Financial Daily from THE HINDU group of publications
Monday, May 13, 2002
`Indo Gulf still thinks fertiliser makes good business'
Mr Debu Bhattacharya, Managing Director, Indo Gulf
MUMBAI, May 12
THE Rs 2,706-crore Indo Gulf Corporation Ltd (IGCL) ended the 2001-2002 fiscal with a 23 per cent growth in turnover and a 20 per cent rise in net profit, despite sluggish demand and industrial slowdown.
Soon after the results were announced, Mr Debu Bhattacharya, Managing Director, IGCL, spoke to Business Line. Excerpts:
In fertiliser, we have no choice, because, the total volume of 8.5 lakh tonnes is capped and we cannot produce more. You will, however, see a little over that because we had an overflow from year before due to which we sold a bit more last year.
The bottom line growth was due to the cost effectiveness programme undertaken across businesses.
In the full year period, your interest outgo came down by 29.5 per cent. How was this achieved?
Debt cost has come down and the total amount of debt has also shrunk. The debt cost is down to 10.32 per cent. We also prepaid Rs 70 crore last year without any premium.
Long-term debt has come down while short-term debt has remained more or less constant. We have approximately Rs 1,100-crore of total debt - Rs 700 crore long-term and Rs 400 crore short-term.
But remember, working capital needs will go up because the total operational size has become bigger.
The fertiliser business showed a dip in its contribution to turnover. Is this on account of the Government's restriction or a planned move on the part of the company to reduce its fertiliser business?
We produce exactly what we are allowed. We have not shrunk the business at all. Personally, I believe the fertiliser business is good for the long haul. It is passing through a difficult phase but that should not be misconstrued as bad intrinsic value. Intrinsically, it is a good business, because, Indian society is agrarian and we need foodgrains.
What happened is that, in terms of revenue mix, it came down from about 21 per cent to 16 per cent. That is because copper grew bigger, and hence, as a percentage, fertiliser came down.
Is the proposed rise in smelter capacity to about 2,20,000 tonnes justified given the sluggishness in LME prices? What downstream areas are you looking at?
LME is a pass-through. It has nothing to do with business viability. We hedge; so we buy and sell at the same price. Hence, it is LME-neutral. In this case, we are going up to the CC (continuous cast) rod plant, not more than that. But we will continue to evaluate possibilities.
We expect the plant to be up and running by next fiscal. Its products are not planned for sale in the domestic market. We are going for exports where we have had a good experience. Having established the market, we now believe we can put up additional capacity.
What kind of ratio between domestic and export turnover do you see evolving over the next couple of years?
The ratio will be almost 50:50. If anything, export will be higher. We are prepared for it. The Far East and the West Asian countries have an enormous demand-supply gap and we have the locational advantage to take advantage of it.
How is the global demand scenario looking at this juncture?
The global demand scenario is very bad. Global demand last year was flat, though I am expecting this year to be slightly better. We all know that after September 11, things got really bad and economies were floundering. If economies are not doing well, then the copper business cannot do well. But why am I growing then? Our targeted market is running short. We are only 10 per cent of the total gap. Our expansion volume is insignificant, compared to the huge gap that is existing. From that point of view, we are favourably positioned.
Would this see Indo Gulf setting up a manufacturing unit overseas?
No. How do I get an advantage by manufacturing overseas? Because I have a base here, further expansion becomes brownfield, whereas if I go abroad, it becomes greenfield and I have to put up all other related infrastructure facilities. It does not make commercial sense.
Having got a base, I would like to develop on top of it such that the next tonne of copper is cheaper than the previous one, and thereby, I become globally competitive not only in quality, but also in cost.
Remember, I have to get copper concentrate from abroad, convert it into copper and put that back again. Therefore, we got to be cost-wise more competitive than many. It will come through one of the three ways; first - volume i.e., a large base; second, efficient operations; and third, having infrastructure advantage.
Overhead costs get distributed and from that perspective, growing where we are already existing gives us advantage up to a point.
Later, however, you will reach a point of inflection, when to grow further you have to duplicate. At that point of time, we will see whether it makes sense to build here itself or go somewhere else.
In the event of a removal of duty differential or a further reduction in customs duty on copper imports, how does the company plan to cope with the possible inflow of imports?
As the import duty comes down, we will reduce our cost, so that we are always the preferred source over imports. It hurts us, but then, if I am prepared to take on the global market at global cost, I should be prepared for the domestic market too.
Yes, it will impact our top line and bottom line. It did so perhaps to a lesser measure last year. But we managed.
Could that mean a longer cycle to recoup the money invested in capacity expansion?
No. But clearly, there will be an intervening period when I have not got that additional volume up and running and customs duty on imports has already come down. These investments do not come to fruition overnight. It takes years. During this intervening period, the business has to tighten its belt. And, precisely not to suffer from this reversal or to minimise this kind of suffering, we are acting as fast as we can.
The commissioning of the plant was in February 1999. It is only three years and we are on the threshold of the second phase of expansion.
Further, investment in this expansion will be significantly lower compared to the earlier capacities.
Do you have any other major capital expenditure plans for this fiscal?
There is a possibility of PSU disinvestment. If the Government policy on fertiliser becomes positive, we will look at fertiliser as a growth centre.
You have a capacity expansion coming up, besides likely participation in PSU disinvestment. How will you raise the needed funds?
Wherever possible, we will dip into internal accruals. If we have an opportunity which justifies investment, we will go for debt. Our debt-equity ratio has come down from 1 in 1999-2000 to 0.49 in 2001-2002. If we have a good idea which adds to shareholder value, funds will not be an issue.
How is the company expected to perform in the next six months considering the current economic situation?
It will be difficult on both businesses, more so in metals because customs duty on imports has been slashed.
The domestic market was flat last year; it is expected to grow this year but very slowly. So, we are relying on exports and its share will go up with expanded volume.
Do you gain any financial synergy from copper and fertiliser businesses. Is it wiser to segregate them?
These two businesses are run independently, and therefore, we do not try to sub-optimise or distribute inefficiency. We can very easily distribute inefficiency.
That means one runs badly, you cover it up with the super efficiency of the other. This is something we try to avoid meticulously. Each must stand on its own feet. At the corporate level, funds are available based on which investment delivers better.
If you participate in a disinvestment deal, would you not be making both the businesses repay funds used for the benefit of only one? Is that fair?
If the fertiliser business supplies funds to the copper segment, the payment will be done at an `arms length' cost of debt. At MIS level, the intrinsic performance of each division will be highlighted.
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