Inking a winning script

SMART TALK/ Vinay Pandya, chief financial officer, Micro Inks

Vinay Pandya

Micro Inks is about to make a big splash. Formerly known as Hindustan Inks and Resins, the company manufactures and markets printing inks which are used in publishing and packaging material.

The company has built expertise right across the value chain - from procurement of raw materials to distribution. Micro Inks' products includes pigments, flush pigments, resins and varnishes, additives and printing inks.

It all started way back in 2000 when Micro Inks entered the US markets and set up a manufacturing unit there. Within three years the company was the

11th-largest ink manufacturer in the US. The company is the largest ink player in India with a marketshare of about 35 per cent. Coates India, which is its closest competitor, has a marketshare of about 25 per cent.

The size of the domestic market is pegged at around Rs 1,000 crore (growing at 15 per cent) while the global market is over $15 billion (growing at about 2-3 per cent).

With consolidation gaining momentum at domestic and global levels, Micro Inks may gain significantly through acquisitions.

The company's consolidated net revenues grew 21 per cent to Rs 779.6 crore on account of deeper penetration across geographies.

The overall growth was led by the general inks segment which grew 26 per cent to Rs 529 crore, followed by a 13 per cent growth in liquid inks to Rs 132 crore.

Micro Inks grew about 15 per cent in the domestic market with the northern and western regions contributing more to sales. The domestic market formed 43 per cent of the company's total sales.

International revenues (forming 57 per cent of total sales) clocked a 119 per cent increase in non-US territories and about 9 per cent increase in the US market. Net profits on a consolidated basis recorded an increase of 238 per cent to Rs 26 crore.

The company's stock has registered some handsome gains in the last three months: its price surged 36 per cent to Rs 646 and commands a P/E of 17.3. However, year-to-date, its price is down 4 per cent. The company has a total market cap of Rs 455 crore.

Vinay Pandya, chief financial officer, talks about the company's global expansion strategy and more. Excerpts:

What is the latest on your global expansion plans?

Once we became the leader in the domestic market in 2001, we decided to expand overseas. We are the only company in the world to have total backward integration in pigments, resins, additives, etc.

This gives us tremendous cost and quality advantage, enabling us to provide superior products. Currently over 60 per cent of our sales comes from overseas markets (over 60 countries), US being the largest. US contributes over 37 per cent of total sales, Europe over 10 per cent, Asia (excluding India) forms 6 per cent and Latin America accounts for 4 per cent.

As far as acquisitions are concerned, we are looking at North America, Europe and Asia. We have short-listed some companies in these regions and initiated dialogues. These companies are usually mid-sized ones with sales of $20-100 million.

There has been some talk about your overseas listing. What stage has it reached?

An IPO is for funding acquisitions overseas, distribution networks and debt reduction. We are likely to go for a GDR issue and have an approval for $40 million.

The GDRs will be listed on the London and Singapore stock exchanges. The exercise should be completed by the end of FY05.

Do you plan to expand capacity?

Right now there is no need to expand capacity; we have an installed capacity of around Rs 2,500 crore.

Last year (FY04) we utilised around 35 per cent of our capacity and this year utilisation should reach about 42 per cent, considering that our sales grew about 28 per cent in the first quarter (we expect to continue growing at the same rate this year).

However, we have started modernising our liquid ink plant which would help us offer better quality.

Do you have any plans to expand your product line?

Our focus is on publication and commercial printing inks. As far as packaging ink is concerned we are not present overseas on a large scale except in countries like Sri Lanka, Bangladesh and Indonesia.

The strategy is to increase marketshares in countries where we are already present while expanding to untapped regions. China is one country where we plan to set up operations on a greater scale. We also plan to expand in Italy.

What sort of competitive advantage does Micro Inks have over its peers?

We have the ability to design products (resins, additives and pigments) at effective prices. It is mainly a cost advantage. For instance, the cost of setting up a manufacturing plant in India is 10-15 per cent less than that in the US or Europe.

How do you expect raw material prices to move over the next year?

Raw material prices have gone up due to oil prices. We use about 500 raw materials (60 per cent of which is imported) out of which 20 per cent are linked to oil prices.

But overall, our basket remains stable with prices of the rest of the raw materials remaining stable. Impact on sales would be around 1-1.5 per cent.

What would be the key driver for growth? What are your earnings expectations for the year?

The key drivers are volumes and better penetration. We expect an operating margin of 18 per cent in FY05 and revenues of Rs 950-1,000 crore by the end of the year. Exports could yield us around Rs 600 crore out of which US should get us Rs 325 crore.

Prices of finished inks may rise if inflationary pressures persist. But long-term remains stable.