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Home » News » Business

Sep 23, 2009, 04.26 PM | Source: CNBC-TV18

Steel Strips Wheels' Jamshedpur plant to add 7% to margins

Dheeraj Garg said that Steel Strips Wheels gains an extra 7% margin due to next door raw material and customers.

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Steel Strips Wheels Jamshedpur plant to add 7% to margins

Dheeraj Garg said that Steel Strips Wheels gains an extra 7% margin due to next door raw material and customers.

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Dheeraj Garg (more)

Managing Director, Steel Strips Wheels |

Dheeraj Garg, Managing Director of Steel Strips Wheels confirmed that the company is putting up a project in Jamshedpur. Talking about the project he said that the company gains an extra 7% margin due to next door raw material and customers. “ Tata Motors is the captive customer,” he said adding that Tata Group holds 13.5% stake in the company.

Here is a verbatim transcript of an exclusive interview with Dheeraj Garg on CNBC-TV18. Also watch the accompanying video.

Q: Can you take us through this investment of Rs 140 crore that you are putting up in Jamshedpur? Where are you getting the money from and what will you use this money i.e. once you expand what kind of profitability and sales can we expect from this plant?

A: This project is being setup in Jamshedpur primarily for the domestic market but also a part of this project sale will be going for the export market. Tata Motors is going to be our captive customer for this. The financing of this project has been tied up with two banks DEG Bank which is German bank and with EXIM Bank and the equity of the project as I said yesterday was that we have put in Rs 5 crore as promoter contribution. The rest we will be looking at internal accruals and possibly another preferential allotment towards end of the last quarter of this fiscal.

Q: Whether we look at your numbers or with the way we look at industry numbers the past few quarters, not so much the last quarter but the quarter before have been fairly trying times for the commercial vehicle industry. Your own profit has come in at Rs two crore for the first quarter against Rs seven crore year ago quarter – margins are under pressure – full year FY09 shows similar trends then why this sudden burst of capex – five times that you already have?

A: The reason for this is that this discussion has been going on for the last three-and-half-years. So in fact before the recession broke out we were already in the midst of acquiring the land and placing orders for the equipment. But now we feel that we have a very big strategic advantage sitting in Jamshedpur in that we have the raw material supplier next door and we have the customer next door. So I gain an extra 7% on margins just by being in Jamshedpur and also Jamshedpur has a port nearby from where I can export my wheels. A lot of money gets lost in transportation of wheels, so by being in Jamshedpur I really have a captive customer and a definite gain in my EBITDA margins. Also, let me mention; right now truck wheels constitute about 3% of my total production or sales. So when I go to Jamshedpur I will certainly be taking on market share from the existing suppliers namely Wheels India and Kalyani Lemmerz.

Q: Tata Steel has 9% stake in the company – can you confirm that?

A: That is correct.

Q: What about other Tata Group? Does Tata Motor also have a stake?

A: There is Tata Capital which owns about 3.5% in the company.

Q: So that’s about 13.5-14% stake for Tata Group?

A: Yes close to 13.5%.

Q: Has Tata Steel appointed a director on the board?

A: Yes. They have recently appointed a director on the company board.

Q: So, is this a step in Tata Steel becoming a promoter of the company? Is this the next step in terms of acquiring further stake because as of now, when we see the shareholding pattern, the stake comes in with non-promoters holding more than 1% equity? Is the plan going forward that you induct the Tata Group as a promoter in the company?

A: I don’t think the Tata Group would like to go beyond a certain percentage in our company. I don’t think they have any plans in the future as well to sort of augment their stake in our company. We have a relationship going with Tata Steel for almost 30 years. It is a one of a kind deal that they have done only for us because they really feel very strongly about our company, and we also feel very strongly about Tata Steel. So, it is a very symbiotic relationship that has been nurtured over 30 years. I think they would let us manage this business and they are very happy to see us grow.

Q: You said that you have a captive consumer in Tata Motors. Is there an undertaking of sorts?

A: There is a soft undertaking. We have had numerous discussions with Tata Motors. If you just look at the math, there is nobody who can compete with us sitting in Jamshedpur. Today, if you look at the competition, the EBITDA margins, they are no more than 9%. So, if I have a saving of 7% on EBITDA margins, you know how the math will unravel.

Q: But surely if they have given you a guarantee in terms of consumption they would also be demanding their pound in terms of margins?

A: Yes, those discussions have happened. I think it will be a win-win relationship and I don’t think either of the parties would go away with it unhappy. Also, more than Tata Motors, we are looking at the market in Japan; we are looking at the market in Europe. We have almost finalised business with two companies in Japan and in Germany. So, increasingly our base customer would be Tata Motors. But we would definitely have access to avenues outside India.

Q: Could you give us an idea of the revenue flow say in 2010-11?

A: I think 2010-11 should be close to about Rs 700-800 crore.

Q: You have also made an allotment to promoters at about Rs 100 per share. So, does the Tata Group shareholding change because of that 13.5%? Does it come down or you have already factored that in?

A: I think that has already been factored in. Maybe it gets affected slightly, but very marginally so. But I have not done the math on that yet. But it is close to that level, 13%.

Q: When you made this allotment the stock price was at about Rs 70. What gave you the kind of confidence to go ahead and make such an allotment at Rs 100 per share?

A: I firmly felt that the company was undervalued at that level. Also, I am putting in money in my own company. So, I don’t mind paying an extra premium to put money in my company and it also sends a signal to investors, and it sends a signal to the existing investors that this company has a great future and that is why the promoters have given a 36% premium on the market price.

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Steel Strips Wheels Jamshedpur plant to add 7% to margins

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