KIOCL's viability lies in merger with NMDC: PWC

The viability of KIOCL, earlier known as Kudremukh Iron Ore Company, lies in merging with state-owned NMDC, says global consultancy firm PWC.
"Considering both intangible and financial synergies of the combined entity, merger with NMDC would be a highly favourable scenario for KIOCL," PWC said in a report on KIOCL's sustainability and viability assessment report which is yet to be made public.
PWC was asked by KIOCL to prepare a way-forward report as the Bangalore-based firm was passing through challenging times with production, sales of pellets, halt of blast furnace operations, uncertain market conditions and lack raw material availability.
Set up in 1976, KIOCL has 3.5 million tonne per annum (mtpa) iron oxide pelletisation complex and pig iron units at the coastal city of Mangalore.

According to the report, KIOCL will bring synergies to the merged entity and the utilisation of its assets will generate stable revenue and reduce project risk, valuable skill and experience of establishing a blast furnace unit and running it successfully. Its captive berth will also support exports.
NMDC will bring raw material security for the pellet plant and the blast furnace unit, it said, adding that the supply of iron ore from its mines in Karnataka will reduce logistic costs. Better raw material quality will also help it fetch better pellet price.

"Stronger organisational structure could also efficiently harness KIOCL's human resource strength. Diversified customer base would support marketing of end products. NMDC's Navaratna status would help the merged entity expand operations abroad," PWC said.

Based on various calculations, PWC said the merged entity could bring in synergy worth Rs 678 a tonne in exports, and Rs 1,326 per tonne in domestic sales.
However, there are challenges involving getting nod of the shareholders, company culture and structure, brand name and leadership challenge among others.
"Being a listed company, NMDC would have to take approval from shareholders before amalgamation. Considering the strong performance of NMDC and poor operating performance of KIOCL. shareholders could reject the merger proposal," PWC said.
Both being PSUs, the company culture and structure risk is relatively low but needs to be managed appropriately; people from one company need to be suitably accommodated in merged entity, it added.

"Upon merger, KIOCL will lose its identity. As people preserve a sense of belongingness to the company, this can affect employees across the board and lead to resistance and low motivation towards merger," PWC said.
"The period of merger is the time of great uncertainty for people of both organisations, as their position, status and salary structures are at risk. Any frustration or resentment can severely affect morale and performance of the employees," it added.