Indo Asian Fusegear was incorporated in 1984 as a private limited company, and converted to public limited in 1991. It manufactures a wide range of high quality electrical control & protection products. These include electrical safety devices such as miniature circuit breakers, residual current circuit breakers, HRC fuses, wires & wiring accessories, distribution boards. It has also diversified into the high-tech energy-efficient lighting field. Its range of lighting products include compact fluoroscent lamps (Ecolite) and light fittings. It is the first company to receive BIS certification in the CFL industry in India.
Mr. V.P. Mahendru is the Chairman and Managing Director of Indo Asian Fusegear Ltd. In 1958, he promoted Indo Asian Group for manufacturing and marketing electrical distribution and safety equipment, which has since been growing by leaps and bounds. He has been member of the Governing Body of the Bureau of Indian Standards (BIS/ISI) and is associated with many BIS and other Committees contributing to the strategic policies for formulation and implementation of Indian Standards for various electrical and electronic equipments. He is also an executive member of various policy-making bodies of Government of India, including the Central Consumer Protection Council of India and the National Productivity Council.
Speaking with Ms. Toral Munshi and Ms. Prajakta Pradhan, Mr. V.P. Mahendru said that "Indo Asian is going to do better than the industry average on account of special initiatives taken by the company in terms of R&D, design development, cost reductions and service to the customers".
Could you give us a broad feedback of the expected growth? Which segments would contribute majorly to this growth?
Within India it is the power sector, which is driving the growth. Currently, the installed capacity in the country is 110,000MW, making India the 4th largest power generator globally. To reduce the shortage of power, the Government plans to add 100,000MW by 2012, totaling to over 200,000MW. This will make India the largest power generator, bigger than China. I hope the additions go as per plans. Consequently, there is an increase in demand for electrical distribution products. We understand from the Ministry of Power, that in most of the tenders floated previously for power equipment even for small values, there used to be a large number of participants. This has now come down to very few participants possibly due to their pre-occupation with larger demands and higher standards of quality specified under the APDRP Programme, for which fewer companies are qualified. Demand is rising. Other sectors pushing up demand are the housing, hotels, institutional buildings and construction industry. Most of the hotels, hospitals and institutional buildings are equipped with power protection and energy efficient lighting equipment. Besides this, there is increased demand from the housing and construction sectors. We also cater to the general industry at large. All these sectors are booming and this is translating into increased demand for electrical distribution equipment offered by us. So I would say that around 30% of turnover comes from the power sector, 30% from the hotels, hospitals and institutional buildings and the rest from the housing and construction sectors.
Liberal policies have induced competition amongst various businesses. Against this backdrop what is your outlook for the electrical industry?
The electrical industry is under pressure to produce more world class quality products that match the international standards. Opening up of economy means that the power distribution companies are no longer obliged to buy from within India as they can buy from anywhere in the world. This puts the entire electrical manufacturing industry on the front foot, to manufacture world-class quality products at highly competitive cost. The electrical industry has come of age, is well matured and is doing a wonderful job in terms of qualitative improvements. Today the Indian electrical industry is on the same upsurge, which 10 years back was seen by the IT industry and a few years back by the auto component industry. Additionally, India is being increasingly recognized as the low cost global quality manufacturing base, so outsourcing also presents an attractive opportunity to Indian manufacturers.
The growth which you have witnessed in the first half, is it domestic driven or export driven?
It is both domestic and export driven. We have a well spread distribution network in India. We have been exporting our products to Middle East for the last 30 years. Exports have been our important strategic thrust area in the past and still continues to be so. Indo Asian is recognized as one of the few Indian companies, manufacturing world-class products for the global market. We mainly export circuit protection equipment besides other electrical switchgear products and CFLs.
So what kind of growth are you expecting at in the switchgear industry?
This industry has witnessed a growth of 20-30% in the last two years and is expected to grow at 30-40% in the next 2-4 years. Indo Asian is going to do better than the industry average on account of special initiatives taken by the company in terms of R&D, design development, cost reductions and service to the customers. Our switchgear segment is covered under power distribution equipment segment, which also includes products such as transformers, switchgears and cables / wires.
The lighting division has experienced de-growth in sales during the first half, what is the reason for the same?
Our CFLs (Compact Fluorescent Lamps) are of better quality in accordance with BIS Standards hence they cannot match the pricing of most of the sub-standard Compact Fluorescent Lamps (CFLs) imported in India from East. There are certain large organizations, which are also importing these cheap CFLs and selling in the market. As they have an established distribution network for other lighting products, these companies enjoy a good market share for CFLs too. However, the situation is changing now due to two things, one is the anti dumping duty levied on the import of cheap sub-standard Chinese CFLs to reduce the dumping of these cheap CFLs, though certain importers are misusing the FTA route to bring the cheap Chinese CFLs to India without paying the anti dumping duty. This has affected our last year's operations. In addition, we have built up internal technology strengths and efficiencies, economies of scale, consequent to which, some of those importers are now reverting back to us for sourcing CFL requirement, as our CFLs are far more superior and reliable than those imported from China. We are slightly more expensive than Chinese CFLs, but as they are reliable, the institutional buyers and consumers increasingly prefer our CFLs. The domestic consumers are now conscious of sub-standard quality of cheap imported CFLs and are looking at good reliable Indian CFLs preferably with BIS certification. They are looking for better quality and reliable products and that is where we come to the forefront. This year we expect much better performance of the lighting division. We had also requested the Government to make BIS certification mandatory for CFLs. As soon as such a notification is issued it will be beneficial for the consumers, as the quality of light, efficiency and long life of CFLs will be assured to consumers, irrespective of whether they are indigenous or imported CFLs.
Can you tell us more about the company's export initiatives? What is the export target for the current year?
In FY04, our exports were Rs126mn, we are targeting exports to touch Rs250-300mn in FY05. We have already achieved Rs100-150mn in the first half of this fiscal. We have recently entered into an agreement with UK / Europe based companies for export of power distribution equipment. We have contracted to export circuit protection equipment for a total amount of Rs500mn to start with. This includes distribution boards, MCBs, RCDs, etc, which are mainly used in the construction sector. This contract will be executed over a time frame of 18 months. In FY06, exports are expected to be more than Rs500mn and will grow further in the following years.
Has this order been reflected in your last quarter's numbers?
For this contract, shipments will start in the IV Quarter of this year and will continue into the next year.
Is this order related only to the switchgear division or does it include the lighting division as well?
This order is related only to the switchgear division. Lighting division has also contracted to export CFLs to UK, which is now under execution on a continuous basis. We are sole suppliers of CFLs to these large companies, which are among the largest electrical companies in UK. These companies have very well established markets in UK and Europe, in fact all over the globe.
Which countries does the company currently export to and any new markets to be tapped?
We have been exporting to Middle East for the last 30 years. We have supplied to utilities and to private industrial clients. We have started selling in Europe also. It is our strategic thrust area now, as good quality switchgear from India are being increasingly accepted by UK / Europe. Our exports are also growing to South East Asia & Middle East. We are considering setting up an office in Europe to further improve our presence in that market. As the demand for power equipment will be large, we are setting up a base in Dubai also from where we will cover the entire Middle East.
What is the proportion of direct sales to outsourcing in the total exports?
The outsourcing proportion is around 10% of the total exports. But with the contracts in hand and in the pipeline, outsourcing will be almost 60% of the total exports by FY06. We have been invited by other companies in Europe too for discussing supply of our switchgear to them on a regular basis. Once we start shipping for the present contract, we will take up the other opportunities too. This will increase the proportion of outsourcing in the total exports substantially.
In view of the increasing volumes, do you have any capex plans? If yes, how is it going to be funded?
We will pump in Rs150-200mn in the next two years for expanding capacities in our existing plants. Out of the total amount, Rs50-60mn would be through internal accruals and the balance through debt and other resources. We are also expanding in Himachal Pradesh to avail of tax benefits. We are expecting around Rs500mn of production in the Himachal Plant in 2005-06, which is exempt from tax for the first 5 years. After that for the next five years, the tax concessions will be 30%. Additionally, we have 100% excise exemption.
Any new products that have been launched recently or products in pipeline?
We are looking at launching new products in the markets due to the changed thinking of power distribution companies of simplifying the process of billing of power supply. We are working with a few meter manufacturing companies in South Africa very closely. They have lot of R&D and manufacturing experience. We have identified the products that can be delivered to the power distribution companies to match their expectations. Basically, we are looking at getting into remote reading meters business to meet the emerging opportunities.
How viable would this business be knowing that the customers would be the State Electricity Boards?
State Electricity Boards (SEBs) are now in better health - thanks to APDRP Programme of the Ministry of Power. Under the new programme, the meters are no longer restricted to be installed by the distribution companies. These can also be purchased and installed by consumers of power. We are looking at meters where the reading would be automatically recorded on centrally located Computers. Additionally, the payment can be made through credit cards and at ATMs.
When is this product expected to be launched and is it included in the capex mentioned earlier?
Meter project is planned to be launched sometime in the next fiscal. For this, we will be setting up a new manufacturing facility. This is apart from the investment of Rs150-200mn capex, which was mentioned earlier.
Any plans to expand your distribution network? If yes can you outline the same?
Yes, definitely. We have regional offices in Delhi, Calcutta, Chennai, Mumbai, Bangalore, Secunderabad, Lucknow, etc and regional commercial offices and warehouses in 10 commercial centers of the country. Our major thrust is on areas, which have fast growth of power demand.
What is the company's present market share? What is the targeted market share in the next 2 years?
In the organized market, we have around 25% market share in the lighting segment. In the switchgear segment there are around 40 players, this segment includes a wide range of products. We specialize in circuit protection equipment, wherein we are leading with 30% market share. Wires form an integral part of electrical distribution network, though the turnover volume is comparatively small.
There has been significant improvement in the operating margins (OPM) of the company in the first half, how has this been achieved? Going forward, what is your guidance on the OPM?
We now have the advantage of economies of scale. We have our own R&D department, which constantly works on re-designing products for higher performance and lower cost of production. We have a well organized system of controlling costs that has helped us cut costs and improve OPM. We also have better price realizations on account of better differentiated quality of our products, which is now being accepted widely. Margins in exports are also good. In domestic market, margins on CFLs are lower as we have to compete with cheap Chinese products. We expect the OPM to improve unless there are any major hiccups. We have 50 people increasingly involved in R&D. R&D expenditure would be around 2% of the total sales.
Bad debts written off in FY04 is very high almost Rs12mn. Can you throw some light on what it was about?
This pertains mostly to SEBs. The SEBs were unable to pay because of their cash crunch. The company was growing so instead of carrying the burden of uncertainties, we decided to write it off. Presently, our exposure to SEBs has also come down drastically.
Who are your competitors in the Indian markets?
Mainly L&T, Schneider, ABB and Havells are our competitors in same ways.
But on the strength of our commitment in the interest of customers' emerging needs, we have grown consistently and substantially.
According to you what are the key growth drivers for the company?
The FDI and national investments are coming up in transmission and distribution segment. For every 1MW of power, Rs50mn have to be spent on the T&D network. So if everything goes as per national plans then for 100,000MW of additional power capacity, Rs5,000bn would be spent on T&D Equipment in the next 8 years. Very high volume of power distribution equipment would be required, which will be a big boost to the progressive electrical industry and to us. Additionally the old equipment with T&D also has to be replaced in the next 8 years, so that there will be increase in demand on that account too.
What are the concerns of the company?
Firstly, it is the import of Chinese cheap sub-standard products. As I mentioned earlier, some importers are using the FTA route to bring in cheap CFLs into the country without payment of any duty leave alone the anti dumping duty. Second is the growth of power sector as planned. This has to be taken seriously, Government has to take greater initiatives and improve the pace of reforms. It is heartening to see that on account of better management of SEBs and distribution companies now the private sector and foreign investors are also investing heavily in this sector. So the situation is not as bad as it was earlier.
What is your message to the shareholders?
We are deeply committed to our shareholders. We are grateful to them for showing constant confidence in Indo Asian. They are our partners who have stood by us through our tough and good times. We value and respect this relationship. We believe that with the growth plans of the company in place, we will all grow together.