"It would be reasonable to estimate moderate growth in the Company's revenues andprofits"
I am pleased to present the performance of the Company for 2018-19.
The performance was our best ever across 50 years of existence. The improvement was onaccount of a 30% upturn in steel product realisations between December 2017 and March2018. This was one of the sharpest increases seen over the last decade the benefits ofwhich translated through the year under review. Your Company capitalised on this increaseby offering a judicious product mix and a critical mass of output. The result was thatwhile revenues decreased 3.23% to Rs 960 Crores the Company reported a 39% growth inprofit tax. This profitable growth where the percentage increase in the bottom line washigher than the percentage growth of the topline validated the robustness of theCompany's business model.
The China factor
The sharp improvement in realisations and the health of the country's steel sector wasbased on the decision of the Chinese government to regulate its environment. The countryfocused on regulating the growth of its unorganised sector came down heavily onmanufacturing facilities with loose emission and effluent standards and forced the closureof a number of such units. The consequent decline in steel output in China helped moderatethe export of steel products from that country. Besides a number of countries imposedhigher customs tariffs on steel imports from China. With a lower global steel surplus thanin the previous years in the face of a growing steel appetite steel realisationsimproved. This scenario benefited a country like India where imports moderatedrealisations strengthened and a larger quantum of steel could now be exported to the ASEANwhere there was a larger demand-supply gap on account of China's lower presence.
Our B2B footprint
During the last financial year 36% of the Company's revenues were derived from the B2Bsegment. This segment comprised structurals and sections with downstream applications inthe country's engineering infrastructure and automotive sectors servicing thespecialised needs of marquee companies like BHEL Tata Steel L&T TVS GroupRaymonds Amtek Group and others.
Engineering and infrastructure: At Beekay we derived 55% of our B2B revenues fromheavy structurals and sections marketed to the engineering and infrastructure industries.As a conscious policy the Company resisted the conventional industry approach ofmanufacturing as much as possible and the dumping products. The Company strengthened itsbusiness through a differentiated approach: it manufactured products and bid selectivelywithout compromising profitability. The result was an appreciable increase in averagedelivered volumes per month of 6500 tonnes as against 4500 tonnes in the previous year anda sustained monthly average of around 8000 tonnes from the second half of the financialyear under review.
Automotive: At Beekay 45% of the B2B revenues were derived from the manufacture ofproducts addressing the needs of India's automotive sector. This segment addressed thedemanding alloy steel requirements of automotive manufacturers. The business grew 8% byvolume during the course of the year riding the growth of the country's automotivesector. The business was affected by the slowdown in the automotive sector from the lastquarter of the year under review. This segment of the business reported a capacityutilisation of around 80% and going ahead the Company will seek to plug the decline indemand from the automotive sector by marketing across a wider spread of industries.
Our deeper B2C presence
During the year under review 65% of the Company's revenues were derived from B2Cengagements. This business comprised the manufacture and marketing of TMT utilisedextensively in the construction industry. Structurals and sections also figured in the B2Csegment marketed through the Company's trade channels. At Beekay we intend to increaseour trade sales over the next few years on the back of longstanding relationships withdistributors coupled with an expanding distributor network.
Construction: At Beekay we derived 54% of our B2C revenues from products like TMTbars used in the construction industry. Over the last few years the Company widened anddeepened its TMT bar presence in coastal Andhra Pradesh in proximity to the Company'smanufacturing facility. During the year under review the Company strengthened itsengagement with trade partners planned its distribution circuit better and deepened itsaccess into consuming markets. This larger distribution provided the Company with the roomto increase output (as opposed to the conventional route of dumping as much as one hadmanufactured affecting realisations) strengthen economies of scale and provide adequateproduct availability to service the growing needs of the market. Going ahead the Companywill increase its TMT volumes and proportion of revenues derived from this product.
At Beekay we have consistently focused on selective backward integration with theobjective to moderate costs and enhance our control on variables affecting ourprofitability. This is an ongoing priority on account of the fact that nearly 22% of thecost of steel manufacture for the Company is on account of fuel any reasonable moderationin which can translate into an attractive increase in profitability.
During the year under review the Company invested in coal pulverisers strengtheningthe Company's transition from the consumption of furnace oil to coal. This switch wasprompted by a sharp increase in furnace oil from Rs 18 per litre to Rs 38 per litrefollowing an increase in crude oil costs during the year. The pulverisers resulted in asuperior combustion of coal for billet heating and the result was that fuel costs pertonne of manufactured steel declined during the year resulting in a notional saving of Rs12 Crores.
The cumulative impact of this priority is that the cost of fuel within the Company hasprogressively declined from Rs 1300 per tonne of the finished product to Rs 800 per tonnetoday benefiting the Company through an annual saving of Rs 12 Crores and providingoperational flexibility to address changes in marketplace dynamics.
Increasing our production
At Beekay we recognise that competitiveness is derived form the ability to achieve ahigh utilisation of our manufacturing assets. The higher we produce translates into asuperior coverage of our fixed costs strengthening our competitiveness.
The Company debottlenecked and modernised the Jamshedpur TMT manufacturing facilityeffectively increasing annual output by 35000 tonnes. The increase will be visible in theCompany's production from 2019-20 onwards strengthening economies of manufacture brandspending and distribution.
Strengthening our financials
At Beekay we believe that it would have been usual for the Company to allocate itsbusiness surplus across additional capacities. The Company generated Rs 114 Crores in cashprofit during the year under review but invested only ~ Rs 22 Crores in capitalexpenditure. The rest of the accruals were invested in strengthening the Company's fiscalefficiency.
During the year under review the Company replaced working capital debt with accruals.This switch helped moderate interest outflow from Rs 18.49 Crores in 2017-18 to Rs 15.77Crores in 2018-19. Correspondingly interest cover strengthened from 7.22 times to 11.34times influencing an increase in EBITDA margin by 452 bps to 18.98%.
Taking the business ahead
At Beekay we will allocate a major portion of our surplus into strengthening ourbusiness and graduating into the next league.
During the year under review we established a new medium and light structural andsections mill within our Beekay Special Steel manufacturing premises in Vizag. This newplant will strengthen customer confidence in working closely with the Company. In turn webelieve that this will translate into higher wallet share.
We intend to manufacture light and medium structurals for engineering andinfrastructure sector and sections for the automotive sector within this plant. A part ofthe product mix from this plant will comprise structurals; where we earlier produced heavystructurals we will now produce light and medium structurals diversifying our productbasket. By the virtue of addressing products warranting deeper quality requirements yourCompany will strengthen its customer engagement that translates into repeat engagement andhigher revenue visibility.
The Rs 22 Crores plant was funded completely through accruals and is expected to becomeprofitable from the current financial year.
Outlook for 2019-20
The scenario for the steel industry is mixed at the present juncture. Following theelections of 2019 political uncertainty has declined. National capital expenditure isexpected to revive bank stress is expected to moderate credit disbursement is expectedto revive and the expectation of improved national liquidity is expected to strengthen thecountry's consumption engine.
Even as the national steel appetite continues to grow some of the traditionally largedownstream consumers like automobiles are in a state of slowdown making it imperative toreallocate one's portfolio.
The Company will continue to service the outsourcing requirements of its largeinstitutional partner accounting for 72% of total volumes. The Company will focus onincreasing the non-conversion manufacturing proportion of revenues through increased TMTbranding stronger B2B engagements and increased revenues from pan-India sales offices.
The benefits of the TMT capacity expansion will be felt during the full course of theyear. The Company may select to manufacture a larger proportion of TMT products under itsbrand as opposed to a higher proportion of conversion manufacturing during the year underreview. The increased output will help the Company address the outsourcing requirements ofits large institutional buyer. Besides the Company will strengthen its B2C business (TMTbars) through increased brand spending and higher exports. The benefits of the coalpulveriser investment will be reflected through the year. A rating upgrade from A minus toA is expected to moderate debt cost. The Company is expected to become net debt-freeduring the current financial year.
In view of this optimistic scenario it would be reasonable to estimate moderate growthin the Company's revenues and profits (without factoring the one-time inventory gain of2018-19) strengthening our business sustainability.
Suresh Chand Bansal