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PET theory

In a largely unorganised packaging market, Manjushree Technopack has managed to create a niche of its own

The Bangalore-Mysore Expressway is popularly called the NICE (Nandini Infrastructure Corridor Enterprises) Road and for most of the 111-km stretch, the name does seem befitting. If it was good enough for Lewis Hamilton to race his Formula One racing car in 2011, it was good enough for us too. On a Monday morning we made our way on the expressway to the industrial area of Bidadi, which houses manufacturing facilities of Toyota and Bosch, to see the spanking new manufacturing facility of Manjushree Technopack. If you haven’t heard about the company, you’ll surely know its key customers — Coca-Cola, Pepsi, Nestlé, Unilever, Cadbury and Tata Tea — for whom it makes PET bottles and preforms. 

In a business held to ransom by raw material fluctuations and intense competition, Manjushree has managed to not only grow its revenues but do so at a healthy 32% every year — from ₹85 crore in FY08 to ₹310 crore in FY12. Profits went up five-fold from ₹4 crore to ₹21 crore during the same period. Much of this growth was supported by timely capacity expansion, in line with emerging demand — from 9,120 MT (metric tonne) in FY08 to 85,000 MT currently.

“We work with every multinational in the country so we can read market trends and predict consumption growth quite accurately. We then plan our capacity addition according to these estimates,” says 58-year-old Vimal Kedia, managing director, Manjushree Technopack. This growth and capacity addition has not come at the cost of profitability. Manjushree has managed to maintain its operating margins at around 20% in the past four years, and that too in a highly competitive industry where manufacturers get squeezed by both vendors
and customers.

Coming of age

Kedia came to Bangalore in 1994 looking for better opportunities when his hometown, Tinsukia, in Assam had little to offer. He first got into manufacturing umbrellas in Assam in 1977 and, since that business was seasonal, he started a flexible packaging business as well in 1983. An existing flexible packaging unit was up for sale in Bangalore and Kedia felt it would be better to buy it out. However, the deal fell through as both parties couldn’t agree on the price. But the salubrious Bangalore weather and a significant unmet demand for PET bottles from packaged drinking water  companies in the South was enough to convince him to stay back and stick to the business. The company’s first facility in Bangalore came up in 1996 followed by a second one in 2001.

But the big traction came in later years. In 2008, Manjushree started manufacturing PET preforms for leading players in the carbonated drinks, packaged drinking water and juices segments. PET preforms are semi-finished bottles, which look like small plastic test tubes. Beverage manufacturers use preform blow-up machines to expand these to full-size bottles before filling them up, thereby avoiding contamination. Around 1/10th the size of PET bottles, they also save packaging companies and their clients a lot on storage and transportation costs. Coca-Cola, Pepsi and Bisleri are some of the key clients in this segment, which contributes around 56% to Manjushree’s revenues. 

The company works on a conversion price model with Coca-Cola and Pepsi. Under this arrangement, the client provides the raw material and is billed only for conversion into the final product, thereby insulating the packaging company from fluctuations in input prices. Analysts suggest that with this new business model, packaging companies have the option of improving their margins significantly. So, it is not surprising then, Manjushree’s margins have increased from 16.45% in FY08 to 22.45% in FY13 for the nine months ended December 2012.

In the past one year, the company has increased its overall PET preform capacity to 85,000 MT from 50,000 MT by setting up its third plant in Bidadi with a total investment of ₹150 crore, making it the largest player in this segment. Of this, ₹90 crore was funded by bank loans and the rest came from internal accruals. The investment will also be used to set up its fourth facility at Harohalli in Karnataka. The facility, which is expected to be completed by the end of 2013, will take the company’s overall capacity to over 100,000 MT by FY14 (see: Fast and furious).

In the fully made PET bottles segment, Manjushree supplies to clients in the confectionery, tea and food supplements segments such as Tata Tea, Mondelēz India (Cadbury Bournvita), GSK Healthcare (Horlicks), Perfetti and P&G, among others. It also makes multi-layered packaging, used to store food items longer by keeping moisture out. Multi-layered packaging finds use mainly for sauces and ketchups, dairy products and juices. The company supplies to Unilever (Kissan), Del Monte and Heinz in this segment. 

Future: Well packaged

Manjushree gets 80% of its sales from the FMCG sector, which has been riding on a burgeoning middle-class population. Estimated to be around 300 million people,  Indian middle class consumer market adds around 90 million to its ranks each year. “The FMCG market is recession-proof. There will be significant change in consumption trends as income levels increase, which will drive the demand for packaging much higher,” says Kedia.

Typically, packaging makes up 8-10% of the total cost for FMCG companies, and they’re looking to their vendors to help bring this figure down. That’s a constant challenge for players like Manjushree. “Packaging companies need to be innovative in developing cost-effective quality packaging solutions. Their ability to innovate will not only help companies differentiate but demand for newer products will ensure that the growth momentum in the packaging industry will sustain,” points out Ankur Bisen, vice-president, retail, at Technopak Advisors. 

Processed food packaging generates nearly half the revenues for the packaging industry, followed by personal care at 27% and pharma  with 6%. Where the alcoholic beverages business currently contributes very little to Manjushree’s business, demand has been growing at 15-20% annually. The company is stepping up efforts here by signing up Barcardi, United Spirits and Diageo, which have been pushing for sales of smaller unit sizes — 60 ml and 90 ml bottles — in India. 

Such moves are important if the company wants to retain its leadership position. According to the Indian Institute of Packaging the packaging industry in India, pegged at around ₹149,000 crore, is the sixth-largest in the world, and is expected to grow by 12% over the next four-five years. With unorganised players making up 85% of the industry, it is highly fragmented and localised. But there’s plenty of room to grow in a country where per capita consumption of packaging is $15 (around ₹810) compared with a global average of $100 (around ₹5,400). 

In the segments that Manjushree operates — PET bottles and preforms — it competes with domestic players such as Pearl Polymers, Sunrise Containers and Chemco Group and international names such as Amcor and Rexam. But the advantage Manjushree has over its peers is the fact that its large capacity is now nearly double that of the 50,000 MT capacity of its immediate competitor, Sunrise Containers. This gives it a significant advantage in the form of a sizeable market share in a highly fragmented industry. According to Kedia, the PET packaging segment is worth ₹5,000 crore, with PET bottles growing at 25% and preform tubes at 10-12%. After the Bidadi expansion, the company hopes to increase its market share from 7% to 10%, this year. Kedia is confident of growing by an average of 15-20% over the next couple of years, riding on the capacity expansion and revenue growth plans of some of its biggest clients.

For instance, Coca-Cola, along with its partners, plans to invest around $5 billion in India — among its top five markets — to increase its bottling plants and back-end supply chain infrastructure by 2020. The Indian cola market is estimated to be around ₹6,000 crore and growing at 11-12% per annum. With a per capita consumption of 11 litres compared with a global average of 30 litres, cola majors have been pumping in resources to capitalise on the growth potential. As cola consumption goes up, demand for PET bottles and preforms is bound to increase.  

Bottled water offers another high growth opportunity. The market, currently estimated at ₹8,000 crore, is expected to grow at 19% to touch ₹36,000 crore by 2020. Market leader Bisleri, which controls over a third of the market, sources part of its bottle requirement from the company. “Manjushree has been one of our trusted suppliers who’ve been able to deliver consistently on quality over the years,” says Ramesh Chauhan, chairman, of the Bisleri International. The company works on a conversion price for Bisleri as well but unlike Coca-Cola or Pepsi, Bisleri does not supply the raw material. “The company uses best-in-class machinery, imported from Canada so that quality is not compromised and they also ensure they are competitive in their pricing,” says Mohan Pillai, head of sourcing, Bisleri, which sells about one million bottles of packaged drinking water daily.

It works to Manjushree’s advantage that South India makes up 60% of the beverages market and nearly half of India’s bottled water manufacturers are located here. For packaging companies, business is viable only if they’re close to their clients to save on high freight costs. Given its capacity and proximity to manufacturers, Manjushree pretty much controls the southern market. In fact, despite not having any long-term supply contracts, its relationship with most of its clients has been sticky. “Food safety is a major concern for every multinational in the country. Vendors need to follow good manufacturing practices and ensure that hygiene is maintained in the storage of goods so that there is no contamination. They look for long-term partners they can trust, and the trust develops over the years. So they don’t usually change vendors in a hurry,” Kedia explains.

Changing consumer tastes, thanks to a growing and richer middle-class will ensure that the growth in the packaging industry will sustain during the next few years. “Only companies with significant scale will be able to leverage the growth opportunities,” says Technopak’s Bisen. While the company’s capacity addition has come with rising debt levels from ₹13.25 crore in FY08 to ₹130.86 crore in FY12, even with a ten-fold increase in debt, Manjushree’s debt-equity ratio is at a comfortable 1.3 times with interest coverage ratio at 3.65 times. More importantly, the capacity being created will continue to be utilised fully. That there’s enough latent demand is evident when Kedia says, “What we manufacture throughout the year just about meets the peak season requirement [March to June] of beverage players.” That being the case, Manjushree Technopack should have no cause for worry.