MAITHAN ALLOYS IS ONE OF THE MOST RESPECTED FAST GROWING MANGANESE ALLOY COMPANIES INTHE WORLD.
Q Were you pleased with the Companys performance in 2015-16?
A I am delighted. Most sectoral peers reported extensive losses and most miningcompanies saw realisations decline below operational costs. On the other hand MaithanAlloys reported a cash profit of RS. 119.06 crore and a PAT of RS. 79.03 crorereaffirming its distinctive long-term positioning.
Q What is this distinctive long-term positioning?
A We are a value-added manganese alloys manufacturer that conducts its business in amanner that is refreshingly distinct. This differentiation is reflected in the kind ofproducts that we have selected to manufacture the high throughput that we haveconsistently reported the nature of long-term customers we cater to and our keen emphasison process excellence. When prices in the industry declined to their lowest in a longtime our profits increased to their highest.
Q What was the principal reason behind this sharp sectoral decline?
A The principal reason was the decline in steel output in China which produces andconsumes 50% of global steel. This led to a glut in steel demand spilling over tomanganese alloys and to manganese ore. The result was that prices of each dropped sharply.
Q How did Maithan Alloys manage to remain Profitable?
A I have two words to explain this phenomenon - Rs. discipline and Rs.efficiency. Let me start with the word Rs. discipline. The manganese alloyssector is marked by resource volatility where there is always a temptation to play the rawmaterial oscillation game. This is especially tempting because of the extensive profitsthat can be generated with even a reasonably open position. This is usually larger thanthe quantum of profits that can be generated from core manufacturing activities during ashort period. However there is a drawback as well; if prices begin to decline there is apossibility that one can be virtually driven out of business in no time.
Consequently at Maithan Alloys we consciously deliberated and evolved our identity anumber of years ago. We decided to become a focused manufacturer and enhance ourconversion efficiency. We resolved to keep our purchase and sale positions closed. Weaspired for a level of competence that would be the best in the world. We chose to focusso extensively on our niche competence that it left us with virtually negligible bandwidthfor peripheral competencies. Over time a persistent implementation of this strategytranslated into a distinctive discipline. We established a reputation of being amanufacturer that does not yield to shortsighted temptation. The result: what you see inour bottomline is a reflection of the profits derived from core manufacturing capabilitiesand not trading opportunism.
Q How did these attributes translate into the Companys Vizag unit performance?
A The Company commenced Vizag plant operations in December 2011 (through a subsidiarycompany). The capacity doubled overnight. 2012 was spent in stabilising operations of thefour furnaces as they were gradually commissioned across in about 15 months. Entering intonew relationships to market the enhanced quantity was a huge challenge which was addressedby mid-2013. The lower interest payment on dollar loans misled the management intobelieving that the performance of the unit was not bad. Comparing the EBIDTA margins ofVizag unit with Kalyaneshwari for 2013-14 was an eye-opener. We realised that our Vizagunit proved to be performing like any other average alloy producer a far cry from ourprevailing standard. In 2014-15 the management replicated the Kalyaneshwari methodologyat the Vizag plant. We reduced energy consumption fine-tuned furnace operations and madedaily operational reporting compulsory. This helped us reduce costs and increase capacityutilisation.
Besides the Government had a 4% export benefit in place for all domestic tariff areaand EOU (export oriented units) but not for SEZ units like ours. This resulted in a 4%drop in EBIDTA margin. The situation was rectified and parity achieved from 1st April 2015wherein a flat 2% export benefit was announced for DTA EOU and SEZ units.
Q What is your message to the shareholders?
A One I would advocate that shareholders appraise the quality of our bottomline whichdoes not contain any impact of trading profits or losses. Two we ran our plants at closeto 100% capacity utilisation which is a reflection of the manner in which we managed oursupply chain improved our furnace uptime created a fast-moving sales mix and forged tieswith large global steel mills.
Q What is the outlook for 2016-17?
A Manganese alloys realisations increased sharply in the last quarter. Companies withlarge open positions reported a turnaround. It is quite likely that these handsomequarterly profits will translate into robust numbers during the first quarter of 2016-17.Since we do not play the commodity game our bottomline in the first quarter of 2016-17 islikely to reflect the impact of core manufacturing profits around a consistent delta(difference between ore costs and end product realisations) and would be stable whencompared to our retrospective profits. We expect similar numbers across the near future aswell.
Q What factors will drive Maithans growth from this point onwards?
A This is possibly the biggest challenge that we are facing. We have two options:expand our capacities or acquire distressed assets. As far as the latter approach isconcerned we will continued to selectively appraise assets based on the realisation thata greenfield plant can take around four years to commission and stabilise whereas we havedemonstrated the competence to transform sub-efficient operations within a year.
The five factors that contributed to our 2015-16 outperformance
We produced more (206178 tonnes compared to 157920 tonnes in 2014-15)
We turned our Vizag operations around
from a PBT of RS. 2.15 crore in 2014-15 to a PBT of RS. 48.31 crore
We marketed more by acquiring a larger share of the customers wallet
We did not lose a single customer
We did not trade raw materials; we focused on product manufacture