Kanoria Chemicals & Industries Ltd (KCIL) grabbed the headlines in April 2011, when it divested its caustic soda business to Aditya Birla Group for Rs 830 crore. Since then, the Kolkata-based speciality chemicals manufacturer has entered the solar power business in India, acquired an electronic auto-part making company in Europe and has committed investments in a denim facility in Ethiopia. In an interview with Business Line , N.K. Nolkha , Chief Financial Officer, KCIL, spoke of the journey so far and the company’s plans.

Excerpts:

You have entered three new business verticals in last two years. Do you seek more acquisitions at this juncture?

If we get something really good, we may acquire. Otherwise, we would like to concentrate on the existing businesses, and expanding them.

Why did you sell caustic soda business? Were high debts an issue?

It was a conscious decision, for two-three reasons. One was the high level of borrowings. Because of the borrowing we were not able to move into a new business. If you look at our track record, the company had never defaulted on any borrowings. We were always making a cash profit or net profit and declaring dividends. But it was getting risky. Maybe the return on investment was not justified. The inflow of funds did help us get out of the problems of the commodity chemical businesses and look for other avenues.

Do you foresee entering such a highly-leveraged situation again?

Hopefully, not; it all depends on what type of industry you are getting into. Right now we are not getting into any industry where there are high levels of borrowings. Our Swiss entity (APAG Holdings) hardly has any borrowings. We have a borrowing of around $12 million in India and another $20 million for Africa operations. The total loan portfolio will shrink as we will repay some portion soon.

Overall, I don’t think we will have more than $20 million (Rs 120 crore at current exchange) of borrowings in the next two years.

How did you use the Rs 830-crore proceeds from disinvestment?

After paying off foreign currency borrowings (Rs 145 crore), taxes (Rs 110 crore) and domestic borrowings, we were left with around Rs 375 crore. Since then, we acquired the European business (Rs 44 crore) and are now expanding it (Rs 50 crore). We also had a share buyback at Rs 50 crore. This apart, we entered the solar power business (5 MW in Rajasthan) at Rs 60 crore. Of this, around Rs 30 crore was borrowings. After adjusting the earnings on investment, we still have more than Rs 200 crore of cash.

You went for a costly buy-back, at much higher than market price. This, despite the promoters holding a clear majority stake. Why?

Post this divestment, although the company had sufficient cash, and was investing in future-looking industries, the market did not perhaps have faith in us. When the stock touched (fell to) Rs 30, we made an offer for a buyback at Rs 42. Ultimately, we bought the shares at Rs 39.21. It gave an option to some of the investors, who did not like our ideas, to exit. (The KCIL share closed at Rs 29.30 on the BSE on July 5).

What kind of topline growth do you except with the new businesses in place?

Currently, our total topline is around Rs 400 crore. Of this, Rs 270 crore would be in Indian operations and the remaining Rs 130 crore from Europe. This fiscal, we don’t see much growth, except in chemicals. In 2014-15, we might see some Rs 150 crore coming from the textile segment (assuming the Ethiopian facility will be on stream by June 2014). Going forward — say, over a four-five-year period, it might be somewhere around Rs 700-750 crore.

Your profit margins from chemicals declined sharply in 2012-13...

The biggest setback for us was the new plant in Vizag. It’s a state-of-the-art facility. But there were some problems. Most important of them was availability of power. There were 10 power holidays a month in Andhra Pradesh. If you lose a third of your production capacities, you are nowhere. We don’t face this problem in Ankleswar (Gujarat). But things are improving now. This year (2013-14) should be better than last year.

However, even as I say this, the devaluation of rupee (11 per cent in June) will impact our imported raw material (methanol) cost. How much (of cost push) we can pass on to the ultimate customer, we really don’t know yet. There will be some resistance initially. But overall I expect it to be a good year.

S0 Q1 should be bad considering the 11 per cent depreciation of the rupee?

If you exclude the foreign exchange impact then I would say there is little impact. But this (rupee depreciation) is something that was not in our control. We expect revenues to grow in July-September unless the rupee depreciates further. And nobody can predict that.

We produce formaldehyde, used by the plywood and laminates industry. We also use a part of the production to make hexamine (used in pigments and for medical purposes) with a focus on exports. This year we have started exports.

When the overall economic sentiment is down, why do you expect revenues to move up?

There is no dearth of demand. After three years we are seeing an improvement in prices. I cannot comment on profit. But the market is not an issue. And there is no such pressure on costs, if we keep out the rupee depreciation and power shortage scenario.

You have diversified into businesses unrelated to your core activity. How will you manage?

We do not see a problem. In the case of European operations (APAG), we have made no change in the management there. R.V. Kanoria’s (CMD, Kanoria Chemicals) son, Anand Kanoria, is looking after operations (as vice-chairman) from the promoters’ side. All other members of the management have been retained.

Cotton textiles are not a new area for us. In the 1980s and 1990s we had plants in Ahmedabad (Anil Synthetics) and Gurgaon (Ujjala Textiles). In the 1990s, people started moving towards polyesters and blended fabrics. So we moved away from the segment. The group also has a presence in jute (Ludlow Jute Mill). The processes in jute and textiles are not very different.

pratim.bose@thehindu.co.in

abhishek.l@thehindu.co.in

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