Kolkata: The future of Haldia Petrochemicals Ltd is “extremely uncertain” as the cash-strapped company may suspend production within weeks unless market conditions improve, managing director Sumantra Choudhury said.
The polymer maker has cut production by at least 40% from its peak capacity for want of working capital and poor demand. It is unable to recover fixed costs operating at this level, Choudhury said. In September, the company made a cash loss of Rs.5 crore from operations.
The firm has an inventory of 22,000 tonnes—at least 50% more than the “acceptable limit”—and is struggling to bring it down, according to Choudhury.
“There is no visibility at this time,” he said. Its marketing team says demand for its products will improve after 15 October, but unless that happens, “there is no point in carrying on like this”, Choudhury said.
Consumers, however, said Haldia Petrochemicals is unable to sell its products because they are more expensive than those of its competitors.
The management is trying hard to reach buyers but only about a third of plastic manufacturers in eastern India buy from it, said Sourabh Khemani, former president of Indian Plastics Federation, a lobby group.
“That demand is sluggish is a lame excuse,” he said. The firm should sort out its pricing issues if it wants to ramp up sales, Khemani said.
Demand for certain petrochemical products is weak, but the bigger issue with some manufacturers in India is their inability to price their products competitively, said Arvind Mahajan, executive director at KPMG, a consultancy.
Choudhury wants to raise production to at least 200 tonnes per hour, which is about 80% of its installed capacity. At this level, the company will be able to “make some money from operations”, he said. But if this cannot be achieved, the plant should be shut to avoid further cash loss, he said.
This isn’t the first time the firm is facing a situation like this. Choudhury’s predecessor Partha S. Bhattacharyya, who quit in June, chose to step down production to conserve working capital when market conditions were unfavourable, but was opposed to shutting the plant.
In defence of his decision, Bhattacharyya had said at that time that restarting the plant could have serious financial implications. Also, it could potentially drive customers to competitors such as Reliance Industries Ltd and Indian Oil Corp. Ltd.
The company’s key problem is its inability to secure financial support from its lenders. They have said they would not make further loans to the company.
Though Choudhury, along with representatives of the two co-promoters—the Chatterjee Group and the West Bengal government—recently met the firm’s lenders to persuade them for financial support, he isn’t expecting banks to restart lending unless a strategic investor is brought in.
Haldia Petrochemicals, which was to repay Rs.98 crore to lenders by the end of September, will be paying this amount in instalments, Choudhury said. The firm has persuaded National Insurance Co. Ltd, its insurer, to receive the annual insurance premium of Rs.25 crore in instalments.
But there are more loans to be repaid starting in one-and-a-half to two months, Choudhury said.
Last year, the company raised Rs.850 crore in fresh short-term loans and was able to retire senior debt despite a cash loss of Rs.437 crore in fiscal 2012. Because of poor capacity utilization and unfavourable market conditions, the company made a cash loss of Rs.247 crore in the quarter till June.
But time is running out for Haldia Petrochemicals, and its management is pressuring the state government to expedite the proposed sale of its 40% stake, according to a government official who did not want to be named. The only way to rescue the firm is by bringing in a strategic investor.
“The state needs at least two months to float a tender seeking buyers for its stake but the key question is will Haldia Petrochemicals survive the wait?” asked the state government official.