Indian Seamless Steels & Alloys Ltd (ISSAL) came into effect on March 27, 2002 subsequent to the amalgamation of erstwhile Indian Seamless Steels & Alloys Ltd with Jejuri Steels & Alloys Ltd on Sep 30, 2001. The company produces Hot Rolled Bars and Rods of Alloy/Non-Alloy Steels and Cast Rolled of Alloy steel at its steel plant at Jejuri in Pune. It has one wholly owned subsidiary called Indian Seamless Power Ltd (ISPL). ISSAL is the main supplier of steel to The Indian Seamless Metal Tubes Ltd (ISMTL), flagship company of the group, and also supplies to auto components, forging and engineering companies in the country
Mr. Baldev Raj Taneja is the Chairman of the Indian Seamless Group. He is a graduate in engineering and has a postgraduate diploma in management. Prior to starting the Indian Seamless Metal Tubes Ltd ? the flagship company of the Group ? in 1977, Mr Taneja spent about two decades with the Indian Tube company (a Tata Group company) in Jamshedpur.
In a telephonic interview with Mrs Toral Munshi and Rajiv Mehta of IndiaInfoline, Mr B R Taneja discussed the industry scenario, company plans, targeted growth and the drivers for the same.
What are your views on the current upswing in the steel industry? How long is the buoyancy expected to last and what will be the drivers for the same?
One has to look at the current upswing in the steel industry at two levels; world level and domestic level. The global upswing has been led by the growth in Chinese economy and the domestic demand has been buoyed by the growth in industrial and infrastructure spending. It is not necessary that both will move in the same direction and at the same speed. With the Chinese Government trying to apply brakes on the planned humongous expansions, the country?s steel demand is expected to slow down thereby stabilizing the world steel industry. This will lend much needed stability to erratic world market, where prices and availability of raw materials and steel have become dependent on activities in China.
As far as the Indian steel demand is concerned, it is expected to be robust with no immediate downturn in the short term. The new Government at the center has also expressed its thrust on infrastructure and one might expect higher allocation towards the same in the coming budget. Further, the domestic steel industry need not worry of dumping (imports) in case of excess capacity outside India, as we are one of the lowest cost steel producers globally and are further protected by import duty and higher freight cost.
Has the steel prices peaked out at the current levels or is there any further upside left? What will be the key determinants of the prices going ahead?
As the Chinese demand consolidates, the world prices are expected to stabilize or might even go down from current levels. In case of domestic prices, it is expected to remain firm with a low probability of moving higher. The continuance of the robust domestic demand will distort the correlation of the domestic prices with world prices.
What are your views on Government?s efforts to control the prices of steel?
There has been lot of noise from the Government lobby but no concrete steps have been taken to control the steel prices. The chances of Government going back to old days of commodity price control are very remote. It might tinker with the excise and custom duty.
What is the product profile (product mix) of the company? Who are the user industries and names of the major customers?
We are involved in the manufacture of special steel and not commodity steel. We make steel rounds and squares with majority of them made of alloy steel. Almost 50% of the production goes to our group company, Indian Seamless Metal Tubes Ltd (ISMTL); 25% is consumed by bearing manufacturers and the balance 25% is consumed by forging and other industries. A large number of bearing steel users are our customers. The names include Tata Steel, SKF, FAG, NEI, etc and other large bearing manufacturers through out the country. We are the approved worldwide suppliers of steel for SKF Bearing India?s global manufacturing facilities. As we are specialized steel manufacturers, we make steel as per the requirements of the client viz size, grade, chemistry, etc.
In case of pricing and term of contracts, the scenario has changed in the last two years. Earlier, we used to have an unwritten price understanding with the buyers. As the steel price started to become volatile, we started entering into 3-month contracts with our customers but now with volatility in steel prices increasing, we have settled down for monthly contracts.
The Indian Seamless Metal Tubes Ltd (ISMTL) is the main customer of the company. What is the percentage of production consumed by ISMTL and how is the transfer price arrived at?
The pricing on the company?s products supplied to ISMTL is totally market based. There is no price discrimination between the group company and other customers.
What are the main raw materials?
The three main raw materials used by the company are DRI (sponge iron), pig iron and scrap. To make good quality steel, we use virgin metals like pig iron and DRI that are of superior quality. The ratio of scrap to virgin metal is 50:50. The scrap is mainly sourced from abroad while we have fixed suppliers for sponge iron and pig iron.
It seems that company has not been successful in passing the hike in raw material cost to its customers? What are the reasons attributable to it?
As we have started to enter into monthly contracts with our customers, we do not face any problems in passing on cost based price hikes.
What is company?s capacity expansion plans considering that the present capacity utilization level is very high at 97%?
We have a total capacity of 190,000 tons, and our last year production was around 185,000 tons thereby utilizing more than 95% of the capacity. In the current year, our production quantity is expected to be in the range of 210,000-215,000 tons. Higher production will be achieved by increasing the plant utilization & productivity and generating efficiencies by implementing latest technology. We have been successful in doing this over the years. For example, our energy cost has come down by Rs700 per ton translating into huge savings for the company. In case of FY06, our production target is 235,000-240,000 tons without incurring major capital expenditure. We are planning to increase the installed capacity of the plant to 300,000 tons in the next 2-3 years. As the variable cost on the incremental capacity will be lower and as fixed cost gets apportioned over higher production, our overall cost of production will come down.
Could you share the details of the merger with the group company, The Indian Seamless Metal Tubes Ltd (ISMTL)? What is the rationale (synergies arising) for the proposed merger?
As 50% of our production is supplied to ISMTL, there is lot of transactional cost involved. After the completion of the merger, the two companies will save on the transactional cost to the extent of Rs50-60mn. The customer profile of the both the companies is very similar which will allow for formulating common marketing arrangements. For example, SKF is one of the common customers of the two companies. The merger will also rationalize the shareholder servicing, legal, marketing and other expense. The overall savings resulting from the merger is expected to be in the range of Rs70-80mn. The swap ratio has been fixed at 5 shares of Rs5 each of ISSAL for 4 shares held of Rs10 each of ISMT. The merger is expected to take atleast 6-8 months to complete.
Could you share the details of the on going CDR plan of the company? What will be the interest cost savings expected out of it?
When the company was incorporated, it acquired debt at a very high rate of interest ranging from 18-22%. These high rates of interest are no longer acceptable and reasonable in the current period of lower interest rate. So as per the CDR plan, the interest has been rationalized to 11%. Another feature of the CDR is that the repayment schedule has been spread across next 11 years.
What are the reasons for higher interest outflow at Rs238mn in H1 FY05 visa-a-vis Rs188mn in H1 FY04 despite the ongoing CDR plan?
There are two reasons attributable for higher interest outflow in H1 FY05. First, as the prices of steel have gone up, our total working capital requirement went up and is expected to remain firm in the coming quarters as well. Second, a loan denominated in Deutsche Mark, serviced at libor, got converted this year into Rupees and is now being serviced at 11%. We are planning to convert this back into Dollars and thereby lower down the interest outflow on it. Overall, one can expect a similar interest outflow in H2 FY05.
The losses made by ISMT increased in H1 FY05 despite favorable exchange rate movement? Why and when is it expected to turnaround?
ISMT would have turned around this year if it would not have received the order from ONGC. Around one and half years ago, the company got a big order from ONGC to supply 47,000 tons of casing pipes worth Rs1,500-1,600mn. It was a fixed price contract with the price fixed at about US$500 per ton. The order was denominated in US$ with exchange rate prevailing at Rs48.3 at the time of accepting the order. The scenario changed since then as steel prices doubled, raw material prices shooting up by more than 100%, and the Dollar depreciating against the domestic currency. The average price of the tube has gone up from US$500 to US$1,000. The order has impacted the company?s profitability by Rs250-300mn. We are on the verge of completing the order with only 300 tons expected to be left after the end of this month. Therefore, the only reason for making losses in this year is this order and once the order gets completed, we will start making profits.
Who are the other customers of ISMTL?
ISMTL products have a good export market and the exports this year are expected to be about 33,000 tons. This will account for 30% of the total production of 100-105,000 tons for the year. Next year we plan to export almost 50% of our total production.
When will be the extent of equity dilution on account of conversion of preference shares and when is it expected?
As per the terms of the CDR, the right of preference shareholders of converting their holdings into equity goes away. The preference shares are now redeemable in three annual installments from 2016-17 to 2018-19.
What was the capex incurred in HI FY05 and plans for the same in H2 FY05 and FY06? How would this be financed?
So far the total capex incurred in the year is close to Rs45mn and we expect to finish the year with Rs50mn. We expect to spend around Rs60mn towards capex in FY06 with no major organic capacity addition expected. The entire amount will be funded by internal accruals.
What is your topline and net profit guidance for FY05 and FY06 and what would be the drivers for the same?
We are confident of increasing the production by 40-50,000 tons by FY06 over FY04 levels. We expect to achieve a turnover of about Rs7,000mn in FY05 and record a growth of 17-18% in FY06 thereby reaching Rs8,350mn in revenues.
In case of ISMT, we expect to touch Rs5,250mn in revenues in the current year and witness a 20% growth in the next year. The main drivers will be completion of ONGC contract in the current year which will lead to securing better prices (almost double) on ~14-15,000 tons next year and robust export growth.
What could be the major concerns that can hinder the company?s progress?
The main challenge for us in the coming years will be to keep on improving quality and increasing efficiencies, both human and technology driven.
Any message for the shareholders of the company?
We would like to thank the shareholders for having the patience and supporting us through our bad times and we look forward to their continued support in the future.
India Infoline News Service / 08:59, Sep 15, 2014
Many a times parents overlook other goals as they are too busy focusing on just one goal, that is on their child's education. They are too emotionally involved in achieving this particular goal that they forget planning for their retirement and saving for other emergencies.