Sanyo guidance will boost cost-cuts, profits: Luthra

Mahindra Ugine Steel Company Ltd (Musco) sold its steel business to its wholly-owned subsidiary Navyug in which Mitsui and Sanyo Special Steel bought a stake of 49%. Hemant Luthra, chairman, Mahindra Sanyo Special Steels and Y Tsukamoto, senior MD, Sanyo Special Steel explained the various details regarding the JV and the plans for the future. 

Below is an edited transcript of the duo's interview on CNBC-TV18.

Q: Can you explain the financial and other details about the JV?

Luthra: We upgraded the plant's capacity from 120,000 tonne to 180, 000 tonne and then increased it to 240,000 tonne. But we realised that to make money in the special steel segment, we must also move up the value chain. So, with the help of Mitsui we zeroed-in on Sanyo.

The structure of the JV is simple. Sanyo and Mitsui together invest 49% into the company. The company is spun down from the parent Musco (Mahindra Ugine Steel Company) which is a listed entity. Musco will hold a  51% in the new unlisted entity with Sanyo holding 29% and Mitsui owning 20%.

Q: According to the details regarding the joint venture, the value of the total equity is about 450 crore. Will these funds be used only for capacity enhancements?

Luthra: You are right; the equity value is Rs 450 crore. There is some debt in the company which will be cleared by the infusion of Rs 220 crore. We want to use Sanyo’s technology and balance capacity between making high-end steel for the oil and gas sector and the tool and die sector where Sanyo is a specialist.

We will also use some of the money to improve the layout of the plant better to avail of the benefit of economies of fuel efficiency. A seven-member technical team from Sanyo has already visited the plant and will be laying out specific plans.

Q: Indian steel prices have fallen recently. What are the realisations on special steel?

Luthra: We recorded a turnover of Rs 850-900 crore at 120 thousand tonne, so our realisation is about Rs 70,000 a tonne, though we have seen better days. The fall in realisation is due to the foray into our segment by bigger plants who are trying to stave off the impact of the slump in structural steel caused by the slowdown in infrastructure.

This urged us to move up the value chain and seek partnership with Sanyo. Going forward, we hope that Sanyo will guide us in reducing the cost, aid our move up the value chain and enable higher realisations.

Q: What are your views on commodity prices in the back-drop of the global slowdown? How are you preparing for the significant correction in global steel prices owing to the slowdown in China?

Tsukamoto: First of all we must make a bit of a distinction between general steel and the specialty steel. We are in the specialty steel business. In Japan, Sanyo has been catering to a niche market, where the prices are negotiated with each customer.

It is really not an open market and is generally much more a compartmentalised, and segregated. That is the reason why specialty steel, has relatively been always more profitable than compared to general steel.  We will try to distinguish ourselves so that customers will pay extra for high quality.

Q: The cement and steel sectors are the lead indicators of the economy India. The cement sector has already begun to slowdown. Are you starting to witness any fall in demand in the steel sector?

Luthra: Our monthly output last year was about 12,000 tonne. Though this has come down to about 10,000 tonne a month, the decline is not due to the slowdown in the cement or structural steel sector. The demand for automotive and bearing steel is holding up. The market for steel used in Maruti’s crankshafts for has been affected by the course of events at Maruti.

The slowdown in the tractor industry has also begun to affect us. However we are looking at other venues. The devaluation of the rupee has made the export market more attractive for us to supply bearing steel to customers like Timken and FAG.

So if we can keep our costs under control with the help of Sanyo, increase profitability with the aid of investment made in alternative supply of electricity, improve the fuel efficiency and cut electricity costs with better plant-layout, I am optimistic about coming back strongly into this market even if the volume go down to 10,000 or stays there for a while.