The year 2011-12 (15 months) was one of the most challenging ever for our Company.
Never in our existence have a number of challenges combined concurrently in the spaceof a single year as they did during the year under review:
The alloy steel industry is resource intensive; during the year under review, there wasa decline in resource availability following regulatory action that stopped mining inKarnataka and Goa leading to a concurrent increase in costs. The increase in the cost offinished goods was not adequate to cover the increase in raw material costs, impacting ourmargins.
The resources and steel businesses are capital-intensive; during the year under review,India suffered high interest rates, which directly affected our margins on account of ourborrowings and indirectly impacted the demand for downstream products (automotive andinfrastructure). This dual impact increased our interest outflow on the one hand andreduced our ability to cover this with enhanced revenues.
The resources business is regulation-driven; during the year under review, thegovernment made regulatory approvals based on environmental considerations more stringent.This staggered the approvals process by six months during the year under review andoperations commenced nearly six months behind our projected schedule. Besides, thegovernment also initiated the verification process of various approvals of all the minesin the region. During this period, mining operations were stalled which hampereddespatches from our existing operational mines.
This is the cumulative impact: even as revenues grew 10% over 2010-11, there
We have appointed Badische Stahl-Engineering Gmbh ("BSE Germany") ofGermany ("BSE Know How Agreement") for providing consultancy services, includingtechnical know how, for improving the productivity of our plant located atChandrihariharpur, Sundargarh, in Orissa.
Kulum iron ore mines are the first captive iron ore mine in the last 10 years tohave started mining operations in Orissa.
Our pellet plant is the first merchant pellet plant with straight gyratetechnology in India.
Our ongoing 540 MW power plant is the first IPP in Jharkhand.
Our technical up-gradation and realigning of refractories in our Mini BlastFurnace (MBF) will enhance the efficiency and capacity from 213,792 tones per annum to231,608 tones per annum while reducing our cost of production
Adhunik Metaliks is progressing well in its TPM journey. Our TPM agenda is beingnavigated by Mr. T Tachibana from JIPM, Japan was a 21% decline in our EBIDTA and a 91%decline in our profit after tax.
At Adhunik, we recognised that the most effective way to counter the impact of theindustrys severe downturn was through a superior management of factors within theCompanys control.
One, even as we suffered high e-auction costs of raw materials, we commenced ourcaptive iron ore mining in June 2012, raised monthly production to 10,000 tons during theyear and engaged in enhancing throughput to 35,000 tons per month in two years which willmeet around 50-60% of our iron ore requirement.
Two, we strengthened our core focus following the divestment of our power transmissionand forging business during the year under review, which helped us mobilise around Rs. 35crore. (entire sales proceeds were used for debt repayment) that will help us reduce Rs. 5crore in annual interest outflow. Besides, we swapped high-cost debt with low-costalternatives.
Three, we enhanced yields without compromising product quality, which helped usgenerate higher throughput for the same costs that we incurred.
Culture of urgency
Adhunik, a company in the formative years of its sectoral presence, will always beengaged in the process of expansion and integration.
Consequently, there is always a premium for the ability to commission projects on orahead of schedule, which can translate into a control on our capital expenditure or areduction vis--vis projected cost. In our view, timely project commissioning gets usinto income mode with speed; when such projects are commissioned ahead of schedule, webenefit in two ways: quicker revenue inflow on the one hand and lower project cost,strengthening our overall viability.
During the year under review, even as the external environment appeared bleak, we hadthe following positive developments to report:
We commenced operations and ramp-up of our captive iron ore mine in June 2012.
We commissioned our pellet plant four months ahead of schedule; we achieved 80%asset utilisation within four months of launch.
We commenced mining operations at our Sulaipat iron ore mine.
We expect to commission the first phase of our 270 MW power plant by October2012 and second phase by January 2013 supported by a captive coal mine and linkages.
At Adhunik, we recognise that winners are companies that ride out of sectoral slowdownsfaster than the others. Our multi-level blueprint comprises initiatives in the area ofvalue-addition, integration and throughput maximisation.
First, Adhunik will focus on its core businesses of steel, merchant mining and power.This will ensure that all our available cash flows are bought back into strengthening ourcompetitive advantage in chosen areas.
Second, in its alloy steel business, Adhunik will focus on niche, value-added andcustomised products with the objective to escape competitive pricing on the one hand andenter into extended customer relationships on the other. In the mining business, Adhunikwill enhance throughput leading to higher revenues.
Third, we will focus on rightsizing our Balance Sheet through the following measures:swap high-cost loans with low-cost alternatives, evaluate alternative funding routes (likeECB) to fund our upcoming pellet plant and mobilise an additional Rs. 1,000 crore though apublic offer of our mining business coupled with an equity dilution of our steel and powerbusiness.
Four, we are tying up with Orissa Mineral Corporation for the supply of iron ore finesthat enable us to enhance value from waste material,
Five, we plan to set up a second pellet plant (1.6 mn TPA) utilising low grade iron orefines for conversion.
Six, we are focusing on the manufacture of niche auto grade steel, enjoying approvalsfrom leading OEMs, which will translate into a first-movers advantage when themarket rebounds.
What bolsters me with optimism is despite the steel sector problems and resourcesavailability still down, our various projects and investments are nearing fruition. Whencommissioned, they will generate attractive cash flows that progressively reduce ourgearing. Once this trend begins, we expect to accelerate our turnaround and enhance valuefor our shareholders in a secure and sustainable way.