Mumbai: Uttam Galva Steel Ltd, which produces flat products used in products such as high-end cars, will continue to focus on exports despite the rupee’s rise against the dollar—this reduces the company’s earnings from exports apart from making them less competitive.
Despite the rupee appreciating by 6.8% against the dollar in the quarter ended June, Uttam Galva, which is expanding capacity from 4.5 lakh tonnes a year to one million tonnes, will have to export almost all its incremental production because its products do not have many takers in India. In 2006-07, exports accounted for 54.32% of the company’s revenues of Rs2,567 crore.
“The kind of new products that we will be producing after our expansion comes on line from September this year, like high grade super thin galvanized auto steel (used in making the metal components of cars like bonnets), currently do not find a market in India as car manufacturers here use lower grades of non galvanized steel,” said Ankit Miglani, director (commercial) Uttam Galva Steels. But with high-end cars increasingly being manufactured (rather than just assembled) in India, Uttam hopes it will eventually be able to increase its percentage of domestic sales. Already, auto grade steel sold in India currently accounts for almost a quarter of its revenues.
“We expect to sell around 300,000 tonnes of cold rolled close annealed (super slim and hard steel sheets) to Mahindra Renault Pvt. Ltd this year. General Motors India Pvt. Ltd and Daimler Chrysler India Pvt. Ltd, too, are putting up car manufacturing plants in Maharashtra, which can be best served from our Khopoli processing unit where we’ve recently added another 30,000 tonnes a month processing capacity,” said Miglani whose family holds a 36.15% stake in Uttam Galva. Auto grade steel typically commands a higher sales value than galvanized corrugated sheets used for roofing.
The company hopes to minimize the erosion of its margins caused by the depreciation of the dollar against the rupee by importing a key raw material, hot rolled coils. “We also hedge our requirement of zinc (for making galvanized sheets) on the London Metals Exchange in full,” said Miglani.
Meanwhile, the appreciation of the local currency and higher interest costs on debt taken on for the capacity expansion project are weighing heavily on the company’s bottom line.
According to a report by IDBI Capital Market Services Ltd, Uttam Galva spent $185 million (Rs747.4 crore) on expanding its capacity. While sales for 2006-07 rose almost 49%, net profit rose by 36% to Rs100.84 crore.
In the quarter ended 31 March 2007, interest costs rose 208% year-on-year to Rs36 crore, despite a larger amount of debt being denominated in foreign currencies, which usually carry lower rates of interest.