(An interview with Chemplast Sanmar Managing Director P S Jayaraman, reproduced with permission from The Hindu Business Line)
At a time when the entire economy is under recessionary pressure, Chennai-based Chemplast Sanmar reported a three-fold increase in its net profit for the first half of the current year. Net profit increased to Rs 10.94 crore from Rs 2.96 crore in the same period last year.
In an interview to Business Line, the company’s Managing Director, P S Jayaraman, plays down the success, taking a position that the business environment for the company’s main product, PVC resins, happened to be good. While Jayaraman is not confident of a repeat performance in the second half, he feels that the long-term business prospects are safe.
Excerpts:
What are your comments on your performance in the first half?
We did do well in the first half. Two or three factors were responsible for the better performance. On the one hand, we had comparatively soft international prices for feedstock, Ethylene di Chloride (EDC). We used that opportunity and brought down our input costs, by maximising import of the feedstock.
The resin prices were sort of comfortably placed in the region of $ 420-430. So the margins were okay. On the chlorochemicals side, i.e., where we have caustic soda/ chlorine operations, we had good domestic prices of caustic soda. Since we sell caustic soda in the market, chlorine cost for us was good.
We also realised the full advantage of the improvement in capacity in speciality resins. We increased the capacity in the first phase by adding 7,000 tonnes (to 26,000 tonnes). The contribution there is better. We had completed the expansion in March last year, so the first six months had the full advantage of the capacity increase.
And we also were ready, in case the international prices of feedstock went up, through our own captive capacity – for that we set up an oxychlorination capacity, which enhanced the EDC manufacturing capacity from 25,000 tonnes to 75,000 tonnes. So, of the 100,000 tonnes of EDC we
need, we can produce 75 per cent in-house. But imported feedstock prices being cheaper (in the first half), we were importing more and more.
How is the outlook for the second half?
I can’t give any numbers, but I can say it won’t be as good as the first half. As expected, starting from the third quarter, caustic soda prices started to drop, due to several reasons – domestic demand, international trends. That is having an impact on operations.
On PVC while EDC prices and feedstock prices are more or less the same, the resin prices have come down, from $450 to $390. Last couple of weeks, slight improvement is there, but because of the drop in the international prices, domestic producers were also forced to cut down. In the last 15 years, this kind of a Rs 5 (per kg) drop has never happened.
What is the explanation for the international trend?
Several reasons. Most important is China – whether they make more or less of EDC. International prices are also influenced by movement of oil prices.
Are you then utilising (your) speciality resins capacity to the full?
Yes. We are also in the second phase of expansion. We will increase the capacity by a further 7,000 tonnes. This will cost about Rs 7 crore. The work started about six months back. From April 2002 we should be on expanded capacity.
That should keep us in good stead during bad times. But what we are not able to do is – we are really helpless on the chlorine prices front. There was a temporary honeymoon for about 7-8 months, but now it is going back to their original level.
But don’t you produce chlorine in-house?
Yes, but we also buy chlorine. Because we also have some captive capacity, we are not that much affected.
What is the update on the greenfield project (150,000 tpa PVC project, coming up at Cuddalore)?
On the greenfield project, the financial institutions – IFC, Washington, DEG and IDBI – are still in the appraisal stage. I expect the appraisal to be complete in one or two months. Once that phase is over, it will lead us to financial closure. We expect that to happen this financial year. We have appointed the EPC contractor (Technip) and appointed the technology supplier (EVC of Germany). The project will take two years.
What do you expect the market to be when you would have completed the project?
The market will be very good. The domestic market for PVC is today about 700,000 tonnes, and is growing at 8 per cent, CAGR.
The growth justifies addition of this kind of capacity.
But can your new plant stand the competition?
There are not much imports happening in the PVC business. At this point of time, the country is balanced. Whatever is being produced is sold in the domestic market. Not much import, not much exports. If new capacities do not come in, then the country will have to import.
But won’t your products be more costly, given the impact of the finance costs?
That is the real viability test. Where the margins will head when import duty rationalisation takes place is a call one has to make. What will be the spread between the end PVC duties and how the margins will behave is the real test of viability. This is assessed both by us and the lenders. We believe that the plant will be viable.
At what rate of import duty?
Import duties will go down. Ultimately, the difference between PVC and feedstock – in this case it is VCM (vinyl chloro monomer, made from EDC) – must settle anywhere between 10-15 per cent. Today, it is 35 per cent and 15 per cent – so the differential is 20 per cent. This differential will come down. At worst it will settle at 10 per cent. To reach zero per cent, it will take a long time.
What is going on in your company on the financial management side?
Like any other company, we have also been taking advantage of the drop in interest rates – trying to replace high cost loans with low cost facilities. In early 2001, we did an issue of debentures for Rs 125 crore, which was used for retiring high cost debt.
The average cost of borrowing came down by 200 basis points. Working capital reduction depends upon the opportunities that present themselves.
At this point in time, when EDC prices are soft, we have consciously been buying and inventorising EDC. Now it is better to accumulate stocks. Instead of stocking the material for three months, you stock it for 4-4.5 months. There may be holding costs, but we get a net benefit.
How are your investments doing?
We have two investments. One is an investment in a joint venture, Cabot Sanmar Ltd., where we make a product called fumed silica. These operations are about three years old. We have done reasonably well.
Has it paid you dividends?
We have not taken any dividends. Instead, the JV has ploughed back the profits in capacity expansion – we are expanding the capacity from 500 tonnes to 700 tonnes. Better to reach better capacities than take the dividends now. The expansion is entirely out of internal accruals and some debt, but we are not putting in any additional money.
The other investment is in shipping – Sanmar Shipping Ltd., which came into being as a result of the hive off of Chemplast’s shipping division into a separate company. We still continue to hold 50 per cent. The only redeeming feature of this is that the shipping business has come out of the downturn. It is making profits.
What is the thinking for this company?
We have to wait for better times. We want to stay in the business and not get out of it.