"We expect Salzer to emerge as a Rs. 1000 crore enterprise by 2020."
R. Doraiswamy Managing Director reviews the companys 2014-15 working andoutlines Salzers prospects
Q: Were you pleased with the companys performance during the year under review?
A: The honest answer is that I was not. I felt that we could have done better given ourcompetitive advantage market leadership and enduring customer relationships. However theother perspective is that we continued to outperform our sectoral growth averagestrengthening or maintaining revenues across the last six quarters while increasingEBIDTA across six of seven successive quarters. The result is that we finished the yearunder review with 15% growth in gross revenues and 42% increase in profit after tax overthe previous year. This was the fifteenth year of straight topline growth and thirdstraight year of EBIDTA increase the industry weakness notwithstanding. The message thatI would like to send out to shareholders is that our numbers in the fourth quarter of thefinancial year under review reflect the potential of our business. Our fourth quarter in2014-15 was a best-ever quarter where we posted revenues of Rs. 86.14 cr which were 16%higher than the immediately preceding quarter and 19% higher than the correspondingquarter of the previous financial year. I am happy to state that the terms of trade beganto favour us; even as total income increased from Rs. 68.70 cr in the first quarter of2014-15 to Rs. 86.14 cr in the last quarter interest outflow was virtually maintained atthe same level. This improvement has inspired the optimism that a sectoral turnaround hasbegun as opposed to the one-off instance of our customers aggregating offtake towards theend of the financial year.
Q: What was the industry landscape against which the company performed?
A: The last few years have been some of the most challenging in the countryselectrical products sector. Despite an evident under-penetration of electrical productsthere was a perceptible slowdown in offtake. Much of this decline is attributed to thefact that government orders declined infrastructure spending staggered industrialcapital expenditure was delayed and consumer spending affected. The result is that theelectrical products industry reported single-digit de-growth in 2011-12 and 2012-13reported 4% growth in 2013-14 followed by 7% growth in 2014-15.
Q: What reasons inspired a sectoral rebound?
A: In the last couple of years a number of stalled industrial projects were completedthere was a greater focus on the implementation of transmission projects the R-APDRP wasimplemented there was marginal economic recovery and the new government catalysedindustrial sentiment. The point that one needs to be highlighted is that Salzercapitalised with responsiveness outperforming its sectoral growth percentage with atleast 1000 bps.
Q: It would appear that the going was comfortably favourable for the company and thesector during the year under review.
A: It would be erroneous to assume such a thing for some reasons. The sectoralsluggishness extended into the year under review the sector was marked by low costimports from China the unorganized sector affected the growth of branded products therewas an erosion in product realizations the Balance Sheets of most industry playersweakened and there was an increase in the industrys receivables cycle from around 75days of turnover equivalent to around 110 days during the year under review (SEBreceivables climbing to 180 days).
Q: How did Salzer counter this challenging industry reality?
A: Salzer countered this reality through a singular focus on product product andproduct. This priority translated into the creation of cutting-edge products that did notjust service customer needs in a simplistic way but strengthened their businesses throughenhanced efficiency and lower costs. The result is that we did not just market more of ourprincipal product CAM-operated rotary switch but we inspired a greaterconfidence among our customers to engage in joint product development which translatedinto product customization and Salzer emerging as a faithful extension of its customers.In doing so we increased share of the customers wallet widened our multi-sectoralpresence and grew revenues across every single vertical.
Q: What were some of the other business-strengthening initiatives embarked upon by thecompany during the year under review?
A: Even as the external environment remained challenging Salzer continued tostrengthen its business with the objective to emerge growth-ready as soon as the sectorrevived. For instance during the year under review the company strengthened itstechnology collaborations which made it possible to deliver world-class products at aprice that is among the lowest in the world. We strengthened our value engineering throughthe formation of focused teams that made it possible to catalyse products and processinnovation. We strengthened our service quality through enhanced flexibility inproduction logistics evolving design needs and timely demand increase. The result isthat we strengthened our brand not just as a competent product provider but as a trustedsolutions partner.
Q: How is the industry expected to perform? How is the company positioned tocapitalize?
A: From the feedback of our large OE customers (based on their growing order book) itappears that the electrical products industry is headed for three to four years ofstraight growth. A number of our automobile customers are asking us to ramp capacities. Anumber of our customers are uptrading and graduating towards a more sophisticated productmix. At Salzer we are optimistic of capitalizing on this emerging reality for a number ofreasons. We enjoy multi-year relationships with a number of our large and prestigiousclients in a business where the cost of switching vendors is time-consumingprocess-intensive risky and costly. We possess a wide and deep product mix that addressesextensive client needs at a single stop.
Q: What is the one development within Salzer that could prove to be transformative?
A: At Salzer we are at an inflection point related to our exports. The company enjoyspresence across 40 countries through the distributor model. It enjoys a growing presencein Latin America and Africa which are vast and growing markets. Its products have beenproved to be competitive in the prestigious North
American market where we expect to double our presence to around 7% of revenues duringthe current financial year. Its products enjoy some of the most prestigious internationalcertifications that serve as a validation of its process and product excellence. Theresult is that we expect exports to increase from around 24% of revenues in 2014-15 to anestimated 30% during the current financial year (on an enlarged revenue base) and 40% ofrevenues by 2020. The result is that Salzer expects to evolve its personality from anIndian company that also engaged in exports into an international company that hasprudently selected to enhance its presence in India.
Q: How are these realities likely to translate into the companys performance?
A: At Salzer we are optimistic of outperforming our sectoral growth and reportingprofitable growth across the foreseeable future. We expect to increase our capacityutilisation from 65% to around 90% across the next two years without needing to invest infresh capacity building. The margins in our industrial switchgear business (accounting for52% of revenues 2014-15) are rising. We expect to roll out more products through jointventures in cutting-edge areas. We expect to maintain our interest outflow at the levelsof 2014-15. Based on a combination of these realities we expect Salzer to grow revenuesby 25% each year for the next two years and emerge as a Rs. 1000 crore enterprise by2020. We believe that this growth will be achieved without compromising our margins bystrengthening our Balance Sheet and by enhancing value for our stakeholders.