The financial year 1998-99 will mark the beginning of a new era for the Rs 500 crore Indo Gulf Fertilisers & Chemicals. Hitherto known as a pure urea company, it expects to see its one lakh tonne per annum copper smelter go on stream in March. The management views the green-field venture, christened `Birla Copper' as a growth vehicle that it hopes will transform the company into a Rs 2,000 crore mammoth by the year 2000.Diversification seems to be the mantra for all Aditya Birla group companies and it is not surprising that the urea manufacturer has chosen to invest in an entirely new business. Also, it is logical to expect higher volume growth as a result of the copper business as there exists a huge demand-supply gap in the country. What is a matter of concern is whether the gamble will pay off in terms of a higher return on shareholders' funds.
Dispelling such concerns about value creation, Indo Gulf's senior joint president (fin & com), NL Jain says, "Not only will the new venture lead to afour-fold growth in turnover, it will also go a long way in adding to shareholder value. There exists a huge demand-supply gap for copper in the country, and we believe that Birla Copper will be in a position to exploit the opportunity profitably."
It is true that there exists a demand-supply gap in the domestic market and about 75 per cent of the country's requirement is being met through imports. While the country's current requirement of copper is about 2 lakh tonnes per annum (tpa), domestic production is only around 50,000 tpa. For years, the public sector Hindustan Copper which has an installed capacity of 47,500 tpa has enjoyed a monopoly in copper production.
It was only in November 1996, when Sterlite Industries' one lakh tpa copper smelter became operational, did it witness some domestic competition. Unlike Hindustan Copper, which has its own captive mines, Sterlite's smelter uses imported concentrate as raw material. However, it has found it difficult to stabilise production and has been facedwith closure twice during the short time that it has been in operation.
Indo Gulf will be the third largest entrant into the copper smelting business which by no means is easy to manage. Group chairman, Kumar Birla would be willing to testify that the technology involved is difficult to master, a fact clearly borne out by Birla Copper's insistence that technology partners continue to hover around the plant for at least a year. But mastering new technology is not an alien feature for the company.
When it started off as a urea producer, it was in a similar situation where the technology used was far more modern than all the existing plants in the country. Joint executive president of Birla Copper, DD Jalan argues, "It is not the first time that we are faced with the challenge of understanding and implementing a new technology. Today we are one of the most cost competent urea producers in the country and we can repeat the success with copper."
Whether the company can make a success out of Birla Copper is,however, something that only time will tell. For now, one can merely speculate based on the available facts. And the facts are that Birla Copper's capital costs are twice that of Sterlite's smelter. Unlike Birla Copper, it had no need to invest in a captive jetty and a power plant. Hence, it is logical to expect that Birla Copper's profitability will not be as high as Sterlite's. Yet, since Birla Copper's plant is supposedly technologically superior and has been cited as environment friendly, it could be argued that the higher investment would pay off in the longer run. Sterlite's equipment is second hand and unlike Birla Copper where technology suppliers will ensure the smooth running of the plant, it could have further problems in stabilising. But then Sterlite is an old hand in the business. Demand for copper, which is estimated to cross 4 lakh tonnes per annum by 2005, will continue to outstrip domestic supply. Therefore, whether or not Birla Copper is able to match Sterlite's costs, it would still beassured of a market for its products. Both Sterlite and Indo Gulf have plans to enhance their capacities to 1.5 lakh tonnes per annum and the domestic demand-supply scenario goes in favour of these enhancements. What could perhaps impact Birla Copper's profitability most adversely is a narrowing of the duty differential between the import of finished copper and concentrate. Currently, the duty differential stands at 25 per cent and the prevalence of this differential is crucial to the success of the new venture. Whatever the concerns may be, there can be no going back as an investment of Rs 1,850 crore is not small change.
Would Indo Gulf be seen more as a copper company in the times to come? "Not really", explains its managing director, BN Puranmalka, "Both fertiliser and copper operations will evolve as separate strategic business units (SBUs). Each one will have its own CEO and will be run as an independent outfit." Nevertheless, March 1998 will witness the emergence of yet another copper mammoth.
Copyright(c)1998 Indian Express Newspapers (Bombay) Ltd.
