Financial Daily from THE HINDU group of publications
Monday, Nov 11, 2002
`Operation & maintenance will be our thrust area' Mr R.P. Bhattacharya, Managing Director, Ondeo Nalco
KOLKATA, Nov. 10
RIDING on the back of a 20-per cent bottomline growth, Ondeo Nalco India expects to return to the dividend list this fiscal itself. According to Mr R.P. Bhattacharya, Managing Director of the company, while water treatment chemicals business would remain as the core business, special thrust is being given to operation and maintenance contracts. He spoke at length to Business Line on the various facets of the company's restructuring plans. Excerpts:
How could Ondeo Nalco show an impressive bottomline growth in the first two quarters of the current fiscal even though the improvement in the topline is marginal?
This is the result of inventory management, downsizing and cost reduction exercises the company has undertaken during the last few months. We have rationalised the product line drastically. From a list of 1,700 products last year, the company has brought it down to a consolidated figure of just 400 this year. This led to better inventory management.
The imports of certain chemicals or raw materials have been replaced by indigenised substitution. The plant capacity utilisation has improved by about 18 per cent in the first six months.
The overall positive effect of these measures has been around 6 to 7 per cent on profitability. The overheads have also been pruned dramatically.
The total manpower has been scaled down to 166 from 216 last fiscal. Expenditure on travel and transport has also been tightened up.
What is the rationale behind the virtual closure of equipment business of Aqua Chemicals & Systems (Mfg) Ltd (ACS), which you acquired earlier?
ACS was a loss-making subsidiary, which is in the process of being merged with Ondeo Nalco. In the domestic market ACS could not generate enough cash flows as its products' life cycle was 3-4 years and it was plagued by a bad debt problem. The recessionary pressure in the infrastructure sector accentuated the woes of the subsidiary.
It was proving to be a drag on Ondeo Nalco's resources. The equipment manufacturing company could not operate in a cost-competitive manner in the international market also.
In December 1999, when the Chennai-based outfit was acquired, it was thought that ACS would be groomed to become the equipment sourcing point for our parent (Nalco Chemicals, USA) for its operations in the Asia-Pacific region.
Currently, we have reduced the equipment manufacturing operations of ACS by about 90 per cent. Skeletal operations will be maintained for some more time mainly to service the equipment already sold. The small chemicals business it had has already been integrated into the Ondeo Nalco's operations.
Would you say that the acquisition of ACS was a wrong business decision?
Not really. The business dynamics for Ondeo Nalco has undergone a change in the last two years since the acquisition of ACS.
The equipment business as a supplementary to the company's as well as our parent's water treatment chemicals operations came down in priority following the acquisition of Nalco, USA, by the French multinational Suez.
Suez has a specialised equipment manufacturing outfit in Degremont. Degremont is also present in India in the form of Degremont India. Thus, it was found that Ondeo Nalco's collaboration with Degremont could prove to be more effective in India and the Asia-Pacific region than that with ACS.
Is it true that Ondeo Nalco has undertaken a business restructuring programme?
Yes. We are going through a major restructuring process. The plan has more than one facet. Integration of business one of ACS and Aquazur India was part of it. The integration of Aquazur's chemicals business has raised Ondeo Nalco's market share in the country by about 30 per cent now.
The other part of the restructuring relates to reorganisation of our divisions. This will be in tandem with re-grouping of customers. The whole process will be completed by January 2003.
On the ground, it will mean reduction in divisions to four from six. The new arrangement will see a division for basic industry customers such as steel, fertilisers, power utilities and civic bodies.
There will be another division for energy services, petroleum refining and drilling including process chemicals. The third will look after paper chemicals business and the fourth will be for the mining sector.
We are doing away with a separate middle market division, which used to cater to orders below Rs 20 lakh. This is primarily because this division was most afflicted by bad debts.
The company will approach this segment with greater discretion and through a dealer network.
Which of these divisions will be the growth drivers for 2003-04?
We expect stagnant business growth in the basic industry segment in the coming financial year. However, we see a great potential in the civic sector.
We are getting into operations and maintenance business in the civic sector, mainly in water treatment. We are already present in Bangalore. We are currently negotiating with New Delhi, Chennai and Kolkata municipal corporations for water treatment and operation & maintenance contracts.
The growth driver will be the mining and paper sectors because of their untapped potential, which can provide 15 per cent and 10 per cent business growth respectively in the next fiscal.
We also expect 10 per cent growth in the energy services. Ondeo Nalco will introduce a few new products, particularly fluids for drilling sector, soon.
Operation and maintenance could be the thrust area of operations for future.
Ondeo Nalco has already bagged three major contracts from paint, sugar and distillery and rubber units.
For the current fiscal, what are your expectations?
At least 20 per cent bottomline growth. The trends indicate that we may return to the dividend list this fiscal itself.
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