Financial Daily from THE HINDU group of publications
Wednesday, Oct 09, 2002
`Our credibility with banks and MFs is very high'
Mr S.Y. Rajagopalan, Director Finance, Electrosteel Castings
KOLKATA, Oct. 8
THE return on net worth (RONW) of Electrosteel Castings Ltd (ECL), a leading player in the Ductile Iron (DI) and Cast Iron (CI) pipes segment in the country, has increased from 21 per cent in 2000-01 to nearly 25 per cent in 2001-02 owing to higher sales, a lower operational cost and higher profit. Boasting a successful run in terms of both turnover and after-tax profits for several years now, ECL's key strength is financial discipline at all levels, says Mr S.Y. Rajagopalan, Director, Finance, of the company. The company's short-term surplus, he pointed out, was well invested during 2001-02 in short-tenure debt instruments or debt-oriented mutual funds. And this was also used to fund the working capital and effectively reducing interest cost . The long-term surplus has been used to repay debt, fund asset expansion and thereby accelerate modernisation of the company's units in West Bengal (Khardah) and Tamil Nadu (Elavur).
Talking to Business Line on various aspects of the company's key financials, Mr Rajagopalan attributes ECL's high credibility in the lenders' community to the nurturing of a conservative approach, keeping a tight leash over high cost borrowings. Excerpts of the interview:
What is the secret of ECL's success in financial management, especially at a time when Indian industry in general has found the going quite tough?
We exercise caution at all times, pay great attention to the liabilities side of the balance sheet, and maintain tight control over borrowings. As for investments, we generally go for commercial paper programmes or Mibor-based debentures, for which best rates are available. Armed with top Crisil ratings, like P1 Plus, our working capital loans are procured through best rates.
In fact, our working capital limit for this year is Rs 120 crore, and we may raise bulk of this amount through the above-mentioned instruments.
What about suppliers' credit?
We keep suppliers' credit to the minimum, and our conservative borrowings policy has so far worked well. I can say with a great deal of pride that our credibility with Mutual Funds and banks is the highest, and this gives us the tremendous advantage of having the ability to raise funds from the market at short notice.
Our repayment record too has been impeccable, as we have never defaulted on any of our payments. An additional advantage here is that we can get much finer rates from institutions on our borrowings, given our assigned credit ratings.
Tell us about your treasury operations a little bit?
Being a sizeable player in the international markets as well, we have a large exposure to the forex markets, mainly to sustain our export operations, and this is a major part of our treasury operations. Booking forex in advance for our Exim operations, and in the process ensuring that we get a fair return through currency swaps.
Starting from July 2000, we entered into a currency swap deal that transferred our liability from Indian rupees into Japanese yen, and through this route, we saved Rs 2.13 crore in 2000-01 and Rs 4.13 crore in 2001-02. In fact, the timing of the swap deals has been perfect. We are doing all this essentially to reduce the interest burden on the company.
What about loans and advances during 2001-02?
For the said period, our loans and advances increased from Rs 33.23 crore to Rs 68.54 crore, including the Rs 41.78 crore as advances for picking up a strategic stake in Lanco Kalahasti Castings Ltd. In March this year, ECL entered into a strategic alliance with the promoters of the Hyderabad-based Lanco group, and we are now fully engaged in the management of Lanco Industries Ltd (LIL) and Lanco Kalahasti Castings (LKCL).
We have acquired 46.43 per cent in LIL and 48.89 per cent in LKCL, and expect that the close interaction will benefit both ECL, and LCL and LKCL. While LCL produces pig iron and slag cement, LKCL produces DI pipes and iron castings.
What are the key factors which have kept the financials of ECL on an even keel for such a long period of time?
Our fundamental strength is that we do not divert our funds for any other purpose. Our focus has always remained on the core business of pipes and fittings, and the funds are deployed only to develop this core area of strength. Secondly, on the investment front, we follow a policy minimal risk exposure.
What about the in-house checks and balances?
We follow a strict code of conduct, and stringent parameters are laid out for all middle and senior level managers to follow in all departments, and especially in the finance department. We also follow complete openness in inter-departmental dealings, having decentralised operations beginning from the middle level.
I must, however admit that transparency alone will not do, and at the end of the day, what really adds to your bottomline is the efficiency levels achieved.
How would do you describe the company's performance during 2001-02?
Given the odds like an economic slowdown and a competitive environment, we have reported a 34 per cent increase in our profit after tax and an EPS of Rs 52.23.
And as for the future, we are optimistic that in the event of a national or global slowdown, water infrastructure projects (our bread and butter, really) will continue to receive government attention and priority.
What is the next milestone?
Having achieved record export of 35,874.01 tonnes of DI pipes during 2001-02, efforts are now on to improve on this in the current financial year, and we are entering the European market through a subsidiary company (Electrosteel Europe S.A.) registered in France on December 21, 2001.
How would you like to sum up the future of DI pipes sector?
While DI pipes may appear more expensive than alternatives, they provide distinct advantages like lower cost option considering the long life (of over 100 years), zero cost of maintenance, non-leak performance, quicker throughput of water and substantial savings in energy costs.
According to a World Bank report, some 75 per cent of India's rural population, about 520 million, do not have access to safe public waster supply.
I believe that with development of infrastructure and greater industrialisation, the demand for DI pipes is sure to pick up in the future.
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