Business India, July 23-August 5, 2001
New steel
Tata Steel, the 90-year-old pioneer in steel making, has absorbed the shocks of liberalisation and turned from Tata’s ugly duckling into a swan
Shivanand Kanavi
“The treasury has its source in the mines; from the treasury the army comes into being. With the treasury and the army, the earth is obtained with the treasury as its ornament.”
— Arthashastra, by Kautilya, Chapter 2, Section12
The mother of all Indian tomes on statecraft and political economy, Arthashastra, was written not too far from the village of Sakchi (renamed Jamshedpur in 1919) over two millennia ago. Tata Steel confirms this ancient wisdom in many ways. During 2000-1, Tisco had the most profits within the House of Tata, after TCS.
Today, J.J. Irani the outgoing MD of Tisco, under whose leadership the company has undergone a remarkable transformation in the last decade, proudly points out that World Steel Dynamics (WSD), a US-based research firm, has placed Tata Steel on top of 12 world-class steel-makers (see table). The peer list includes such global giants as Nippon Steel, Usinor, Posco and Nucor. The 17 parameters compared for grading included operating costs, ownership of iron ore and coking coal, location, skills of manpower, power cost, on-going cost-cutting efforts, downstream business, borrowing costs and quality of management. Though such surveys were not done earlier, one can say that Tata Steel has not been in this elite club, far less has it topped it. A few years back, the public sector SAIL did better than Tisco, leading several people to question Tatas’ wisdom in continuing with the steel business. Some even said the group should focus on I T, perhaps even automobiles, and exit steel. But the Tatas abhor the idea of exiting a business when it is in trouble. (See Ratan Tata interview:“Given the right incentives, India can be a steel supplier to the world”) i
It has taken nearly 10 years of dogged effort to trim costs, improve operational efficiency, spend large sums to modernise the plant, develop a high-margin downstream product mix and increase labour productivity – all of which has turned this ugly duckling into a swan.
The company, which came into being in 1907, started production of pig iron from its blast furnace 90 years ago in 1911. Which is why many people even now, react to Tisco’s profits by saying: “Oh they have a depreciated plant”. The truth is, Tisco today has one of the most modern plants. As far as cold rolling, it is the most modern plant, not only in India but in the world. Except for the seven blast furnaces, which range from probably the oldest working blast furnace in the world – BFA, built in 1911 and a modern one B F-G, built in the ’90s – the rest of the integrated plant has undergone a total revamp. “In the early ’80s, I told JRD that if we do not modernize the plant, we might soon turn it into a steel industry museum and stand at the gates selling tickets,” reminisces Jamshed Irani, the out-going managing director who led the transformation in Jamshedpur in the last decade.
The steel shop was also transformed, from an open hearth process to the modern basic oxygen furnace (also called LD shop). Then came continuous casting. However, the product mix of Tisco was still primarily ‘longs’ used in construction. So, first of all, a shift was made to a modern wire rod mill and when ‘flats’ consumption increased in the country, a hot rolled coil mill was built. The last element, recently added, in this modernizing effort was the cold rolling mill along with galvanising lines.
Cold rolled coils are used in the automotive industry and the white goods industry, in refrigerators, air conditioners and washing machines. The galvanised sheets are used for mundane applications such as roofing to outer skin panels of cars. Thus, Tisco today has the most complete product mix as an integrated steel maker. One of the reasons for it staying afloat and even making profits in an industrial slump, is this product mix, which other steel makers in India lack. So, today when the flats are not fetching a good margin, the better margins in longs are helping the bottom-line.
Sajjan Jindal, vice-chairman and managing director of Jindal Vijaynagar Steel, points out, “The strengths of Tisco are: control over raw materials, a highly-skilled operating team, fully integrated plant including rolling mill, Tata brand equity, mixed product profile (flats and longs), cheaper access to capital being an AAA company. While we pay an average of 17 per cent, they pay 12 per cent — which is even below PLR.”
The planning and commissioning of the 1.2 MTPA cold rolling mill has been an important achievement for Tisco in many ways. It has not only added high-value products, which can fetch three times the price of hot rolled coil, but seems to have energized huge segments of management. The project managers felt it important enough to chronicle the saga in a hardbound book The Lotus and the Chrysanthemum. Besides the intrinsic importance of the project, what comes out clearly is the enthusiasm that the project generated in the company and the H R fallout. The project was completed at a rock bottom price of Rs1,600 crore and in a world record time of 26 months. Whereas, a similar cold rolling project took 38 months for Baoshan in China, 37 months for Siam United Steel in Thailand, 31months for Bethleheim Steel in the US and 29 months for Posco in South Korea. The phase of “modernisation of the mind” as Irani calls it, has clearly begun.
“It is an issue of leadership and motivating people. Rigorous followup – we used I T tools for project management – a lot of weekly meetings etc. We had a lot of problems from local vendors, but we made them come every month and make presentations with photographs on progress achieved. When we started, I had not seen a cold rolling mill (CRM), so we created a technology team, which went all around the world to see the CRM,” says B.D. Muthuraman, the new managing director who was in charge of the CRM project.
“Given right incentives, India can be a steel supplier to the world”--Ratan Tata
In a free-wheeling hour-long interview, Tata group chairman Ratan Tata
spoke to Shivanand Kanavi about the challenges faced at Tisco. Excerpts:
How do you look at your nine years as chairman of Tata Steel?
When I became the chairman, Tata Steel had just come out of the administered price regime where price increases were simply passed on to the consumer. The month I took over there was a crisis because freight equalisation had been discontinued and we were adversely affected since the major markets were in the south and the west. Tata Steel had come out of a seller’s market and hadn’t really oriented itself to the customer.
We set up two task forces, one to look at realisation and the other to look at costs, both of which were headed by Jamshed Irani. They went about looking at issues in a real hard way. We made some progress on both those scores. We started benchmarking ourselves with the best of the breed in the world. That really paid off, in terms of keeping great pressure on the level of our costs.
We also made a decision not to expand but modernise our facilities, and to move into flat products, which we saw as the growth area. We went through some difficult years in terms of cash flow and liquidity as we increased our levels of borrowings to see the various phases of modernisation through. Finally, the hot rolled mill and subsequently the cold rolled mill came into being. For a period of time, Tata Steel did not look hot to investors and analysts until we moved to the last phase of what we were doing.
The leadership in Jamshedpur has had a tremendous role to play in what was achieved. Jamshed Irani and his team have resolutely gone about making this transition, with no pulls and pressures that it should have been done in another way.
I think the only distraction would have been the view that Tata Steel should grow to 15 million tonnes, that it should be a volume producer as against a company that would be the best in its class. And perhaps, the period when one thought that Gopalpur would be the focal point of growth. I felt that growth in steel is going to be a difficult one and that we should consolidate ourselves and improve our operations before we looked at expansion.
What stops India from becoming the steel supplier to the world?
There are several issues. Koreans operate at 9:1 debt equity ratio, their interest rates are close to 1-2 per cent, whereas it is 18 per cent here. Tisco has had the benefit of the
Steel Development Fund, which is softer but which does not cover everything. The social costs in India and Tisco are a part of our baggage. Posco, for example, will bulldoze a plant that is obsolete and build another one in its place that is newer. We can’t do that in India. We need a MITI like approach to become supplier to the world. Here the steel industry has never been given the required incentives.
To build a modern company in Bihar must have been quite a challenge.
The credit has to go to a very strong community spirit in Jamshedpur. The people of
Jamshedpur have a very strong sense of pride, and there is a sense of fear that it should not become like the rest. When I lived there, in the ’60s, there was a time when for Rs15,000 somebody could get killed. Finally, we had a good SP who cleaned up the place. So the rot can happen in Jamshedpur also. Tata Steel has been a fair corporate citizen, it has given a lot to the community. It has administered not in its own self -interest, but in the broader interest of the community.
Don’t investors question why you give away Rs100 crore every year to Jamshedpur and surroundings?
In particular, foreign shareholders think that this is baggage we are carrying and, in a manner of speaking, it is. But if you look at the industrial harmony and so on, I don’t think you can ascribe a value to it. This is a cost you have and despite that if you are still going to be the lowest cost steel producer, then no one should mind.
Instead of investing in ferrochrome and titanium why don’t you acquire steel?
Within India Tata Steel has looked at some options. But we recognized that, regrettably, the steel industry does not cover the cost of capital — and this is the global situation. Therefore, you do see reductions in capacities in various parts of the world. If you have to invest thousands of crores, as we did in the modernisation of the plant, and if it doesn’t give us a return that is equal to the cost of capital, then we have destroyed shareholder value. Moreover, just because you are Tata Steel does not mean that steel can be your only growth area. In the world you have companies that started in fertilizers and now are in pharmaceuticals. Companies like Mannesman that were in steel are now in telecom.
There are other group companies operating in the area of telecom, then why Tata Steel?
Tata Steel has not decided to get into telecom. We said let’s parcel out various parts of the telecom activity and look at the Group as a whole being in telecom. Ideally, you would have got one consolidated telecom company in the Group. But again, shareholders say: ‘This is my money and all I have is dividend returns from the company’. So, another way to do it is, you parcel it out even though that is a less efficient way of doing it. The bits are not in competition but complement each other. Maybe one day we will merge those into one.
Are you looking at acquiring steel plants abroad?
We are looking at plants abroad. However, we should be sure that we can manage that extra capacity on a global basis also. You could get a huge asset at a very good price, but you might end up having surplus capacity, which will be outside India. You then have to support it in terms of foreign exchange and we do not have a foreign base to do it. So we may be cautious in looking at these plants. Our ethic also prevents us from walking away from an acquisition when it sours.
Did McKinsey’s advise you to dump steel?
McKinsey’s did not tell us to dump this or dump that. McKinsey’s just gave us discussion notes in various industries. They raised some serious questions regarding the steel industry and whether it destroyed shareholder value. And I must say they awakened us to the fact that we had to do much more in steel to make it an investor-attractive area of business.
Last year Tata Steel made the most profits in the Group after TCS.
We need to be a little circumspect. Tisco has now got two high margin plants on line. It has shed its old processes. Crucial to producing and sustaining these results is growth in demand in its user industries, like auto, white goods and construction. Even if domestic demand picks up but there is over capacity in the world then you will be faced with low cost imports.
However, there are two pluses; one is that steel is a commodity. Hence, Tata Steel has been able to go all-out in production, covering its cost and dropping its price. The other advantage is, if the Indian market got bad you could export it. In product markets like trucks or refrigerators you can’t do both these things.
“The language in the project changed as well. We call our workers ‘associates’. They used to make presentations regularly. In any project, the operating manuals come from the suppliers, in our case Standard Operating Practice Instructions was written by our workers. It has been used as a training document. Our operators kept redrafting it. Thus, they have ownership now. We look at the manual and make additions based on experience,” adds Muthuraman.
“We were operating the steel melting plant for 90 years in a particular way, whereas here things had to be done differently. So we segregated the project. We gave everybody a uniform. Even I have to wear it when I go into C R M. We selected a higher class of people, all of who know how to use computers, and used a different salary structure — a large part of the salary is variable (performance linked). The union also agreed to it. That experiment has succeeded and we are now moving for this type of organizational structure and salaries in other departments also. There are only three levels there, whereas in the rest of the plant there are 11 levels. Instead of forcing this model on others, we wanted them to feel that they want it themselves — and it is working,” says Irani.
A major factor, which led to a record low cost for the C R M, has been the optimum usage of in-house capabilities. “Our principle for the last 20 years has been to build as much as possible ourselves. We have a Growth Shop in Jamshedpur built by Sumant Moolgaonkar 30 years back for the express purpose of building steel plant equipment. So we naturally used it for the hot strip mill, LD project. For the wire and rod mill project we negotiated with our ultimate suppliers to give us the drawings to be used only by us and not to be exported — and we have maintained our word. Similarly, we did use Hitachi’s drawings for CRM but we do not then make it for others unethically,” explains Irani.
Sajjan Jindal was most impressed on his recent Jamshedpur visit. He told Business India: “It is a world-class facility. The highly skilled team at Tisco will make a winner out of it. Quality and marketing the automotive grade is a problem since it is a new product. It will take a little time, but they will do it. Tisco also got the cold rolling mill at a very good price, since nobody else was building a mill at that time.”
Along with modernising the plant came the emphasis on customers. “You have to see the change in our marketing offices in Kolkata and throughout the country to understand the change in the mindset,” says Firdaus Vandrewala, deputy managing director, international projects, who was till recently in charge of marketing. “From a totally sellers’ market during the control regime, we have moved into a highly customer friendly attitude with a very high usage and ERP tools and IT in general. We are constantly monitoring customer satisfaction and one of the most important programmes in the plant is the ‘Customer Week’, which we hold regularly. During the week, we invite our customers to see the plant and make suggestions and register any complaints which will be immediately addressed,” adds Vandrewala. Business India visited Jamshedpur during one such Customer Week programme. The importance attached to the programme was very clear, since all the top executives, including Irani and Muthuraman, excused themselves from interviews and photo-shoots to attend to the customers.
As far as manufacturing practices are concerned, Tisco has a long tradition of benchmarking with the First World even a century ago. In his endeavour to usher in a modern steel age in India, visionary Jamsetji Tata travelled extensively across the world and saw the best steel plants in Great Britain, Germany and the US and consulted with the best geologists and mining engineers, before he raised the money from the Indian public. The tradition was carried forward by Dorab Tata, who implemented his father’s vision in the jungles of Chota Nagpur near the village of Sakchi. He had the blast furnace set up by the Americans, the steel shop by the Germans, the coke ovens by the Welsh.
The control regime in independent India, of course, greatly reduced the opportunities to grow into a global giant. At the same time, by providing administered prices and other protection, it removed the edge from the steel business. However, Malay Mukherjee, COO, Ispat International, remembers his days in Bhilai: “During my time in S A I L, I had visited Tisco a number of times. Each time I learnt something from them and introduced many good practices in our SAIL plants. I got great satisfaction when, during my time in Bhilai, we won the first Prime Minister’s award as the best steel plant. Tata Steel was second. The satisfaction came from the fact that on many of the subjects we were judged on, I had implemented what I had learned during my visits to Tisco. I have maintained contacts over the years and I have been impressed by the progress they have made in modernizing the plant and putting in proper technology for quality improvements.”
Today Tisco is being hailed as one of the lowest-cost producers of steel in the world. A fact reiterated by a report by Consumer Research Unit of the UK. Incidentally, the report does not consider L.N. Mittal’s plant in Kazakhstan, which claims to be almost 30 per cent lower in cost than Tisco. This controversy aside, the cost consciousness in Tisco warms the cockles of Ishaat Hussain’s heart. “Everywhere you go in Tisco you will find an obsession with cost,” says Hussain, who is director, Tata Sons, and an old Tisco hand.
What did Tisco actually do to achieve the low-cost producer status? Answers Tridib Mukherjee, deputy managing director, who is in charge of operations and marketing: “We concentrated on four to five areas. First of all, we looked at our strengths. We have captive raw materials like coal, iron ore and lime stone so we can be the cheapest hot metal producers. When we looked at that part, we found that we were using up to 30 per cent of imported scrap as feedstock. This was totally unnecessary and we reduced it over a period of time to 5 per cent. Secondly, we increased the output of hot metal by increasing what we could get out of existing assets like blast furnaces. We used to produce 2,800 tonnes per day with our B F-G, which we gradually took up to 4,000 tpd. We benchmarked with the best practices of leaders like Nippon, CST (Brazil) and Posco in this regard. We fine-tuned our sinter plant and increased production from 2.4 MT of sinter to 3.9 MT, which is as good as having one sinter plant free. Similarly, we were using imported coal for coke ovens and found that by changing the way we charge the ovens to Stamp Charging, we could produce high-quality coke with our own pulverised coal. Now our mix is 70:30 for Indian and imported coke. We were also able to develop highquality low phosphorous steel with our own technology. This was necessary since our ore contains high phosphorous. For this we had to develop a dolomite-free process. We reduced the labour from 72,000 to 48,000. A major factor for cost reduction is, of course, employee involvement. We received literally thousands of suggestions. Our estimate is that the suggestions have saved us Rs250 crore last year,” says Mukherjee.
The stamp charging technology for coke ovens was seen by Irani in a power plant in Germany in the ’80s. He then convinced his colleagues to invest in redoing the coke ovens for this new method, which has proven a great success. But Irani explains that cost consciousness is more mindset than a specific project. “We attacked energy consumption. The use of liquid fuel has been eliminated by generating enough gas from coke oven and blast furnace. That gas is used to heat up steel before rolling it out. We have a material in India, called Blue Dust, which is grey in colour, very rich in iron but as fine as talcum powder. It cannot be used in the blast furnace in a powder form. So we put up a new sinter plant and developed the appropriate technology with Lurgi, which saved us money since we used to throw the Blue Dust away earlier. It has also extended the life of our mines. We improved the yields in our mills by benchmarking. There must be at least 500 items in each department for cost reduction. Cost consciousness is an attitude. It is not just one single project. For example, now that we are all on e-mail, our STD spend comes down,” he adds.
Today, prominent bill boards at the plant and in Jamshedpur city no longer say: ‘We also make steel’ Instead they say: ‘Cost, Customer and Code’. While the exhortation about cost and customer is as clear as daylight in today’s competitive market place, one wonders what the code is all about. The insistence on boy scout like adherence to the Tata code of conduct and good corporate practice in yesterday’s Bihar or today’s Jharkhand, sounds impractical to pragmatists, leave alone the cynics.
How do Tatas run a First World company in a Fourth World environment? The articulate A.N. Singh, director in charge of township services, is an authority of sorts on the subject. He served in the I P S for 22 years in Bihar before he took voluntary retirement and joined Tata Steel. “The moment you play according to their rules, you will remain in the Fourth World. Of course, delays will take place. There is a great amount of poverty and lack of will to administer the laws of the country. But Tata Steel has been doing business for 90 years and there are others also doing reasonably well. If we can do it with our code of conduct, I do see a future. For example, we are in an island of peace in West Bokaro, surrounded by extremists. One of the reasons is our sense of corporate responsibility and being able to vibe with the community. For example, in West Bokaro we have open cast coal mines. The community living around us has realized for decades that they are flourishing because this coal mine is being run by the Tatas,” says Singh.
Irani adds: “Laloo Prasad Yadav is my friend, and right in the beginning I made it clear what friendship stood for. I said to him: ‘You have your rules and we have ours. We will do everything by your rules. We will not ask you to give a sales tax benefit here, or some short cut there. In return, don’t ask us for any underhand thing and break our value system.’ And to his credit, he has never made an indecent proposal. He asked us to clean up Patna, which we do as our social responsibility. He wanted a college to be built in Samastipur. We did that since we encourage education. He asked us to build a Tata ward for children in Patna hospital, which was in a very pitiable condition and we did that. Now we are doing a hospital in Hazaribagh. Laloo told somebody: ‘Going for anything illegal to the Tatas is like going to an Udupi restaurant and asking for a tandoori chicken’. Sometimes people come to Jamshedpur with expectations and then find in a week or longer that the Tatas won’t give money and they give up. If I find any of our officers has done underhand things, then I sack him instantly,” says Irani. No wonder Irani has earned the sobriquet from some leading politicians of Jharkhand— “the prime minister of Jharkhand.
When we enquired as to the truth of these assertions from a prominent businessman in Jamshedpur, who is not “burdened” by any code of conduct, he said: “Of course, it is true. That is why Tisco takes three months to get something done from the government in matters which take me three telephone calls.”
The emphasis on quality in Tisco has been recognised by Indian industry and several awards are pouring in. But the one that makes Tisco people walk a little taller within the Tata group is the J.R.D. Tata award for excellence in quality, which has been fashioned on the Malcolm Baldridge award. It makes them proud that this 90-year-old company, which many people thought stood for stodginess in the group, has made it to the top, while other companies in the group have not even reached the qualifying mark.
Irani, however, is not carried away by the hype about being the lowest cost producer in the world. He admits that if the advantage of coal and iron ore mines – which Posco and Nippon Steel do not have – is taken away, then Tisco will be one of the efficient producers and not necessarily the lowestcost producer. He points out that the World Steel Dynamics report clearly gives the same number of points to all the top 12 steel makers regarding ongoing cost-cutting programmes and the proactive quality of the management. So, Tisco’s position at the top can be temporary. “Living in today’s world means running to stand still,” is the advice he gives to Muthuraman.
The wily Kautilya seems to have hit the nail on its head about Tisco by stating: “The treasury has its source in the mines....”
Tuesday, August 21, 2007
Tuesday, August 14, 2007
E-commerce--IRCTC
Business India, September 15 – 28, 2003
E-com on the rails
A subsidiary of the railways serves up reservations on the Net
Shivanand Kanavi
Have you heard of Aluva, Allapuzha, Haldwani, Kollam, Palakkad, or Thrissur? Even if you had, definitely not as hot beds of ecommerce. Well, the data that Amitabh Pandey, GM (IT services) at IRCTC (Indian Railways Catering and Tourism Corporation) dishes out from his desktop would teach a thing or two to many Internet gurus.
IRCTC has been providing online ticketing for Indian Railways for the last year. In this short time it has come to be the largest e-commerce site in India, booking over 50,000 tickets per month. Some might say that Railways sell over 500,000 tickets a day, and hence this is “just peanuts”. Sure it is.But what’s important is the trend. The convenience of booking a ticket online using a credit card without standing in any queue, and then having the tickets delivered home by courier, is drawing people by the droves into it.
“It’s not just the metros which have been active but as soon as we add a new town on our system, they start getting active with hardly any advertisement,” adds Pandey. “You can see from the July 2003 data that clearly Mumbai (11,107), Delhi (7,504), Chennai (6,141), and Bangalore (4,430) lead. But a fairly large number of bookings are coming from Anand, Allahabad, Baroda, Bhopal, Bhubaneswar, Coimbatore, Dehradun, Faridabad, Ghaziabad, Guwahati, Indore, Jaipur, Jabalpur, Kanpur, Kochi, Kozhikode, Ludhiana, Nagpur, Patna, Rajkot, Silvassa, Surat, Vapi, Varanasi, and Visakhapatnam as well,” he adds.
Pandey has become an evangelist for e-commerce. “Despite the fact that Internet spread is very limited, it is spreading very fast. I just came from Kumaon last week — in a tahsil town like Ranikhet there is Internet access. The telecom revolution has come to India. I remember when I was in Jhansi the only reliable telephone was the railway’s telephone at the station. Today I see my parents in their 1970s chatting on AOL. In fact a majority of users of online booking are above 30, breaking another myth that Internet commerce is basically a youth phenomenon.
The middle class is conscious of the Internet and its possibilities. It may be small compared to the volumes in India, but it has come to stay and is growing very fast. The opportunities are immense.
This is not rocket science; the idea has been around for a long time even in the Railways. After IRCTC was set up to mainly improve catering and hospitality associated with Railways, we went to the Railways and said this too could be done quickly by us. The ministry was totally with us. It took us only one presentation to convince the board. It was a simple presentation and the board asked us some questions. We assured them that the existing passenger reservation system would not be disturbed and they said, go ahead.”
With his enthusiasm for technology one would think Pandey is a techie. But he is not. A product of the Delhi School of Economics, Pandey taught in Delhi University colleges for a few years before joining Railway Traffic Services in 1982. Traffic services involve operations (train planning, running, traffic planning, etc), associated commercial activities, and safety monitoring.
Pandey’s 15 years in operations took him to Bombay,Nagpur, Bhusawal, Jhansi, etc. Then the Railways started to corporatise catering and set up IRCTC, which started operations in 2001.
Historically, the Indian Railways have played a major role in popularising computers in India. Reservations were computerised in the 1980s by CMC and immediately brought relief to consumers in terms of efficiency and time saved. The Railways set up the Centre of Railway Information Systems (CRIS) in 1986 to be an umbrella for all computer activities of Indian
Railways so that different divisions did not carry on incompatible IT activities. They also entrusted it with the task of design, development, and implementation of the Freight Operations Information Systems, along with its associated communications infrastructure.
CRIS improved the reservation system and also networked it so that any one could book any ticket from any terminal in India and improved the system further. This service, enjoyed by millions, contributed greatly to changing the image of computers as job-stealers into enhancers of productivity.
Of the 11 million passengers who travel in 8,520 trains each day, about 550,000 have reserved accommodations. The challenge is to provide a reservation system that can support such a huge scale of operations — regardless of whether it’s measured by kilometers, passenger numbers, routing complexity, or simply the sheer scale of India. The Passenger Reservation System (PRS) started in 1985 as a pilot project in New Delhi. It has distributed databases at Mumbai, Delhi, Kolkata, Chennai, and Secunderabad. These five centres are networked with leased lines and different towns are connected in turn to one of these centres. It is a robust system, selling nearly 200 million tickets a year, and no one wants to disturb it even if its technology is obviously two decades old. That is the reason the IRCTC team went to great lengths to assure the Railway Board that they would not touch the existing system in any way. IRCTC would need just an entry point into PRS, where the queries coming from its Internet customers would be converted into an appropriate form understandable to PRS. The Railways treated IRCTC as any other ticket window, hence IRCTC had to pay them in advance and collect the money later from its customers through credit card payments.
“Though we have secure servers, people are still hesitant to give credit card information on the net. Hence we are increasingly connecting it to the payment gateways of banks providing Net banking so that the money can be deducted from their bank accounts directly,” says Pandey. The number of banks joining in this direct debit is increasing by the day — ICICI Bank, HDFC Bank, IDBI Bank, Citibank, Bank of Punjab, Global Trust Bank, UTI Bank, and Centurion Bank are already on board. The recent addition of State Bank of India is expected to increase the reach of this system.
“Direct debit transactions have increased greatly after we hooked up with IRCTC,” says C.N. Ram, IT head at HDFC Bank. But Pandey continues to innovate. “We are looking at bookings on the phone through call centres as well as through mobile commerce, where service providers take up the collection risk.” The volumes of online booking are still small. In the last year they have amounted to only Rs57 crore, but as the number cities and towns serviced by IRCTC increases and as payment options increase, the volumes are also bound to rise. Why should towns be added to an Internet booking service? After all, the Net is accessible from anywhere in the globe. Well, the limitation comes from the courier service since the tickets can be booked from anywhere but the delivery is still physical. Of course, one way to sort this out is to take the e-ticket route, where the ticket is sent by email to the customers as many airlines do in the US.
Pandey and his team are of course ironing out any wrinkles in the system for example a common complaint from customers in Mumbai is that when a customer books a return ticket, inexplicably he gets a ticket terminating at Kalyan or Borivli, which are outlying stations. The reason is that Mumbai is not one station. Several fall in the area: Kalyan, Kurla, Dadar (Central), Dadar (Western), Borivli, Bandra, and Mumbai Central. When the customer does not give the right station code understood by PRS, the system assumes the outermost station in the cluster and goes ahead. “This is in fact the challenge in our system. PRS is an interactive system, which is operated by trained railway personnel the way airline reservations are done by travel agents, whereas Internet bookings are done by customers who are not accustomed to codes, etc, and need a self-help portal. We are working constantly to improve it,” says Pandey.
Clearly the “death of distance” vision of the dot.com era had substance which got buried in the hype. Now with greater Internet and PC penetration, along with improved telecom infrastructure, some glimpses of that future are here.
E-com on the rails
A subsidiary of the railways serves up reservations on the Net
Shivanand Kanavi
Have you heard of Aluva, Allapuzha, Haldwani, Kollam, Palakkad, or Thrissur? Even if you had, definitely not as hot beds of ecommerce. Well, the data that Amitabh Pandey, GM (IT services) at IRCTC (Indian Railways Catering and Tourism Corporation) dishes out from his desktop would teach a thing or two to many Internet gurus.
IRCTC has been providing online ticketing for Indian Railways for the last year. In this short time it has come to be the largest e-commerce site in India, booking over 50,000 tickets per month. Some might say that Railways sell over 500,000 tickets a day, and hence this is “just peanuts”. Sure it is.But what’s important is the trend. The convenience of booking a ticket online using a credit card without standing in any queue, and then having the tickets delivered home by courier, is drawing people by the droves into it.
“It’s not just the metros which have been active but as soon as we add a new town on our system, they start getting active with hardly any advertisement,” adds Pandey. “You can see from the July 2003 data that clearly Mumbai (11,107), Delhi (7,504), Chennai (6,141), and Bangalore (4,430) lead. But a fairly large number of bookings are coming from Anand, Allahabad, Baroda, Bhopal, Bhubaneswar, Coimbatore, Dehradun, Faridabad, Ghaziabad, Guwahati, Indore, Jaipur, Jabalpur, Kanpur, Kochi, Kozhikode, Ludhiana, Nagpur, Patna, Rajkot, Silvassa, Surat, Vapi, Varanasi, and Visakhapatnam as well,” he adds.
Pandey has become an evangelist for e-commerce. “Despite the fact that Internet spread is very limited, it is spreading very fast. I just came from Kumaon last week — in a tahsil town like Ranikhet there is Internet access. The telecom revolution has come to India. I remember when I was in Jhansi the only reliable telephone was the railway’s telephone at the station. Today I see my parents in their 1970s chatting on AOL. In fact a majority of users of online booking are above 30, breaking another myth that Internet commerce is basically a youth phenomenon.
The middle class is conscious of the Internet and its possibilities. It may be small compared to the volumes in India, but it has come to stay and is growing very fast. The opportunities are immense.
This is not rocket science; the idea has been around for a long time even in the Railways. After IRCTC was set up to mainly improve catering and hospitality associated with Railways, we went to the Railways and said this too could be done quickly by us. The ministry was totally with us. It took us only one presentation to convince the board. It was a simple presentation and the board asked us some questions. We assured them that the existing passenger reservation system would not be disturbed and they said, go ahead.”
With his enthusiasm for technology one would think Pandey is a techie. But he is not. A product of the Delhi School of Economics, Pandey taught in Delhi University colleges for a few years before joining Railway Traffic Services in 1982. Traffic services involve operations (train planning, running, traffic planning, etc), associated commercial activities, and safety monitoring.
Pandey’s 15 years in operations took him to Bombay,Nagpur, Bhusawal, Jhansi, etc. Then the Railways started to corporatise catering and set up IRCTC, which started operations in 2001.
Historically, the Indian Railways have played a major role in popularising computers in India. Reservations were computerised in the 1980s by CMC and immediately brought relief to consumers in terms of efficiency and time saved. The Railways set up the Centre of Railway Information Systems (CRIS) in 1986 to be an umbrella for all computer activities of Indian
Railways so that different divisions did not carry on incompatible IT activities. They also entrusted it with the task of design, development, and implementation of the Freight Operations Information Systems, along with its associated communications infrastructure.
CRIS improved the reservation system and also networked it so that any one could book any ticket from any terminal in India and improved the system further. This service, enjoyed by millions, contributed greatly to changing the image of computers as job-stealers into enhancers of productivity.
Of the 11 million passengers who travel in 8,520 trains each day, about 550,000 have reserved accommodations. The challenge is to provide a reservation system that can support such a huge scale of operations — regardless of whether it’s measured by kilometers, passenger numbers, routing complexity, or simply the sheer scale of India. The Passenger Reservation System (PRS) started in 1985 as a pilot project in New Delhi. It has distributed databases at Mumbai, Delhi, Kolkata, Chennai, and Secunderabad. These five centres are networked with leased lines and different towns are connected in turn to one of these centres. It is a robust system, selling nearly 200 million tickets a year, and no one wants to disturb it even if its technology is obviously two decades old. That is the reason the IRCTC team went to great lengths to assure the Railway Board that they would not touch the existing system in any way. IRCTC would need just an entry point into PRS, where the queries coming from its Internet customers would be converted into an appropriate form understandable to PRS. The Railways treated IRCTC as any other ticket window, hence IRCTC had to pay them in advance and collect the money later from its customers through credit card payments.
“Though we have secure servers, people are still hesitant to give credit card information on the net. Hence we are increasingly connecting it to the payment gateways of banks providing Net banking so that the money can be deducted from their bank accounts directly,” says Pandey. The number of banks joining in this direct debit is increasing by the day — ICICI Bank, HDFC Bank, IDBI Bank, Citibank, Bank of Punjab, Global Trust Bank, UTI Bank, and Centurion Bank are already on board. The recent addition of State Bank of India is expected to increase the reach of this system.
“Direct debit transactions have increased greatly after we hooked up with IRCTC,” says C.N. Ram, IT head at HDFC Bank. But Pandey continues to innovate. “We are looking at bookings on the phone through call centres as well as through mobile commerce, where service providers take up the collection risk.” The volumes of online booking are still small. In the last year they have amounted to only Rs57 crore, but as the number cities and towns serviced by IRCTC increases and as payment options increase, the volumes are also bound to rise. Why should towns be added to an Internet booking service? After all, the Net is accessible from anywhere in the globe. Well, the limitation comes from the courier service since the tickets can be booked from anywhere but the delivery is still physical. Of course, one way to sort this out is to take the e-ticket route, where the ticket is sent by email to the customers as many airlines do in the US.
Pandey and his team are of course ironing out any wrinkles in the system for example a common complaint from customers in Mumbai is that when a customer books a return ticket, inexplicably he gets a ticket terminating at Kalyan or Borivli, which are outlying stations. The reason is that Mumbai is not one station. Several fall in the area: Kalyan, Kurla, Dadar (Central), Dadar (Western), Borivli, Bandra, and Mumbai Central. When the customer does not give the right station code understood by PRS, the system assumes the outermost station in the cluster and goes ahead. “This is in fact the challenge in our system. PRS is an interactive system, which is operated by trained railway personnel the way airline reservations are done by travel agents, whereas Internet bookings are done by customers who are not accustomed to codes, etc, and need a self-help portal. We are working constantly to improve it,” says Pandey.
Clearly the “death of distance” vision of the dot.com era had substance which got buried in the hype. Now with greater Internet and PC penetration, along with improved telecom infrastructure, some glimpses of that future are here.
Rajeev Motwani
Business India, May 24-June 6, 2004
Mathematician at heart
Rajeev Motwani is eagerly waiting for the Google IPO
Shivanand Kanavi
Rajeev Motwani has done it all. A Godel Prize winner, one of the most prestigious awards in theoretical computer science, one of the youngest professors at Stanford. Author of several papers in esoteric subjects like randomised algorithms and data streaming, Motwani is now eagerly waiting. No, not about another award or a theoretical conference, but for the Google I P O. As a former technical advisor to Google and a mentor to the founders in their student days at Stanford, where the search engine took shape, Motwani owns an undisclosed amount of stock in Google.
Motwani’s father was in the Indian Army, which meant growing up all over India. Young Motwani wanted to be a mathematician, like Gauss. “This was partly shaped by the books I had at home. My parents for some reason had a lot of these books – 10 great scientists or five famous mathematicians – their life story and so on. As a child, whatever heroes you read about you want to become,” adds he.
After St. Columbus in Delhi, Motwani joined I I T Kanpur, which at that time had just started the undergraduate programme in computer science. “I truly wanted to be a mathematician, and my parents were hesitant because how do you make money as a mathematician, how do you support a family, what is this all a b o u t .
“I was basically forced into going into computer science even though I did not want to, but it turned out to my wonderful surprise that computer science is actually quite mathematical as a field. One of the shaping influences was actually Kesav Nori – he was there for a while and, in fact, I I T Kanpur at that time had a outstanding computer science department. It was an amazing confluence of people and p e r s o n a l i t i e s .
“Again Berkeley was a very positive influence, very politically oriented; it’s like the J N U of the US. I was so thoroughly enjoying the new environment I was in. My advisor, Richard Karp, was a Turing Award winner, which is sort of like the Nobel Prize in computer science. At that point it occurred to me that I am letting down this great man, not producing anything and the last two years I was tremendously productive.”
Motwani has worked in many different areas in Stanford, like robotics and drug design. “I credit Stanford for creating an environment where people in different areas can work with each other and do things where the whole is greater than the sum of the parts,” he says.
“Meanwhile the World Wide Web was coming around at that time and I just got sucked into that. Sergey Brin and Larry Page were running a search engine out of Stanford. These 21- year-olds would come in and make demands on me – we need more disk space because we are crawling the Web and its getting bigger, we need to buy more disk... I’d give them more money and they’d go buy more disks. At some point these guys said, we want to go do a company. Everybody said you must be out of your minds. There are like 37 search engines out there and what are you guys going to do? And how are you going to raise money, how will you build a company, and these two guys said, we’ll just do it and they went off and did it. And there are some big names who supported the company in its early stages. And then they took over the world. And right now, you know, other search engines do not even compare. It is just amazing. Just feels like a part of a little bit of history and I contributed a little bit to that history. Now I have become a start-up
j u n k i e . ”
How does Google’s technology work? He explains, “Let us say that you wanted information on ‘bread yeast’ and put those two words in Google. Then it not only sees which documents have these as words mentioned but also whether these documents are linked to other documents. An important page for ‘bread yeast’ must be having all other pages on the Web dealing in any way with ‘bread yeast’ also linking to it. In our example there may be a Bakers’ Association of America, which is hyper-linked by most documents containing ‘bread yeast’, then it implies that most people involved with ‘bread’ and ‘yeast’ think that the Bakers Association’s Web site is an important source of information. So Google will rate that Web site very high and put it on top of its list. Irrelevant documents which just mention ‘bread’ and ‘yeast’ will not be given any priority in the results.
“By the way, you might have noticed that the job of the search engine is nothing more than what a humble Librarian does all the time and more intelligently! However, the automation in the software comes to our rescue in coping with the exponential rise in information.”
Rajeev Motwani is eagerly waiting for the Google IPO
Shivanand Kanavi
Rajeev Motwani has done it all. A Godel Prize winner, one of the most prestigious awards in theoretical computer science, one of the youngest professors at Stanford. Author of several papers in esoteric subjects like randomised algorithms and data streaming, Motwani is now eagerly waiting. No, not about another award or a theoretical conference, but for the Google I P O. As a former technical advisor to Google and a mentor to the founders in their student days at Stanford, where the search engine took shape, Motwani owns an undisclosed amount of stock in Google.
Motwani’s father was in the Indian Army, which meant growing up all over India. Young Motwani wanted to be a mathematician, like Gauss. “This was partly shaped by the books I had at home. My parents for some reason had a lot of these books – 10 great scientists or five famous mathematicians – their life story and so on. As a child, whatever heroes you read about you want to become,” adds he.
After St. Columbus in Delhi, Motwani joined I I T Kanpur, which at that time had just started the undergraduate programme in computer science. “I truly wanted to be a mathematician, and my parents were hesitant because how do you make money as a mathematician, how do you support a family, what is this all a b o u t .
“I was basically forced into going into computer science even though I did not want to, but it turned out to my wonderful surprise that computer science is actually quite mathematical as a field. One of the shaping influences was actually Kesav Nori – he was there for a while and, in fact, I I T Kanpur at that time had a outstanding computer science department. It was an amazing confluence of people and p e r s o n a l i t i e s .
“Again Berkeley was a very positive influence, very politically oriented; it’s like the J N U of the US. I was so thoroughly enjoying the new environment I was in. My advisor, Richard Karp, was a Turing Award winner, which is sort of like the Nobel Prize in computer science. At that point it occurred to me that I am letting down this great man, not producing anything and the last two years I was tremendously productive.”
Motwani has worked in many different areas in Stanford, like robotics and drug design. “I credit Stanford for creating an environment where people in different areas can work with each other and do things where the whole is greater than the sum of the parts,” he says.
“Meanwhile the World Wide Web was coming around at that time and I just got sucked into that. Sergey Brin and Larry Page were running a search engine out of Stanford. These 21- year-olds would come in and make demands on me – we need more disk space because we are crawling the Web and its getting bigger, we need to buy more disk... I’d give them more money and they’d go buy more disks. At some point these guys said, we want to go do a company. Everybody said you must be out of your minds. There are like 37 search engines out there and what are you guys going to do? And how are you going to raise money, how will you build a company, and these two guys said, we’ll just do it and they went off and did it. And there are some big names who supported the company in its early stages. And then they took over the world. And right now, you know, other search engines do not even compare. It is just amazing. Just feels like a part of a little bit of history and I contributed a little bit to that history. Now I have become a start-up
j u n k i e . ”
How does Google’s technology work? He explains, “Let us say that you wanted information on ‘bread yeast’ and put those two words in Google. Then it not only sees which documents have these as words mentioned but also whether these documents are linked to other documents. An important page for ‘bread yeast’ must be having all other pages on the Web dealing in any way with ‘bread yeast’ also linking to it. In our example there may be a Bakers’ Association of America, which is hyper-linked by most documents containing ‘bread yeast’, then it implies that most people involved with ‘bread’ and ‘yeast’ think that the Bakers Association’s Web site is an important source of information. So Google will rate that Web site very high and put it on top of its list. Irrelevant documents which just mention ‘bread’ and ‘yeast’ will not be given any priority in the results.
“By the way, you might have noticed that the job of the search engine is nothing more than what a humble Librarian does all the time and more intelligently! However, the automation in the software comes to our rescue in coping with the exponential rise in information.”
Monday, August 13, 2007
The Essar Story
Business India, July 26-August 8, 1999
Tempering Essar
A group that became one of the icons os entrepreneurship in the early 1990s has suffered a setback. Will it learn from its mistakes and fight its way out of the corner?
Shivanand Kanavi
It is a great view from the top of Essar House, an ornate structure bordering on the opulent. The Ruias manage their conglomerate, the Essar Group, encompassing steel, power, oil, telecommunications, and shipping, from their offices on the 19th and 20th storeys. From the glass-and-marble tower you have a bird’s eye view of the famous Royal Western India Turf Club, commonly known as Mahalaxmi Race Course, where fortunes are sometimes made but most often lost. Turning left, you see businessmen and executives sharpening their swings and putts with their irons on the golf course at Willingdon Club. Straight ahead is the panoramic expanse of the Arabian Sea and, if the weather's good, a clear horizon. Today, however, the monsoon has made the seas choppy. In the midst of their packed schedules with international bankers, as the Ruias cast glances at the turbulent waters, they must find the sight rather symbolic.
They have had many firsts in several businesses, of which they are proud of, but today they don't relish the new first: they became the first Indian corporate group to have defaulted on a foreign financial obligation by failing to redeem their floating rate notes (FRNS) worth $250 million on 20 July 1999.
What has gone wrong?
What will they do next? Are they going under? Will they survive this setback and bounce back? Do they have a credible plan for the same? These are several questions that Business India investigated. To put things in perspective and not be carried away by the down cycles in commodities, the more appropriate question to start with is: What did they do right?
If there was any proof needed that liberalisation would unleash true entrepreneurship in India, then Essar's growth in the last 10 years could be cited as one of the handful of examples. From successful medium-sized businesses in marine and port construction, oil-drilling, and shipping, Essar first took the opportunity provided by the gas pipeline to start a very successful sponge iron business and then, with the gradual opening up of the steel sector, had the vision to set up a world-class integrated steel plant.
For Indians used to outdated steel technology in public sector mills, and the old works at Jamshedpur, Essar provided the first glimpse of world-class steel manufacturing, setting up a mill that produces two million tonnes of steel and hot-rolled coils with less than 2,000 employees. When many thought that India could be competitive because of cheap labour, Essar thought otherwise. Today its labour costs (according to Paribas Asia Equity) are $5 per tonne as compared to $49 per tonne for SAIL and $ 76 per tonne for Tisco, and its energy costs per tonne are half that of SAIL and Tisco.
Since an assured and cheap power supply is essential, they first went in for a 215 MW captive power plant and then, when the opportunity arose for independent power producers, expanded it to 515 MW. This power plant is run by a total of 38 people.
It is well known that Bailadila in Orissa produces the best iron ore in the world. However, lumps of iron ore are exported, while the fines or tailings mount up into ugly mountains at the rate of 8-9 million tonnes per year. In the monsoons a large part of these fines actually flow into the rivers, polluting the water. So Essar came up with a plan to convert them into pellets that can be fed directly into sponge iron plants as feedstock. Until now the South Americans had a monopoly over this product (DR-grade pellets). So Essar set up a modern pellet plant at Visakhapatnam (run by 75 people, including administration) producing 3.5 Mtpy of pellets. Since rail transport of fines costs about Rs400 per tonne, it planned a beneficiation plant that would upgrade the fines, and a slurry pipeline that would reduce the cost of transportation to Rsl00 per tonne. Essar designed it to carry 7 million tonnes, giving themselves enough scope to double capacity whenever required.
Essar had already built up expertise in shipping and port construction, thus building the required infrastructure at Hazira and Vizag was no problem. In fact, it actually gave them the flexibility to use pellets internally as well as export pellets from Vizag and steel or sponge iron from Hazira.
Similarly, when the government allowed the private sector to exploit developed minor oilfields and explore new ones, Essar, by then one of the largest drilling contractors in the Gulf, was quick to bid. When government took great time to carryon in this direction but opened up oil refining, Essar was one of the first out with a proposal to build a refinery. Since then, even though dozens of proposals were submitted by various industrial houses and public sector oil companies, the only ones under implementation are Reliance Petroleum (27 Mtpy) and Essar Oil (10.5 Mtpy with a provision to reach 24 Mtpy later). Reliance has announced the commissioning of its refinery, while Essar's is in an advanced stage awaiting commissioning in the second half of next year.
Restructuring a reputation
While financially restructuring the conglomerate, the Essar group is faced with an even more difficult task of changing public perception about itself. The problems with refinancing its floating rate notes (FRNS) leading to default have been accompanied by a large number of negative reporting in the media, which Essar claims is based on fiction rather than the facts. As a result, while Shashi and Ravi Ruia are talking to bankers, young Prashant Ruia is taking time off from hectic debottlenecking activities in the steel plant at Hazira. Important improvements are being made in manufacturing technology at Hazira which might soon take Essar Steel into the elite top tenth percentile of lowest-cost steel producers in the world. After all, with his costs down, if signs of another upcycle in steel prove to be true he might just start making some 24-carat gold at Hazira rather than "24carat steel" as the ad campaign says.
But today Prashant is courting the fourth estate. He has already met senior editorial teams of several newspapers and magazines and is telling others that he can meet them any time on their turf. The format of these meetings has varied from formal presentations and Q&A to free for all "court-martial". Prashant is not expecting remarkable immediate benefits from this communication exercise, but acknowledges that, if he had done enough of this earlier, maybe the media's perception would have been different by now. Nevertheless, armed with tons of documents, and his informal, amiable nature, he is chugging on. Clearly, he's hoping that, like the commodity cycles that he speaks so much about, there is also a cycle of a non-commodity called public perception.
However, Prashant Ruia also claims that negative public perception is not only a result of bad communication but also downright disinformation. One such example, he points out, is a forged document being circulated in media circles as 'Highlights of Heads of Financial institutions Meeting held in Delhi on 24 June'. Among other things the 'document' says, "The heads of financial institutions unanimously decided that the Ruias should be replaced from the management of the following companies at the earliest to ensure viability of any attempt to revive these companies: Essar Steel, Essar Oil, Essar Mineral, and Essar Telecom." When Business India tried to verify the authenticity of this document, we were told by a spokesman of IDBI, “Please be advised that the purported copy of the minutes of HIM (officialese for heads-of-institutions meeting) is not true and does not reflect the discussion held at the HIM."
In this atmosphere, some common allegations the Ruias are trying to refute are:
•’’Essar has diverted funds from publicly listed companies into family-owned ones. For example, from steel, oil, shipping, and power into telecom”
Essar Steel, Essar Power, Essar Shipping, and Essar Oil have not invested in Essar's telecom business as inter-corporate deposits, as secured or unsecured debt, or as equity. Ruias are ready to provide certificates from the elite top six audit firms, some of which have been vetting every financial move in Essar group as a part of implementing a code of corporate governance.
• "By floating a family owned entity 'Prime Hazira' and taking a minority stake in Essar Power, the family will make money in the current sale of Essar Power to Marathon”
Prime Hazira was set up as a special purpose vehicle in Mauritius to channel international funds into an independent power project. Accordingly, UBS lent it $75 million, which was used to bring equity into Essar Power. Prime Hazira's entry was with the knowledge and approval of the FIS and an undertaking that any future profit made by Prime Hazira by selling its stake would flow back to Essar Steel. JM Morgan stanley and Donaldson, Luffkins &: Jernette (DLJ) have structured the deal with Marathon for the 100 per cent sale of Essar Power. They were mandated to not only consult the lenders while maximising value for existing shareholders, but also make sure that the sale of Prime Hazira's holding was not to the detriment of Essar Steel and Essar Oil.
• "Funds from listed companies were diverted for the building of Essar House as a family property”
Essar House was built with family funds from the sale of real estate owned by the family in Maker Towers, Nariman Point, and elsewhere, and borrowings from HDFC. No funds from any of the listed companies were utilised in any manner for the same. Even now the listed companies pay rents and deposits to Essar House based on rates fixed by an independent real estate valuer.
• "Cost overruns and project padding are used by Ruias to siphon funds from projects”
Essar's capex per tonne of manufacturing capacity created in steel, oil, and power (per MW) are among the lowest not only in India but in the rest of Asia as well (see tables). These comparative figures are available in project appraisals done by financial institutions and other documents as well.
• "The FRNs have been bought by the Ruias at a discount and they are waiting for the FIs to refinance the notes so that they can make money”
According to a letter written by Chase Securities Inc on 18 June 1999, "to our knowledge, neither the Ruia family nor other affiliates of Essar own any material amount of the notes."
• "The Ruia family's international holdings are a mystery"
These are transparent and strategic investments. Acquiring the holding in ILVA Italy (one of the largest integrated steel producers in Europe) was financed by Essar Global, a family-owned company, with the full knowledge of the Government of India. Actually, Essar Steel wanted to pick up the stake in ILVA but RBI rules did not permit the same. The required money was raised as acquisition financing by Essar Global and repaid after partial divestment in favour of the Riva family. "The investment has bought considerable technological support for Essar Steel during its start-up phase (nearly 50 ILVA personnel were at Hazira), as a result of which we were able to achieve quality and ramp up capacity very fast. Now it provides a good source of understanding of the European steel market." With regard to P.T. Essar Dhananjaya in Indonesia, the promoters are Essar Steel, Essar Global, and the local Dhananjaya group. This cold-rolling unit is a major importer of Essar Steel's hotrolled coils and has done well even during the Southeast Asian crisis. Essar Global has also invested $23 million in the AfroAsian Satellite project - the first by the Indian private sector - promoted by Subhash Chandra.
The fact that such questions are being asked of this group are testimony to one of its weaknesses - the lack of an aggressive communication policy that is both reactive and proactive, a must for all modern corporations. But it is to be admitted that we as a nation are not known for objectivity. One day we hail them - "They can do no wrong" - and the next we condemn them - "They can do no right". Reliance, another business group which has risen fast, periodically suffers the same plunges in public perception. We can appropriately name this the "Azharuddin syndrome" after our cricket captain, who must know this phenomenon better than anybody else.
Jamnagar was the natural choice for both Essar and Reliance, because the Gulf of Kutch allows for all-season import of crude and is the shortest distance away from wells in the Middle East. Not only that - since refinery products are in great demand in north and central India and since a product pipeline already exists between Kandla and Bhatinda, a small extension from Vadinar to Kandla can evacuate the products to the north, while a central Indian pipeline is being planned by Petronet from J amnagar to Itarsi and Gwalior. Essar's own project engineers, who number about 800, are playing an important role in building, debottlenecking, and detail-engineering many of their projects.
When the government liberalised shipping, Essar expanded furiously and is today the second largest in terms of capacity (38 vessels, 1.42 million tonnes dwt). It owns six of the most modern double-hull, doublebottomed Suezmax tankers, which operate in international waters. It also owns several bulk carriers which operate in both Indian and international waters. The fleet is the youngest in India, with an average age of seven years. A majority of the vessels are employed on long- and medium-term time charters, enabling stability of revenue generation even during the shipping down cycle. Essar Shipping has negotiated a $97-million loan from GE capital corporation (GECC), USA, one of the largest and with the longest maturity periods ever raised in the Indian shipping industry. In fact, the second tranche of the loan was disbursed recently after Essar Steel defaulted on its FRNS, testifying to the soundness of its shipping business. Essar makes a considerable amount of money by buying ships when the prices are low and selling them when they are in demand following standard international practices.
Get connected
When the government opened up telecommunication Essar, like 23 other business groups in India, saw a great opportunity and bid for various circles. With an astute plan it acquired the licences for basic services in Punjab and cellular services in Delhi, Punjab, Haryana, Rajasthan, and eastern UP through vendor and acquisition financing. "Big vendors like Nokia, Motorola, Ericsson, Siemens, and others have built huge capacities to supply telecom equipment and are facing a downturn in their business, so besides investment bankers, vendors too are aggressively funding acquisitions. The idea is that one pledges the shares to these companies and either borrows from them or gives them a certain equity stake with a clause to buy back later with a certain mark-up. Then, once the service is rolled out and a subscriber base built up, that is value is built into the business, one sells the whole or part of one's equity and repays the loans," explains Ravi Ruia. In effect, the licence-holder puts in very little of his own money.
This has become a standard method of funding telecom projects the world over. In fact, the entire telecom financing in China has been done this way. Though Essar faced problems in paying its licence fees to DoT recently, the new telecom policy has encouraged several banks and institutions to come forward with funds now. "The key fact is that we own cellular licences to most of north India and, with appropriate strategic alliances in Gujarat and Mumbai, we can harness the long-distance traffic between Delhi and Mumbai, where the cream of STD traffic lies," says Hemanth Luthra, CEO of Essar Telecom. Now that Swisscom, its foreign partner, wants to exit from its Asian businesses and focus on the new action in European telecoms, and Shivasankaran, the other minority partner, also wants an exit, Essar is seriously engaged in raising funds for acquiring the remaining 49 per cent in Sterling Cellular. It is also keen on bringing in a new strategic partner.
If it is such a rah-rah story, then what went wrong? The Jamnagar refinery is literally lying in pieces at various points on a massive 15-sq km plot, making for a truly tragic sight. Over Rs5,000 crore worth of equipment has already been purchased and Rs4,219 crore been paid to suppliers and contractors. But 15,000 labourers who were working day and night to finish the work have been sent home since March 1999. Many ABB Lummus crest engineers who had the responsibility to execute the project within the stipulated time and budget have gone home on a "short vacation". The damage and delay caused by the cyclone to the refinery's seawater intake and tank farm were being set right after filing for insurance claims, but all that is at a standstill. The reason for this paralysis: institutions are not disbursing sanctioned loans worth about Rs800 crore, ostensibly because Essar has not brought in Rs585 crore as additional equity through the Euro Convertible Bond route. For that, however, the present market conditions are entirely to blame.
Meanwhile, the Ruias are diluting their equity in the refinery project through fresh infusion of equity by a strategic partner. In the process they will reduce their own holdings to 26 per cent from the present 44 per cent, the partner will hold another 26 per cent, and the public the rest - the pattern adopted by MRPL. In this regard two oil companies - BPCL and Oman Oil- are carrying on simultaneous due diligence of the project, which is an attractive potential strategic acquisition for both - the former is short of refining capacity and the latter, an oil producer, is looking for capacity. The process, however, will take several months. Meanwhile ABB Lummus crest is putting in Rs200 crore as subordinate debt (treated as quasiequity) to keep the work going. But will the FIS now relent and release the already sanctioned loans and stop this colossal waste? It has been reported that MRPL is in a similar bind and has been unable to bring in Rs671 crore as equity because of the adverse market conditions. However, in its case, the FIS have been "sympathetic" and offered to take up Rs400 crore as equity while MRPL brings in another Rs271 crore thraugh internal accruals. When Business India asked ICICI whether this report was true and, if it was, why the discrimination, we received no reply. Similar was the official response from lOBI. Asked about the FRNS, everybody was either" too busy or travelling".
Whose money is it anyway? If the institutions have come to the conclusion that the Ruias are incompetent, they should remove them from management and take over the project instead of paralysing it. The point is not that the Essar Group has not made mistakes, but that it is well on the way to restructuring its finances with the full knowledge of its bankers and institutional lenders. The group is not asking for a "bailout" either, but simply disbursal of sanctioned loans to complete the project while the restructuring is on. Everybody who is trying to buy or sell a small house knows that it cannot be done in a jiffy, leave alone deals involving assets worth thousands of crores of rupees.
The Essar Group is selling its power plant to Marathon of the US, however painful it may be to part with a moneyspinner. The sale will reduce its debt exposure by Rs1,550 crore and return Rs 130 crore worth of unsecured loans to Essar Steel. The sale of equity will bring in $ 71.4 million into Essar Steel's and $15.3 million into Essar Oil's reserves.
It has spun off its pelletisation plant in Vizag as a separate company Essar Minerals on the advice of institutions. The FIS have assessed its Vizag assets at Rs1,OOO crore - about Rs400 crore in equity and Rs600 crare in debt. Stemcor, a large international trading house, wants to acquire 51 per cent of the equity in Essar Minerals. Essar Steel is diluting its holding by issuing fresh equity worth Rs180 crore to Stemcor, thereby giving it about 30 per cent. This fresh equity infusion will go into the completion of the pipeline and beneficiation project. Whatever stock Stemcor buys from Essar Steel later to gain a majority within the Rs580-crore total equity will go to Essar Steel. This divestment will also lead to the transfer of Rs500 crore in debt from Essar Steel to Essar Minerals.
By acquiring a majority stake in Essar Minerals, Stem cor will get an assured source of DR-grade pellets for supply to China, Southeast Asia, Iran, Qatar, etc. "The slurry pipeline has already been bought. The beneficiation plant has also been bought and both are lying in Vizag. Stemcor's money will help us complete it.
We have decided that we are not going to invest any more in the project. Whatever more money is required to complete the pipeline and later build the second plant will be brought in by Stemcor,” says Prashant Ruia. “However, as in the sale of Essar power, we have made sure that Essar Steel will get an assured supply, in this case of DR-grade pellets,“ adds Ravi Ruia. The total equity of the project as it stands will be about Rs600 crore and debt Rs900 crore. The additional Rs300 odd-crore in debt will be arranged by Stemcor. Trading houses Internationally are acquiring assets like this for assured supplied. Instead of doing spot trading they want long-term supplied, which helps them moderate the cyclicals. Similarly, another trading house called Deferco has bought steel mills in Russia and the US, and is emerging as a large investor.
Riding out of death valley
These two moves themselves will remove over Rs2,l 00 crore in debt from Essar Steel's books, since Rs1,550 crore is being taken over by Marathon and Rs600 crore transferred to Essar Minerals, in which Essar Steel will have a minority stake. This will reduce the debt-equity ratio from the current 2:1 to 1.34:1. It should be noted that the debt-equity ratios for two other major steel projects - Ispat and Jindal- stand at 3.51:1 and 2.88:1 respectively. Already Essar's cost of production is $230 per tonne and hectic efforts are on at Hazira to reduce this by another $ 7-10 using hot sponge iron for steel, a pioneering effort in many ways. Phase II of debottlenecking is in progress to increase the capacity of the plant to 2.4 Mt with no new investments. In short, Essar Steel will be raring to go in the expected upcycle in steel. A 22 June report by World Steel Dynamics Inc predicts that the international steel market has crossed the "death valley" of $185-240 a tonne - the lowest in the last 20 years. In fact, Essar has already started booking orders at $250-260 a tonne for exports," says]. Mehra, managing director of Essar Steel. "It is clear that commodities need branding as well, and that is why we are on a major marketing and market development campaign to highlight the quality of our product, for which people are ready to pay a premium,” says Prashant Ruia.
The default by Essar Steel on the redemption of its FRNs worth $250 million also has an interesting backgroungd. The FRNS were raised in the international market in 1994 with a maturity period o five years. The event itself was a first for an Indian company. The steel sector internationally has access to long-term loans extending anywhere from 12-15 years. However, at that time, such long-term mony was not available for Indian steel compnies. Today, steel manufacturers can raise money which will mature after 12 years. Since this debt was part of the project as appraised by financial institutions and not outside of it, Essar Steel assumed that the FIS would refinance it to meet the new 12-year norm. Meanwhile, not willing to rely on them, since the PIS were already heavily exposed to the group (though within their prudential norms), Essar tried to raise the money to refinance the FRNS in the international market more than a year before redemption. In fact, lead manager Lehman Brothers Securities Asia Ltd had prepared a prospectus for an issue of $200 million notes due AD 2008 and $200 million notes due AD 2018 in early 1998. However, Pokhran-II buried all hopes for the issue. Since the finance minister had promised in Parliament that no Indian company would suffer as a result of the sanctions, and so on, Essar assumed that Indian banks and financial institutions would now refinance the FRNS and that too on merit and not as a favour. However, these hopes were belied when they advised them to seek a roll-over from the noteholders. Rollover is a euphemism for default. Essar hoped against hope till the last moment and finally wrote a letter to all the noteholders through Chase Securities, trustee to the issue. "The company is currently examining the possibility of refinancing the notes or seeking an extension of the maturity of the notes. The company intends to present a comprehensive plan within 90 days of the scheduled redemption date. The company proposes to pay the interest due on the FRNS shortly," the letter said.
"They are not Real Value (remember the Vacumizer?). After all, how many business groups in India have built up assets of about Rs15,000 crore in the last 10 or even 20 years?" asks R. Sankaran, chairman of IndGlobal Trust, the only banker who was willing to go on record, which points to the prevailing atmosphere. "They have my sympathy. They started the project when there was 140 per cent duty protection on imports of steel and interest rates were 17-18 percent. By the time they came up with the project, duties were down to 25-30 per cent. Under these circumstances, how do you put up global capacities and be competitive?" Warming up to the subject, Sankaran says, "As far as the fRNS are concerned, the issue is very simple. IDBI and other institutions should be asked what they were doing all this time. SBI had also said it would finance it. Where are they? Everybody knew that the notes were coming to maturity. Six months back they were quoted at a 40 per cent discount. The institutions could have saved the country $100 million by buying the notes from the market at that time and extinguishing them, and then asking Essar to pay up the $250-million loan.
A top SBI official acknowledged, "The rolling-over of the FRNS is viewed as a technical default in India. But in the international markets it is done quite often even by reputed corporates and MNCS. There is nothing wrong with the Essar Group. It miscalculated its strategy and the current imbroglio is the price it had had to pay. But the group still has steam left in it and is restructuring its businesses. Indian banks and DFIS will not increase their support to Essar because they have reached their lending limits and because it has become a politically sensitive issue. But I am sure Essar will raise the money from some bank overseas." A large number of people we met in the financial community expressed similar views and were similarly averse to going on record.
The attitude, however understandable, cannot be justified. After all, a banker is a trustee of public money. Other than matters that govern fiduciary confidentiality, his opinion on an important corporate issue, whether it is favourable to the company or not, is a matter of public interest. Remember, it is these very gentlemen who, in endless streams of appraisal notes, assure their boards that, in the present globalising economy, these mega projects are not only viable but, indeed, desirable. Of course, if a promoter, however well intentioned, has proved to be incompetent, the bankers who have put public money into the company have every right to remove him from management control and bring in their own team, which is the international practice.
"In the last 15 days I have learnt what I couldn't have in 15 years," says young Prashant Ruia. The major mistake Essar made is that, while launching its global-sized projects in steel and oil, it did not fully comprehend the ramifications of the term 'financial closure'. But that is all in hindsight. After all, till Enron made the term popular, how many of us knew it or how many companies understood it? Today, of course, it is as sacred as "motherhood" in Essar House. "By nature I am loath to borrowing money. After nearly 20 years as a successful entrepreneur I raised my first loan for the sponge iron plant," says Shashi Ruia. Who knows, after the shock of default wears off, he might still come up with some surprises and remove this blemish.
Today, looking out of his office at Essar House towards Mahalaxmi race course, he hasn't the stomach for further financial gambles of any sort. "Financial closure first," he says. A bit uncharacteristic for a man who became a legend for his risk-taking in Indian ports from Kakinada to Tuticorin, from Goa to Mangalore and Chennai to Mumbai, and succeeding when he was barely in his 20s. But that is what tempering is all about - it means moderation and steeling. He could retire, handing the business over to the younger ones, and take to golf at Willing don and improve his present handicap. But he will have none of it - his eyes are set on the choppy Arabian Sea and, like a true shipper, he assures you that the rough seas will pass. He would rather engage in an animated discussion about the latest telecom technologies than wallow in the memories of the good old days in the docks. With that kind of determination, it should surprise nobody if the tempered Ruias bounce back in the not-too-distant future. After all another group, Reliance, went through similar rough seas in the 1980s and fought their way back.
Tempering Essar
A group that became one of the icons os entrepreneurship in the early 1990s has suffered a setback. Will it learn from its mistakes and fight its way out of the corner?
Shivanand Kanavi
It is a great view from the top of Essar House, an ornate structure bordering on the opulent. The Ruias manage their conglomerate, the Essar Group, encompassing steel, power, oil, telecommunications, and shipping, from their offices on the 19th and 20th storeys. From the glass-and-marble tower you have a bird’s eye view of the famous Royal Western India Turf Club, commonly known as Mahalaxmi Race Course, where fortunes are sometimes made but most often lost. Turning left, you see businessmen and executives sharpening their swings and putts with their irons on the golf course at Willingdon Club. Straight ahead is the panoramic expanse of the Arabian Sea and, if the weather's good, a clear horizon. Today, however, the monsoon has made the seas choppy. In the midst of their packed schedules with international bankers, as the Ruias cast glances at the turbulent waters, they must find the sight rather symbolic.
They have had many firsts in several businesses, of which they are proud of, but today they don't relish the new first: they became the first Indian corporate group to have defaulted on a foreign financial obligation by failing to redeem their floating rate notes (FRNS) worth $250 million on 20 July 1999.
What has gone wrong?
What will they do next? Are they going under? Will they survive this setback and bounce back? Do they have a credible plan for the same? These are several questions that Business India investigated. To put things in perspective and not be carried away by the down cycles in commodities, the more appropriate question to start with is: What did they do right?
If there was any proof needed that liberalisation would unleash true entrepreneurship in India, then Essar's growth in the last 10 years could be cited as one of the handful of examples. From successful medium-sized businesses in marine and port construction, oil-drilling, and shipping, Essar first took the opportunity provided by the gas pipeline to start a very successful sponge iron business and then, with the gradual opening up of the steel sector, had the vision to set up a world-class integrated steel plant.
For Indians used to outdated steel technology in public sector mills, and the old works at Jamshedpur, Essar provided the first glimpse of world-class steel manufacturing, setting up a mill that produces two million tonnes of steel and hot-rolled coils with less than 2,000 employees. When many thought that India could be competitive because of cheap labour, Essar thought otherwise. Today its labour costs (according to Paribas Asia Equity) are $5 per tonne as compared to $49 per tonne for SAIL and $ 76 per tonne for Tisco, and its energy costs per tonne are half that of SAIL and Tisco.
Since an assured and cheap power supply is essential, they first went in for a 215 MW captive power plant and then, when the opportunity arose for independent power producers, expanded it to 515 MW. This power plant is run by a total of 38 people.
It is well known that Bailadila in Orissa produces the best iron ore in the world. However, lumps of iron ore are exported, while the fines or tailings mount up into ugly mountains at the rate of 8-9 million tonnes per year. In the monsoons a large part of these fines actually flow into the rivers, polluting the water. So Essar came up with a plan to convert them into pellets that can be fed directly into sponge iron plants as feedstock. Until now the South Americans had a monopoly over this product (DR-grade pellets). So Essar set up a modern pellet plant at Visakhapatnam (run by 75 people, including administration) producing 3.5 Mtpy of pellets. Since rail transport of fines costs about Rs400 per tonne, it planned a beneficiation plant that would upgrade the fines, and a slurry pipeline that would reduce the cost of transportation to Rsl00 per tonne. Essar designed it to carry 7 million tonnes, giving themselves enough scope to double capacity whenever required.
Essar had already built up expertise in shipping and port construction, thus building the required infrastructure at Hazira and Vizag was no problem. In fact, it actually gave them the flexibility to use pellets internally as well as export pellets from Vizag and steel or sponge iron from Hazira.
Similarly, when the government allowed the private sector to exploit developed minor oilfields and explore new ones, Essar, by then one of the largest drilling contractors in the Gulf, was quick to bid. When government took great time to carryon in this direction but opened up oil refining, Essar was one of the first out with a proposal to build a refinery. Since then, even though dozens of proposals were submitted by various industrial houses and public sector oil companies, the only ones under implementation are Reliance Petroleum (27 Mtpy) and Essar Oil (10.5 Mtpy with a provision to reach 24 Mtpy later). Reliance has announced the commissioning of its refinery, while Essar's is in an advanced stage awaiting commissioning in the second half of next year.
Restructuring a reputation
While financially restructuring the conglomerate, the Essar group is faced with an even more difficult task of changing public perception about itself. The problems with refinancing its floating rate notes (FRNS) leading to default have been accompanied by a large number of negative reporting in the media, which Essar claims is based on fiction rather than the facts. As a result, while Shashi and Ravi Ruia are talking to bankers, young Prashant Ruia is taking time off from hectic debottlenecking activities in the steel plant at Hazira. Important improvements are being made in manufacturing technology at Hazira which might soon take Essar Steel into the elite top tenth percentile of lowest-cost steel producers in the world. After all, with his costs down, if signs of another upcycle in steel prove to be true he might just start making some 24-carat gold at Hazira rather than "24carat steel" as the ad campaign says.
But today Prashant is courting the fourth estate. He has already met senior editorial teams of several newspapers and magazines and is telling others that he can meet them any time on their turf. The format of these meetings has varied from formal presentations and Q&A to free for all "court-martial". Prashant is not expecting remarkable immediate benefits from this communication exercise, but acknowledges that, if he had done enough of this earlier, maybe the media's perception would have been different by now. Nevertheless, armed with tons of documents, and his informal, amiable nature, he is chugging on. Clearly, he's hoping that, like the commodity cycles that he speaks so much about, there is also a cycle of a non-commodity called public perception.
However, Prashant Ruia also claims that negative public perception is not only a result of bad communication but also downright disinformation. One such example, he points out, is a forged document being circulated in media circles as 'Highlights of Heads of Financial institutions Meeting held in Delhi on 24 June'. Among other things the 'document' says, "The heads of financial institutions unanimously decided that the Ruias should be replaced from the management of the following companies at the earliest to ensure viability of any attempt to revive these companies: Essar Steel, Essar Oil, Essar Mineral, and Essar Telecom." When Business India tried to verify the authenticity of this document, we were told by a spokesman of IDBI, “Please be advised that the purported copy of the minutes of HIM (officialese for heads-of-institutions meeting) is not true and does not reflect the discussion held at the HIM."
In this atmosphere, some common allegations the Ruias are trying to refute are:
•’’Essar has diverted funds from publicly listed companies into family-owned ones. For example, from steel, oil, shipping, and power into telecom”
Essar Steel, Essar Power, Essar Shipping, and Essar Oil have not invested in Essar's telecom business as inter-corporate deposits, as secured or unsecured debt, or as equity. Ruias are ready to provide certificates from the elite top six audit firms, some of which have been vetting every financial move in Essar group as a part of implementing a code of corporate governance.
• "By floating a family owned entity 'Prime Hazira' and taking a minority stake in Essar Power, the family will make money in the current sale of Essar Power to Marathon”
Prime Hazira was set up as a special purpose vehicle in Mauritius to channel international funds into an independent power project. Accordingly, UBS lent it $75 million, which was used to bring equity into Essar Power. Prime Hazira's entry was with the knowledge and approval of the FIS and an undertaking that any future profit made by Prime Hazira by selling its stake would flow back to Essar Steel. JM Morgan stanley and Donaldson, Luffkins &: Jernette (DLJ) have structured the deal with Marathon for the 100 per cent sale of Essar Power. They were mandated to not only consult the lenders while maximising value for existing shareholders, but also make sure that the sale of Prime Hazira's holding was not to the detriment of Essar Steel and Essar Oil.
• "Funds from listed companies were diverted for the building of Essar House as a family property”
Essar House was built with family funds from the sale of real estate owned by the family in Maker Towers, Nariman Point, and elsewhere, and borrowings from HDFC. No funds from any of the listed companies were utilised in any manner for the same. Even now the listed companies pay rents and deposits to Essar House based on rates fixed by an independent real estate valuer.
• "Cost overruns and project padding are used by Ruias to siphon funds from projects”
Essar's capex per tonne of manufacturing capacity created in steel, oil, and power (per MW) are among the lowest not only in India but in the rest of Asia as well (see tables). These comparative figures are available in project appraisals done by financial institutions and other documents as well.
• "The FRNs have been bought by the Ruias at a discount and they are waiting for the FIs to refinance the notes so that they can make money”
According to a letter written by Chase Securities Inc on 18 June 1999, "to our knowledge, neither the Ruia family nor other affiliates of Essar own any material amount of the notes."
• "The Ruia family's international holdings are a mystery"
These are transparent and strategic investments. Acquiring the holding in ILVA Italy (one of the largest integrated steel producers in Europe) was financed by Essar Global, a family-owned company, with the full knowledge of the Government of India. Actually, Essar Steel wanted to pick up the stake in ILVA but RBI rules did not permit the same. The required money was raised as acquisition financing by Essar Global and repaid after partial divestment in favour of the Riva family. "The investment has bought considerable technological support for Essar Steel during its start-up phase (nearly 50 ILVA personnel were at Hazira), as a result of which we were able to achieve quality and ramp up capacity very fast. Now it provides a good source of understanding of the European steel market." With regard to P.T. Essar Dhananjaya in Indonesia, the promoters are Essar Steel, Essar Global, and the local Dhananjaya group. This cold-rolling unit is a major importer of Essar Steel's hotrolled coils and has done well even during the Southeast Asian crisis. Essar Global has also invested $23 million in the AfroAsian Satellite project - the first by the Indian private sector - promoted by Subhash Chandra.
The fact that such questions are being asked of this group are testimony to one of its weaknesses - the lack of an aggressive communication policy that is both reactive and proactive, a must for all modern corporations. But it is to be admitted that we as a nation are not known for objectivity. One day we hail them - "They can do no wrong" - and the next we condemn them - "They can do no right". Reliance, another business group which has risen fast, periodically suffers the same plunges in public perception. We can appropriately name this the "Azharuddin syndrome" after our cricket captain, who must know this phenomenon better than anybody else.
Jamnagar was the natural choice for both Essar and Reliance, because the Gulf of Kutch allows for all-season import of crude and is the shortest distance away from wells in the Middle East. Not only that - since refinery products are in great demand in north and central India and since a product pipeline already exists between Kandla and Bhatinda, a small extension from Vadinar to Kandla can evacuate the products to the north, while a central Indian pipeline is being planned by Petronet from J amnagar to Itarsi and Gwalior. Essar's own project engineers, who number about 800, are playing an important role in building, debottlenecking, and detail-engineering many of their projects.
When the government liberalised shipping, Essar expanded furiously and is today the second largest in terms of capacity (38 vessels, 1.42 million tonnes dwt). It owns six of the most modern double-hull, doublebottomed Suezmax tankers, which operate in international waters. It also owns several bulk carriers which operate in both Indian and international waters. The fleet is the youngest in India, with an average age of seven years. A majority of the vessels are employed on long- and medium-term time charters, enabling stability of revenue generation even during the shipping down cycle. Essar Shipping has negotiated a $97-million loan from GE capital corporation (GECC), USA, one of the largest and with the longest maturity periods ever raised in the Indian shipping industry. In fact, the second tranche of the loan was disbursed recently after Essar Steel defaulted on its FRNS, testifying to the soundness of its shipping business. Essar makes a considerable amount of money by buying ships when the prices are low and selling them when they are in demand following standard international practices.
Get connected
When the government opened up telecommunication Essar, like 23 other business groups in India, saw a great opportunity and bid for various circles. With an astute plan it acquired the licences for basic services in Punjab and cellular services in Delhi, Punjab, Haryana, Rajasthan, and eastern UP through vendor and acquisition financing. "Big vendors like Nokia, Motorola, Ericsson, Siemens, and others have built huge capacities to supply telecom equipment and are facing a downturn in their business, so besides investment bankers, vendors too are aggressively funding acquisitions. The idea is that one pledges the shares to these companies and either borrows from them or gives them a certain equity stake with a clause to buy back later with a certain mark-up. Then, once the service is rolled out and a subscriber base built up, that is value is built into the business, one sells the whole or part of one's equity and repays the loans," explains Ravi Ruia. In effect, the licence-holder puts in very little of his own money.
This has become a standard method of funding telecom projects the world over. In fact, the entire telecom financing in China has been done this way. Though Essar faced problems in paying its licence fees to DoT recently, the new telecom policy has encouraged several banks and institutions to come forward with funds now. "The key fact is that we own cellular licences to most of north India and, with appropriate strategic alliances in Gujarat and Mumbai, we can harness the long-distance traffic between Delhi and Mumbai, where the cream of STD traffic lies," says Hemanth Luthra, CEO of Essar Telecom. Now that Swisscom, its foreign partner, wants to exit from its Asian businesses and focus on the new action in European telecoms, and Shivasankaran, the other minority partner, also wants an exit, Essar is seriously engaged in raising funds for acquiring the remaining 49 per cent in Sterling Cellular. It is also keen on bringing in a new strategic partner.
If it is such a rah-rah story, then what went wrong? The Jamnagar refinery is literally lying in pieces at various points on a massive 15-sq km plot, making for a truly tragic sight. Over Rs5,000 crore worth of equipment has already been purchased and Rs4,219 crore been paid to suppliers and contractors. But 15,000 labourers who were working day and night to finish the work have been sent home since March 1999. Many ABB Lummus crest engineers who had the responsibility to execute the project within the stipulated time and budget have gone home on a "short vacation". The damage and delay caused by the cyclone to the refinery's seawater intake and tank farm were being set right after filing for insurance claims, but all that is at a standstill. The reason for this paralysis: institutions are not disbursing sanctioned loans worth about Rs800 crore, ostensibly because Essar has not brought in Rs585 crore as additional equity through the Euro Convertible Bond route. For that, however, the present market conditions are entirely to blame.
Meanwhile, the Ruias are diluting their equity in the refinery project through fresh infusion of equity by a strategic partner. In the process they will reduce their own holdings to 26 per cent from the present 44 per cent, the partner will hold another 26 per cent, and the public the rest - the pattern adopted by MRPL. In this regard two oil companies - BPCL and Oman Oil- are carrying on simultaneous due diligence of the project, which is an attractive potential strategic acquisition for both - the former is short of refining capacity and the latter, an oil producer, is looking for capacity. The process, however, will take several months. Meanwhile ABB Lummus crest is putting in Rs200 crore as subordinate debt (treated as quasiequity) to keep the work going. But will the FIS now relent and release the already sanctioned loans and stop this colossal waste? It has been reported that MRPL is in a similar bind and has been unable to bring in Rs671 crore as equity because of the adverse market conditions. However, in its case, the FIS have been "sympathetic" and offered to take up Rs400 crore as equity while MRPL brings in another Rs271 crore thraugh internal accruals. When Business India asked ICICI whether this report was true and, if it was, why the discrimination, we received no reply. Similar was the official response from lOBI. Asked about the FRNS, everybody was either" too busy or travelling".
Whose money is it anyway? If the institutions have come to the conclusion that the Ruias are incompetent, they should remove them from management and take over the project instead of paralysing it. The point is not that the Essar Group has not made mistakes, but that it is well on the way to restructuring its finances with the full knowledge of its bankers and institutional lenders. The group is not asking for a "bailout" either, but simply disbursal of sanctioned loans to complete the project while the restructuring is on. Everybody who is trying to buy or sell a small house knows that it cannot be done in a jiffy, leave alone deals involving assets worth thousands of crores of rupees.
The Essar Group is selling its power plant to Marathon of the US, however painful it may be to part with a moneyspinner. The sale will reduce its debt exposure by Rs1,550 crore and return Rs 130 crore worth of unsecured loans to Essar Steel. The sale of equity will bring in $ 71.4 million into Essar Steel's and $15.3 million into Essar Oil's reserves.
It has spun off its pelletisation plant in Vizag as a separate company Essar Minerals on the advice of institutions. The FIS have assessed its Vizag assets at Rs1,OOO crore - about Rs400 crore in equity and Rs600 crare in debt. Stemcor, a large international trading house, wants to acquire 51 per cent of the equity in Essar Minerals. Essar Steel is diluting its holding by issuing fresh equity worth Rs180 crore to Stemcor, thereby giving it about 30 per cent. This fresh equity infusion will go into the completion of the pipeline and beneficiation project. Whatever stock Stemcor buys from Essar Steel later to gain a majority within the Rs580-crore total equity will go to Essar Steel. This divestment will also lead to the transfer of Rs500 crore in debt from Essar Steel to Essar Minerals.
By acquiring a majority stake in Essar Minerals, Stem cor will get an assured source of DR-grade pellets for supply to China, Southeast Asia, Iran, Qatar, etc. "The slurry pipeline has already been bought. The beneficiation plant has also been bought and both are lying in Vizag. Stemcor's money will help us complete it.
We have decided that we are not going to invest any more in the project. Whatever more money is required to complete the pipeline and later build the second plant will be brought in by Stemcor,” says Prashant Ruia. “However, as in the sale of Essar power, we have made sure that Essar Steel will get an assured supply, in this case of DR-grade pellets,“ adds Ravi Ruia. The total equity of the project as it stands will be about Rs600 crore and debt Rs900 crore. The additional Rs300 odd-crore in debt will be arranged by Stemcor. Trading houses Internationally are acquiring assets like this for assured supplied. Instead of doing spot trading they want long-term supplied, which helps them moderate the cyclicals. Similarly, another trading house called Deferco has bought steel mills in Russia and the US, and is emerging as a large investor.
Riding out of death valley
These two moves themselves will remove over Rs2,l 00 crore in debt from Essar Steel's books, since Rs1,550 crore is being taken over by Marathon and Rs600 crore transferred to Essar Minerals, in which Essar Steel will have a minority stake. This will reduce the debt-equity ratio from the current 2:1 to 1.34:1. It should be noted that the debt-equity ratios for two other major steel projects - Ispat and Jindal- stand at 3.51:1 and 2.88:1 respectively. Already Essar's cost of production is $230 per tonne and hectic efforts are on at Hazira to reduce this by another $ 7-10 using hot sponge iron for steel, a pioneering effort in many ways. Phase II of debottlenecking is in progress to increase the capacity of the plant to 2.4 Mt with no new investments. In short, Essar Steel will be raring to go in the expected upcycle in steel. A 22 June report by World Steel Dynamics Inc predicts that the international steel market has crossed the "death valley" of $185-240 a tonne - the lowest in the last 20 years. In fact, Essar has already started booking orders at $250-260 a tonne for exports," says]. Mehra, managing director of Essar Steel. "It is clear that commodities need branding as well, and that is why we are on a major marketing and market development campaign to highlight the quality of our product, for which people are ready to pay a premium,” says Prashant Ruia.
The default by Essar Steel on the redemption of its FRNs worth $250 million also has an interesting backgroungd. The FRNS were raised in the international market in 1994 with a maturity period o five years. The event itself was a first for an Indian company. The steel sector internationally has access to long-term loans extending anywhere from 12-15 years. However, at that time, such long-term mony was not available for Indian steel compnies. Today, steel manufacturers can raise money which will mature after 12 years. Since this debt was part of the project as appraised by financial institutions and not outside of it, Essar Steel assumed that the FIS would refinance it to meet the new 12-year norm. Meanwhile, not willing to rely on them, since the PIS were already heavily exposed to the group (though within their prudential norms), Essar tried to raise the money to refinance the FRNS in the international market more than a year before redemption. In fact, lead manager Lehman Brothers Securities Asia Ltd had prepared a prospectus for an issue of $200 million notes due AD 2008 and $200 million notes due AD 2018 in early 1998. However, Pokhran-II buried all hopes for the issue. Since the finance minister had promised in Parliament that no Indian company would suffer as a result of the sanctions, and so on, Essar assumed that Indian banks and financial institutions would now refinance the FRNS and that too on merit and not as a favour. However, these hopes were belied when they advised them to seek a roll-over from the noteholders. Rollover is a euphemism for default. Essar hoped against hope till the last moment and finally wrote a letter to all the noteholders through Chase Securities, trustee to the issue. "The company is currently examining the possibility of refinancing the notes or seeking an extension of the maturity of the notes. The company intends to present a comprehensive plan within 90 days of the scheduled redemption date. The company proposes to pay the interest due on the FRNS shortly," the letter said.
"They are not Real Value (remember the Vacumizer?). After all, how many business groups in India have built up assets of about Rs15,000 crore in the last 10 or even 20 years?" asks R. Sankaran, chairman of IndGlobal Trust, the only banker who was willing to go on record, which points to the prevailing atmosphere. "They have my sympathy. They started the project when there was 140 per cent duty protection on imports of steel and interest rates were 17-18 percent. By the time they came up with the project, duties were down to 25-30 per cent. Under these circumstances, how do you put up global capacities and be competitive?" Warming up to the subject, Sankaran says, "As far as the fRNS are concerned, the issue is very simple. IDBI and other institutions should be asked what they were doing all this time. SBI had also said it would finance it. Where are they? Everybody knew that the notes were coming to maturity. Six months back they were quoted at a 40 per cent discount. The institutions could have saved the country $100 million by buying the notes from the market at that time and extinguishing them, and then asking Essar to pay up the $250-million loan.
A top SBI official acknowledged, "The rolling-over of the FRNS is viewed as a technical default in India. But in the international markets it is done quite often even by reputed corporates and MNCS. There is nothing wrong with the Essar Group. It miscalculated its strategy and the current imbroglio is the price it had had to pay. But the group still has steam left in it and is restructuring its businesses. Indian banks and DFIS will not increase their support to Essar because they have reached their lending limits and because it has become a politically sensitive issue. But I am sure Essar will raise the money from some bank overseas." A large number of people we met in the financial community expressed similar views and were similarly averse to going on record.
The attitude, however understandable, cannot be justified. After all, a banker is a trustee of public money. Other than matters that govern fiduciary confidentiality, his opinion on an important corporate issue, whether it is favourable to the company or not, is a matter of public interest. Remember, it is these very gentlemen who, in endless streams of appraisal notes, assure their boards that, in the present globalising economy, these mega projects are not only viable but, indeed, desirable. Of course, if a promoter, however well intentioned, has proved to be incompetent, the bankers who have put public money into the company have every right to remove him from management control and bring in their own team, which is the international practice.
"In the last 15 days I have learnt what I couldn't have in 15 years," says young Prashant Ruia. The major mistake Essar made is that, while launching its global-sized projects in steel and oil, it did not fully comprehend the ramifications of the term 'financial closure'. But that is all in hindsight. After all, till Enron made the term popular, how many of us knew it or how many companies understood it? Today, of course, it is as sacred as "motherhood" in Essar House. "By nature I am loath to borrowing money. After nearly 20 years as a successful entrepreneur I raised my first loan for the sponge iron plant," says Shashi Ruia. Who knows, after the shock of default wears off, he might still come up with some surprises and remove this blemish.
Today, looking out of his office at Essar House towards Mahalaxmi race course, he hasn't the stomach for further financial gambles of any sort. "Financial closure first," he says. A bit uncharacteristic for a man who became a legend for his risk-taking in Indian ports from Kakinada to Tuticorin, from Goa to Mangalore and Chennai to Mumbai, and succeeding when he was barely in his 20s. But that is what tempering is all about - it means moderation and steeling. He could retire, handing the business over to the younger ones, and take to golf at Willing don and improve his present handicap. But he will have none of it - his eyes are set on the choppy Arabian Sea and, like a true shipper, he assures you that the rough seas will pass. He would rather engage in an animated discussion about the latest telecom technologies than wallow in the memories of the good old days in the docks. With that kind of determination, it should surprise nobody if the tempered Ruias bounce back in the not-too-distant future. After all another group, Reliance, went through similar rough seas in the 1980s and fought their way back.
Friday, August 10, 2007
Reliance Story
Business India, July 14-27, 1997
Playing to win
With the commissioning of the largest multi-feed cracker in the world at Hazira, Reliance catapults itself into the world of petrochemical giants
Shivanand Kanavi
Scene 1: The place: Oriental Hotel in Singapore. The event: A discreet meeting of major polymer producers from Korea, Indonesia, Thailand, Malaysia, Singapore, Japan and Saudi Arabia, with the Americans joining later for an 'informal' dinner. The host: A senior executive of an Indian company. The agenda: Problems of the global plastics industry, falling polymer prices and dumping in each others' markets.
Such a get-together is taking place for the first time. Once the pleasantries are over, the Indian executive softly informs the others that if they continue to dump polyethylene into India then he will pay them back with interest in their home markets. After all, the executive says, all it takes is a small, well-directed consignment to spoil a market. The words are heeded. The dumping stops soon after.
Scene 2: Another time and another place. Some European producers of linear alkyl benzene (LAB) are similarly cautioned by this company against dumping into India. This time, too, the words are heeded
The Company: Reliance
Reliance provokes extreme reactions in India. Either you are pro-Reliance or anti-Reliance. There is nothing in between. To many, God is a poor second cousin to Dhirubhai Ambani, the chairman of Reliance Industries Ltd (RIL). To others, the Ambanis typify the seamy side of big business: fixing import quotas, pre-empting licences and switching share certificates. Amidst such extremes, public drama, recrimination and bitter controversies, RIL has built up huge capacities at extremely competitive costs and become a force to reckon with in petrochemicals.
This is a story of dominance. In the licence regime, RIL used every trick in the book to control competition and carve out niches in whichever market they operated. With the gradual opening up since the late 1980s, Reliance changed gear. Despite their formidable political and bureaucratic clout and their profound understanding of power, Dhirubhai and his sons, Anil and Mukesh Ambani, realised that the new globalised game would be one of scale, competitiveness, technological prowess and market dominance. Hav ing created one of India's greatest synthetic textile brands - Vimal - the troika decided that real power came with backward integration and huge, globally comparable scales of operation. Once the strategy was decided, RiL executed it with a vengeance, even at the cost of short- and medium-term shareholder value.
With his recent dramatic announcement of the 1: 1 bonus share issue after a hiatus of 14 years, Dhirubhai is again back to being the God of the shareholders. Divinity aside, what Business India found was a remarkable story of the emergence of a highly competitive mega-corporation with skills and vision required to compete in a globalising economy. Well on its way to hitting $8-10 billion by the year 2000, the Reliance group is possibly the only real global giant in India.
From cloth to cracking
RIL emerged in the early 1970s as a pioneer in branded textiles. In the early years, when RIL'S Naroda mill was in its infancy, Dhirubhai and his cousin, the late Rasikbhai Meswani, built the brand with cloth produced by thousands of powerloom weavers in Surat. Excellent production and finishing supported by a sustained media campaign that lasted for over two decades made Vimal a household word. As if that were not enough, RIL became the company that developed the equity cult. With public offers of shares and partially convertible debentures, RIL went straight to small investors to raise huge sums of money long before the phrase 'primary market' entered the Nariman Point lexicon.
In 1982, RIL honed in on backward integration. Given the polyester content in Vimal fabrics, the obvious choice was to manufacture polyester staple fibre (PSF) and polyester filament yarn (PFY). The PFY plant was launched in Patalganga (Maharashtra) in 1982, which was followed by PSF capacity in 1986. The next step was to move backward into purified terephthalic acid (PTA) in 1986 and paraxylene (input for PTA) in 1988. The market for detergent input was captured by setting up a capacity to manufacture linear alkyl benzene (LAB) in 1987. Then, in 1991, the Reliance group went in for the most ambitious project of them all at Hazira. Besides housing the largest single multi-feed ethylene cracker in the world, Hazira is a complex of a dozen global-sized downstream plants producing polyethylene, polypropylene, polyvinyl chloride (PVC), PFY, PSF, polyester terapthalate (PET) and intermediates like vinyl chloride monomer (VCM), MEG and PTA. The cracker plant was commissioned in March this year and, with the exception of the PET and the sec ond PTA plant, the Hazira project has been completed.
"There has never been in the history of chemical industry in India something as big as the Hazira complex.," says internationally recognised chemical engineer M.M. Sharma, whose effusiveness may be partly because Mukesh Ambani was his student. But, the fact remains that the combined annual cracking capacity of IPCL (at Baroda and Nagothane), Nocil and the smaller crackers put together is less than Hazira's capacity. An unabashed Reliance fan, Sharma says, "Knowing their capacity to debottleneck, put balancing equipment and expand, I will be disappointed if the Hazira plant does not produce a million tonnes of ethylene within two years."
The six-tenth rule
The technological key to RIL'S expansion in petrochemicals is increasing returns to scale. Continuous process chemical industries are characterised by cylindrical pipes and reactors. There is a simple mathematical property that the area of the cross-section of a cylinder increases as a square of the radius. This yields the famous 'six-tenth rule' that is beloved of chemical engineers: if capacity rises from 300,000 tonnes per annum (tpa) to 750,000 tpa (i.e. 2.5 times), then the cost of production will only increase by a factor of 1.73. Of course, the mathematics makes even more sense if one adds the purely commercial advantage of negotiating bargain basement prices in bulk purchase of plant equipment and raw materials not to mention the ability to use giant scales to pre-empt competition.
While the advantages of economies of scale are well known, there are serious obstacles in putting up globally sized chemical plants in India, such as the lack of infrastructure to handle raw materials, inadequate port and jetty facilities, erratic power and water supply and non-availability of huge funds at internationally comparable costs. What sets Reliance apart is the manner in which it has levelled this uneven playing field by meticulous project planning, excellent system engineering and swift project implementation backed up by the trading savvy of three of the sharpest entrepreneurial minds in the country. To overcome infrastructure problems, RIL has gone ahead to create self sufficient islands of in-house facilities. For example, it has built its own jetties in Hazira and a single buoy mooring 5 km off the coast for large tankers to transfer liquids directly into the storage space (called tank farms). All RIL sites are self-sufficient in power. The infrastructure that has put RIL on the world map is the ethylene terminal at Hazira. Since the cracker plant was to be commissioned at the very end, RIL needed large-scale imports of ethylene for their downstream pvc and PET plants. So they built a cryogenic terminal for transferring ethylene at -138°C in deep seas. "That was the first time it was done in the world, " recalls Anil Ambani. "Everybody told us ethylene transfer is unsafe and definitely not possible in a country like India. But once we proved that we can do it, and do it safely, others in the world are copying it."
Sweating it out
“A major strength of RIL is the way they integrate their projects," says Pradeep Shah of Indocean Venture and a long-time Reliance watcher. The importance of integrating backwards is a lesson that RIL learnt from the Patalganga project. PTA and DMT require paraxylene as feedstock, which had to be imported. Since India had hardly any infrastructure to handle imported chemicals, the Ambanis had no hesitation in going for a paraxylene plant with technology from the world leader, Universal Oil Products (UOP). Their next-door neighbour, Bombay Dyeing, which had put up a dimethyl terapthalate (DMT) plant, suffered because it depended on imported paraxylene.
The paraxylene plant required naphtha as feedstock. Instead of relying on tanker movement by road from Mumbai to Patalganga, RIL quickly laid a pipeline to Bharat Petroleum's refinery. When they discovered that the hydrogen produced in the catalytic cracking of naphtha was being flared away, RIL diverted it to the PTA plant where hydrogen is needed. Similarly, instead of wasting the nitrogen by-product in the PTA plant, RIL used it as a conveyor gas. Byproducts of naphtha cracking are used in gas turbines, and kerosene, from which paraffins are extracted for making LAB, are similarly burnt. Any extra heat in a process is not wasted, but used to pre-heat various feedstock.
But system and backward integration are not all. According to Mukesh Ambani, one of the main reasons RIL's 1996-97 performance was better than expected by analysts is the use of 'sweat technology,' or making the plants produce more through clever chemical engineering. Teams work relentlessly to milk as much as possible from the plants. For example, the engineers at Patalganga discovered that adding another compressor and supplying more air to the reactor where paraxylene gets oxidised in the PTA plant would enhance the output greatly. Immediately, the cost-benefit ratio was worked out and an expensive 30-tonne compressor added. Today, the engineers are not fully satisfied. Up to now, only 23 tonnes of air are being used. So a team is working on how t0 use the remaining seven tonnes.
Clearly 'sweating' pays off. A case in point is PVC production. IPCL uses 420 cubic metres of total reactor volume to produce 50,000 tpa of PVC, while Finolex uses 500 cubic metres to produce 110,000 tpa. In contrast, RIL'S first pvc plant at Hazira utilises 560 cubic metres to produce 180,000 tpa. "When our people went recently to Geon, the company which supplied the technology for our I've plant, they were told Reliance has nothing more to learn in PVC technology," says K. Ramamurthy, president of RIL's polymer division.
The Vanvas is over
RIL's triumphal return to its shareholders
People had written him off as an old man who had lost his magic touch. On 26 June, 1997, in the middle of RIL's annual general meeting, Dhirubhai Ambani announced an interruption with a board meeting to discuss bonus shares. The market began to oscillate wildly. Then Dhirubhai came back and asked the shareholders, "What do you want?" The roar of "One is to one!" reverberated across Birla Matushree Hall. He grinned, paused, and said, "You have it." The market went gaga as Lord Dhirubhai returned to his throne.
With the bonus issue after 14 years, the Ambanis have outfoxed equity analysts once again. "We need to be good at psychoanalysis to predict their results," says an analyst jocularly. According to Jal Irani of Jardine Fleming, "Petrochem analysts have difficulty in quantifying the effect of economies of scale on manufacturing costs and hence the bottomline." Read that as a confession, "We don't know."
But, corporate watchers are happy to eat crow, delighted as they are to see one of India's fastest growing companies churning out a better-than-expected performance. Analysts predicted net profits ranging from Rs900-1, 100 crore. Instead, RIL overcame depressed petrochemical prices to post a net profit of over Rs1 ,300 crore in 1996-97, which was 1.3 per cent higher than the previous year. It managed to buck the industry trend by pushing volumes. The turnover for 1996-97 (Rs9,31 0 crore, of which Rs290 crore is other income) is 12 per cent higher than the previous year.
The view of analysts is that despite the controversies that have dogged Reliance, "it has
created assets for all to see." The asset growth is quite phenomenal. Between 31 March, 1992 and March, 1997, RIL's total assets have increased at? compound annual rate of almost 28 per cent for the last five years and now stand at Rs19,536 crore. Last year alone it increased by 30 per cent.
This growth has been financed through higher leveraging. At a time when India's equity market was in the bear phase, the Ambanis were the first major to tap the overseas debt market with long term debt, including the 100-year Yankee bond. As of March, 1997, about 62 per cent of the total debt is foreign currency denominated. However, such leveraging carries risk. RIL's overall debt/equity ratio has risen from 0.49:1 in 1995-96 to 0.83:1 in 1996-97. Consequently, the interest bill has increased by over 54 per cent from Rs110 to Rs1 70 crore. This, plus a 22 per cent jump in depreciation (to Rs 410 crore) and Rs45 crore on account of the minimum alternate tax (MAT) has contained RIL'S post-tax profit at Rs1 ,323 crore - up by only 1 .3 per cent over that of last year. The rise in depreciation was because RIL responded to MAT by changing the method of calculation from straight-line to written-down value.
Have the results been dressed up? Some analysts have asked how a 35 per cent increase in volume can be achieved with a less than 12 per cent rise in manufacturing expenditure. Granted that raw material costs have come down, but labour, power and other costs, plus inflation, should have pushed manufacturing costs higher. The Ambanis attribute this to ruthless operational efficiencies. "We make our plants sweat and try to squeeze the maximum out of them," says Mukesh.
The fact is that RIL has successfully withstood the pressures of 1996-97 - one of the most difficult and recessionary years for the petrochem industry. Today, the company has world-class plants, integrated facilities and state-of-the-art technology. RIL also has one of the lowest employee costs (2.7 per cent of sales), although the capital cost of newly set-up plants would be higher when compared to depreciated facilities of major global competitors. While RIL is diversifying into oil, gas, power and telecom, its mainstay in next three to four years will be petrochemicals and polyester.
According to some analysts, the current year will see RPL make full use of its capacity expansion and total integration from crude oil and cracking facilities to downstream fibres and cloth to post a phenomenal growth in sales and earnings. Mahesh Talreja of Ventura Securities places the estimated growth in earning for 1997-98 at 56 per cent and "an EPS of Rs45 on its pre-bonus issue equity." Rupa Bose of Banque Paribas differs. In her report, she predicts a 20 per cent increase in PAT to the region of Rs1 ,640 crore and a more modest 23-24 per cent growth in EPS. Jardine Fleming's latest PAT projections are similar: Rs1 ,611 crore.
Even if the conservatives are right, it would be an impressive performance. But you can never tell with Dhirubhai. The old fox could stun the market yet again next year. If he does, the analysts will be seen at the Zodiac Grill ecstatically eating Crow a la Languedoc!
Calculated risks
"We can deal with the risks in petrochemicals like the process design risk, feedstock risk, operational risk or the market risk as well as anyone else in the world," asserts Mukesh Ambani. But their record shows that it is no empty bravado.
The first attempt at risk-taking was at Patalganga, when RIL took its chances by putting up capacities that were bigger than the entire Indian market for PFY and PSF. It paid off. India's market for synthetic and blended cloth grew by leaps and bounds in the 1980s and early 1990s despite adverse excise duties vis-a-vis cotton. Soon afterwards, the decision to bet on the new technology from ICI of making PTA, a feedstock for polyester, was taken despite the fact that, at that time, DMT was the proven raw material. The risk was taken because the PTA route did not need an intermediate extraction plant and, hence, translated to a lower capital cost. Again, the risk paid off. Today the PTA-vs-DMT controversy has been globally settled in favour of PTA.
Similarly, when RIL was putting up its first pvc plant in Hazira in 199091, the rated output of 180,000 tpa was larger than the total Indian demand. Today, RIL has expanded their capacity in the same plant to 275,000 tpa, and the market has not only absorbed this output but that of others like Finolex and IPCL as well. And Reliance isn't satisfied. Ramamurthy of the polymer division is planning to increase the Hazira capacity to 310,000 tpa. As a Reliance watcher and family insider pointed out, "The hallmark of the father and sons is that after meticulous research they rely on their sharp trading instinct. It is this instinct that makes them incessantly bet on growth and virtually create the growth by generating massive economies of scale."
The Jamnagar experiment
Reliance's emphasis on system integration, which evolved at Patalganga, has become a way of life in project planning. While the Hazira complex has numerous examples of such integration, RIL'S Jamnagar refinery might become a textbook case. When asked why the entire technology package for the ]amnagar project was awarded to UOP, Mukesh Ambani pointed out, "Large benefits are going to come from clever feedstock and heat integration. That can only happen when the right hand knows what the left hand is doing."
All components of the output at Jamnagar are either end products or by-products that are to be used somewhere as a feedstock for high-value petrochemicals or as fuel for generating process heat. In fact, petrochemical experts estimate that, when the entire system stabilises, no more than 0.2 per cent of the refinery throughput will be wasted. If that happens, it will be a world record, because the international wastage figure for refineries hovers around 5 per cent.
RIL's system planning often takes place well before the project is implemented. For instance, when BHEL engineers were asked four years ago by Reliance to experiment with petroleum coke as boiler fuel, they were naturally puzzled. It is now evident that even in 1993-94, the RIL team was looking at ways to use refinery residue - six years before the complex was due for completion. The experiment worked. Now, the gameplan is to convert refinery residue into petroleum coke to be used for the in-house power project to generate 1,000 MW of power.
When phase one is completed in 1999, the Jamnagar refinery project will be truly mind-boggling. It will not only supply 3 million tonnes of naphtha to Hazira but also enough propene as feedstock for another 400,OOO-tonne polypropylene plant and a 1.2-million tonne paraxylene complex in Jamnagar. Petrochemical engineers expect that the second phase at Jamnagar (starting from 2001) will produce another 1 million tonnes of ethylene as well as high-value petrochemicals for use in drugs, dyes and paints, unleaded petrol, food additives and polystyrene foam. In fact, a senior technologist at uop said that RIL is actually driving refining technologies in new directions - away from traditional refining towards high-value petrochemicals.
Jack be nimble ...
"Without flexibility in operations one cannot quickly respond to market conditions," says Mukesh Ambani. Said by many, done by few. In Reliance's case, flexibility seems to be the holy word - be it in engineering, systems design or financial deal-making. Consider just the production side. The polyethylene plant at Hazira has a swing reactor that can produce, with hardly any change, either high-density polyethylene (HDPE) or linear low-density polyethylene (LLDPE) according to market requirements. The cracker at Hazira is designed to use gas, liquefied natural gas, naphtha or gas oil as feedstock. "Since feedstock prices cannot be predicted, RIL has the flexibility to use whichever combination that increases our operating margins," explains Mukesh Ambani. "Considering the lifecycle cost of the cracker, the extra investment on a multi-feed cracker is marginal."
This agility translates to greater value addition. Earlier, RIL was spending $1,300 on ethylene to produce about $2,800 of products. Today, the cracker uses no more than $600 worth of naphtha to produce the same end value. "We hope to make a profit of Rs2,200-3,000 crore every year from Hazira alone," exults Ramamurthy. According to him, even if global petrochemical prices fall by 10-15 per cent, the high value addition at Hazira will sufficiently insulate RIL from such downturns. "On top of it, our marketing. costs are extremely low," says Ramamurthy. "We spend $3 per tonne for marketing $800 of plastic. Our total distribution cost of plastics to any point in India is $26 a tonne. Let anyone who wants to enter the Indian market beat that!"
New horizons
RIL has never been shy of seizing a business opportunity: Here is a peek at some of the things they're getting into
Power
Reliance Power is a separate company wholly-owned by RIL. A power purchase agreement (PPA) has been signed for the 41 0 MW Patalganga project and is now awaiting techno-economic clearance for financial closure. The Bhawana 423 MW project is waiting for PPA to be signed. Reliance is also bidding for a 2,000 MW super thermal pit head project in Bihar and a 800 MW hydel project in Himachal and 1,200 MW hydel project in Sikkim.
Telecom
Reliance Telecom, another separate com pany with 10 per cent participation from Nynex, has won cellular licences for seven circles: Madhya Pradesh, Orissa, West Bengal, Bihar,Sikkim and the seven sisters of the northeast. RIL was the first to sign the agreement with DoT to pay the required fees and is in fact well on its way to starting cellular service in 22 cities.
Oil & Gas
Oil & Gas is a division of RIL. The ONGC- Enron-RIL (40:30:30) joint venture is pumping out over 12,000 barrels of oil daily from Panna and Mukta. These fields were termed marginal and uneconomical by ONGC. RIL found that with their project management expertise the cost of recovery could be lowered 20-30 per cent and, with Enron agreeing to a lower internal rate of return, the project became viable.
They have also hit gas at Tapti. One million cubic metres of gas will soon flow daily to Hazira. Since there are problems in sharing the existing pipeline with ONGC, RIL is trying to convince its partners to go in for a separate gas pipeline. Another promising deal is being negotiated in Iraq between the Iraqi government and RIL-ONGC videsh. If it comes through, this field should yield in one day (about 200,000 barrels) the entire production from Bombay High.
Master builders
While RIL'S low capital and operational costs are recognised globally, another factor which makes them competitive is the speed at which they erect plants. All the Hazira plants were erected in record times, with the giant cracker coming up in only 29 months. All indicators point to Jamnagar proceeding at an even more frenetic pace. According to Sharma, "The main reason is that the Ambanis sit on everybody's head, be they contractors, sub-contractors, or employees, and put in long hours themselves. Do you know that there were a couple of CMD's of IPCL who never spent a night at Nagothane when it was coming up, even though it was their biggest investment at that time?" Hetal Meswani, a cousin of Mukesh and Anil and an executive director of RIL, was literally living in Hazira during construction and has now moved to Jamnagar. Engineers recall how Mukesh Ambani would spend days on end at Patalganga when it was coming up.
Today there are daily video conferences between Mumbai, Jamnagar and the London office of Bechtel, who are doing the engineering work for the refinery project. There is a team of RIL engineers sitting in the London office of Bechtel, while a team of Bechtel engineers is at Jamnagar. New technologies are being adopted to speed up construction. "We found that 40 per cent of the time in erecting piping is taken up by welding the joints," says S.C. Malhotra, technical executive director of Reliance Industrial Infrastructure, a Reliance group company. "So we decided to spend a few crore and automate the whole thing by going for a giant induction pipe-bending machine that can bend even a 2-ft diameter steel pipe into any angle."
Blurring boundaries
"Do you think a modern Rs10,000 crore business can be run by two brothers?" asks an executive rhetorically. From foremen, site supervisors and middle-level plant managers to vice-presidents and presidents, every one in RIL is given considerable autonomy. According to Pradip Shah, that is one reason why Reliance has such a strong core group of highly talented professionals in marketing, finance, operations, projects, construction, telecom, power, oil and gas, fibre, intermediates, polymers and textiles. It is a peculiar but successful amalgam - the family makes the key decisions, which are then meticulously executed by professionals.
"In the best companies of the world the boundaries between technology, finance, and marketing have collapsed," points out Mukesh Ambani. Just as the siblings don't have any rigid compartmentalisation of responsibilities, so too do many of the top executives of RIL. "I was coming from a conference in Singapore and I heard about a good trading opportunity in Jakarta," says C.S. Gokhale, who runs the fibre intermediates division. "So, I rang up Mukesh and he not only agreecd with me but asked me to come via Jakarta and clinch the deal. There are no barriers iuch as this is a purchase function and somebody else has to do it. After all, when I joined RIL, I was told that I will be an owner-manager, and I have no doubts on that." Hemant Desai, vice-president in charge of polymer plants at Hazira, also emphasises the importance of being a wellrounded manager. "I used to be in fibre marketing; today I am in polymers; tomorrow if I have to go to Jamnagar and talk to the sarpanch of Mothikavdi [the village next to RIL'S site] I will do that." The motto is if it benefits the company, go ahead and just do it.
It is that motto which has driven RIL relentlessly. In the process, it has made enemies, occasionally bent laws and liberally buttered bread on both sides. But even Reliance's worst detractor cannot ignore four simple facts: it has created a massive asset base in the fastest possible time; it has produced successful plants on truly global scales; its costs are internationally competitive in the truest sense of the term; and that has given it consistent long-term value to 2.6 million shareholders. No company can beat that. Not yet, anyway.
Sibling speak
Excerpts from interviews
We will benchmark with the top 100 companies in the world
MUKESH AMBANI
• We have always believed that we shouldn't get into anything because it was in fashion or everybody else was doing it. We must first understand it thoroughly. Then we back it up with dedicated leadership, which is not restricted to my father or myself and my brother.
• Our projections for the group in 1999-2000 are assets worth Rs30,000-35,000 crore and a turnover between Rs40,000-50,000 crore.
• If the administered pricing mechanism for petroleum is lifted and crude is decanalised, then with the way we have . configured the Jamnagar refinery, Reliance will be globally competitive.
• Refineries of the future will be fully integrated with petrochemicals and power. We were the first in the world to think that way and the first to build such a refinery.
• After Jamnagar, we will grow upstream into oil and gas and energy. For that we might even have to go outside India, and have already bid for Iraq sites with ONGC videsh. The new exploration policy itself will open up opportunities in India. If there is any oil in India then Reliance will definitely find it.
• Right now we are having discussions with IOC about fuel distribution from the Jamnagar refinery. There is merit in India's oil majors getting together to reduce distribution costs.
• We won't move into a gas cracker project in Assam until it is clear what feedstock we are going to get. Only then can we employ our knowledge and add maximum value to the project. In India, people are not used to up-front rigorous analysis. Instead, they prefer foundation stone-laying ceremonies. Let us first be clear about what we will get. That is better than to assume something and have problems later.
• Reliance will get listed on Wall Street because we want to benchmark ourselves with the top 100 companies of the world.
We have the lowest capital expenditure costs globally
ANIL AMBANI
• Our capex costs are the lowest because we do not look at a plant as a black box. We break it into every possible component, and optimise what we can do in India and what we can do offshore. Our aggression also comes from scale. We believe in having rate contracts. Also we buy everything with cash. If the vendor has to provide finance, he jacks up the price by say 20 per cent. Similarly we give the site contractors assured work in exchange of which they are ready to take a knock on the margins.
• The skills we built in the chemical industry we are repeating in telecom. Our costs are far lower than any other telecom company in India. Investors are applauding our telecom strategy - to pay the lowest possible licence fee and aim for the highest geographical spread. This will give us the ability to innovate in marketing and tariffs.
• We are not going to have 30 telecom operators in India. There will be a shakeout. Nearly 20 licences, including HFCL's, are up for sale. If the rules of the game change, then Reliance will be in the frontline buying some of them out.
• What's the big deal about P/E ratios? In the 1980s and 1990s, Shell was quoting at two times earnings! Isn't Shell a great company? In the lifecycle of every company, there are ups and downs. Look at IPCL. They have no merger, no private placement, no seeming controversy, are a strong petrochemical player, have scale, integration, depreciated assets, 51 per cent owned by the government, no fear of great dilution, all accounts are certified by any number of government agencies. Then why is it quoting at four times earnings and RIL is quoting at ten times earnings? There is no rationale.
• As India integrates with the global economy, people will begin to understand the value of assets. For people who are interested in looking at the long term, these are very exciting times.
Book Review-- Maths-S Ramanujan
Ramanujan: Letters and Commentary (History of Mathematics, Vol 9)-- by Bruce C. Berndt, Robert A. Rankin
It is lonely at the top
Shivanand Kanavi
"I beg to introduce myself to you as a clerk in the accounts department of the Port Trust Office at Madras .... ". Thus started the most famous letter in 20th century mathematics, written by Srinivasa Ramanujan to Godfrey I-tarold Hardy.
Was Ramanujan, afraid that proofs of his theorems may be stolen by the dons at Cambridge or was he afraid of being ridiculed for his intuitionistic methods? Was he really afraid that he will be "polluted" by going to England or was he pressured into refusing to go by other orthodox Brahmins, and so on are among the many questions that are raised by this latest collection of Ramnaujan letters, edited by two mathematicians, B.C.Berndt and R.A.Rankin.
Ramanujan's method of stating an important result and providing some 'hand waving' arguments as the basis of the result rather than give rigorous proofs was unique and mathematicians like MJ.M.Hill dismissed his genius. One of the reasons for the cryptic nature of his proofs was his notation which he very much kept to himself and the other was that many a time his "proof" will involve leaps that could not be bridged by rigorous mathematics. Nevertheless G.H.Hardy recognised the genius and endeavoured successfully to get him to come to Cambridge. In fact the collection contains a letter written by Bertrand Russel to one of his women friends wherein he mentions, "I found Hardy and Littlewood in a state of wild excitement, because they believe they have discovered a second Newton, a Hindu clerk in Madras".
But actually, Hardy's close associate J.E.Littlewood thought otherwise, in a letter he told Hardy that, he placed Ramanujan on par with Jacobi (important Hungarian mathematician, but not up to the stature of Newton). He also thought Ramanujan was not disclosing his proofs because he probably feared that English mathematicians might "steal" his results! Ramanujan expressed his pain on reading the same allusion in Hardy's reply to his first letter, but surprisingly did not disclose any more information regarding his methods. Instead he wrote, "I am already a half starving man. To preserve my brains I want food and this is now my first consideration. Any sympathetic letter from you will be helpful to me here to get a scholarship either from the University or the government", and added a few more results in his famous second letter. Considering his economic plight and the craving for professional peer recognition and even critique and considering the plundering of India in the hands of Britain his unexpressed fears are understandable.
A misconception cleared by the collection under review is regarding Ramanujan's orthodoxy that. prevented him from accepting the invitation to go to Cambridge. In a letter to Hardy, Ramanujan explained that when the offer was made by C.E.Mallet of India Office, London, it was too vague and besides it brought visions of having to appear for a civil service examination. This made him hesitate and mean while, his boss, an orthodox Brahmin, who was accompanying him, intervened and categorically told mallet that Ramanujan cannot go due to religious reasons. It is clear from the letters that Ramanujan was actually looking forward to meeting the best mathematical minds of Europe.
The letters also bring out the loneliness he suffered during his illness first in England and then in India. However being extremely conscientious and grateful for the fellowship he kept sending new results despite severe illness.(The illness which was never diagnosed properly has now been diagnosed as amoebiasis of the liver according to the authors). In fact Hardy's letter to J.J.Thompson (Nobel Laureate physicist and president of the Royal Society) shows that fearing the worst and aiming to give some incentive to Ramanujan to fight the illness, Hardy lobbied for the early award of the Fellowship of the Royal Society.
Though after his death his family members engaged in a sordid exhibition of greed and propensity to cash in on respect and sympathy for Ramanujan, he himself exhibited his generosity by asking his family to actually give some money for scholarships to poor students.
The collection is a valuable addition to the growing literature about Ramanujan's life and work. The editors have taken particular pains to add fairly detailed biographical notes on all the individuals that are mentioned in the letters, thereby giving a flavour of associates and friends of Ramnaujan. They have also given extensive mathematical notes on the history and evolution of each of Ramanujan's propositions as they appeared in his letters. On the whole it is an enjoyable reading for mathematicians as well as lay public interested in the Indian genius.
It is lonely at the top
Shivanand Kanavi
"I beg to introduce myself to you as a clerk in the accounts department of the Port Trust Office at Madras .... ". Thus started the most famous letter in 20th century mathematics, written by Srinivasa Ramanujan to Godfrey I-tarold Hardy.
Was Ramanujan, afraid that proofs of his theorems may be stolen by the dons at Cambridge or was he afraid of being ridiculed for his intuitionistic methods? Was he really afraid that he will be "polluted" by going to England or was he pressured into refusing to go by other orthodox Brahmins, and so on are among the many questions that are raised by this latest collection of Ramnaujan letters, edited by two mathematicians, B.C.Berndt and R.A.Rankin.
Ramanujan's method of stating an important result and providing some 'hand waving' arguments as the basis of the result rather than give rigorous proofs was unique and mathematicians like MJ.M.Hill dismissed his genius. One of the reasons for the cryptic nature of his proofs was his notation which he very much kept to himself and the other was that many a time his "proof" will involve leaps that could not be bridged by rigorous mathematics. Nevertheless G.H.Hardy recognised the genius and endeavoured successfully to get him to come to Cambridge. In fact the collection contains a letter written by Bertrand Russel to one of his women friends wherein he mentions, "I found Hardy and Littlewood in a state of wild excitement, because they believe they have discovered a second Newton, a Hindu clerk in Madras".
But actually, Hardy's close associate J.E.Littlewood thought otherwise, in a letter he told Hardy that, he placed Ramanujan on par with Jacobi (important Hungarian mathematician, but not up to the stature of Newton). He also thought Ramanujan was not disclosing his proofs because he probably feared that English mathematicians might "steal" his results! Ramanujan expressed his pain on reading the same allusion in Hardy's reply to his first letter, but surprisingly did not disclose any more information regarding his methods. Instead he wrote, "I am already a half starving man. To preserve my brains I want food and this is now my first consideration. Any sympathetic letter from you will be helpful to me here to get a scholarship either from the University or the government", and added a few more results in his famous second letter. Considering his economic plight and the craving for professional peer recognition and even critique and considering the plundering of India in the hands of Britain his unexpressed fears are understandable.
A misconception cleared by the collection under review is regarding Ramanujan's orthodoxy that. prevented him from accepting the invitation to go to Cambridge. In a letter to Hardy, Ramanujan explained that when the offer was made by C.E.Mallet of India Office, London, it was too vague and besides it brought visions of having to appear for a civil service examination. This made him hesitate and mean while, his boss, an orthodox Brahmin, who was accompanying him, intervened and categorically told mallet that Ramanujan cannot go due to religious reasons. It is clear from the letters that Ramanujan was actually looking forward to meeting the best mathematical minds of Europe.
The letters also bring out the loneliness he suffered during his illness first in England and then in India. However being extremely conscientious and grateful for the fellowship he kept sending new results despite severe illness.(The illness which was never diagnosed properly has now been diagnosed as amoebiasis of the liver according to the authors). In fact Hardy's letter to J.J.Thompson (Nobel Laureate physicist and president of the Royal Society) shows that fearing the worst and aiming to give some incentive to Ramanujan to fight the illness, Hardy lobbied for the early award of the Fellowship of the Royal Society.
Though after his death his family members engaged in a sordid exhibition of greed and propensity to cash in on respect and sympathy for Ramanujan, he himself exhibited his generosity by asking his family to actually give some money for scholarships to poor students.
The collection is a valuable addition to the growing literature about Ramanujan's life and work. The editors have taken particular pains to add fairly detailed biographical notes on all the individuals that are mentioned in the letters, thereby giving a flavour of associates and friends of Ramnaujan. They have also given extensive mathematical notes on the history and evolution of each of Ramanujan's propositions as they appeared in his letters. On the whole it is an enjoyable reading for mathematicians as well as lay public interested in the Indian genius.
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