough. As far as margins I think we are pretty much holding on to, you know, in fact there would be some improvement. Slight improvement, yes. And another thing is if we run through the engineering division, there you are saying I think there has been a good traction on the auto component related tubes especially. Now, what is your understanding or what is your feel that you are getting in terms of pricing power, you know, in terms of do you think that you know pricing can be sustained or do you think that if there is any issue as far as actual demand is concerned on the ground and you know the pricing might deteriorate. What is your sense on that? So long as the steel prices don t go up I think we are safe. The moment the steel prices go up regardless of the demand situation every time we need to negotiate with the OEMs, and touch wood till this first quarter we have been able to recover all the increases in the last three four quarters, I think partly because the demand is also pretty strong. But if the steel prices go up too much I think it could have an detrimental affect on the recovery situation, because even if they give the increase they don t give fully or there is slight 8-8 -

9 delay in the increase, but right now we don t foresee a major problem unless there is a dramatic increase in the steel prices. Okay, and your interactions with the auto companies do, I mean we are seeing the numbers, but what is your sense in terms of the demand, do you think that we are headed for a good time ahead going forward? I wish I knew the answer, but I will still tell you what people have been telling us. The normal thing you must be hearing from others as well is this quarter will be good up to Diwali. We don t know what will happen after that is what people are saying. This is one version. The other version is, yes people are just saying that this trend will continue. But I think at the moment looks things are going strong. The worrisome things are the inflation, the fuel price increase, and if steel price also goes up the end price of the product will go up, and interest rates going up for lending, since lending is very important for automotive. These factors don t look very encouraging or favorable. These have happened in the last six months also when the growth has happened, but I think somewhere it could have a impact in terms of dampening the demand. We hope it doesn t happen, but beyond the second quarter it is very difficult to say, but probably one would say it will not come down drastically, the rate of growth may slow down but it cannot I think just get reversed. Okay. One question which I had was towards the metal form produced actually. You had acquired 77% stake in Sedis Group, right? Correct. Could you give some more light as to what the entire market is that you are getting into and you know what is the kind of technology or products that we can bring on board and how can we get foothold in other markets, if you can you know give some light on that front

10 Sure. Sedis follows year of calendar year, January to December. So, for the first half their turn over was similar to last year, it is around 82 crores, and they did make a profit, many of the chain companies in Europe are not making profit. Sedis is making cash profit and able to maintain its business. In terms of synergies the following we are doing: some of their very unique processes for heat treatment and others which will enhance the chain life. These products are being imported into India. We are commissioning those plants in the next 2-3 months, after which we will be able to give much better chains to our customers, This could help us in terms of higher market share, while customer will get a chain with a longer life. Second is, we are also jointly working on marketing some of the Sedis products in Southeast Asia and North America where we have existing customers who would ask for these kinds of products. Third is, we are looking at the infrastructure industry in India which is elevator, escalator, the cement plants etc., where the Sedis products will be very useful. Today some of these products are being imported into India. So if you really look at it we have these three tracks on which we are trying to derive the synergies. We have one member each from our side and their side who have been full time nominated to work on these projects and slowly we will start getting the results. We are also adopting some of the shop floor practices, automation etc. simultaneously apart from getting these heat treatment and other equipment to improve the process. Okay, and basically when do you expect this to actually start contributing? This year itself we will have an impact in terms of turn over and profits, may be from the last quarter of this year. Okay, and just moving on to the insurance segment, I mean what was the premium written this quarter? Premium written this quarter is 246 crores

11 Though it is encouraging that at the operating level we are not losing money, question you know I have in mind I mean which I thought I will ask you is that if you can give us some light as to you know what exactly is the path to profit in this industry, can we ever expect underwriting surpluses being posted or should we just look at investment income or should we never look at profits, what should we be looking at and when will the part to profits happen? I think people like yourselves who deal with a lot of insurance company have a perspective on the insurance industry. I think.. But it is better to understand from you. A lot of representations are being made to the government in terms of de-tariffing and stuff like that. A lot of things which are being brought in which makes it very difficult to run this business. So I think there would be sooner than later restoration of some rationale to the premium. May be it can happen in 3 months or may be it can happen within a year. I think the moment that happens then the people in the industry will start getting paid for what is due. I think all of us are definitely looking for profits to be made out of premiums rather than only investment income. Investment income is just to keep us afloat. So, we believe that there is a lot o work going on in terms of the industry representing to various forums, the IRDA and all that, and hopefully something should happen, we are hopeful. Fair enough, and lastly, I mean just to round it off, what is the trend or the growth that you are seeing in the cycle business, I think we have seen good volumes going forward, you have done lot of events which are very visible, so what is the trend that you are seeing that in terms of numbers, I mean do you see the trend continuing in terms of growth? We have grown faster than the market, we estimate the market should have grown by 7-8%, we grew by 15-16%. We will continue to grow faster than the market. In between we see sometimes people are stocking in anticipation of price increase. Definitely we see a double digit growth in the later quarters, I am not able to say whether it will be 15% and

12 16% as we have done, we are targeting for that, but it will be definitely in upwards of 10% plus. That is very encouraging to know. Also, you know, there was one segment that we launched towards extremely high end premium bicycles that we had launched. What is the numbers you are seeing there? Are you seeing pic up and are you seeing penetration happening on that front? It is happening. I know what you are talking about, the Bianchi and Cannondale bicycles which go upwards of Rs. 25,000 and up to one lakh and all that, so here we have been able to sell nominal quantities of may be 1500 to 2000 per quarter, but I think the encouraging thing is we have our own premium bikes which are we call them mass premium in the internal terminology, which is bicycles of price more than 5000 and up to 25,000. We have seen a very strong growth in these bicycles. Last year whatever we sold the whole year we have sold more than 50% in the first quarter itself. So, that is quite encouraging. That is good. Just last question from my front was towards the escooter division, I mean what is an update there, how are you seeing that shaping up? In the escooter division as we told you the initial problem was that there were too many unorganized players who have all gone. The market has also shrunk. Now there are hardly three major players, Hero, Yo, and ourselves. Major market happens to be Delhi because of the subsidy. If other governments also give subsidy like Delhi then I think the market will double or triple very quickly. Even assuming that this will not happen, we are working towards giving a higher value to the customer. One of our new products to be launched in August will have a higher power and one of the reasons for launching is though people buy electric scooters they want power like the petrol scooter. So, we are going to get something much better than anybody can offer in India. Then, we are working on another product which will come very close to petrol scooter. This could come sometime in the end of the financial year, may be March We believe with this we should be able to get a kind of a leadership position and also improve our market share and volumes. At the moment we are growing compared to last year, but still we have some way to go before actually we can make profits in this business. We are just about recovering our costs

13 What is the volumes that we are seeing, like this quarter what was the volume on escooter front versus last year same quarter or last quarter, I mean both if you can give us. Last year we did for the quarter 1300 scooters, this year first quarter we did Okay. So, when do we see this division contributing meaningfully, I mean They are contributing meaningfully to the long term, if you take a short term view then may be they are not. Probably in a year s time I think we should start earning positive with the new products. Thank you so much. I will get back to you later. Thank you so much. Operator: Thank you sir. Next question comes from Mr. Ramnath Venkat from Reliance Mutual Funds. You may go ahead. Mr. Ramanand Venkat: Good afternoon sir. Good afternoon

14 Mr. Ramanand Venkat: In the bicycle side I just want to understand, now we already have a fairly dominant market share now, and in the last couple of years we have been growing at twice the growth of the market. How long can we grow at a much higher pace than the market give our size of the pie or for what more period can you do that before we trend to market growth? You know any company which is growing and has ambitions of leadership will always want to grow faster than the market, be it 1%, 2%, 8% whatever is the market growth. Now, the goal is we should grow faster than the market. We may not be able to maintain a 20-25% growth every year, because then there comes a time when there is not enough room. But if you ask me we would like to grow faster than the market albeit the growth rates may be lower than what it was 2 years back, because this is a consumer product, and there is a huge scope in terms of service and reach in this business. So, whoever is able to increase the service, whoever is able to give a better product will always get a higher market share, and as you know our emphasis has been on this, be it retail, be it cycling, or various other things which we have done. These are the first time it is being done in India. So we believe the consumers will get excited and we will garner a higher market share. Others can copy of course, but I think we will always come up with something new. For example, last year we launched something like 62 new products, competition overall must have done something like We have got into a certain rhythm in terms of doing some of these activities which others may be are either ignoring or taking time to catch up or trying to do something different which is not so effective. So, we would like to do more of this because this is the way to go in terms of getting closer to the consumer. I hope I have answered your question. Mr. Ramanand Venkat: So, which means from a value perspective not may be from volume, but from value perspective because there is more and more of value added or higher premium products, the overall market can be growing at a little higher pace than what we look at from a volume perspective. The volume when we say 6-7% growth in the market.. You are right, because the lower value product is not growing so much, so the value growth should be higher. So, if you say 7-8%, the value may be 10%

15 Mr. Ramanand Venkat: Sure. The other thing is as far as margins on the bicycles side is concerned, I mean if we look at the last several quarters or several few years, you have always been in the 6-7% margin range, except for the last year s first quarter. But now we have come to a 9 9.5% kind of margin this quarter. Now, do you think that we have reached a scale where we can sustain at the 9 9.5% or at some stage we will go back to that 7-8% margin? Scale is fine, because we are only growing. It is a demand supply you know. In terms of the pricing power, we are growing faster than competition. Competition also puts pressure by dropping the prices or not increasing the prices when it is required to do so. When that competitive intensity goes up I think there could be a pressure in terms of the margin. Otherwise we will be able to retain the margins. I think with our growth you know the margin percentage should not go down, but this you cannot say as you yourselves said you cannot keep on growing. So somewhere you know you get into head on kind of a competition. At that point of time there could be some, we don t see something like that happening in the near future, because still we are #2, we are not #1. Mr. Ramanand Venkat: Sure, okay. The other thing is from an overall sales perspective, I think which you discussed earlier also, but you know in each of the three segments we have grown more than 30% on an annualized basis, I mean on an year on year basis, now for the full year also we think we can maintain this momentum? We will end up with about 25 odd percent for the whole life? I hope, as I said second quarter looks good, we would like to take it as it comes. Mr. Ramanand Venkat: Let us say assuming there is no double dip and triple dip. I don t know really, you know, I mean if this trend continues it should continue, I mean as I said second quarter I can say because one month is over at least almost, so everybody as I was saying earlier says after Diwali things can slow down in auto and all that, but my guess is I don t know probably at least the 20-25% should be possible, it is my personal view, you know, I mean it is a hunch

16 Mr. Ramanand Venkat: Sure, okay. Thank a lot. Operator: Thank you sir. Once again, if you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. I repeat, if you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. At this time, there are no further questions from the participants. I would like to hand the floor back to Mr. Sahil Kedia for final remarks. Over to you, sir. I would like to thank all the participants and the management for taking this time out for this call. Thank you so much sir and all the best for the future sir. Thank you so much. Thank you. Operator: That does concludes our conference for today. Thank you for participating on Reliance Conferencing Bridge. You may all disconnect now