From moulding markets to changing mindset, how Vedanta revived Electrosteel

The second of a four-part series on IBC takes a look at how Vedanta restored faith of suppliers and customers and updated products to turn around the stressed plant

Building a greenfield steel mill takes a long time. The path is strewn with challenges. Getting approvals is painful. When Vedanta acquired a running concern, Electrosteel Steels, in June 2018, therefore, it could have been forgiven for congratulating itself on taking the easier option. 

In the 18 months since then, Vedanta has realised that turning around a stressed steel plant can be just as hard. A blast furnace gone kaput, raw material suppliers loath to risk their inputs to an insolvent steel unit, and markets not keen to absorb its products. 

“Electrosteel was being run by a team led by PricewaterhouseCoopers when we took over. Suppliers were nervous, not knowing if they would get paid for their material,” said Pankaj Malhan, deputy chief executive officer of Electrosteel Steels. 

Vedanta’s management realised they had a lot of ground to cover to win back the confidence of the suppliers. “We straightaway entered into long-term contracts with these big ticket miners. We assured them surety in the form of long-term contracts. From advances, we moved to payment terms. That was the confidence which the suppliers got,” said Malhan. 

By clinching long-term agreements, Vedanta made the raw material suppliers their partners. It also reassured the MSMEs of the conglomerate's vision. The Vedanta management met the units every quarter.

Having convinced the raw material suppliers, Vedanta's next major step was to get Electrosteel's products back to the markets. The entire senior leadership reached out to customers.

“Initially, the customers were not sure whether the products they were buying from Electrosteel will be delivered on time and whether they will be in the desired quantities. We streamlined the terms and conditions. There was a huge amount of marketing activity involved. Soon, we turned one of the preferred suppliers to PSUs and navratna units”, said Malhan. 

He introduced benchmarking so that Electrosteel’s performance was compared with that of the best steel producers in the country. With a canny mix of strategy and vision, Vedanta delivered outcomes quicker than anticipated.

When Vedanta acquired Electrosteel Steels, the latter had a modest Ebitda (earnings before interest, taxes, depreciation & amortisation) of $55 per tonne. By the end of FY19, the Ebitda rate was $135-140 a tonne. Even in FY20 when fragile global demand has subdued steel prices and crimped margins for steel makers, Vedanta is still hopeful of $100-105 Ebitda on an average. 

In parallel, Vedanta has also recast the product portfolio to shore up Eletrosteel's bottomline. The steel plant’s current portfolio is made up of TMT bars and wire rods. Within TMT, it was producing 500d and 550d variants.

 

“We are going to a second level of tensile strength which is 600d. These products will fetch us better margins. Moreover, we were finding it difficult to achieve volume sales in automobiles and infrastructure due to the slowdown. So, we moved into the industrial segment consisting of electrodes. Today, we are the only player in India which is making 75 per cent high carbon products where net sales realization is higher by $25-30 per tonne”, said Malhan. 

To bolster margins, Electrosteel has forayed into the retail segment in TMT bars. The company looks to tap the franchise model for the retail business format by engaging the two-tier dealership network.

Apart from a products rejig, Vedanta is hoping to double capacity. The ailing unit had an original capacity of 0.7 million tonne pa (mtpa) in steel making but Vedanta swiftly ramped this up to 1.5 mtpa. Plans are underway to expand this further to three mtpa at a cost of Rs 4,000-5,000 crore. 

Such a performance would not have been possible without a repositioning of the workforce. Vedanta refused to retrench any employee. It continued with the same manpower pool except that it injected its own performance culture. 

A core team comprising staff from both companies was given the task of reviving the unit and delivering results.  

 

Every person’s task was spelt out. The COO had to ramp up output and sweat the assets right. The CCO had to engage suppliers in such a way that Vedanta did not end up fixing a lot of inventory. The CMO’s role was to get customers back. The CFO had the more gruelling role of ensuring that the compliance structures were rigorously followed with respect to an Insolvency & Bankruptcy Code asset.

Something called a ‘CEO Connect’ was started with 21 villages located on the periphery of the Electrosteel factory. Another initiative, Pragati, involved the senior management connecting online with 1500-odd people every month.

“Motivation doesn’t always come from challenges. We were also responsible to the pockets of the employees. Apart from crediting salaries on the first of every month, we introduced the variable salary concept. This fuelled motivation for the employees to perform better,” said Malhan. 

A Business Excellence & Innovation Centre was set up. Within two months of the takeover, Vedanta had collected over 7,000 suggestions for cutting costs, all from workforce and implemented 5,600 of them without incurring any extra cost.

There’s more to Electrosteel’s turnaround story, of course, than the ramp-up or higher efficiency in operational parameters. It’s a mindset change. “Today, we have got a chief sustainability officer led by a woman….and she is doing a phenomenal job in keeping up that changed mindset,” said Malhan.