Adhunik consolidating in steel business; mining, power growth drivers: Agarwal

Source: IRIS (06-NOV-13) 1

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In an interview with Meena Konar of Myiris.com, Manoj Kumar Agarwal, Managing Director at Adhunik Group says, ''The coming quarter looks very promising for the company's earnings and profitability.'' How do you see your company's earnings performance for the coming quarter? Iron and steel sector has been facing difficult times for the last few quarters. We are seeing slight recovery in the sector with raw material prices coming down. Demand is steady. We expect demand to pick after the coming elections. In mining business as well we are gradually increasing manganese ore production, enhancing capacity of pellets will be operational in next 6 months time. Volumes from Suliepat iron ore mines are expected to pick up. In power business, both units have stabilised and steadily operating at 75%. We also expect power rates to pick up after elections. Our captive mines will be operational in next few quarters. Hence all three sectors are well placed to capture the upside. The coming quarter looks very promising for the companys earnings and profitability. Currently, steel contributes around 60% of revenues and 25% of profitability whereas mining business contributes 40% of revenues and 75% of profitability. Power has just begun its operations. However, going forward, power will also contribute significantly and with volume growth in mining, all three verticals are expected to contribute equally to our overall sales. How do you see the overall industry outlook? Indian Steel Industry has witnessed difficult times in the recent past where raw material prices had risen to unprecedented levels and finished goods prices were not adequate to cover the increase in raw material price. However gradually, situation has improved with coking coal prices sharply coming down along with that of iron ore and coal prices which will be reflected in coming quarters. Demand has been steady in last few quarters and is expected to regain momentum going forward with the expectation of gradual recovery of economy that would positively impact the Auto and Infrastructure sectors. The mining sector, in recent times, has become a crisis hit industry. Regaining confidence depends on how the industry responds to its rising costs, increasingly volatile commodity prices and other challenges such as resource nationalism. The recent mining scam in the various ore-rich states of India has generated controversy, which spans encroachment of forest areas, underpayment of government royalties, and conflict with tribals regarding land-rights etc. The power sector too has witnessed few bottlenecks like fuel shortage, high import cost of coal, shortage of coal supply uncertainty over coal linkages, delays in land acquisition, environmental & other regulatory clearances, ambiguity over new FSAs and issues of price pooling which has resulted in lesser capacity addition. Power distribution is perhaps the weakest link in the Indian power sector, with ATC losses estimated at an alarming rate of about 25% coupled with a weak financial health of state discoms. Rise in

power tariffs have been another stumbling block. Majority of discoms face several hurdles to announce an increase in tariffs because of the state governments, who because of their political motive have kept tariffs low and as a result downplayed for the sector. However, recent government measures have put forward the hopes of revival of the sector. A radically new approach to the sector will soon provide one of the biggest avenues to participate in the development of Indias infrastructure. What growth opportunities are you seeing? Steel is a key product to industries like automotive, construction, transport and power. These are critical infrastructure segments on which the socio-economic development of any country depends. With the need of infrastructural development, the basic raw material, i.e., steel is bound to grow by leaps & bounds. The demand for steel is ever-increasing. According to the World Steel Association, steel demand in India is expected to grow by 5.9% to 75.8 mt in 2013 on the back of monetary easing which in turn would support investment activities. The demand growth should further be accelerated to 7% in 2014. Besides, the Government has also announced a slew of measures to kick start the investment cycle which should create healthy demand for steel. The Indian Mining sector was opened up to Foreign Direct Investment in 1993 post the announcement of the New Mineral Policy. About 80% of the total mining activities are coal and the balance 20% is in various metals like iron, gold, copper, lead, bauxite, zinc and uranium. With 20,000 mineral deposits all over the country, India is self-sufficient in the case of 36 minerals. Demand is expected to increase on the back of increasing levels of consumption, growing infrastructure and progress in the economy. The Government is closely monitoring the overall strategy ofdevelopment and misuse of minerals. With a planned expenditure of USD 1 trillion in infrastructure by 2017, the sector has enormous potential. India aims to add 88,000 MW by the end of the 12th five-year plan. Historically, India has experienced shortages in energy and peak power requirements. Energy deficit averaged 8.1% and the peak power deficit averaged 12.3% during Fiscal 2002 to Fiscal 2007, primarily as a consequence of slow progress in the development of additional generation capacity. The GoI has recognized the power sector as a key infrastructure sector to be developed to sustain India's economic growth and has taken various steps to reform the power sector to attract private participation. Estimates show that India needs to build capacity fast given that every 1% increase in GDP requires power capacity to grow by 0.9%. Feeding India's growing population with consistent power and the low per capita consumption of in India compared to the world average presents a significant potential for sustainable growth in the demand for electric power in India. What are your capex and expansion plans for the coming year? We are consolidating in steel business while mining and power are growth drivers for the Group. In steel business, we are working to upgrade and modernize some of our facilities to improve efficiency and utilization thereby decreasing costs. We envisage moving up the value chain to produce high value added steel like auto steel and structural steel and intend to ramp up our captive iron ore mine to ensure greater cost efficiencies. We will demonstrate the quality of our products by emerging as a preferred vendor to the leading domestic and global OEMs. In the mining business, the future approach will be multipronged. On one hand, the utilization of the Patratu Coal mine and ramping up the Suleipat iron ore mine will ensure consolidation and utilization of mining assets. Simultaneously, there will be focus on volume increase in manganese ore and ramping up of the iron ore beneficiation & pellet project. We will enhance throughput leading to higher revenues. We are working on increasing installed capacity of our pellet plant from 1.2 MTPA to 1.6 MTPA. The Company is also tying up with Orissa Mineral Corporation for the supply of iron ore fines that will enable it to enhance value from waste material. In power, with the commissioning of our 540 MW power plant in Jharkhand, we have successfully moved up the value chain from being a captive generator of power to entering into long term PPAs with power

companies. Henceforth, we would continue our sustained efforts in the power sector to become one of the leading players. Gradually we will increase utilization to achieve 85%-90% utilization rates. Apart from the envisaged 1,080 MW in Jharkhand, we have signed MoUs with Governments of Bihar, Chhattisgarh and Orissa for setting up 1,000 MW in each state. We are working on Super Critical Thermal Power Plants at Janjgir-Champa in Chhattisgarh and Bhagalpur in Bihar for 2x660 MW power plants at each site location. The expected outlays for the said projects are more than Rs. 16,000 crore, which we plan to implement in the 12th Plan. However, we will secure raw material supplies before making big investment in these projects. Adhunik Group has entered the next phase of growth and has emerged as one of the fastest growing alloy, special and construction steel manufacturing companies in the country with significant presence in the mining and power sectors through its subsidiaries. It has completed almost all major capital expenditure for both backward and forward integration and emerged as an integrated manufacturer of special steel with downstream utilization of products. Would you like to convey any message to the shareholders of the company? The Group is contemplating on merging its three companies in India, i.e. AML (Adhunik Metaliks) & ZSL (Zion Steel) into OMML (Orissa Manganese and Minerals), considering the inherent synergies offered by a system that is fully integrated at the product level. AML will reverse merge into OMML and OMML will emerge as single integrated entity post merger. This will provide a much wider product portfolio and a high level of integration to the merged company's operations. The amalgamated entity will be an integrated unit in the true sense as it would be capturing the entire value chain viz. minerals to metal. Merger will also be tax efficient as OMML has healthy profits whereas AML has unabsorbed depreciations. The Group's entry into the power vertical was apt for diversification for existing steel and mining. Steel business provides large income but low margin, mining business provides mid incomes but high margin, power business will provide high revenues but assured margins. It is a prudent mix of all three businesses to counter the challenges of a volatile external environment. Straddling these 3 sectors led us to chart out separate strategies for each of these businesses which operate in common ecosystems but are continuously facing varied regulatory environments and economic conditions. The challenge of facing these conditions and ensuring greater returns to all our stakeholders remains our top priority.

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