Small gas cylinders ‘will be a thing of the past’8 min read . Updated: 24 Sep 2008, 01:07 AM IST
Small gas cylinders ‘will be a thing of the past’
Small gas cylinders ‘will be a thing of the past’
Mumbai: B.K. Goenka likes to be in control.
The vice-chairman and managing director of the Welspun group is working to integrate his pipeline business, and one of his companies will soon start manufacturing steel plates and coils.
Goenka has set his firms the target of producing 1.5 million tonnes (mt) of pipes which will make the group the largest pipeline manufacturer in India and double revenue in home textiles to $1 billion in a couple of years. Edited excerpts:
Will Welspun Gujarat’s growth be affected by the recent slowdown?
Building capacities take time. And they are long-term decisions. I think the question should be whether more drilling will happen or not. One year ago, crude oil was quoting at $60. Industry believed it would stabilize at $60-70. I don’t see any slowdown in the oil and gas sector, either in the refining or drilling segment of the oil industry, because existing capacity was put in place when crude was quoting at $30 per barrel. Countries such as Saudi Arabia set up their infrastructure at $3 per barrel. For that matter, most of the big oil companies invested in infrastructure on an assumption that oil will be available at $30. All the new plans for expansion have come at $60. So even at $80-90 per barrel, I believe, the industry is still comfortable.
I believe, there is a lot of potential in the oil and gas sector. Suddenly, when the oil price is quoting below $100 per barrel from $140, oil looks cheap. In the Indian context, the dollar has moved up by 12-15% and so cost has come down only by 10-15% .
So, there is no slowdown...
There is no slowdown in the oil and gas sector. Consider the US; if there is any place that is doing well, it is Texas. The economy driving that state is different. There is slowdown in housing, in textiles, other sectors, but there is no slowdown in the oil and gas industry. That’s the only growing sector.
There is hectic drilling activity in the US. The maximum rigs are put in use in that country and they are actually facing a shortage. So, I don’t think there will be any slowdown in the near future. Because in this industry, you cannot slowdown or stop some or deploy again. But if prices go (down) to $40 or $50, then it is a different thing.
How does Welspun’s order book look now. Last quarter, your order book was overflowing at Rs7,200 crore
It becomes very difficult to talk about order book because we complete deliveries in some cases and simultaneously take some fresh orders.
Is replacing old pipelines a big opportunity?
In Russia and the US, where pipelines were laid some 40 years back, there is some replacement of old pipes that is going on. This business will grow. But there are issues to be overcome such as shortages of contractors and welders, etc. But the potential is there.
See, if you take a country such as India, the sector is just happening. Gas is a new commodity for India. GAIL is talking about a national grid where they plan to spend some $5 billion in five years. Then Reliance Industries Ltd, GSPL, ONGC and Cairn Energy...are installing fresh capacity. So in the next five years, there will be huge activity taking place in India.
Then there will be spud lines which will go to fertilizer plants, power plants and ultimately to the last mile—to city gas. It is yet to come. Companies have started announcing the projects but the gas is yet to arrive. The small cylinders that you see will be a thing of the past. There will be piped gas in every house. Pipes would be required from 2 inches (diameter) to 56 inches. We are in the complete range.
But in the case of Reliance Industries’ east-west pipeline, the Chinese outbid you.
We have also supplied pipes which were offshore and specialized pipes. But the Chinese pipes were very cheap for onshore lines and so the order went to the Chinese. Ultimately, I hear the Chinese also could not deliver fully and they partly delivered. The Chinese contractor did not do it and Punj Lloyd did it.
How big is the pipeline industry? Some place it as a $118 billion one.
The overall size is very difficult to say. To count in dollars...and the fact that steel prices have moved from $1,000 to $2,000. The numbers went haywire, because steel is the major input. Thankfully, steel prices are coming down. So, the scenario and the size of the industry changes.
Welspun has a capacity of 1mt, but you have already embarked on a plan to expand it?
We will go to 1.5mt, but don’t go by capacities as it is a misnomer. What size, what thickness, what diameter (of pipes) a company manufactures is crucial.
The Japanese are bigger, right? They have a capacity of 3mt.
The Japanese are three companies together. If you take Nippon Steel, it has less than a million tonnes pipe manufacturing capacity, but when you include Kawasaki and others they get about 3mt. But India will be the hub in the future. See Kutch in Gujarat alone will have a capacity of 2.5mt.
You referred to the high price of steel. Haven’t you done some backward integration to insulate yourself from this?
We got a steel plate mill and coil mill started. But we still import the slabs. So when steel prices fell, the slab prices also fell and even the coil and plate prices came down. So it has a cascading effect.
How will the vertical integration that you have embarked upon impact your margins?
The vertical integration will help us not to depend on the steel makers so much. We will have our own plates and coils. We can make pipes of all kinds of sizes. Steel plates for pipes and heavier thicknesses are not available in the market. The European steel makers have a monopoly which we can now overcome. It gives us an advantage. This will be the first brand new plate mill after the 1960s (when one) was put up by Steel Authority of India with Russian technology. We have acquired technology for this from Voest Alpine of Austria.
Is the recent acquisition of a sponge iron plant from Grasim for about Rs1,000 crore part of the same integration?
That is a separate company. It has nothing to do with our pipes business. We got into it through our group company Welspun Power and Steel.
So are you saying the acquisition has no synergy with your pipes business?
Not yet. Ultimately we will have to make slabs. We will have to further go downstream. We import everything. We import the slabs. Nobody makes slabs of this grade in India.
But that will take a couple of years. The sponge iron plant is a gas-based plant. We bought it not for the short term. Going forward, we see gas will be available and we see India’s gas production doubling. The new LNG terminals will be set up. So gas will not be a constraint. In the long term, in two or three years, we will be a completely integrated player.
Even in India, there are pipeline firms bigger than you.
The players are talking of size in a different way. But you have to see who has the tonnage. In two years, we’ll have a production capacity of 1.5mt. We did 900,000 tonnes this year and next year we’ll do 1.2mt. We can’t utilize our full capacity. But yes, we have the flexibility and we have the size to reach an overall capacity of 1.5mt.
In the US, 60% of oil and gas is transported by pipelines. It is less than 10% in India.
We have no choice. Earlier in India, our political leaders decided where to locate refineries and they chose different regions. Today, these companies are independent. They have to compete with the Reliances and Essars of the world. Every company is competing to reduce costs to the last mile. And that’s possible only through pipelines. Go to a city, put a pipeline and a “tankfarm" and distribute it one circle. In the future, we will have a network like highways. So companies will ultimately share the pipelines. In US, pipeline owners are different from the oil and gas companies. In India, oil companies own pipelines.
In the US you can set up a pipeline. I would like to do that. The point is (in) India it is not allowed. They say you either have to be a consumer or producer of 50% (of what is transported). This is still a very conservative way of looking at things.
When you talk about vertical integration, would you look at laying pipelines?
Not really. Because manufacturing pipes is different from laying pipes as it becomes a contracting business. Your mindset has to be different. We can have an alliance but we will not get into this business.
Coming to your textile business, you have embarked on a major restructuring and it comes when the markets are down.
We wanted mass. So we waited this long to hive off (the business). We have three main focus areas. Branding, retailing and marketing. So we put in one company, Welspun Global Brands Ltd, all the distribution, brands and the retail unit. The second company we created will have all the manufacturing assets, and the investments will be put in Welspun Investments. We’ll give shares to every shareholder and the three companies will be listed.
Tell us more on your plans for Welspun India, your home textiles company.
We want to become a billion dollar company. This year at group level we will have a turnover of $500 million.
Since the Welspun group is largely focussed on exports, do you hedge your forex risks?
Every single textile company in India has sold at Rs41 against the dollar. Who knew that the rupee will go suddenly from Rs41 to Rs47, against the dollar? We don’t do derivatives... We are not in that business. Nobody could predict the rupee movement. The so called gurus and bankers had no clue. We are into manufacturing and are not worried. It is opportunity lost for six months. Six months will not take much time, as we are committed to this price only for six months.
Is there a slowdown in your overseas business and in demand from foreign retailers?
There is a slowdown because of which we cannot break even in Mexico. But we are running at 30%, so we are losing. If you see our subsidiaries, they are losing but our manufacturing is not losing. That’s the scenario.That’s why we are hiving off to bring some focus.