At Rs 8,500 crore, Welspun Corp’s order-book has rebounded from its lowest point last year to a highest ever. However, the company doesn’t expect profitability to improve this year. Akhil Jindal, director, Welspun, in an interview with Shubhashish shares the company’s hopes from 2013-14, the study to set up a new plant in Latin America and the financial re-engineering.
You are putting a lot of emphasis on your order book this year.
Ours is a business which is affected by oil and gas but not so much in direct proportion. There is certain time lag between between our business and oil and gas demand. Before 2008 crisis, all pipe companies were flooded with orders. We have order book which is usually lasting 9-12 months. that means if people slowed down drilling activities in 2008-09 it did not affect us till mid 2010. It started affecting the industry post that as it was the time when no orders were being placed.
We saw some effect of it in our demand situation during last year. If we compare October 2011 to that of this year we were at an almost lowest point of our order book in 2011 and today we are at the highest point. That shows that there has been a smart recovery. Secondly, all the drilling that had stopped in 2009 have again started. Now and beyond, the order book will keep on rising.
The worst is over for us. Emphasis is on order book. Last one year the emphasis was to build the order book. There was no point in us saying that we will charge $100 more than the industry which we used to do and had a premium position. Our EBITDA per tonne was almost $100-120 per tonne more than the industry average in the domestic as well as international market. That luxury was over for us in the last year. But that is back again. Today we are very choosy on what orders we want to take up. Today we are bidding for big projects where there is a premium available.
We are now sitting at our highest order book ever and that gives us the flexibility to bid for a project that we want to build.
But the margins have shrunk. Is it because you wanted to maximise order book?
The first six months we did sales of Rs 4600 crore and an EBITDA of Rs 450 crore. Now, corresponding six months of last year we did sales of Rs 3800 crore and EBITDA of Rs 600 crore. Since last year, there have been two impacts. One is, of course, the foreign exchange provision of Rs 90 crore we did this year because of the sharp rupee depreciation. If I add back this temporary provision the EBITDA goes up to Rs 540 crore for the first six months of this year.
Also, our USA plant was down in the last quarter because of the fire. The plant is functional again and this means that the third and the fourth quarter of the current fiscal will be better than the first half. Third factor is that almost 1,10,000 tonne inventory of pipes that was lying with us as on September 30. This is now being shipped.
Overall impact of the business is virtually same as last year perhaps a little better. In terms of EBITDA, we are back to where we were last year.
What is the update on the US plant now?
There was a small fire in the plant but because of it the plant was shut down for three months. Now it is back and we have got some recoveries from the insurance company and some more will come in the current quarter. Apart from the plant coming back on production, the ERW mill is under trials and by December 31, the ERW mill will start production.
This means that as Welspun, we will be the largest global capacity for large-diameter pipes, particularly meant for oil and gas sector.
What is the demand looking like for your products in the USA?
We are booked up till August 2013 and the ERW mill will go in commercial production soon. There is a significant amount of inquiries coming in for the ERW pipes. The aim is to get significant orders before commissioning the ERW mill.
What would be the next wave of growth for Welspun?
We need to ramp up our capacities. There is still 30% growth within Welspun without installing new capacities and spend money. Secondly, we are looking at niche geographies. There is so much market in Latin America and North America. Of course we have a US plant but that may not be sufficient.
If the Latin American market is booming will you look to service that market from your US plant or there are plans to set up a pipe mill there as well?
We are looking at both options. I don’t think we will be able to meet all the demand from the US plant. If it means that we will have to set up a facility then we will do it.
Have you firmed up on any plans for a Latin American plant till date?
It is important to understand the customer need first. These (pipes for oil and gas) are tailor made products and are very specific. If we have made a pipe for company A we can’t sell it to company B if A doesn’t want it. We need to do a demand assessment with the customer. We are talking about big oil and gas companies which have huge capital expenditure plans.
There are a lot of oil rigs being deployed in the Latin American market. Does this mean that there is demand for pipes as well?
We are in discussions with our big clients and the demand assessments comes first and it is going on currently. It will take us around 6-8 months more to get clarity on the demand situation in the region and the investment needed.
You recently bought back FCCBs worth $45 million and raise Rs 90 crore via NCDs. What are your borrowing plans going forward?
Its a strong statement we are making. At a time when companies are defaulting on their FCCB payments we are going ahead and buying them back ahead of its time. FCCB worth $105 million is still left and we will continue to explore such opportunities.
As a company we are doing three things. One is we are pushing all our short term loans, either by repayments (like FCCB) or by extending maturities. We don’t want short term loans on our books. We have made an application to the RBI for their permission to buy back ECBs worth $100 million falling due in April 2013 and April 2014 each.
Second, we don’t want to use our cash to repay all this. We are talking to our banks to give us a longer maturity loan so that we could pay off the ECB once the RBI gives us the permission. Its a refinance. We are not letting our cash deplete.
