FCCBs are emerging as better funding options

Updated: Apr 29 2007, 07:22am hrs
The wind energy sector is garnering a lot of attention with major companies looking for alternate sources of power. The obvious power shortage in India and the growth potential is pushing companies into tapping alternative energy sources. Rajesh Naidu of The Financial Express poses questions to Prayasvin Patel, CMD, Elecon Engineering, one such player wanting to make it big in the wind energy business. Excerpts

What are your domestic endeavours

With regard to domestic endeavours, we have bagged an order from NTPC worth Rs 237 crore for the supply and installation of a Coal Handling Plant Package on a turnkey basis for their Dadri Stage-II (2 x 490MW) Thermal Power Project. This includes coal unloading through track hopper and wagon tipplers, crushing and screening systems, storage facilities and associated conveyor system handling coal with 1400/1540 mtph capacity.

We have also procured an order from the Indian Navy. It includes supplying main propulsion gearboxes to India's first indigenous aircraft carrier. This is our second major endeavour in sophisticated marine gears' technology after the successful delivery of gearboxes for the Navy's new stealth warships under construction at Mazagon Docks.

We have also entered into a technical collaboration with Renk AG, which has wide experience in design, manufacture and testing of high-quality special gears for marine propulsion. In addition, an order worth Rs 15 crore from Chettinand Cements Corp for their Ariyalur cement works awaits us, which entails designing, manufacturing and supplying a stacker reclaimer system for limestone, correctives and coal/lignite for two new mtpa cement projects.

We have also received an order worth Rs 12.07 crore from Indure Private for designing, manufacturing and supplying wagon tipplers for Rajasthan Rajya Vidyut Utpadan Nigam.

You cater to different sectors. Which sector contributes the most to your revenues

With regard to our gear division, the steel and cement sector contributes the most to our revenues, while for the material handling equipment division it is power sector.

Going forward, for a one- year period, what initiatives does your company intend to take to combat any sharp rise in raw material costs such as that of steel, nickel or chrome Also, could you elaborate on your foray into the wind energy segment

The company has been taking several steps to fight an increase in raw material prices. These include orders from public sectors, which are embedded with 'escalation clauses' that can partially take care of the price rise. We also enter into 'annual rate contracts' with suppliers that cushion the impact of a hike in raw material prices.

As far as our foray into the wind energy segment is concerned, we are implementing windmill projects of 10 wtg, each of 600 kw. For this, we have already acquired the necessary private land with power evacuation facilities. We intend to commission this project from September to December 2007. We are also in the process of setting up 50 mw projects in Jamnagar district at three sites for which government land acquisition is in the final stage.

Elecon Engineering has been using the FCCB route to raise funds. Considering today's market conditions, how lucrative is the FCCB route

FCCBs are attractive instruments. They have features of both debt and equity and thus have the advantages of both forms of financing. Average cost of debt with a FCCB is lower due to the value of the equity option.

With rising interest rates, FCCBs are emerging as better funding options. Organic and inorganic growth by Indian companies and an improved regulatory environment is further pushing the rush for FCCB. USD/EUR denominated FCCBs placed with international investors help in diversifying the funding mix and investor base.

Additionally, there is no immediate pressure on the stock, the increase in free float is less when compared to straight equity, and dilution of promoter holding and EPS is further delayed/controlled.

However, current volatility and market corrections in the equity market are having a negative impact on FCCB issuance. The risk attached with FCCBs is hedging. Moreover, premium should be minimum in FCCBs to make them attractive and profitable. For this, few clauses can also be added to ensure that there are no losses in FCCB conversion.

What are your futures plans

We are planning to set up a separate facility for manufacturing gearboxes between 1 mw and 2 mw. We will also be setting up an independent facility by building two sheds and installing testing equipments.