In era of low demand, Gallantt to treble steelmaking capacity

In an environment where steel companies have been struggling with low prices and demand, the board of Gallantt Ispat has given approval for the company to nearly treble its capacity.In an interview with CNBC-TV18, CEO Mayank Agrawal explained the rationale behind the decision.Below is the verbatim transcript of Mayank Agrawal’s interview with Mangalam Maloo and Reema Tendulkar on CNBC-TV18.Reema: Take us through your expansion plans, when will the total capacity come on stream and how much will your capacity go up by? A: The board of directors have given their approval on April 5 for the expansion of the capacities of our unit at Gorakhpur. The total investment would be Rs 511 crore. The current capacity from 1,62,000 tonne of steel making would be enhanced to 4,50,000 tonne per annum. We are expecting the project to be commissioned in January 2018. Mangalam: We have been talking to a lot of metal or steel companies before and they only talk about how demand is not picking up. At this point in time you going with capex and not just capex, you are probably trebling your capacity, do you anticipate demand to pickup and what capacity utilisation do you expect to work at once the plant is commissioned?A: Currently, in the current year we have achieved a capacity utilisation of about 85 percent. We are not able to suffice our customers in terms of supplies. We have excessive demand in our area. Due to lack of competition locally, we do not see any problem to be able to sell this. Reema: You have indicated that your project expansion will be funded by a subsidy which will be disbursed by the state government, Rs 250 crore, is that correct? A: That is correct, the total investment is Rs 500 crore. Out of that, Rs 250 crore is to be received from government in terms of subsidy and the rest we are proposing it by internal accruals.Reema: What is the cash that you are currently sitting on because you are planning to fund Rs 150 crore out of the Rs 511 crore of the total money that you need via internal accruals? A: This project will take about two years for it to be installed and currently we are making a profit before interest in taxes of around Rs 45-50 crore. So, in the next two years, we would have about Rs 100 crore from the generation of the existing unit which is operational. Also, we would be getting Rs 50 crore revenue from our real estate division, wherein we have a joint venture with a party wherein we have to get a total of 13 percent from the revenue and the total revenue generated is about Rs 600 crore. Mangalam: You spoke about your real estate division so let me just delve a little bit on that as well. What is the kind of land bank that you are sitting on right now and how much is that worth and when can we see all of that being monetised?A: The land bank is huge but specifically in terms of Rs 600 crore, I am talking about a specific project which we are developing. It is housing project in Lucknow and the deal is that we have invested about Rs 8-9 crore in the land purchase and we have given it in joint venture with a company called Shalimar. We have to basically receive 13 percent of the total revenue. So, the first phase of the project is already almost complete and the handover has already started. So, in the next one and half to two years that project will be fully complete and we would be getting about Rs 78 crore from there. Reema: When I the shareholding pattern, at least the promoter stake has come down from 71 percent in March 2015 to about 63 percent as of December 2015. Do the promoters have more plans to pare down their stake?A: Promoters have not liquidated their stake. Actually one of the promoter group companies, Gallant Udyog, was merged Gallant Ispat in the current year. So, when the fresh allotment of shares has happened to the shareholders of Gallant Udyog, 22 percent of shares have come to the promoter group and 9 percent have gone to the non-promoter group because of which about 9 percent of the shares seems to be short on promoter side overall. Mangalam: Coming back to your steel business then, in the last quarter, your steel business did make an operational loss of close to about Rs 3 crore. What is the outlook there, by when will you be operationally profitable or will you be operationally profitable in the near future? A: We are already operationally profitable. In the last year, we have posted a profit of about Rs 40 crore before interest in taxes. Mangalam: In the steel division?A: No, cumulatively, steel and power together. Mangalam: Talking specifically about your steel division then and also with the capex coming in, your fixed cost will increase. So, will that not be a hit on the profitability of the company? A: Not at all. Actually steel and power is inter-related. We cannot classify it separately because power is being utilised by steel making itself. So, we have to see at the company’s balance sheet cumulatively because the power plant is a part of the same unit which is supplying power to the steel division. We are not selling power.