Vizag steel plant turnaround plan gives rise to speculation

SUNIL MUKHOPADHYAY

If you want to sell your old car, paint it to make it attractive,” any intelligent person would advise you. “But, mind you, don’t go for any capital expenditure,” he will hastily add. This advice seems equally applicable to any sell-off.

Many in the steel industry believe that this is exactly what is happening in the case of government-owned Vizag Steel Plant of Rashtriya Ispat Nigam Ltd (RINL), which is yet to achieve a net profit since it was commissioned in 1992. Its accumulated losses soared to around Rs 5,100 crore at the end of 2000-01 fiscal. The brass of this first shore-based integrated steel plant of the country have now drawn a turnaround plan. They aim to break even by 2002-03 fiscal. “If this is achieved, the government will be in a better bargaining position for a sell-off or divestment,” sources say.

To add to speculation, the RINL brass has slowed down efforts to clear a Rs 1,742 crore investment plan for value addition submitted to the government in October 1998. The plan includes setting up of a steel smelting shop, a coke oven battery, coal dust injection facility in the blast furnace and a rolling mill. “No one wants to invest a huge amount when he has plans to sell off,” they point out.

RINL’s chairman-cum-managing director, BN Singh, however, evaded the issue of sell-off or divestment, saying: “I’m an employee of the company, not the owner. Being the CMD, my duty is to run the plant as efficiently as possible and achieve a turnaround. The rest depends on the owners.” RINL’s owners are the Union government and the Andhra Pradesh government. The Andhra chief minister, Chandrababu Naidu, however, is said to be opposed to the idea of divestment.

However, Dr Singh admitted that the company was not too keen on new investments at the moment. “We are already saddled with huge interest and depreciation burden. If the investment plan is through and we start its implementation, the cost of the new project will go up to Rs 3,000 crore calculated at the present price. This means additional interest and depreciation burden. We can hardly afford to bear the burden,” he said. The company had Rs 357 crore interest and Rs 453 crore depreciation burden in 2000-01 fiscal against Rs Rs 425 crore and Rs 430 crore, respectively, in the previous fiscal.

The Tatas showed some interest in taking over the plant during the last fiscal, as it would have compensated for Tisco’s abortive efforts to set up a shore-based steel plant at Gopalpur in Orissa. According to sources in the steel ministry, the Tatas offered such a low price that the government did not think it necessary to continue the talks.

The financial state of the Vizag plant would not have been so bad had it been commissioned in time. Although its foundation stone was laid way back in 1971, it took 21 years for commissioning. The time overrun resulted in a cost overrun from an estimated cost of Rs 2,225 crore to a final cost of Rs 8,594 crore. Moreover, a number of units which were incorporated in the original plan with an aim to add value to its products, were left out of the final plan to reduce the project cost. But at what cost? The plant’s product-mix is not conducive to earning profits. It mainly produces low-value long products.

Experts admit that Vizag is one of the best laid out steel plants in the world and its infrastructure base is so good that its capacity could be increased to 15 million tonnes without any change in layout. However, in 2000-01, the plant produced 2.51mt of saleable steel, which is up from 1.93mt in 1998-99 and 2.38mt in 1999-2000.
The Centre agreed to carry out capital restructuring in 1998 and around Rs 1,400 crore of government and institutional loans were converted into equity. As a result, RINL’s equity base shot up to Rs 7,800 crore. At present, the company’s loans stand at Rs 1,600 crore, mostly with Life Insurance Corporation and Unit Trust of India. In the current fiscal, it intends to reduce its debt burden by Rs 170-180 crore.

“When I came here as CMD, I was not sure whether the plant could be turned around,” admits Dr Singh. “But having a series of discussions with the people here, I came to the conclusion that the plant could be turned around even without any major investment for value addition. This can be done by improving the chemistry for value addition, improving techno-economic parameters for cost reduction and for increasing production, as higher production helps bring flexibility in fixing prices of products,” he said.

The performance of the company in the last three years indicate that Dr Singh did not exaggerate. Labour productivity of the plant went up from 161 tonne of liquid steel per man per year in 1998-99 to 192 in 1999-2000 and further to 211 in 2000-01, the highest in any integrated steel plant in the country. It could reduce cost by Rs 44 crore, Rs 118 crore and Rs 176 crore, respectively, during the period. Turnover went up from Rs 2,761 crore to Rs 2,973 crore and further to Rs 3,441 crore. This year it has a target to achieve a turnover of Rs 4,000 crore. Operating profit started increasing from Rs 15 crore in 1998-99 to Rs 252 crore in 1999-2000 and about Rs 500 crore in 2000-01.

Many in the government might be happy that the plant is gradually becoming attractive for a sell-off or divestment. “But that would also raise a serious question: Is privatisation or divestment at all necessary for a turnaround?” asks a trade union leader of the plant.