How to fund print - Are the finance firms responding? - The Noel D'Cunha Sunday Column

Bobst India clearly wanted to convey a certain impression at the Competence ’15, an open house it hosted towards the end of this February.

13 Mar 2015 | By Noel D'Cunha

It wanted to demonstrate that automation is the key to more cost and operational efficiency, and for a profitable growth.
Chennai-based Label Kingdom, a packaging specialist, has recently invested in a new site and machinery which includes two die-cutters and an Eterna hot foil stamping machine.
The company is impressed with the Bobst Novacut 106 ER and may invest in one at a later date. The company has always based its investment on funding from financing companies. It will want funding to bring in the behemoth at its premises.
George Vettiyil, director of Bengaluru-based corrugation firm, Vettiyil Packaging says, some day he will get the Bobst Lila II 145 folder-gluer, but for now he cannot afford it. Even when he can, he will depend on funding from financial institutions.
These are just two of the many print CEO, who my colleague Anand Srinivasan and I met at the Bobst open house.
Among the exhibitors were two financing companies – Siemens Financial Services (SFC) and Tata Capital Financial Services.
Reuben Ray, national produce manager, equipment finance at Tata Capital, says, he would be delighted to fund these projects. “We typically operate with the big players and for a big player, the average cost of the machine starts from Rs 3-crore, which includes the customs duty as well. This is why the average ticket size goes up.”
Siemen’s vendor manager, Deepak Jotwani, however, says, choosing the right finance packaging is as important as getting the right level of debt. “In the banking parlance, in the normal scenario, the debt ratio ideally should be 2:1. But as far as the capital intensive printing industry is concerned, there are some leeway that are allowed, like the debt can go up to 2.5. Being an NBFC, we can consider that.”
Does the size matter?
The questions that one will ask when financial institutions go about doing business – Does the size of the print operation in any way determine the size of the funding?

We are equally comfortable with smaller turnovers, says Arun Kar, regional sales manager for Siemens. ”The bottom line is more important than the top line in this industry where topline as an appraisal parameter can be tricky. More than 80% of players in this industry have turnover of less than Rs 5-crore. We want to cater to players across the range. The operation has to be good and profitable. If a company is buying equipment worth Rs 10-50 lakhs, the appraisal parameters are different from the loan requirements where the company is procuring a Rs 5-crore to Rs 10crore asset. SFS is flexible and equally effective across the range.”
Tata Capital does a study on what a customer’s business is. “A customer might be catering to 70% of the total industry. In this case, there’s a large risk involved, should the industry fails. Hence, the machine does not play a role there. His customer segmentation plays a role.” 
Siemens, which came into the financial services business, has grown its portfolio at a fast clip, claiming that it adds approximately 50 clients every month. “That’s a positive sign for us,” says Jotwani. While Siemens caters to large players too, most of its clients are smaller players.
In contrast, Ray of Tata Capital says, catering to smaller players is not his company's current focus. “If you look at the turnover or profitability then we are at a much higher edge. If you look at some of our competitors’ book today, they are at Rs 1,700-crores today and their strength is around 100 people. So that means the average employee productivity is around Rs 17-crore. If you compare this to our books, it is somewhere around Rs 700-800 crores but my employee strength is around 20. So correspondingly we are higher.”
Tata Capital’s operates in the segments of printing and packaging, machine tools, IT, pharma equipment and health care equipment, with its prime focus being on printing and packaging. “Printing and packaging was the segment we first entered into and then we evolved into the other segments.”
Risk element
The down payment for investment to be made by the loaner is decided on a case to case basis. With Tata Capital, for example, the down payment can be as low as 10%, with the company funding the rest, which includes the customs duty. “Typically when you import a machine, you end up paying 23-24% duties, a huge component of the cost. So, we have realised this and we fund the equivalent amount of the duties part as well. Hence, we end up funding up to 90%, in case of equipment from companies like Bobst, Heidelberg or Komori, both on the invoice cost of the machine and the duties.”
The amount of down payment that a loaning company pumps in is a very important factor says Jotwani of Siemens. “Let's say a promoter/owner is not putting money to the extent that we require, it clearly shows that his confidence in that kind of project is not that strong. So, as a banker we would obviously ask for at least 20-25% margin but in case if any promoter is willing to put more than that, we would happily take that.”
Ray has a different take on down payments and the percentage. He says, when you calculate the value of 10% in a big investment, it becomes a big sum.  “We know that, these big machines even when they are taken off on day one, they will fetch exactly similar values. The life of a Heidelberg is 20-25 years and similar is the case of a Bobst machine, even the used machines are not available. So we feel that the class of the machine is far superior hence your risk gets mitigated.”
The other risk element involves financing custom-made kit, which are built to produce specific or niche products. These may not be quickly disposable in the market in cases of default. “In custom-made machines, we keep our loan rate a bit lower,” says Jotwani. “For example, in a standard machinery, we provide finance of up to 80% but in a custom-made it may go to as low as 65%-70%.”
And though Ray believes it’s a risk, he says, “It’s a risk worth taking.”
And this confidence comes from the fact that the debt default ratio in case of the printing and packaging industry is negligible. At Tata Capital, it’s 2.11%. Siemens’ Kar says, there are hardly any defaults. “As far as the industry is concerned these are run by individual promoters and close families, hence close monitoring has safeguarded this industry.”
ROI on heavy investments 
Both the finance companies agree on one thing – more high-end technologies are coming to India. “With such high-end technologies coming into India, ROIs would be more but simultaneously we should also have that much demand to cater to, because if we don't have that much demand then putting high-end equipments is of no use. So both these things go hand in hand, there should be a demand for high-end technology product and a high-end machine required to make that product.”
Ray says the trend of high-end technologies coming into India will continue. “Heidelberg is launching their new machine at Dongguan in China during the Print China show while Bobst premiered the Lila II and launched the new Novacut 106 ER.”
He adds, “I think all these machines will make a difference plus there is some positive vibe in the industry which is making people at least take the risks.”
Know your requirement Whether the company needs project finance, term loan, working capital loan or equipment finance, your existing Financier may not be the best in all products.

Get the best financiers/banks on board depending on the requirement Preferably get working capital loan and project finance from a bank and equipment finance from an NBFC.

Use competition to your advantage Depending on the size of the company please keep two banks and two NBFCs on board. If your old bank does not agree to dilute the exclusive banking clause, change it. Times have changed.

Be prepared to make a deposit Just as in the housing market, lenders for capital equipment look for a serious deposit before lending. Typically this deposit is a minimum of 10%.

Keep your accounts up to date  Lenders won’t be impressed by figures based on potential income from a single client that you haven’t yet secured. Successful plans are built on realistic evaluations of income, expense and risk and projected turnover based on a portfolio of clients.

Are you generating good profits hence paying a good amount of tax? Explore leasing option with dependable NBFCs. You can get leasing solution for your equipments where the lease rentals can be shown as expenses and it will reduce the taxable income.

Do not take financial risks you do not understand For example, keeping your LC limit and buyers credit limit unhedged for import of equipments. Remember you are a printer and not a forex expert. Rather than speculating and worrying about forex fluctuations over months, take forward covers and peacefully concentrate on your core job.

Control over cash credit facility Sometimes a higher working capital limit brings in complacency in your collection department. Keep tight control over your cash credit facilities. Remember there are your competitors whose CC limits are more often than not underutilised. They have cash purchase advantage.

Keep your accounts up to date  Lenders won’t be impressed by figures based on potential income from a single client that you haven’t yet secured. Successful plans are built on realistic evaluations of income, expense and risk and projected turnover based on a portfolio of clients.

Do you know that your cash credit facilities can be given only against hypothecation of your stocks without your land and building as collateral? The best in the business have similar facilities. Negotiate with your bank to release some of your properties which they have been holding for ages.


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