Adhunik Metaliks Ltd is the flagship company of the Adhunik Group with its core operations in value-added steel products, alloy steels and stainless steel. The company caters to the requirements of a plethora of industries and the end use of its products are found in utensils and household ware, kitchenware sinks, tubes and pipes, automobiles, railways, furniture, refineries, petrochemicals, nuclear applications, power plants etc.
As of now the company is on an aggressive growth trajectory and has been busy implementing its strategic plan of achieving the status of an integrated steel producer. So far it was positioned as a secondary steel manufacturer. In doing so Adhunik Metaliks intends to create linkages across the entire value chain from critical raw materials such as iron ore and coal to produce value-added steel products. The advantage of the new business model stretch far beyond achieving cost efficiencies and ensures significant de-risking of the business. This is especially important in the steel manufacturing industry, where manufacturers are price takers; this aspect combined with the severe supply side constraints within the global industry leaves very little room for producers to increase margins. But the two pronged strategy of backward and forward integration will to a large extent insulate Adhunik Metaliks from both these issues.
Supply Side Dynamics
Currently the biggest worry for the global steel market is the escalating prices of raw materials, especially iron ore. The backward integration initiated by Adhunik Metaliks has been quite successful with captive ownership of critical raw materials. Adhunik Metaliks has been allotted iron ore mines at Kulum in Orissa which are about 125 km from its plant in Rourkela. The mine has a rich ferrous content and is likely to feed the company's requirements for the next 30 years.
Because these mines have been partly used, the cost of mining will be lower relative to an untouched site. This would effectively insulate the company from rising iron ore prices, further the proximity of the reserves to the manufacturing plant will be a big benefit to the company, relative to competition. An estimated 45 per cent reduction in cost is likely once this mine at Kulum becomes operational. The company has also been successful in bagging significant reserves of coal situated about 230 km from its manufacturing unit which will feed its plants for the next 30 years. The company has gone one step further to reduce its power cost by setting up a captive power plant.
Adhunik has decided to use the inorganic route to enter the forgings business. By doing so it intends making in roads into the automobile and engineering forgings. These two sectors are significant consumers of its existing product line. The company also acquired Unistar Galvanising and Fabrication Ltd in July 2006. Unistar is a transmission tower manufacturing company producing transmission towers, galvanized substation and switchyard structures, ground based and roof top galvanized telecom towers, welded structure and masts for railways and lighting masts, pipe structures, foundation bolts and accessories.
But the key leverage that Unistar offers is the approvals it possess from the likes of NTPC, Power Grid Corporation, BHEL etc. On March 12, 2007 Unistar bagged a Rs 53-crore order from India Wireless Technology for the manufacture and supply of complete telecommunication towers. The order will occupy four to five months of the production facility.
Demand Side Dynamics
The biggest plus point today for the Indian steel industry is that the domestic demand for steel is not skewed due to excess demand from any one sector or industry. Such robustness in demand makes it more sustainable. Demand in the global market is also likely to remain strong in the medium term.
The robustness of GDP growth rates has permeated to all sectors of the economy, so whether it is infrastructure development or kitchenware- There is capacity expansions in most industries, which has in turn caused a surge in demand for steel. The automobile sector which is in fact the largest consumer of alloy and special steel has witnessed a double digit CAGR (compounded annual growth rate) over the past five years, which is likely to remain sustainable with increasing disposable incomes as well as the gradual emergence of India as an export hub for automobiles. At the same time there remains significant latent demand for stainless steel in the country with the per capita consumption of stainless steel at an estimated 1.1 kg, much lower that 4 kg in China and 15-20 kg in developed nations.
The expansion, which will be completed by 2008, will almost double the capacity of the company. But the key ingredient to this expansion is the diversification into value added variants that can be sold at much higher margins. Hence profitability of the company will increase at a higher pace than the increase in revenues. On an optimistic note it is estimated that the buoyancy in global demand for steel will be sustainable over a long term of 10 odd years, with the new capacity in place Adhunik will benefit from it for a long time to come. Having said that the global demand for steel is likely to slow down and a rationalisation of current prices is inevitable.
But the most exciting phase for the company will emerge from its new avatar of an integrated steel player. The biggest benefit from this will be the ability to absorb price fluctuation in the steel business better.