Our next wave of Spencer expansion will be confined to the three states that we dominate – West Bengal, Andhra and Eastern Uttar Pradesh, Sanjiv Goenka, Chairman, RP-Sanjiv Goenka group, tells ET Now.
Congratulations on winning the Malegaon circle in the recent auction conducted by Maharashtra discom. Walk us through the contours of the order win.
Maharashtra is a very attractive state for distribution of power. Any state needs two important facets to have a successful distribution network. One is the desire to have tariff reforms and Maharashtra has done that; two, the ability or the desire to deal with theft. Both these issues Maharashtra has demonstrated very strongly and we believe Maharashtra has become an attractive potential destination.
You have several successful private franchises or licensees there and Malegaon appeared to be attractive. It has got 83% industrial load and that is why we bid and we are happy that we have won and the fact that the T&D loses are close to 45% demonstrates that there is a potential to bring it down and improve the operation significantly.
Is the majority of energy supplied to industrial commercial customers and are gross margins higher in this segment?
Yes 85% to 87% of the supply is to industry and commercial and that is what makes it a little more attractive. But, of course, you have social issues in that region and as we have discovered in our venture in distributing power in Rajasthan and earlier in Noida. Each zone, each area has its own issues and they have to be dealt with in a very local manner while being sympathetic towards local considerations and issues.
We understand the Malegaon circle is equal to CESCs quota distribution franchise circle in terms of input energy. Will gross margins be higher than quota and what about the AT&C losses?
The ATC losses are at 45% as it stands. They will have to be progressively brought down with investments in hard capex and soft technology and issues in terms of dealing with power theft and all that. It is something that we have just won. We had evaluated it but now we have to get in there and I think the process of handover is going to take about four months. So in that process we have to equip ourselves with a very specific action plan which is what we are doing right now.
You also have won three distribution circles in Rajasthan. Give us more details on these circles.
Our philosophy is that going forward distribution will be a good part of the power business to be in and that is why we are expanding aggressively in distribution. We have won the distribution bids for Kota, Bharatpur and Bikaner and one of the three has already turned profitable. We hope in the next 12 months, the other two will also turn profitable in Rajasthan. There have been issues beginning with language but we are learning to deal with each one of these and we are coming out on top. It is slightly delayed from where we had anticipated but we are getting there.
What exactly is the profit sharing agreement in the new circles that you won and what is the arrangement on reduction of AT&C losses for the distribution franchise?
Got a target for reduction of AT&C losses and we do believe that it is something that can be delivered and that is what we are going to work towards.
Let us talk about the retail business because organised retail is expected to grow from the $60 billion mark in the US in FY16 to about $180 billion in FY20. How do you think Spencers can participate in the backdrop of the intense disruption which one is seeing in this space?
Spencer's took a long time in getting all the actions correctly and the first six months we were at close to a PBT breakeven. We expect pretty much to be either almost at PBT breakeven or just a very minor token kind of loss for the year ended. Our next wave of expansion will be confined to the three states that we dominate – West Bengal, Andhra and Eastern Uttar Pradesh.
We will up properties more aggressively in these states because there is no additional cost for us. There is no additional advertising for us. There is no additional awareness that needs to be created. There is no additional backend cost that we need to incur. So every penny of contribution will go to the bottom line and that is the strategy going forward. You will see an aggressive but calibrated phase of growth for Spencer's and each year on year you will see significant additions to square footage.
What is the update on the stake sale to Alibaba? Are you in talks for the same and when would it materialise?
Spencers is almost close to breakeven and we should be there very shortly, at a PBT level which is the bottom line. The first six months were breakeven and so we will be there in another quarter, another four, five months.
Theres a lot of speculation on Spencers. Please allow me not to comment on speculation.
What is the outlook for the FMCG business? The Too Yumm brands have seen good traction?
The ambitions are huge — Rs 10,000 crore in five to six years. But for now, it is has to break even on Too Yumm and that could happen in the next 15 months. We will launch more products, we will be more aggressive about our two brands – Too Yumm and Evita. We have 4,30,000 distribution outlets which is quite fast considering that we have been in the trade just for about 18 months.
By second quarter next year, we expect to break even in Too Yumm. That would be fairly good by our estimation and that is what we are moving towards, products are doing well, we are having month-on-month growth, consumers are liking our products and that is the best proof for us.
What is the outlook on Phillips Carbon Black?
The carbon black industry has gone through a good period in the last 12 months. Phillips Carbon Black itself had done a lot of reinvention in terms of costs, logistics, sourcing and product mix so increasingly more and more of our product is becoming specialised blacks and where margins are higher, our costs have gone down because of better yields, better sourcing of raw material, better logistics, just in time supplies.
Having great long-term relationships with key accounts like MRF, Ceat, Apollo, JK in India, several accounts overseas, helped us to service them to their complete satisfaction.
It is a different company now compared to what it was. It is doing well. Profits have been higher than they have ever been. We have just finished commissioning our new plant at Mundra.
By the second quarter of this year, we hope to finish commissioning another capacity addition at Palaj which is again in Gujarat and we hope to begin work on our plant in south India in the next two quarters I would imagine.