Mukand Steel: A turnaround tale

Mukand Steel: A turnaround tale


The company came out of its losses to break even two years ago and last
fiscal it notched up Rs 86 crore operating profit, which is expected to
touch Rs 120 crore this fiscal.
Mumbai March 17 Some seven years ago, every imaginable financial woe
stalked speciality steel makers: shrinking working capital, rising raw
material prices, gloomy market off-take, debilitating losses and above all,
flagging employee morale.

Many of the steel utilities shut down, unable to contain the financial
haemorrhage. Mukand Steel, a Bajaj group company, was one of the afflicted,
having recorded Rs 100-crore loss four years ago.

But today it is a profit-making entity and has crossed over into the comfort
zone.

"Today our steel making facilities at Hospet and Kalwe (in Thane district,
Maharashtra) are working at full capacity and we are having to refuse
orders. We are also implementing a Rs 290-crore expansion programme,
including a new coke oven battery at Hospet," said Mr Neeraj Bajaj, Managing
Director.

Speciality steel, which comes in hundreds of grades, is mostly consumed by
the automobile industry and hence the fortunes of the two sectors are
closely linked.

Turbulent time

Seven years ago, when the auto industry was facing turbulent times, the
fortunes of the alloy steel makers also dipped.

The situation got aggravated when some 25 new plants, with a combined
capacity of three million tonnes, sprang up across the country. At that
time, the demand for such steel in the country was a measly 1.3-1.4 million
tonnes.

"As there are hundreds of grades of speciality steel, we could not even
export, as the export market demanded different grades. I remember that the
prices we got for our finished products were often below the variable costs.
During this period, 12-13 companies had to close down," Mr Bajaj said.

With time, things got a trifle better as the demand crawled up to two
million tonnes; the closing down of a few companies trimmed output.

Mukand took this opportunity to tighten its belt - an elaborate turnaround
strategy was put in place to shore up productivity levels, cut production
costs and sharpen quality.

"We empowered our workers and supervisors to form quality teams. Everybody
was involved in the quality initiative backed by incentives. Costs were
drastically reduced - not just operational costs, but also administrative
costs like travel."

Whiff of success

It was about three years ago the company smelt the first whiff of success.

Mukand came out of its losses to break even two years ago and last fiscal it
notched up Rs 86 crore operating profit, which is expected to touch Rs 120
crore this fiscal.

Profits were bolstered by a rise in demand, which is currently estimated at
three million tonnes.

The company's working capital markedly improved towards 2005-end when it
sold one million sq ft of real estate in the suburbs of Mumbai. It expected
barely Rs 80 crore from the sale, but as realty prices flared up, the
company garnered Rs 221 crore.

Expansion drive

And that set the tone for Mukand's expansion drive. The expansion programme,
which will add hot metal capacity of six lakh TPA, rolling mill capacity of
three lakh TPA and wire rod mill capacity of three lakh TPA, will be wrapped
up by 2007-end.

What is significant about the expansion is that Mukand will be getting
further into value addition, which, as Mr Bajaj said, should have been done
three years ago.

Earlier, the finished products from Mukand used to go all across the country
for five per cent value addition and then sold to the auto industry.

"Examples of such value addition are converting black bar to bright bar and
wire rod to wire. After the expansion, our Kalwe mills will be able to do
this, which will improve our margins."

It will also enable Mukand to get into overseas markets. Its ball bearing
steel has already been approved by SKF for its plants worldwide, while it is
in talks with Mico Bosch for supplies.

Distinct in nature

What makes the expansion programme distinct is the low capital cost - a
greenfield plant would cost Rs 40,000 per tonne of production while in
Mukand's case, it comes down to Rs 10,000 for every tonne of fresh capacity.

"The payback period (of the expansion) may be just 13-14 months. Normally,
for a greenfield facility, the payback could stretch to 4-5 years."

Now that Mukand is sitting pretty, will it be looking for mergers and
acquisitions?

"First, we would like to get the full benefits of our expansion. Only then
we will think of other options," he said, winding up a turnaround tale.