THE BIGGEST MESSAGE THAT I WISH TO SEND OUT TO OUR SHAREHOLDERS IS THAT THE PERFORMANCEOF THE COMPANY DURING THE YEAR UNDER REVIEW REPRESENTED A VALUATION OF ITS DIVERSIFIEDBUSINESS MODEL.
Over the years a number of shareholders and analysts have questioned the diversifiedmodel of the Company on the grounds that the businesses - textiles and building products -were unrelated and represented no synergistic fit. When the Company went one step aheadand introduced a second building product analysts increased their pitch on the groundsthat the diverse business basket for the Company would not prove value- accretive.
For a number of years we kept defending our decision to diversify our business mix onthe grounds that their being unrelated was in itself the single biggest reason why theyneeded to be reconciled within a single business model. When one business did not performwell enough another from within the same company would serve as a buffer. The nature ofthe combination - two unrelated businesses - would itself serve as the basis of theCompany's longterm sustainability.
I am pleased to state that this business model was successfully validated during theyear under review. The Company reported a 2.3% decline in revenues corresponded by a 15%growth in profit after tax. This improvement transpired even as the Company's flagshipdivision reported a decline in volumes revenues and profits. The fact that the Companycould report an improvement in its performance when its principal engine underperformedrepresents a validation of its strategic robustness and overall sustainability.
Our asbestos sheet business
The asbestos sheet segment of the building products business encountered one of itsmost challenging years. The business delivered a decline in sales volume by 2.7% asagainst 2014-15 with an installed capacity of 802000 tonnes.
That the Company reported a capacity utilisation as low as 86% for a product consideredintrinsic to rural lives was a reflection of the weakness in India's rural economy. Twosuccessive weak monsoons affected rural incomes; new home building and renovations werepostponed; asbestos sheet offtake was affected. Food inflation moderated the surplusavailable with rural Indians that would otherwise have been invested in home building.Besides the cost of colour coated steel sheets - considered an asbestos sheet alternative- declined as a result of a sustained global demand recession prompting a number ofconsumers to switch preferences.
The result was that offtake declined across the sector and receivables cycles werestretched for most players. Given this background and the fact that there was a sizeabledecline in volume offtake the Company did well to restrict a decline in EBIDTA margin tojust 231 bps even as revenues moderated 5.4% during the year under review.
This moderate decline in margins was the result of the Company's long-termcompetitiveness structural leanness effective cost management and terms of trade thatfacilitated offtake. The result is that even as industry-wide volumes declined 8% theCompany's volume offtake declined only 2.7%.
Going ahead one continues to be optimistic of prospects of the asbestos sheet productsegment for a number of reasons. The product continues to be cost-effective compared withalternatives and is generally preferred in rural residential solutions. The product hasbeen traditionally used incentivising its use whenever a roof is made or a previous sheetis replaced. Besides we see a moderate revival in the landed cost of colour coated sheetsfollowing an increase in customs duty which should result in enhanced room to priceasbestos sheets as well.
The biggest optimism driver in the midst of the gloom is the prospect of anabove-average monsoon following the expected tapering of the El Nino effect.
The meteorological estimate that India's 2016 monsoon is likely to be 8% above normalhas kindled the hope that increased agricultural incomes are likely to kickstart ruralhome building. Besides rural home building is likely to receive a fillip on the back ofmoderated inflation and declining interest rates two of the sector's biggest drivers. Theincreased Government spends in the rural economy is also likely to catalyse the growth inthis segment.
Our fibre cement boards business
The highlight of the Company's financials was the performance of its fibre cementboards (V-Boards) business. This business was started in 2008 with the objective toprovide decorative building material for interiors and exteriors as well. The businessreported an attractive swing back during the last financial year following an increase insales volume by 15% in 2015-16: a cash loss of B8.3 crore in 2014-15 transformed to a cashprofit of B8.3 crore in 2015-16; an EBIDTA margin of a negative 0.04% in 2014-15 reboundedto 11.26% in 2015-16.
There are a number of reasons why this product could emerge as a game-changer. There isa growing consensus that this product is at a point in India where asbestos sheets were 40years ago except that prospective national growth of this product is likely to be faster.
The market for this product currently is no more than around 0.3 million TPA in India;the market even in a small developing country like Thailand is nearly twice larger. Thevolume of this product in China grew from 0.3 million TPA in 2006 to 1.3 million TPA in2014 and is growing. The product is being used largely within corporate interiors; thetime has come to extend the product to residential interiors as well. The product islargely used in urban India; the time has come to extend this to suburban and rural Indiaas well. Besides the product possesses a number of characteristics over competinginterior infrastructure products which enhances the optimism that India is sitting at thestart of a large consumption curve.
Visaka brings excellent value to its fibre cement board business. Over the last fewyears the Company has been working extensively with opinion makers interior designersand architects educating them on the product's attributes and enhancing their skills inworking with the material.
The Company possesses a manufacturing capacity of 129750 TPA for V-Next products; theCompany has been demonstrating a refreshing increase in margins with every successiveincrease in volumes and revenues; the Company expects to grow this business with acorresponding increase in margins making this business an attractive volume-value play.
That brings me to the Company's textiles business. This business performed creditablybetter. Revenues declined 4.5% to B172 crore following changes in product mix which wasmore than compensated by an increase in EBIDTA margin from 13.64% to 16.11% and EBIDTAreported by this business grew from B24.5 crore to B27.6 crore. As it turned out thisbusiness accounted for the largest contribution to the Company's profits during the yearunder review.
What is creditable is that the business reported possibly the highest margins withinIndia's yarn spinning sector. Given this reality the management decided to expand itscapacity by 26% which is expected to be on stream from the second half of the currentfinancial year. With the objective to capitalise on interest rebate incentive schemesannounced by the Maharashtra government and enhance shareholder value the Company decidedto fund this expansion mostly through debt strengthening the long-term sustainability ofthis business.
Our optimism in this business is derived from the fact that the Company is a boutiqueplayer.
There is a growing respect for yarn makers who can deliver first-rate quality servicingthe demanding needs of technical textile and home furnishing manufacturers.
The Company is a returns-driven manufacturer selecting to manufacture yarn productsthat fetch the highest realisations on the one hand and possess a consistent clientele onthe other. The Company is product-based in an otherwise commodity industry.
I am pleased to state that this expansion and business growth will not enhance thefinancial risk profile of the Company. The Company possessed B54 crore in long-term debtagainst a net worth of B347 crore as on March 312016. The Company's average funds costdeclined 90 bps to around 9%. The increase in debt mobilisation to fund the textilesexpansion was conducted at a deeply discounted interest cost for a tenure of seven yearsprospectively reinforcing our high- margin commitment in that business.
The big picture at Visaka is that we possess three robust businesses two of whichperformed creditably during the last financial year; the third is expected to take offduring the current financial year should the above-normal monsoon materialise. We believethat the combination of the three businesses represents wide de-risking: the asbestossheets segment is B2C addressing the bottom of the country's pyramid; the V-Boardsbusiness is presently urban with a B2B connect and the yarns business is B2B with apremium positioning. We believe this business mix to be adequately de-risked making itpossible for the Company to capitalise on the intrinsic need of India to live better.
Going ahead we expect to grow the non-cement asbestos sheet component of our businessfrom 31% of turnover to a projected 50% by the year 2020 generating a disproportionatelyhigher increase in our margins and profits.
There is one more point that I wish to make. The Company reported a robust cash profit(PAT plus depreciation) of B60.74 cr during the year under review (cash earning per shareof B38.25) against a market capitalisation of B168 cr (as on 31 March 2016).
This discounting is considerably lower than the prevailing sectoral average. We are inbusiness to enhance shareholder value and believe that the emergence of our new businessand decline in profit volatilities should strengthen value for our shareholders across theforeseeable future.
Smt. G. Saroja Vivekanand