Building A Road Where None Exists
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TOP CEOs

29 Nov,2009 18:30 IST

Building A Road Where None Exists

More growth in the past two years than in 10 — that is Sesa Goa under P.K. Mukherjee

Muthukumar K.

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Last year, iron ore major Sesa Goa hit a roadblock, literally. The Rs 5,294-crore company, which is in the business of exporting iron ore from its mines in Goa, Karnataka and Orissa, was faced with a problem of traffic congestions, particularly on Goan roads. An extended delay, and some business would be lost to mines in Australia or Brazil. "We found that there was a lot of traffic on one side of the river, where our mines were located. But if the river was crossed, the road was empty," recalls P.K. Mukherjee, managing director and CEO of Sesa Goa. Crossing the river, however, was not possible as there was no bridge to be used and building a regular one would take time.

Mukherjee's team came up with a simple and effective way to circumvent the problem. A bailey bridge was built in just four months. (A bailey bridge is portable and built with prefabricated steel panels bolted together, which does not need heavy equipment.)

His ability to find answers where none exist, has taken Sesa Goa far, and Mukherjee to the top of our valuable CEOs list. In April 2007, London-based billionaire Anil Agarwal took over the company. Since then its revenues have more than doubled and profit tripled.

 In 2009, the company acquired the mining and maritime businesses of Dempo group, adding another 4 million tonnes of production. The acquisition is reported to be the second largest in India's iron ore sector. "We have achieved more in the past two-and-a-half years than what we had done in a whole decade before," says Mukherjee. The leap has more than proved that 54-year-old Mukherjee is much more than an erstwhile bean counter. He had mostly worked with accounting, finance and taxation since he joined Sesa Goa as a manager in 1987. He was a financial director before taking over as managing director in April 2006.

Bailey bridge is a small example of the steps that Sesa Goa is now trying to take to improve operational efficiency to become a low-cost producer of metals and minerals. "The Sesa Goa management has strong MIS (management information system) in place with a tremendous focus on improving cost efficiencies," says Ashim Bhuwania, vice-president of Ambit Corporate Finance, which had represented Dempo during the sale of its operations.

The $6.7-billion metal and minerals empire of Vedanta group, Sesa Goa's parent company, has ambitious plans to capture 10 per cent market share of global sea-borne trade of iron ore, over the next few years. This means locking horns directly with the global triumvirate of Rio Tinto, BHP Billiton and Vale, which will not be easy. First, these three players have close to 70 per cent market share, which gives them bargaining power. At present, Sesa Goa is essentially a price taker. Second, if the company has to scale up fast, it will have to crack resources — probably through mergers and acquisitions in Brazil or Australia.

The global economy too played spoilsport and the demand for steel fell, and likewise iron ore. "Net profit declined 50 per cent in the September 2009 quarter for Sesa Goa on account of lower iron ore realisation (down 48 per cent year on year), higher royalty costs and higher transportation costs," says a recent report by brokerage Kotak Institutional Equities. Iron ore prices, which hovered around $107 a tonne in peak times, are now in the $51 range. However, some industry watchers expect the prices to go up to $70-75 per tonne in 2009, compared to $60-65 per tonne last year.
A googly came when the government moved  to ad-valorem duty rate of 10 per cent in August 2009 from the earlier system of specific duty (on a per tonne basis). This increased Sesa Goa's royalty costs substantially. Northward movement of Baltic freight index (which tracks worldwide shipping prices of dry bulk cargoes) increased the company's shipping costs. Transportation costs, in fact, increased from 29 per cent of its total costs to 43 per cent during the June-September quarter.

Mukherjee, however, has an answer for every challenge. "Our focus is on improving volumes by 25 per cent year on year," he says. Earlier, it had plans to ramp up production to 25 million tonnes (it sold 15.1 million tonnes in 2009). In addition, as a risk-mitigation measure, it is moving towards more long-term contracts to smoothen price realisations. "We are looking for a spot-to-contract ratio of 50:50," says Mukherjee. In the previous quarter, almost 90 per cent of sales was on a spot basis. Sesa Goa plans to sign contracts where 50 per cent is fixed price and the balance is on an index-based system linked to spot prices.

 

This, again, is not easy as Chinese steel manufacturers often do not abide with long-term contracts when the going gets tough. And, with spot prices crashing, many have reneged on contracts, opting to pay on the basis of lower spot prices. "Legal intervention is also not easy," says Mukherjee. With 85 per cent of the company's sales coming from China alone, this is one risk he has to live with.

An investigation by the Serious Fraud Investigation Office (SFIO) into the company's financials that is keeping investors on tenterhooks, is yet another challenge that Mukherjee is facing.

A Vision For The Future
Amidst all this, Mukherjee continues to nurture ambitions to get into steel production. He, however, does not admit to it. Says Manoj Mohta, head of research at Crisil Research, "The needs of the steel industry are being met by local iron ore suppliers. But over the next five years, as steel demand explodes, some local miners might look at diversifying into value-added products."

Sesa Goa is a step ahead. It is already making pig iron and is currently ramping up operations to increase capacity from 0.25 million tonnes per annum (mtpa) to 0.625 mtpa. There were even reports in the media about a possible joint venture with a local steel company.

The market is sniffing another takeover. Perhaps an iron ore or a mid-sized steel company. A recent Emkay Broker report says the company plans to raise $500 million through foreign currency convertible bonds (FCCBs). It has also got shareholder approval to raise funds up to Rs 6,000 crore (including FCCBs). This is on top of the company's existing cash reserves of around Rs 2,900 crore. "It is setting itself up for some inorganic growth," says a report by India Infoline.

Certainly, in the Mukherjee scheme of things, there is more to come. He is bracing for another leap. Whether it will be by road, over bridges or simply through takeovers, remains to be seen.

 

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