Operating margins expected to be 9-10% this FY: Uttam Galva

Mangalam: Could you give us a sense of the debt on Uttam Galva and Uttam Value Steels. What are the options you are looking to refinance this debt?

A: Uttam Galva Steel Limited has a long-term debt of Rs 2,500 crore. Uttam Value Steel has a long term debt of about Rs 700 crore. We are not actively looking at refinancing money in any particular way but it is an on-going exercise regardless of the market environment to work on reducing our overall costs.

For Uttam Galva Steel Limited, we are looking at options of exploring the equity market. We are always working on trying to reduce our interest costs to reduce the leverage equation on the company. I understand there is an article on the company pursuing the 5/25 route. This is not classified as restructuring by the banks. Steel is now classified as infrastructure by Reserve Bank of India (RBI) and that is a standard operating procedure given for all infrastructure companies. We are not pursuing that plan as of now.

Reema: Can you walk us through the other option that you are considering. One you said is tapping the equity markets. What else? Which one is likely to fructify in the near term?

A: We are exploring other options with other advisors. We have not crystallised our action plan as of now, but as I said it is not an environment-related situation alone.

We are always looking at finding ways to reduce our overall interest costs. One option is to find ways to dollarize our debts because steel is primarily a dollar industry. All pricing and margins are in dollar. Currency risk is actually very limited over a long period of time. Although, we are affected by sudden shocks in the exchange rates but dollarizing as much debt as we can would significantly reduce our coupon costs which would alleviate the pressure on our balance sheet.

Reema: So between raising money and equity versus dollarizing debt, which one is preferred strategically or financially by the company?

A: We are working aggressively on both options but again raising equity is also a function of the market environment. So we don’t know how positive the response will be on that side but we are looking at all options to improve our balance sheet numbers.

Mangalam: In the last quarter, your total income grew by just one percent while your operating profit went down by 16 percent. The steel prices have been under pressure. Do you sense that it has bottomed out right now and going forward, will demand get better? If yes, then can you give us a sense of what the income growth will be for FY16?

A: The rest of this year is going to continue to remain under a lot of pressure. We are not seeing any significant improvement in the business operating parameters. The Indian market demand is very weak. Cash flow is a concern for all customers and the lack of working capital is killing the ability of customers to buy and that is creating a lot of problems.

The global market also is in slowdown. We are facing a lot of pressure from China and all the other international markets. We don’t expect operating environment to improve in this calendar year. We expect this fiscal year should be relatively flat compared to the previous one.

Reema: Revenues would perhaps be flat this fiscal year. In some other metrics, do you expect the working capital situation to worsen for the company considering that the operating environment remains challenging? What does it currently stand at and how much would it rise by? Do you have receivable days which will go up?

A: On the working capital side, we are facing a lot of pressure. All credit cycles have increased dramatically. If payments were received in 30 days then they are extending to 60-90 days now. So, there is a lot of pressure on the working capital cycle. Overall, we are working on an aggressive strategy to improve our EBITDA during the course of the year by a very focused approach on the product mix and improving our customer base.

Although, there will be pressure on the finance cost-front, we expect that to be offset by better operating margins contributed to buy the better product-mix and improvements in the customer profile.

Mangalam: If you could give us a sense of what operating margins in FY16 will look like because in the last quarter they came down by 150 bps and settled at around 7.5 percent. Do you think that will continue over FY16?

A: Our target is to go back to between 9-10 percent by the end of this fiscal year, but that might not be on a weighted average level. We are targeting a 9-10 percent on a run-rate level and we are working aggressively to achieve these numbers. There should be some significant improvement over the course of this year. However, this is with an understanding that the market situation will remain as is or will get worse. If the market situation improves and demand comes back, the numbers here could jump up significantly because the margins on these products would significantly improve.