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Wednesday, Jul 09, 2003

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`Quality, competitiveness, low cost our strategy for growth' — Mr V. Pichai, V-P (Finance) & Secretary, Seshasayee Paper

R. Balaji


WITH a production capacity of 120,000 tonnes per year, Seshasayee Paper and Boards Ltd is among the major players in the paper industry.

Following a Rs 200-crore expansion two years ago, the company went through a consolidation phase with a focus on reducing costs and last year predicted a growth phase.

Mr V. Pichai, Vice-President (Finance) and Secretary, tells Business Line about the company's plans on continuing along this path. Quality, low cost and competitiveness in the domestic and export markets are a part of the strategy. Excerpts:

How was 2002-03 for the company?

It has been a satisfying year for Seshasayee Paper with volumes of production and sales increasing, market conditions favourable, end-product prices increasing and costs under control.

These have contributed to boosting the bottomline. Production was 1.13 lakh tonnes, an 11.66 per cent increase over the previous year and sales 1.12 lakh tonnes.

Capacity utilisation on the new paper machine was 95 per cent. Turnover was up by 8.02 per cent.

Domestic market conditions improved but export markets softened from the second quarter making us cut export targets.

In the last quarter of the year, expectations of a cut in excise duty and the proposed introduction of value-added tax (VAT) affected the market.

How have you addressed cutting production cost?

Cost curtailment, which was the thrust area for the company, is a consistent and sustained effort. Four elements — raw materials, energy costs, fuel and maximisation of captive power production were addressed.

The company has started sourcing its raw material from the market and moved away from Government agencies, which are costlier. In the process, it has commenced using casuarinas wood instead of eucalyptus hybrid wood, thus saving raw material cost considerably.

With the prices of imported pulp increasing, the company opted for 45 per cent captive pulp wood/bagasse pulp with imported pulp for the balance, resulting in substantial cost reduction.

The company changed the fuel mix and maximised captive power production. We now use imported coal as a major fuel in the power boilers. The supply is certain, the quality consistent, calorific value high and ash content low. This has increased efficiency in boiler operations, leading to lower steam cost.

The power requirement is currently met partly through in-house captive power and the balance purchased from the State grid. While the grid power costs around Rs 4.50 per kWh, captive power costs us Rs 1.50 per kWh. Seshasayee Paper has enhanced its captive power generation to around nine MW, thereby effecting substantial savings in energy costs. The company proposes to set up a 20 MW captive power plant based on coal, to meet its entire power requirement. The project is estimated to cost around Rs 65 crore. This will make the company self-sufficient in power and improve its profitability as well.

How do you manage your working capital and debt? And, swapping high cost debt with low cost floating interest loans?

The company is not availing major portion of the working capital limits sanctioned by banks, and whatever limits availed are in the form of FCNR (B) loans, which are LIBOR linked rates. Even taking into account, the forward cover for the exchange risks, the rate of interest will not exceed 7 per cent per annum. The term loans were borrowed for our expansion/modernisation project.

While the term loan from IDBI carries a fixed rate of interest, the rest borrowed from banks are floating rate loans. These floating rate loans move along with the PLRs of the banks. The company negotiated with IDBI for reduction in the rate of interest on its term loan. Though it is a fixed interest loan, IDBI reduced it by 2.25 per cent.

The other major element in interest and financing charges is cash discount to customers who pay promptly. The rates depend on duration of advance payments. The company is taking steps to reduce the rates step by step.

The company has approached IDBI to convert part of the existing loans into foreign currency loans whose interest rates will be LIBOR linked and will be attractive. Our exports will act as a natural hedge against foreign currency exchange risks. Further, pre-closure of loan with IDBI will attract hefty pre-payment premium, which makes swapping not only unattractive but also costly.

The company has written off bad debts and investments amounting to Rs 7.73 crore in 2002-03. Can you elaborate on that?

One of our associate companies, Ponni Sugars and Chemicals Ltd (PSL), set up a sugar plant in Orissa. The project could not succeed due to unproductive farming community leading to shortage of cane. The operations have to be discontinued on this account and mounting losses. The financial institutions evolved a relief package by which the Erode and Orissa units were segregated. Even after the relief package was worked out, the operations could not be commenced and the Orissa unit remains closed. The funding agencies are looking around for possible buyers. In the meantime, the company has become sick and referred to BIFR.

In the present status, the sale proceeds of either the company as such or its equipment in piecemeal will not meet even the liabilities of the secured creditors in full. Our company has investments of Rs 6.41 crore in Ponni Sugars (Orissa) Ltd. It owes our company Rs 1.27 crore and other bad debts written off include Rs 4.98 lakh. As there is no scope for any recovery of these amounts, the company has written off these amounts in the accounts for the year ended March 31, 2003.

What is the outlook for 2003-04?

The paper business is highly cyclical in nature. The performance of the industry is closely intertwined with global macro-economic factors and demand-supply situation. The 2003-04 paper prices will depend on international prices of pulp and paper, which depend on demand push as determined by the global economic performance. The outlook for the current year is positive considering the fact that most of the developed countries are witnessing economic recovery.

For us, failure of monsoon and absence of water flow in the Cauvery (the primary source of water for the factory) has created anxious moments. The company has been able to manage its operations without any significant loss of production so far. Absence of copious rains in catchment areas, may expose the company to curtailment of production. The company has, however, succeeded in reducing the quantum of water used in the process, substantially.

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