DI pipe merger to benefit bottom-line profits: Tata Metaliks MD

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Tata Metaliks has amalgamated Tata Metaliks DI Pipes with itself. Last month Calcutta High Court had approved the scheme of amalgamation.

Tata Metaliks was the star performer of 2016 with a rally of 200 percent.

Speaking to CNBC-TV18, Sanjiv Paul, company’s Chief said the DI Pipe merger will benefit the bottom-line profits and also result in operational and taxation benefits.

On the pig iron front, he said the quarter three has been the worst. Rising coking coal prices have hurt the profitability of pig iron business.

He also said they are looking to bring down debt-to-equity ratio to 1:1 and company’s capacity utilisation is at 100 percent.

Below is the verbatim transcript of Sanjiv Paul’s interview to Reema Tendulkar & Nigel D’Souza on CNBC-TV18.

Nigel: The news that we got yesterday was that the DI Pipes subsidiary will be merged with itself. Could you tell us what are the benefits in terms of operations and in terms of taxation and also if you could give us a number in terms of bottomline, what can it add?

A: DI Pipes subsidiary was Tata Metaliks and Kubota Pipes of Japan had formed a 51:41 joint venture in 2008-2009 and in 2013 Kubota had bought up and this became 100 percent subsidiary of Tata Metaliks.

Therefore, we have now amalgamated it back into the main company and there will surely be synergies in terms of cost, in terms of management bandwidth that we will get out of this amalgamation. The biggest synergy primarily would be the tax savings that will happen on account of the excise incidence that happened. When we sell hot metal from Tata Metaliks to Tata Metaliks DI Pipes, which was the subsidiary, for which hot metal becomes a raw material and DI Pipes being tax exempt, excise exempt, this was getting lost, this would be a saving instance. And there are other cost advantages also in terms of Tata Metaliks produces power, Tata Metaliks DI Pipes consumes power, being two different legal entities, we were not in a position to transfer that power directly. Now we would be. So there would be some other advantages also.

Reema: To your bottomline, what could be the benefit of these cost synergies and tax savings etc? How much can it add to the company’s profitability?

A: These are numbers that you will get to know when you see the results but it would be considerable.

Nigel: It maybe in the range of around Rs 10-20 crore. Would that be a fair estimate?

A: I think it will be more than that.

Reema: Coming on to the pig iron business, could you tell us how this quarter has shaped up for you. Currently what the realisations are and what is the trend on the volumes?

A: On the pig iron front, this quarter has been one of the worst that there could be. Plus, for pig iron, 55-60 percent of the cost is the cost of coke that we buy, metallurgical coke. That coke lasts maybe 2-2.5 months has risen by 200 percent maybe more. And with not enough of a demand pull, we have not been able to pass through this cost to the customer. So, margins have been under tremendous pressure. In fact we have had to put down one of our furnaces. But that was part of a larger plan itself. We have put down one of the furnaces and it will come back by the middle of February. It will be a bigger, more efficient furnace. But this quarter, in terms of pig iron business has not really been very hot.

Nigel: Then let us talk about the other business, the DI Pipes business. Pig iron, unfortunate because it was improving in the last couple of quarters. Coke prices clearly are hurting. What about the ductile pipes business? What is the current capacity utilisation in that business? Post demonetisation has there been any kind of impact? How are things shaping up over there because I remember on your quarterly basis, for your ductile you used to do around Rs 15-25 crore, that has been gradually coming down so give us some guidance on that front.

A: This ductile iron pipe is slightly longer term business in the sense that we get contracts for longer period. It has remained steady but there is a cash crunch in the market so offtake, dispatches have been a bit slow because transporters have issues. Customers are having issues. People who are laying down these pipes, they are having problems in paying their labourers etc. So, it has slowed down a bit, but I do not think it should continue for long. This should pick up. This quarter has been okay and the next quarter would be better.

Reema: Your finance costs were also lower in the quarter gone by. If you could give us an update on the company’s debt situation and any plans to further bring down the debt?

A: We have been on this effort to continuously bring down the debt and it is because of that that the finance cost is low. And we will stay on course with this effort and ultimately bring the debt equity to 1:1. So, that effort will remain on.

Nigel: What is the absolute number in terms of debt, Rs 350 crore or Rs 400 crore?

A: Debt today would be around Rs 400 crore.

Nigel: Could you tell us what is the capacity utilisation of your ductile pipes business, that is question number one. You were doing some expansion as well, when will that come about and what is your order book?

A: The expansion that we were talking about has happened. We commissioned that in August this year. And capacity utilisation is 100 percent, so we are doing fine there.