New Delhi: In the capital-intensive steel industry, how can a small player keep its investments low, multiply profits and expand business across borders at the same time? Answer: take the franchise route.
The Rs300 crore Kamdhenu Ispat Ltd, which sells ribbed, corrosion-free construction bars known as TMT, or thermo mechanically treated bars, has registered its brand name in four nations in the subcontinent with a view to growing five-fold its capacity built on a series of partnership contracts up to 6 million tonnes (mt) in the next five years.
The Kamdhenu brand name was recently registered in Pakistan, Sri Lanka, Bangladesh and Nepal, said its chief managing director Satish Kumar Agarwal. “We want to enter into franchisee (deals) with local players in the subcontinent and step up our marketing drive to promote our brand name,” he said.
More than 6mt of steel bars used largely in construction are produced in the country, mostly in the unorganized sector. The three largest players, Steel Authority of India Ltd (SAIL), Tata Steel Ltd and Rashtriya Ispat Nigam Ltd, dominate the domestic market selling a total of roughly 3.5mt of branded steel bars a year.
Last year, Kamdhenu collected royalty worth Rs8 crore from its franchisee partners, producing 1.2mt steel with an investment of between Rs500 crore and Rs600 crore.
Its franchisee programme generated sales worth Rs1,800 crore last year while the company’s own plant in Bhiwadi, Rajasthan, produced just 72,000 tonnes. It raised Rs32 crore through an initial public offering last year.
Kamdhenu’s retail-style business model franchisee has grown from one in 2002 to 34 this year; about nine of them for manufacturing structural steel, the rest TMT bars.
It has recently tied up with Kathmandu-based Nandan Steel Rolling Mills Pvt. Ltd to produce and market its TMT bars in Nepal, a country where consumption is a low 480,000 tonnes but poised to grow at a rate of 10-11% each year in the next decade.
It plans to sign on at least three other players in Bangladesh within 12 months, said Harish Aggrawal, the company’s chief financial officer, as part of a strategy to keep transportation costs low by signing on strategic partners for production of its brand in different locations. The Nepal company will produce 60,000 tonnes of steel by next year.
Kamdhenu supplies technology and collects royalty on a per tonne basis. Recently, it has also started picking up 5% to 10% equity in its franchisees and has already bought stakes in five companies, for about Rs1 crore in each, said CFO Aggrawal.
The franchisee model, an analyst said, will help Kamdhenu expand its distribution. “Smaller players that are mainly into long products such as TMT bars cater to regional demands,” said Kshitiz Prasad, senior analyst at Mumbai broking firm Anand Rathi Securities Ltd.
“This kind of strategy will give them access to newer markets,” he added.
Large players that have national presence such as Tata Steel Ltd also sell to bordering nations. Around 50,000 tonnes of steel bars, sold under its brand name Tata Tiscon, were dispatched to Sri Lanka, Bangladesh and Nepal, according to a company spokesperson.
With construction growth expected to stay stable at 10% annual growth in the subcontinent, smaller companies, such as Chennai-based Viki Industries Ltd, which sells under the iSteel brand name, is already exploring the Sri Lankan and Maldives market, selling small quantities.
Both the government-owned companies—SAIL and Rashtriya Ispat—are attempting to promote their products at home rather than look at regional exports. SAIL TMT is being sold through a wide dealership network spread across 604 districts and has engaged 4,000-odd block-level dealers to boost its market presence in the last 12 months. It produced 750,000 tonnes of TMT bars last year.
Visakhapatnam’s Rashtriya Ispat, on the other hand, has appointed 99 dealers in southern India and plans to take the number to 162 by the year-end to sell its TMT brand known as RINL Vizag TMT.
“There is a tremendous demand for branded products within the country,” said Rashtriya Ispat commercial director C.G. Patil. “There is no need to look at external market.”