The steel industry is booming and the profits are finally there for all to see. Essar Steel Ltd, having posted a net profit of Rs 197 crore for the third quarter of the fiscal, is riding the crest. But there has been no qualitative reduction in cost of funds, with post corporate debt restructuring rates continuing at 14 per cent for rupee loans and 8 per cent for foreign currency loans, that too with personal guarantee of promoters and pledge of equity shares, says Mr V.G. Raghavan, Director - Finance, Essar Steel.

In an interview to Business Line, he said the only way out for companies like Essar Steel was to foreclose these loans at the earliest - either through refinancing or through own accruals. Excerpts of the interview:

Essar Steel had a net profit of about Rs 120 crore for the first six months of FY 2005. Against this, PAT for Q3 alone stood close to Rs 200 crore. What has contributed to this rise? What is the outlook for the last quarter? And has the 50 per cent rise in top line during Q3 mainly come on the strength of firming steel prices as the quantity of steel sold rose only marginally from 5.02 lakh tonnes in Q3 of FY 2004 to 5.24 lakh tonnes this quarter?

PAT for the current year has increased nearly to Rs 200 crore due to the following reasons:

The volume of production in comparison to the corresponding quarter of the previous year has gone up by 30,000 tonnes.

We have moved towards producing more value-added grades like API, HSLA, IF Steel etc. Many of them are metallurgical used in critical applications. These are less volatile to market vagaries and hence fetch better realisation in the market place (both domestic and export). Our aim is not to compete on tonnage, but more quality grades and higher yield per tonne.

Net profit has also increased due to various improvements made by the company to contain the increase in cost of production. These include technological measures as well as better mix of inputs. We are now self-sufficient in inputs, which has reduced the current raw material cost despite 18 per cent increase in the ore price. We have procured adequate quantity of LNG that replaces naphtha.

With the introduction of DR grade pellets from April 2005, our cost of production will reduce substantially in future. If the steel prices hold at current level, our outlook for the next quarter looks encouraging.

Essar Steel is planning to raise Hazira plant capacity from 2.4 million tpa to 3.6 million tpa in one year. How are you tying up the requisite funds?

The increase in capacity will be financed out of internal accrual (around Rs 300 crore) and out of term loan assistance (Rs 600 crore). The increase in capacity of 1.2 million tpa, which is 50 per cent of our present capacity, is being achieved at very low capital cost.

Talking of funds, what stage are your plans to raise $500 million through compulsorily convertible preference shares (CCPS) to buy back your original stake in Hi Grade Pellets (HGPL) at Vizag and stake in Steel Corporation of Gujarat (SCGL) from StemCor, UK?

Our plan to raise $500 million more through CCPS is on firm footing. Shareholders have approved the proposal in the last EGM meeting held on January 15.

Necessary applications have been made to the relevant authorities. We have also obtained the consent of existing lenders for the proposed offering of CCPS on certain terms and conditions.

Meanwhile, valuation of the companies is on, which will be followed by price negotiations. We expect to close the deal in one or two months.

On completion of these formalities, we shall be able to complete the buyback of remaining equity of Stemcor in HGPL and equity in SCGL, which will significantly improve the position of Essar Steel in many ways.

Financially speaking, the balance sheet of the company on consolidated basis would become substantially stronger.

What is the outstanding debt of Essar Steel as on date? When are you planning to repay Rs 927 crore to UTI as part of CDR?

The total debt is now Rs 3,800 crore, both in rupee and foreign currency. We have already started repaying UTI and will be completing the repayment programme by December. We have already repaid Rs 100 crore to UTI.

There seems to be no significant reduction in interest cost this quarter at Rs 129 crore against Rs 136 crore in Q3 last year. Comment.

We trust that with the steps now being taken to refinance the existing lenders through various measures, we will be able to reduce the cost of funds in the coming quarters. Unless we get out of the CDR, which gave us only an extended tenure of 14 years, the finance cost will not come down.