Jack in the box

Ashok Kumar Bansal has been an IKEA supplier for the last 15 years, but he may not have been quite prepared for the mother of all orders that landed at his Noida factory last fortnight. The Swedish retailer wants Rs 600-crore worth of soft toys (and a bit of kids furnishings).

If Bansal, who is the Chairman and Managing Director of Hanung Toys, can’t stop grinning about it, it’s because it is the single-largest order in the history of an industry whose annual revenue is estimated at a bare Rs 2,000 crore.

In the first year, Hanung (named so to sound like a Chinese company— clever, huh?) will ship soft toys worth Rs 82 crore, but the figure will jump to Rs 320 crore in the fourth year. It’s just the sort of deal that may catapult Hanung, which also manufactures cushions and home furnishings, into the league of global suppliers.

The IKEA order comes close on the heels of another large (Rs 265-crore) order from a US-based home furnishings company. “We are going to sign more (such) orders for the long term, so that we can concentrate on production and have better capacity utilisation and profit margins,” says Bansal, who set up the company 17 years ago.

Hanung is already a top player in the organised market of stuffed toys and among the top five in home furnishings. It has the capacity to produce 17.5 million pieces per annum of stuffed toys and 33 million metres per annum of home furnishings.

Exports have always been the mainstay for Hanung, but now it is also increasing its focus on the domestic market. It has a stuffed toy brand called Play-n-Pets and a home furnishing brand, Splash. Says Bansal: “A large chunk (75 per cent) of our revenues comes from export orders.

The company mainly exports to Europe, the US, Latin America and Middle East. Now with the domestic toy industry poised to grow at around 25 per cent annually, there is a huge scope for growth here, and we also see higher EBITDA margins in the domestic markets vis-à-vis exports.”

In order to expand its presence in the home furnishing business, Hanung recently set up an integrated home textile unit in Uttaranchal at a cost of Rs 168 crore.

According to Bansal, while textiles will give Hanung the much needed volume growth due to high demand in international markets and a growing domestic retail industry, toys (which fetch better margins) will support profit growth. Currently, textiles fetch 60 per cent of the company’s revenues (projected at around Rs 525-550 crore for 2007-08) and toys the rest. Bansal is targeting a 50:50 mix over the long term.

In a bid to boost its toys business, Hanung is scouting for a toymaker in China. Why walk into the lion’s lair? “China is an excellent market for mass products, and we are looking for a company with turnover of $50-60 million,” says Bansal. The reason is simple.

At present, Hanung’s toys cater to upper middle class and high income groups, but building market heft will need volumes, which will only come from mass market products.

Despite its recent big wins, Hanung has some way to go. Rising competition from China and a stronger rupee are hurting its bottom line. Also, stiff competition from the unorganised players, who cater to about 70 per cent of the toy market, adds to Hanung’s woes. “As far as China is concerned, their product quality is highly suspect.

In the case of rupee appreciation, the most interesting part of the IKEA deal is that all the billing will be done in Indian rupees. So, we don’t have any risk or any hedging to worry about,”says Bansal.

Toys may be kids play, but making them is surely not.