Printing success

PENNY WISE

The Dauphin acquisition will give Manugraph a foothold in the $60 billion North American market.

Until you give up your habit of enjoying your morning coffee with a crisp newspaper, the fortunes of Manugraph India will only keep getting better.

Manugraph is a leading printing solutions provider of web offset machinery equipment, which are largely used for printing newspapers.

The company supplies printing machines and spares to its customers that contribute 95 per cent and 5 per cent to its revenues respectively.

Strong business
Manugraph boasts of a clientele comprising large publishing houses like the Times of India group, Indian Express group and the Ananda Bazar Patrika group besides various regional newspapers and publications.

The newsprint media industry size in India is estimated to be around Rs 12,100 crore has grown at a CAGR of 11 per cent over the last three years.

With growing literacy rate, rising advertising spend and changes in demographics, the newspaper industry is expected to grow rapidly. Going ahead, the Indian newsprint industry is expected to grow at a CAGR of 10 per cent for next three-four years.

There are 774 daily newspapers in India. Both, English and vernacular language newspapers and magazines publishers are expanding capacities.

A booming Indian economy, improving literacy rates, growing need for content teamed with government initiatives that have opened up the sector to foreign investment are fuelling growth in print media.

Also, as competition increases and technology upgrades, demand from replacement would increase. Manugraph is well poised to take advantage of such a situation.

Says Umesh Karne, an analyst at Emkay Private Client Research, "Having developed strong technical skill sets in its product domain, the price differential enjoyed by Manugraph is significantly high as compared to other global players like Heidelberg and Man Roland, which have large business presence across Europe and the US. Hence going ahead outsourcing opportunities can throw open a large business opportunity for Manugraph."

At present the company also exports its products. At Rs 103.47 crore, exports contributed around 32 per cent to FY06 revenues. Manugraph expects this contribution to go up to 60 per cent.

"With a strong marketing set-up throughout the world and now in US, our export prospects are bright," says Sanat Shah, chairman, Manugraph India.

The company has a cost advantage in terms of labour cost and other overheads. The price difference between newsprint machines manufactured by European manufacturers and by Indian manufactures is as high as 30-40 per cent.

The Dauphin purchase
Earlier this month, the company acquired the US-based Dauphin Graphic Machines for $19.2 million (Rs 86 crore). To fund this acquisition, Manugraph will raise $2.2 million through a preferential allotment and the rest will be funded through debt.

Dauphin is a profit making company with an annual turnover of around $70 million (Rs 314 crore). Manugraph currently enjoys 65 per cent market share in India, while Dauphin is also a leading US-based player.

With Dauphin under its fold, Manugraph will become the largest single width press manufacturing company in the world, and the combined entity is expected to have a turnover of Rs 750 crore in FY08, more than twice Manugraph's FY06 revenues of Rs 320 crore.

Besides, there will be other synergies of manufacturing and cross-selling. Says Sanat Shah, "Dauphin outsources $20 million worth of auxiliary and component parts at present. Manugraph, to a large extent, will be supplying these auxiliary and components from India whereby Dauphin will derive cost advantage and Manugraph will get additional value in its business."

Manugraph, with Dauphin, will also launch a new range of products globally. "By virtue of Dauphin's marketing and service set-up in the US, Manugraph will be able to comfortably introduce 16-page commercial web and 4-page frontline machines which have a huge market in the US," says Shah.

"Such machines are not manufactured by Dauphin and it will therefore give additional benefits to both the companies in increasing their turnover and profitability," he adds.

The combined entity will continue to maintain its manufacturing and assembling operations at three facilities - two in India, and one in the US.

"The acquisition gives Manugraph an entry in the $60 billion North American markets which are the largest in the world," says Emkay's Umesh Karne.

However, he feels that the operating profit margin of the combined entity could suffer as Dauphin's margin will not be as high as Manugraph's. The average operating margin in the US is about 5-6 per cent, while Manugraph's margin was 26.22 per cent in FY06.

Financials
Manugraph incurred a capital expenditure of Rs 30 crore towards modernisation in FY06 which was funded from internal accruals and borrowings.

"This was essential for achieving higher levels of quality and productivity," says Shah. Manugraph will need to incur an additional capital expenditure of Rs 50 crore for production of high speed news paper machines and to meet the components and auxiliary requirements of Dauphin as well as for components that will be outsourced by German and Japanese firms through Manugraph.

However, there was a dip in the September quarter numbers. Sales dropped 6.93 per cent y-o-y to Rs 81.79 crore. Net profit plunged 37.61 per cent to Rs 12.61 crore. Margins too took a hit. The operating profit margin was 535.6 basis points lower at 22.06 per cent. Exports dropped around 68 per cent to Rs 16.85 crore resulting in the operating margin being affected. 
 

NEWS STORY
(Rs crore)	FY06	FY05	FY04
Net Sales	318.05	247.96	202.59
y-o-y growth (%)	28.27	22.39	77.46
Operating Profit	83.38	45.78	22.11
y-o-y growth (%)	82.13	107.06	182.38
OPM (%)	26.22	18.46	10.91
Net Profit	55.70	28.48	16.00
y-o-y growth (%)	95.58	78.00	692.08
NPM (%)	17.51	11.49	7.90

"In spite of lower numbers reported by Manugraph, we remain very positive on its business model on the back of robust demand," says Binita Patel, senior equity analyst, Niche Brokerage.

Expected capacity addition of publishers in the domestic markets and the company's foray in big export markets like China and the US will drive growth for the company going forward.

As per company estimates, at the current price of Rs 228, the stock trades at 10.2 times and 6.6 times its expected FY07 and FY08 earnings respectively.