More than a pipe dream

Setting up steel plants was all the rage 10 years ago. More than a dozen businessmen, from Rita Singh of Mesco to the late Raunaq Singh, announced plans to set up greenfield steel projects.

Most of these projects never saw the light of day, though investments were made in a few. There is now hope for at least one of these "" Delhi-based D P Jindal has plans to buy a mill to make billets with an annual capacity of one million tonnes.

His flagship company, Maharashtra Seamless Ltd, is in the process of raising its capacity for making seamless and ERW pipes from 200,000 tonnes per annum to 500,000 tonnes per annum at a cost of Rs 200 crore. (Jindal picked up a second-hand mill in the US which is being re-assembled at the company's existing location called Pipe Nagar in Raigad district, Maharashtra.)

Once the expansion is over, Maharashtra Seamless will require billets (these are blown into seamless pipes) of up to 700,000 tonnes per annum. This makes a backward integration into billets an attractive option for Jindal.

And this is where he is trying to fit in one of the ill-fated projects of the early 1990s, though he is open to the idea of putting up a greenfield project as well.

"Many of these plants have good infrastructure. We could acquire one of these," Jindal says. (Just for the record, the slow-talking Jindal is also looking at acquiring Engineers India as well as the steel-related business of Balmer Lawrie.)

But who is Jindal? He is a nephew of O P Jindal whose $2 billion business includes companies like Jindal Strips, Jindal Steel & Power, Jindal Vijaynagar, Jindal Iron & Steel Co., Saw Pipes and Shalimar Paints. Jindal's business is smaller at around Rs 1,000 crore.

Apart from pipes used in the energy sector, he also makes water pipes and has interests in offshore drilling for oil and gas, trading and IT consultancy.

Jindal set up Maharashtra Seamless in 1989, 17 years after the Jindal family separation in 1972. It is today the country's largest producer of seamless tubes.

A few years ago, Jindal made plans to raise Maharashtra Seamless' capacity to produce seamless pipes from 100,000 tonnes per annum to 200,000 tonnes with a small investment of Rs 25 crore.

Still, there was a market which he was not being able to tap "" pipes with a diameter of over 10 inches. There was no company in the country making such pipes and customers were resorting to imports.

As a greenfield project would have taken a lot of time, Jindal started scouting for plants in Europe and the US which could be bought and relocated to India.

To be sure, Maharashtra Seamless is financially comfortable. As per the company's unaudited results for 2002-03, it has a net worth of Rs 215 crore (Rs 29 crore in equity capital, Rs 14 crore in preference share capital and Rs 172 crore in reserves), while the total debt on its books is a meagre Rs 55 crore. This makes the company virtually debt-free.

Jindal says that on account of buoyant demand, he has been able to pass on all price hikes in basic steel which has shored up the company's bottomline.

He finally identified a plant in the US, which is now being shifted to Pipe Nagar. All told, Maharashtra Seamless will spend around Rs 200 crore on this venture.

A greenfield project of this size would have cost the company nothing less than Rs 500 crore, Jindal said. Thanks to the company's strong finances, the project is being funded largely out of internal accruals "" the debt raised for the expansion is to the tune of only Rs 50 crore.

At the moment, the civil construction is on. Trial runs will begin in a year and full commercial production will begin in 2005.

Once that happens, Jindal expects the profitability of Maharashtra Seamless to rise sharply. As per the company's projections, while turnover will rise from Rs 650 crore in 20004-05 to Rs 900 crore in 2005-06 and Rs 1,100 crore in 2006-07, its profit after tax will improve from Rs 95 crore to Rs 142 crore to Rs 175 crore.

Apart from substituting imports in the country, Jindal also has an eye on export markets like the US and the Far East.

With more cash flowing into the company's coffers, Jindal plans to integrate his operations backwards by setting up a mill to make billets with an investment that could go up to Rs 1,000 crore.

At the moment, the plans are still on the drawing board. The company is yet to decide whether to go for a blast furnace or an electric furnace.

"We may look for an existing unit which make pig iron which already has an infrastructure in place," Jindal says adding: "The picture will be clear in about six months."

So, is all hunky dory for Jindal? Not really. To begin with, his other big company, the closely-held Jindal Pipes which makes water pipes, makes very low profits.

On an annual turnover of almost Rs 400 crore, it earns Jindal less than Rs 10 crore. There are two reasons for the low profitability: one, it is a low-technology business with numerous players; and two, there is little scope for value addition with raw materials accounting for 80 per cent of the production cost. Jindal is only too aware of this.

"We are looking at how to increase production to a more economical scale," he says. But he admits that even such an exercise can push up the company's profitability only marginally.

Jindal's critics also point out that his company is still essentially family-controlled. "He needs to build a very strong team of executives if he wants to grow the business rapidly. At the moment, he may be handling things well. But once the business gets bigger, he will have to increasingly involve professionals," says a steel analyst.

Right now, Jindal does not seem to be bothered. Evidence: he has significantly ramped up his stake in the company in the last two years.

In the last two years, he has raised his stake in Maharashtra Seamless from 31 per cent to 51 per cent using the creeping acquisition route. Clearly, he is bullish on his company.