Mr. Pawan Kumar Ruia, Chairman of the Ruia Group, spoke to select media persons on Friday, Dec. 4, in Mumbai. He talked at length about the group’s tyre business, industry prospects, expansion plans and Dunlop’s re-listing on BSE.
The Ruia Group has interests in infrastructure, engineering, tyre, rubber products, sugar and electronics. It has had a phenomenal growth since its inception in 1993. The able leadership of its chairman Mr. Pawan Kumar Ruia has given the Ruia Group a formidable reputation in turning around ailing industrial giants through innovative management practices. Headquartered in Kolkata, the Ruia group has a workforce of about 9000 skilled, committed and qualified professionals. In 2003, the Ruia group took over ailing engineering PSU Jessop & Co. Ltd. In 2005, the group took over tyre major Dunlop India Ltd. from its erstwhile promoters and settling enormous liabilities, resumed production after a hiatus of almost 7 years. Infrastructure and tyre are now experiencing unprecedented boom in India. The acquired companies, in the meanwhile, have successfully wiped out the accumulated losses. The Ruia group has a pan-India presence with manufacturing facilities at Kolkata and Sahaganj (West Bengal), Chennai (Tamil Nadu), Mysore (Karnataka) and offices in New Delhi, Mumbai, Chennai, Bangalore and Bhubaneswar.
Hemant P. Maradia of India Infoline presents below the key takeaways from the meeting with Mr. Ruia who said: “We are very bullish on the tyre industry as the auto sector has started doing well again.”
Background on Ruia group’s entry into Tyre business
The Ruia group acquired the tyre business of the Jumbo group in December 2005. This comprised of Dunlop India Ltd. and Falcon Tyres Ltd. Falcon is in the 2 and 3 wheeler segment. Dunlop is into the 4 wheeler segment, including the OTRs.
When we bought Dunlop Tyres, it was in a mess. There was a labour dispute, hundreds of litigations and Rs6bn in liabilities. We have resolved the mess one by one. But now the Dunlop plants at Ambattur (near Chennai) and Shahaganj (near Kolkata) are operational.
On Falcon Tyres and acquisition of Monotona Tyres
In Falcon Tyres, when we acquired the company, it used to produce 250,000 tyres a month. This has now increased to 900,000 tyres a month. In 2007, we bought another company called Monotona Tyres Ltd., which is based out of Mumbai. This company was mainly catering to Bajaj Auto. It makes 300,000 tyres a month. Taken together, Falcon and Monotona are producing 1.2mn tyres a month. The two companies make only 2 and 3 wheeler tyres.
Expansion at Falcon tyres
We are expanding the capacity at Falcon by an additional 500,000 tyres a month. Once this is completed, this will be the largest 2 and 3 wheeler tyre capacity in India. The construction is underway and production of the newly expanded capacity will start in another 5-6 months.
On current operations of Dunlop
Dunlop will produce approximately 40 tons a day each at Ambattur and Shahaganj. The total installed capacity at these two plants is 130 tons a day. We will stabilise production in the next 3-4 months. We will go to full capacity utilisation in about a year from now at both these plants.
On resumption of trading in Dunlop shares
Trading in Dunlop shares was suspended in 2002. In the next 10-15 days, the stock should be available for trading once again. In 2002, Dunlop had a capital of Rs190mn – 19mn shares of Rs10 each. This was then increased by Rs260mn, taking the capital to Rs450mn. In 2007, this capital was increased by another Rs270mn, taking the capital to Rs720mn. The trading in Dunlop will resume on 45mn shares and suspension will remain in place for the balance 27mn shares, as some matters are still to be resolved.
Falcon expansion to cost Rs3bn
In Falcon, the total expansion will cost Rs3bn. Out of that, Rs2bn will be by way of term loans; Rs1bn of term loans have already been approved and for the balance the process of financial closure is underway. The balance will be in the form of an equity infusion. The promoters’ stake in Falcon is at 86% post the open offer. We now have to reduce this to under 75%, as per SEBI rules.
The capacity addition at Falcon will be for cross ply tyres, and not radials. About 2-3 years down the line most tyres will be radial and therefore we are also planning to make only radials in future. Falcon has a technological tie up with Sumitomo Corp. We are in talks with Sumitomo and other global players for the radial tyre technology. Falcon’s plant is located at Mysore while Monotona’s plant is at Wada (near Thane).
Some concern on rising rubber prices
We are very bullish on the tyre industry as the auto sector has started doing well again. The only concern is that the rubber prices have started climbing in the past one month or so. It might affect our margins unless we pass on the rise to the consumers. If the industry is unable to absorb the increase in rubber prices, there will be a price hike.
Demand for tyres is rising. We have heard that some mining equipment have been lying idle because there are no tyres for them. Even 2 and 3 wheeler segment could face shortage of tyres due to lack of production capacity. We will try and increase our market share.
Further price hike looms
We have hiked our prices and could consider doing so again if rubber prices remain elevated. Rubber prices have moved from Rs108 per kg to Rs128 a kg. The highest we saw last time round was Rs147 per kg. The price hike could be anywhere between 3-8%.
Dunlop planning 50 MW Captive power plant
Dunlop will not go for expansion right now. We are planning to set up a 50 MW captive power plant for Dunlop at the Shahaganj plant. It will cost us Rs2.5bn. The plan is at a drawing board. We have already obtained required permissions. This will take another 1 to 1 ½ years of time. Not all power will be utilised by Dunlop. Extra electricity will be sold out.
The Ambattur plant of Dunlop makes tyres for commercial vehicles. At Shahaganj, we make 10 tons a day of industrial tyres; 20 tons a day of OTR tyres and 100 tons a day of CV tyres. We expect the plants to stabilise in the next 4-6 months. Once that happens, reaching 130 tons a day capacity at both the plants will not be all that difficult.
Working capital requirement will rise for Dunlop
Our working capital requirement will be at least three times more when we increase the capacity at both these plants to 130 tons a day. So, we will require about Rs2bn each for both the plants to reach optimum capacity. We think at 30 tons a day we will break even and at 40 tons a day we will have positive cash flow, subject to raw material prices not shooting up too high. All the projections were done keeping in mind rubber prices of Rs105 per kg.
Eyes up to 10% dilution in Dunlop
Our stake in Dunlop at present is 74%. We might go for dilution of up to 10%.
Supply shortage in domestic market
We are seeing supply shortage in 2 and 3 wheeler tyres. We are running almost at more than 100% capacity at Falcon. We have been trying to see if we can get some outside capacity to meet the rising demand. Demand for tyres is strong. Such strong is the demand for tyres that some companies are resorting to imports from China. Even during the downturn demand for 2 and 3 wheeler tyres was pretty strong.
Dunlop may foray into passenger car tyres
We might look at getting into passenger car tyres whenever we consider an expansion in Dunlop. This will be when we reach 130 tons a day capacity at both the Dunlop plants.
Falcon exports about 20% of its products. In Dunlop, we are planning to export about 20-30% of the total production volume (80 tons a day). We are currently exporting to markets in the Middle East, South America, Philippines and Far East.
Dunlop turnover to cross Rs7bn in FY11
Falcon will be crossing a turnover of Rs7bn in the next fiscal year (Oct-Sept. 2009-10). Monotona will surpass Rs3bn by March 2010. Dunlop will have a turnover of Rs2-3bn by March 2010 if the current situation continues for another 4 months.
But, once we expand capacity, Dunlop will clock a turnover of Rs7-8bn in FY11.
Land dispute at Dunlop
Dunlop had sold about 25 acres of land behind Ambattur to a private builder. When we took over that company, we were told by mistake some of the sold land was falling within the factory. The price of the land went up sharply. This happened sometime in October last year. We had to suspend operations at Ambattur.
We got the land area back. But, the matter is still pending in court. The size of the disputed territory is about 8.33 acres. The Ambattur plant was re-opened a month back and Shahaganj was re-opened on December 2.
On excess land
We have excess land in Ambattur. This is 58 acres. We have not taken any decision with regard to this piece of land as yet. At Shahaganj we have 240 acres of land. Out of this, 58 acres is used for production purposes. We have a housing colony and schools on the excess land. We have not thought about what to do with the surplus land at Shahaganj.
Debt not an issue
In Dunlop, the term loan is zero. We have paid off all the dues. Working capital outstanding should not be more than Rs400-500mn. In Falcon, the term loan should be around Rs600-650mn and working capital (fund based) should be about Rs800mn.
Most legal hurdles crossed
Most legal cases have been settled, except a few ones. There is an issue at Shahaganj, which is going on right now with regard to 25 employees. We have dismissed those employees and filed a chargesheet as well. We are trying to find our way out of this matter.