- What products does ISMT manufacture?
ISMT manufactures Engineering Steels and specialized Seamless tubes made of carbon and alloy steels. The steels and tubes that we manufacture cater to the requirements of a very wide variety of industries including OCTG, Mining, Bearings, Construction, Powergen and General Engineering. Our company’s focus is on developing steels and tubes for specialized applications within each of these industry segments and our entire organization structure is built around this central objective.
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- What is the size of the seamless tube market globally and in India?
The total seamless tube making capacity in the world is somewhere between
25 and 30 million MT. Our own tube making capacity is now 475,000 MT. The market for seamless tubes in India is of the order of 600,000 MT annually.
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- Who do you compete with and how do you differentiate yourselves?
As far as seamless tubes are concerned our domestic competitors include Maharashtra Seamless, Jindal Saw and BHEL (which produces tubes for internal consumption). However, competition, within India and outside, is not restricted to these players and we compete globally with the likes of Vallourec, Benteler, Tenaris, Timken, Ovako and a host of Chinese manufacturers.
Given the size and diversity of the seamless tube market, individual manufacturers have chosen to differentiate themselves by focusing on particular market segments. The larger players such as Vallourec and Tenaris are focused on the Powergen and premium OCTG segments, Benteler focusses on Powergen, Automotive and Engineering segments while Ovako and Timken target the Bearing and Mechanical tubes industry. The Chinese players as well as some of our domestic peers tend to be focused on the Powergen and the commodity end of the OCTG industries.
ISMT primary focus is on the Bearing, Engineering (Automotive, Mining, Construction) and Powergen sectors. In other words, we are positioned somewhere between Benteler and Ovako. We do sell tubes to the OCTG industry but this is not our primary business.
The nature of the market that we serve is very different from the OCTG sector. Most of our customers tend to be OEMs to whom we sell tubes for specific applications. The time taken to have our product approved for these applications tends to be fairly long, the development of tubes requires detailed knowledge of the particular applications, and in most cases we are required to develop a special steel to meet the needs of the application. The fact that we produce our own steel is a major differentiating factor. It is much more time-consuming to develop this market but on the other hand there is a greater degree of customer loyalty.
Another vital differentiation factor is our ability to supply small quantities of tubes. The combination of mills that we operate (PQF for large volumes and Assel for small volumes) we are cost effective for the supply of large volumes as well as small customized lots.
As far as the sale of steel is concerned, most of our steel is sold within India where we compete with the likes of Mahindra Ugine, Mukand, and Kalyani Steels. Once again, in this market we are focused on the upper end of the Bearing and Engineering steel segments. This is our primary differentiation and our efforts are to constantly move up the value chain by developing new products. For instance, this year we have started manufacturing creep resistant steels and Martensitic stainless steels.
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- What is your overall growth strategy?
Over the last couple of years we have invested significant efforts in widening our customer base and in developing tubes for new applications (we call these new products) thereby increasing the size of our addressable market. We have restructured our entire organization around the central objective of developing new customers and new product lines. We have also established an in-house training centre call the ISMT Centre of Excellence which acts a central repository for collecting and disseminating technical know-how within the company.
Given that the PQF mill is now ready, our growth strategy is to fill up the capacity created the by PQF mill, as early as possible, with commodity tubes and then move the product mix in favour of the higher value added products developed by the company. In today’s market, filling up capacity with commodity products has become slightly difficult. We have therefore accelerated the program to start selling higher value added products.
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- Could you comment on the performance for FY 2008-09?
Net Sales grew by 9.2% from Rs. 1991 crores to Rs. 1301 Crores. Operating profit grew from Rs. 151.97 crores to 182.15 crores while Net profit declined from Rs. 100.04 crores to Rs. 62.21 crores. There were two major reasons for the dip in Net profits as compared to the previous two years.
In the first half of the year, even though the demand for tubes was strong, the margins of the company continued to be squeezed as a result of spiraling input prices. While the company was able to pass on these cost increases (with a lag of two to three months), and margins recovered in the second half, the ‘Contribution’ lost during the first half could not be recovered during the second half because volumes declined concurrently as a result of the economic slowdown.
In addition, the company registered an accounting loss of Rs. 49.73 crores as a result the depreciation of the Rupee causing an upward revision in the value of the outstanding dollar denominated debt on the company’s books. This loss largely accounted for the difference in Net profit between the last year and the preceding one.
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- What is the status of the seamless tube expansion project being undertaken at the Baramati plant?
The newly installed PQF mill has almost completed its trial runs. The objective of the trial phase was to test the mill technically through the entire design size range, for all usable grades of steel, for stability in dimensional parameters, and for production costs viz-a-viz guarantees provided by equipment suppliers. As on date, the trial phase is nearing an end and we expect to declare commercial production shortly. The commissioning of the new mill will not only increase the tube-making capacity of the company but will also allow us to enter new markets as result of reduced production costs.
- What are the advantages that are expected to accrue from the commissioning of this mill?
- First of all, this mill will increase ISMT’s installed tube making capacity from 150,000 MT to 475,000 MT.
- Even more importantly it will reduce our production costs across a number of product lines thereby increasing the size of the economically addressable market available to us. In other words, we will now be able to sell tubes into certain markets that were earlier out of our reach. Powergen tubes constitute one such market where we were priced out earlier and where we are now very competitive.
- The capacity expansion has been carried out a relatively low cost such that the savings generated on account of production costs alone (on existing volumes) justifies the investments. Given that sales volumes will increase as a result of the new mill we expect the investment to pay off rapidly.
- The expansion Project at Baramati has also been accorded 'Mega Project ' status by the State Government of Maharashtra. This entitles the company to significant fiscal benefits.
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- Is input price volatility an issue and if so what is its impact on profitability? What does the company do to hedge against such fluctuations.
Input price (of scrap, sponge iron, pig iron, and ferro-alloys) volatility has the following impact on the company:
ISMT has a largely OEM customer base where prices tend to be sticky. In other words, it takes two to three months to pass on price increase to customers and it takes a similar time for prices to be revised downwards. As a result, when input prices go up margins get squeezed and when input prices go down margins expand. In a normal up and down cycle the ‘contribution’ loss when input prices are rising gets compensated by a ‘contribution’ gain during the reverse cycle. However, this assumes that sale volumes remain constant through the cycle. Last year even though input prices decreased towards the second half and margins expanded, the loss of contribution from the first half could not be fully compensated since sales volumes dropped drastically in the second half.
To hedge against such movements ISMT is now trying to maintain a three month forward order of raw materials. This should smoothen out the earnings cycle. In addition, a significant portion of export contracts are being signed with price fluctuation clauses which allow for price variations based on changes in input prices.
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- Will the Company be able to sustain the EBIDTA margins in context with the highly volatile raw material prices?
ISMT’s strategy is to constantly move the product mix in favour of higher value added products. We are doing so by identifying and developing steels and tubes for new applications within each industry segment. This strategy, combined with cost cutting, through the addition of the PQF mill, should enable us to protect and increase our margins.
It is also our view that in an environment where input prices are extremely volatile ‘earnings per ton’ is a better measure of profitability than ‘EBITDA margins’. In other words when input prices change drastically the absolute profit tends to get protected but not the percentage margin.
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- Does the company perceive any threats?
The most significant threat faced by any seamless tube manufacturer today is the threat of Chinese dumping. Given that only a part of our market overlaps with that targeted by the Chinese, this threat is limited; nonetheless, it is a threat.
Both the U.S.A and Europe have initiated anti-dumping proceedings against Chinese made seamless tubes. This is both an opportunity and a threat. Should the anti-dumping levies materialize in these countries the Chinese will probably resort to dumping tubes in the Middle East, South East Asia, and in India. Such an action, will impact the commodity end of the tube market in these regions. On the other hand the demand for Indian tubes in the U.S. and Europe should increase.
ISMT is actively lobbying the Indian Government to take similar action to protect the domestic market from Chinese dumping. ISMT believes that there is a very strong and just cause for the levy of anti-dumping duty on Chinese seamless tubes coming into India.
Having said that we believe that the opportunities facing ISMT today outweigh the threats and that despite the global slowdown there is ample opportunity for ISMT to increase its sales and profitability.
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- Will the market support growth in the next two/three years?
We believe so. The steels and seamless tubes manufactured by ISMT are used across a variety of industrial sectors many of which, for example, Power, Construction etc., have not affected by the global slowdown. Moreover, we are focused on developing a variety of new products that were hitherto the preserve of European mills. As a result our ‘addressable market’ is expanding even though the overall market for tubes may be contracting.
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- What is the Company's exports agenda?
1.Exports continue to be important for the Company's growth agenda, however this is an outcome rather than a stand-alone objective. The objective is to maximize contribution and to do so by positioning us strongly in the specific market segments that we are targeting regardless of geography. Given that our productive capacity cannot be absorbed by the Indian market it is imperative that we export.
We have put in place techno-commercial teams focused on specific sectors of the market, domestic as well as international, and these teams are charged with creating a strong market position for us both domestically as well as internationally.
Exports stood at Rs. 369 crores in FY 2008-09 against Rs. 258 Crores in FY 2007-08, a growth of over 43%.
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- What are the advantages of having a captive steel making facility?
In the market that we address it is very difficult, if not impossible, to produce tubes without a captive steel source. In contrast with OCTG tube producers who, typically require a handful of steel grades, we require hundreds of grades of steel with a tremendous emphasis on quality. It is therefore almost impossible to source such a large variety of steels from an outside source. This was the reason for setting up a steel manufacturing plant and we believe that this decision has served us well.
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- What are some of the main initiatives implemented to rationalize costs and achieve profitability?
- Better asset utilization
- Yield improvement
- Process cost improvement
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- How do you see yourself in the international marketplace?
We are already one of the largest integrated manufacturers of Specialized Seamless tubes globally and our vision is to become the most profitable and respected player in this segment.
- What are some of the key differentiating factors vis-à-vis your competition?
- Specialized precision seamless tube manufactures used across diversified industry segments.
- Strong technology orientation
- Believe in creating and retaining knowledge
- Niche products
- Capability to service small lot orders
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- Which country accounts for the largest share of exports?
Very roughly, exports are equally divided between Europe, USA, and the rest of the world.
- Your future growth is predicated on a growth in exports. What is it that gives you the confidence that you will be able to maintain sustained international competitiveness?
Price, Quality, Cost, Niche Products, Short Lead Time.
- What are you doing to insulate yourself from the impact of exchange rate fluctuations?
We are hedging our exposures through the purchase of forward currency contracts as well as by matching outflows and inflows through borrowings in foreign currencies. Simply put, our strategy is not to speculate on currencies and to make money only on selling steel and tubes.
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- Are you planning to diversify into anything else?
At the moment we are looking to consolidate our business and unlock the value that is represented by the addition of the PQF mill. We believe that our time is best spent today in increasing sales from the PQF mill and in ramping up sales of some of the new products that we have developed.
Having said that, ISMT is in the process of setting up a 40 MW Captive Power Plant in the State of Maharashtra. This power plant will deliver substantial savings to the company going forward. It will also hedge our costs against future increases in the cost of power.
Extending the same logic, ISMT has decided to participate in setting up a 150 MW Thermal Coal based Group Captive Power Plant in the state of Tamilnadu. Once again, we expect that our investment in this plant will be more than offset by the cost savings that accrue to the company through the purchase of power.
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- How has the current slowdown impacted its European Subsidiary?
ISMT acquired Structo Hydraulics AB, a Swedish company in June 07. Structo Hydraulics AB is one of the largest manufacturer of Cold Drawn and Skived and Roller burnished tubes and components manufacturer for the Hydraulic Cylinder industry in Europe. Structo buys hot-finished tubes from ISMT and further cold draws them and also Skives and Roller burnishes them so that they are ready for the hydraulic cylinder market.
The slowdown in the European markets has had a significant impact on sales at Structo and our efforts are now directed at cutting costs and improving utilization at Structo. We expect sales to start recovering towards the second half of this year – there are already some signs that this is beginning to happen. Our longer term objective of using Structo to establish ourselves as the leading player in the hydraulic cylinder tube market in Europe and Asia remains unchanged.
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- How much is the total amount of debt on ISMT's books ?
As of 31st March 09, Long term debt stands at Rs. 677 Crores. This does not include the FFCB discussed in point #27 below.
- Is the Company Rated by any External Agency?
ISMT has been rated by 'FITCH' Rating agency and has been assigned an Long Term Debt rating of 'A' and Short Term Debt Rating of 'F1'.
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- What is the total equity of ISMT Limited?
Rs. 73.25 crores divided into 14.65 Crore shares of Rs. 5 each.
- How much is the promoters’ share of the equity?
Promoters holding as on 31.03.09 stands at 51 percent.
- What would be the effect of Outstanding FCCB on Equity dilution?
ISMT has raised Zero Percent FCCB amounting to USD 20 Million convertible into 85.45 Lac equity shares at an average price of Rs. 105 per share within a period of 5 years from date of issue. No conversion has taken place up to 31st March 09.
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- Why is the Tax payment so low?
The company has a carryover tax shield (arising largely out of the acquisition of Kalyani Seamless) that, as of 31st March 09, stands at approximately Rs. 230 crores. Therefore, the Company pays tax as per MAT . The existing tax shield is expected to be available at least upto FY 2009-10.
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