Mr Kiran Mehta chairman and managing director said that backward integration will give the company absolute control over quality and reasonably good control over cost
Varun Industries, the multi dimensional conglomerate with investments in steelware, raw steel, oil & gas, wind energy, mining, gems and jewellery, is setting up two units in Jodhpur and Karnataka. The company, which earns the bulk of its revenues from the export of stainless steel kitchenware, registered a 65% growth in net profit at INR 39.34 crore last year from INR 23.81 crore in the previous year and is working to consolidate its position in the premium segment at home. In an interview to Moneylife, Mr Kiran Mehta chairman and managing director discussed the company's growth and future prospects in India and abroad.
Q - When is the 60,000 tonnes per annum steel flat project in Jodhpur likely to be completed?
A - This project is yet to be completed. We have a manufacturing unit at Jodhpur which manufactures steel sheets. These sheets are used for manufacturing our end product at the Vasai plant. The current capacity of this plant is 18,000 tonnes, which is now being increased to 30,000 tonnes. The expansion is almost over. Another plant is for further backward integration, which will produce steel flats. This project could be completed in another three-four years. The initial phase of land acquisition is over, we have acquired 150 acres. The investment is about INR 800 crore.
Q - The company has said that it will not make any capital expenditure towards the pig iron plant in the Bagalkot district of Karnataka, though it has land approved for the project. When is the project expected to start? How much has the company invested in it?
A - The land acquisition for the Karnataka project is still going on as it is a bigger area of around 500 acres. This happens in two ways-one way is to ask the government to allot the land, which could take up to four years; another is to identify the land and hand over with the consent of the owners to the government. We have taken the second route.
About capex, what we said was for 2012-13, as there would not be any capex other than land acquisition. The total investment would be INR 2,200 crore, in three phases.
The pig iron plant has two phases. First, to put up a plant; second is to get the required iron ore, that is allotment of mines. The Karnataka government has changed its mines policy and it is now allotting mines only for actual users. So we need to get the mines allotment and put up a unit. Both these processes have to synchronise. The Karnataka and the second Jodhpur project will start simultaneously. Both have a deadline of 2015.
Q - What is your current market share in the kitchenware sector? And what is your position vis-à-vis the competitors?
A - We were not in the domestic market till about two years. We have just started. So, we don't talk about our market share in India. We are a leading player in export of these items. In these two years, we have opened ten exclusives shops. We realised that the model chosen needs amendment, in the light of the fact that retailing is taking place in a different format. We have already created a brand name in the global market in the premium segment. We plan to foray into all segments. The domestic market is fragmented.
Q - What would be your positioning in terms of sales, expansion once the backward integration is completed? What growth rate are you expecting for FY12?
A - The idea of backward integration is to have absolute control over the quality and to have reasonably good control on the cost. Once we are able to do that we would be able to sustain in both the domestic and global markets. We would like to grow at 20% to 25%. Last year our topline was INR 2,940 crore. We have a target of INR 3,350 crore for the current year.
Q - According to the Indian Stainless Steel Authority, the industry may have a 1.3 million tonne surplus by the end of next year. How would you position yourself in this situation?
A - There are two segments; one is steel manufacturers and the other is steel users. This includes steel used for construction. We are primarily talking about the value added product, stainless steel, used for kitchenware and tableware items. Going by our past performance, we did well despite the recession, we don't envisage any problem. So we would like to position ourselves as consumers of steel within that segment and we don't foresee any shrinkage in the market share.
Q - Indian companies have big capacity expansion plans. For instance, Jindal Stainless is doubling its capacity at Hisar. The Salem Steel Plant of SAIL, Panchmahal Steel, Viraj Steel and Mukand are also expanding capacity. Is it getting too crowded?
A - If you are manufacturing stainless steel, whether it is sheet, coil and so on, and using it for your end-product, then there is no reason to worry, unlike steel makers who do not have the capability to make end-use items. We have no reason to worry. For instance, if the sale of end-products far exceeds our raw material production, we will be comfortable as there is a distinctive possibility of outsourcing the material at a much cheaper rate. Industry is always in a cycle; sometimes it is crowded, then it evens out on demand. Basic steel is a concern with a lot of capacity build up going on. The concern is not overcrowding, but it's about sustainability of growth.
Q - There is strong competition for Indian kitchenware manufacturers from Chinese imports as these products are 20% to -25% cheaper. Also, they have better access to nickel and pig iron. Will this Chinese edge sustain, given that India lacks access to developed technology to produce nickel and pig iron?
A - The quality of these items is very bad. The situation is more or less the same in India, as stainless steel kitchenware items are cheaper due to the competition. It's not only because of technology. For instance, a lot of people started units for non-stick ware items, then they found that importing from China was cheaper. But this was for a very short period, as they realised that the quality was hopelessly bad. The Chinese goods story is in the lower-end products, so those in the lower end category have to worry. Chinese items are not in the premium segment.
Q - The company was focusing on setting up franchisees in shopping malls to expand its reach and sell its branded steelware products? How far has that happened?
A - The franchisee model has not been chosen as yet, it is in the pipeline. For the domestic market we have several plans, such as tapping the wholesale market, supplies to the army, police, port trust. We have already started selling our products through shopping malls instead of exclusive shops.
Q - Varun Industries has also invested in sectors such as mining and oil & gas? What is the status of these businesses?
A - We have diversified into the oil sector in India. We have an oil rig in the North-East which we lease out to companies such as ONGC. The revenue generated is in dollars terms on an import substitution basis. Our revenues are to the extent of USD 3.6 million a year. The process is on to acquire 3 to 4 rigs. We have also diversified into the power sector. We have windmills of 4.9MW in Rajasthan and about 4MW in Tamil Nadu. We want to expand it to another 5MW in the current year. These businesses have helped us as a revenue-earning and tax-planning device. In terms of revenues, Rajasthan offers INR 4.4 per unit and Tamil Nadu is about INR 3.4 per unit. This is our Indian operations.
We also have some interest in Madagascar, where we have been operating for 10-12 years. We have certain 100% owned subsidiaries based in Mauritius and they in turn hold a majority stake in some of the companies in Madagascar. These companies hold oil and gas assets. For gold and precious stones we have tied up with Australian mining company Cluff Resources. In terms of the expenditure arrangement, 75% has to be met by them and 25% by us, whereas in revenue sharing, 65% comes to us and 35% goes to them. The initial test reports are also very positive. In a nutshell, the entire exercise in Madagascar is to ensure that from what we own there, the value is brought to the Indian company's balance sheet.
Q - Are you planning any tie-ups with foreign companies?
A - As far as other assets are concerned, we are trying to tie up with global players who have requisite expertise and financial capability, to ensure that we don't get into huge capex.
Source - www.moneylife.in
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Source - www.moneylife.in
Source - www.moneylife.in
