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1. What products does ISMT manufacture?

ISMT manufactures Engineering Steels and specialized Seamless tubes made of carbon and alloy steels. The steels and tubes that we manufacture cater to the requirements of a very wide variety of industries including OCTG, Mining, Bearings, Construction, Powergen and General Engineering. Our company?s focus is on developing steels and tubes for specialized applications within each of these industry segments and our entire organization structure is built around this central objective.  

2. What is the size of the seamless tube market globally and in India?

The total seamless tube making capacity in the world is somewhere between 30 -32 million MT. Our own tube making capacity is now 465,000 MT. The market for seamless tubes in India is of the order of 700,000 MT annually.

3. Who do you compete with and how do you differentiate yourselves?

As far as seamless tubes are concerned our domestic competitors include Maharashtra Seamless, Jindal Saw and BHEL (which produces tubes for internal consumption). However, competition, within India and outside, is not restricted to these players and we compete globally with the likes of Vallourec, Benteler, Tenaris, Timken, Ovako and a host of Chinese manufacturers.

Given the size and diversity of the seamless tube market, individual manufacturers have chosen to differentiate themselves by focusing on particular market segments. The larger players such as Vallourec and Tenaris are focused on the Powergen and premium OCTG segments, Benteler focusses on Powergen, Automotive and Engineering segments while Ovako and Timken target the Bearing and Mechanical tubes industry. The Chinese players as well as some of our domestic peers tend to be focused on the Powergen and the commodity end of the OCTG industries.

ISMT primary focus is on the Bearing, Engineering (Automotive, Mining, Construction) and Powergen sectors. In other words, we are positioned somewhere between Benteler and Ovako. We do sell tubes to the OCTG industry but this is not our primary business.

The nature of the market that we serve is very different from the OCTG sector. Most of our customers tend to be OEMs to whom we sell tubes for specific applications. The time taken to have our product approved for these applications tends to be fairly long, the development of tubes requires detailed knowledge of the particular applications, and in most cases we are required to develop a special steel to meet the needs of the application. The fact that we produce our own steel is a major differentiating factor. It is much more time-consuming to develop this market but on the other hand there is a greater degree of customer loyalty.

Another vital differentiation factor is our ability to supply small quantities of tubes. The combination of mills that we operate (PQF for large volumes and Assel for small volumes) we are cost effective for the supply of large volumes as well as small customized lots.

As far as the sale of steel is concerned, most of our steel is sold within India where we compete with the likes of Mahindra Ugine, Mukand, and Kalyani Steels. Once again, in this market we are focused on the upper end of the Bearing and Engineering steel segments. This is our primary differentiation and our efforts are to constantly move up the value chain by developing new products. For instance, this year we have started manufacturing creep resistant steels and Martensitic stainless steels.

4. What is your overall growth strategy?

Over the last couple of years we have invested significant efforts in widening our customer base and in developing tubes for new applications (we call these new products) thereby increasing the size of our addressable market. We have restructured our entire organization around the central objective of developing new customers and new product lines. We have also established an in-house training centre call the ISMT Center of Excellence which acts a central repository for collecting and disseminating technical know-how within the company.

The Seamless Tube Expansion Project that has been commissioned in May 2010 has positively impacted multiple facets of our business. Firstly, our installed seamless tube manufacturing capacity has increased from 155,000 MT per annum to 465,000 MT per annum. Secondly, our costs of producing various products within the seamless tube segment have reduced. Thirdly, as a result of the cost reductions, various markets that were outside our competitive area have now become addressable. The combination of these elements has made our business model very robust and has laid a secure foundation for growth.

Our growth strategy is to fill up the capacity created the by the Seamless Tube Expansion project, as early as possible, with commodity tubes and then move the product mix in favour of the higher value added products developed by the company. In today?s market, filling up capacity with commodity products has become slightly difficult. We have therefore accelerated the program to start selling higher value added products.

5. Could you comment on the performance for FY 2011-12?

Revenue during the year grew by 18% from Rs. 1630 crores to Rs. 1944 Crores. During the year PAT stood at Rs. 28.59 crore. The aggressive marketing efforts in overseas markets led to over 49% rise in export sales which has now crossed Rs. 490 crores. Exports now accounts for over 38% of company's total tube sales against 31% last year.

6. What is the status of 40 MW Captive Power Project undertaken at Chandrapur?

ISMT Limited has commissioned its 40 MW thermal coal based Captive Power Plant. Located at Chandrapur district (Maharashtra). The Power Plant was conceived to address the rising energy costs of the company. The plant commenced commercial production from 28th May 2012. The Power generated is wheeled using the state electricity grid to all three manufacturing plants located at Ahmednagar, Baramati & Jejuri.

The captive plant will cater to over 80% of the company's power requirement, thereby helping the Company to substantially reduce its variable costs.

7. What are the advantages that are expected to accrue from the expanded Seamless Tube & Steel Billet manufacturing capacities?

The Commercial production of Seamless Tube Expansion project at Baramati plant has commenced from 8th May 2010. With this expansion, the seamless tube capacity stands increased to 465,000 MTPA. The Commercial Production of Steel Expansion project at Jejuri plant has also commenced from 27th September 2010. With this expansion, the Steel Billet manufacturing capacity stands increased to 3,50,000 MTPA.

The expanded capacities would bring in following advantages;

- It will reduce our production costs across a number of product lines thereby increasing the size of the economically addressable market available to us. In other words, we will now be able to sell tubes into certain markets that were earlier out of our reach. Powergen tubes constitute one such market where we were priced out earlier and where we are now very competitive.

- The capacity expansion has been carried out a relatively low cost such that the savings generated on account of production costs alone (on existing volumes) justifies the investments. Given that sales volumes will increase as a result of the new mill we expect the investment to pay off rapidly.

- The expansion Project at Baramati has also been accorded 'Mega Project ' status by the State Government of Maharashtra. This entitles the company to significant fiscal benefits.

8. Is input price volatility an issue and if so what is its impact on profitability? What does the company do to hedge against such fluctuations.

Input price (of scrap, sponge iron, pig iron, and ferro-alloys) volatility has the following impact on the company:
ISMT has a largely OEM customer base where prices tend to be sticky. In other words, it takes two to three months to pass on price increase to customers and it takes a similar time for prices to be revised downwards. As a result, when input prices go up margins get squeezed and when input prices go down margins expand. In a normal up and down cycle the ?contribution? loss when input prices are rising gets compensated by a ?contribution? gain during the reverse cycle. However, this assumes that sale volumes remain constant through the cycle.

To hedge against such movements ISMT is now trying to maintain a three month forward order of raw materials. This should smoothen out the earnings cycle. In addition, a significant portion of export contracts are being signed with price fluctuation clauses which allow for price variations based on changes in input prices.

9. Why are EBIDTA margins so volatile and fluctuating? How do you plan to improve margins over a longer tenure?

As mentioned above, apart from the delay in passing on variation in Raw material price to end customers, the proportion of Steel & Tube sales in overall net External sales also leads to volatile margins. The Tube business generally has higher margins as compared to steel.

Further, ISMT?s strategy is to constantly move the product mix in favour of higher value added products. We are doing so by identifying and developing steels and tubes for new applications within each industry segment. This strategy, combined with cost cutting, through the addition of the PQF mill, should enable us to protect and increase our margins going forward.

It is also our view that in an environment where input prices are extremely volatile ?earnings per ton? is a better measure of profitability than ?EBITDA margins?. In other words when input prices change drastically the absolute profit tends to get protected but not the percentage margin.

10. Does the company perceive any threats?

The most significant threat faced by any seamless tube manufacturer today is the threat of Chinese dumping. Given that only a part of our market overlaps with that targeted by the Chinese, this threat is limited; nonetheless, it is a threat.

Both the U.S.A and Europe have initiated anti-dumping proceedings against Chinese made seamless tubes. This is both an opportunity and a threat. Should the anti-dumping levies materialize in these countries the Chinese will probably resort to dumping tubes in the Middle East, South East Asia, and in India. Such an action, will impact the commodity end of the tube market in these regions. On the other hand the demand for Indian tubes in the U.S. and Europe should increase.

ISMT is actively lobbying the Indian Government to take similar action to protect the domestic market from Chinese dumping. ISMT believes that there is a very strong and just cause for the levy of safeguard duty on Chinese seamless tubes coming into India.

Having said that we believe that the opportunities facing ISMT today outweigh the threats and that despite the global slowdown there is ample opportunity for ISMT to increase its sales and profitability.  

11. Will the market support growth in the next two/three years?

We believe so. The steels and seamless tubes manufactured by ISMT are used across a variety of industrial sectors many of which, for example, Power, Construction etc., have not affected by the global slowdown. Moreover, we are focused on developing a variety of new products that were hitherto the preserve of European mills. As a result our ?addressable market? is expanding even though the overall market for tubes may be contracting.  

12. What is the Company's exports agenda?

Exports continue to be important for the Company's growth agenda, however this is an outcome rather than a stand-alone objective. The objective is to maximize contribution and to do so by positioning us strongly in the specific market segments that we are targeting regardless of geography. Given that our productive capacity cannot be absorbed by the Indian market it is imperative that we export.

We have put in place techno-commercial teams focused on specific sectors of the market, domestic as well as international, and these teams are charged with creating a strong market position for us both domestically as well as internationally.  

13. What are the advantages of having a captive steel making facility?

In the market that we address it is very difficult, if not impossible, to produce tubes without a captive steel source. In contrast with OCTG tube producers who, typically require a handful of steel grades, we require hundreds of grades of steel with a tremendous emphasis on quality. It is therefore almost impossible to source such a large variety of steels from an outside source. This was the reason for setting up a steel manufacturing plant and we believe that this decision has served us well.

14. What are some of the main initiatives implemented to rationalize costs and achieve profitability?
  • Better asset utilization
  • Yield improvement
  • Process cost improvement

15. How do you see yourself in the international marketplace?

We are already one of the largest integrated manufacturers of Specialized Seamless tubes globally and our vision is to become the most profitable and respected player in this segment.

16. What are some of the key differentiating factors vis-?-vis your competition?
  • Strong technology orientation
  • Believe in creating and retaining knowledge
  • Niche products
  • Specialized precision seamless tube manufactures used across diversified industry segments.
  • Capability to service small lot orders

17. Which country accounts for the largest share of exports?

Very roughly, exports are equally divided between Europe, USA, and the rest of the world.

18. Your future growth is predicated on a growth in exports. What is it that gives you the confidence that you will be able to maintain sustained international competitiveness?

Price, Quality, Cost, Niche Products, Short Lead Time.

19. What are you doing to insulate yourself from the impact of exchange rate fluctuations?

We are hedging our exposures through the purchase of forward currency contracts as well as by matching outflows and inflows through borrowings in foreign currencies. Simply put, our strategy is not to speculate on currencies and to make money only on selling steel and tubes.

20. Are you planning to diversify into anything else?

At the moment we are looking to consolidate our business and unlock the value that is represented by the addition of the PQF mill. We believe that our time is best spent today in increasing sales from the PQF mill and in ramping up sales of some of the new products that we have developed.

As stated above, the 40 MW Captive Power Plant at Chandrapur commenced commercial operations from 28th May 2012. This power plant will deliver substantial savings to the company going forward. It will also hedge our costs against future increases in the cost of power.

Extending the same logic, ISMT has decided to participate in setting up a 150 MW Thermal Coal based Group Captive Power Plant in the state of Tamilnadu. Once again, we expect that our investment in this plant will be more than offset by the cost savings that accrue to the company through the purchase of power.

21. How has the current slowdown impacted its European Subsidiary?

ISMT acquired Structo Hydraulics AB, a Swedish company in June 07. Structo Hydraulics AB is one of the largest manufacturer of Cold Drawn and Skived and Roller burnished tubes and components manufacturer for the Hydraulic Cylinder industry in Europe.

The slowdown in the European markets has had a significant impact on sales at Structo and our efforts are now directed at cutting costs and improving utilization at Structo. Our longer term objective of using Structo to establish ourselves as the leading player in the hydraulic cylinder tube market in Europe and Asia remains unchanged. As a part of cost rationalisation, the Cold drawing operations of Sturcto are now shifted to India. ISMT now supply's Cold draw tubes to Structo, while Sturcto further Skives and Roller burnishes them so that they are ready for the hydraulic cylinder market. This shifting of Cold draw process to ISMT has led to increase in Cold draw product range for ISMT, while Structo to concentrate on high-end technology intensive processing. On the back drop on continuing European crisis and the Cold draw bench shifting, Structo's performance was satisfactory.  

22. How much is the total amount of debt on ISMT's books ?

As of 31st March 12, Long term debt stands at Rs. 969 Crores. During the year Company successfully redeemed all of the Outstanding FCCB's of USD 20 Million along with redemption premium.

23. Is the Company Rated by any External Agency?

ISMT has been rated by 'FITCH' Rating agency and has been assigned an Long Term Debt rating of 'A' and Short Term Debt Rating of 'F1'.

Further CRISIL's Independent Equity Research team has assigned Fundamental grade of 3/5, indicating that ISMT's fundamentals are good relative to other listed securities in India and has assigned Valuation grade of 5/5 indicating Current Market price has strong upside.  

24. What is the total equity of ISMT Limited?

Rs. 73.25 crores divided into 14.65 Crore shares of Rs. 5 each.

25. How much is the promoters? share of the equity?

Promoters holding as on 31.03.12 stands at 51.70%.