Slump or no slump
The steel sector is in the news for a plethora of reasons — from massive debt burdens to lacklustre demand— which makes for a depressing mix. Surprisingly in such market conditions, a steel trading company, Akansha Ispat, was still able to perform well.
Thus, it is safe to say that this Mumbai-headquartered company is an exception. “We look at steel trading as a service sector activity, rather than a plain industrial activity.
This positioning is aided by certain factors…,” the company, Director, Pradeep Sureka reasons for this performance. Today, Akansha Ispat is run by the second generation of Sureka family, with Nikhil Sureka, the third generation, also getting involved.
The original promoter, Mahavir Prasad Sureka, started a partnership firm called Dinesh Steel in 1969. Though the company was founded as a private limited company only in 2008, its reputation in the market is not that of a newbie.
Elaborating on the service industry approach, Pradeep says though the company does not have any investment in processing machinery, it can arrange for the material to be processed—grinding, polishing, thickness reduction, extrusion, annealing, heat treatment, galvanising—as per the client's needs.
The company has put in years of effort to develop a good ecosystem of workshops. This approach— of being a quasi-material manager for the client, rather than a pure supplier—has helped it differentiate itself from the normal trading entity.
The benefits of this—client satisfaction and retention, scope of enhancement of product portfolio, extension of market, better pricing power due to customisation and convenience —outweigh the disadvantage of a longer sales and collection cycle.
Pradeep estimates that around 25 per cent of the company's total material is processed in some way or the other. Akansha Ispat has not only battled market forces, but it has been able to turn policy-level challenges to opportunities.
This company is among the very few SMEs that was not adversely impacted by demonetisation. In fact, Pradeep avers, ‘it was a minor blessing of sorts’. His logic is that 90-95 per cent of the company's end-user clients are in the organised sector, as can be seen in the table alongside.
The main off-take from the company goes directly, or via its clients, to sectors such as automobiles, heavy machinery or other engineering segments. And these tend to have proper processes, with registrations for excise, GST and other things in place.
He adds, “Cash transactions are generally negligible in our case.” In fact, the demonetisation exercise worked in Akansha Ispat’s favour. “We saw rise in business (during that time) because the unorganised players competing with us did not have their dovetailing systems in place and therefore we were preferred as a supplier.”
Most of the company's business is done in the Mumbai Metropolitan area (60 per cent). Pune contributes 30 percent and the remainder goes to myriad locations in Maharashtra itself. It is typical of the steel trading business that customers would largely be localised in a radius, because freight costs would render long-distance sales unviable.
The other key advantage for the company, as the promoter explains, is on the sourcing side. More than 50 per cent of the company's purchases are from overseas, mainly Western Europe, where quality of material is much better. Sourcing consists mainly of three types of goods—export surplus stock, export rejects and rejects of customised material.
The company has long-standing experience of dealing with reputed companies in those countries and hence it gets benefit of regular supply at good price arbitrage (anywhere up to 50 percent of normal market rates).
This access advantage has been assiduously nurtured by the company— at times for some material a supplier would want it offloaded on an urgent basis; the company does not always remain rigid on its margins; and so on.
Over time, this is translated into a competitive advantage where the company is assured of a regular source of good-quality material which would have a good market locally.
On an average, even the reject grades from those markets have a quality advantage over locally-produced mass market material, and when combined with the company's ability to deliver as per customer specifications, offtake is not a problem.
Rather than focussing on pure volumes, the company can then grow business in a discerning fashion. The product quality helps attract clientele as well. Pradeep estimates that Revathy CP, a leader in mining equipment, would have procured around 10,000 tonnes from the company over the past two decades.
The access to good quality steel, combined with its service-oriented approach, has helped the company survive and grow steadily in an industry which sees a cyclical downturn every decade, either due to local or global factors.
Discussing the current scenario in the industry, Pradeep dissects the downturn to a handful of reasons. Firstly, the overall subdued economic activity. Then there is the psychological scare that the auto industry is facing due to the imminent competition from electric vehicles in its traditional products.
According to him, this situation is blown out of proportion because even in developed nations, 80-90 per cent of cars run on traditional fuels. Even Germany, which has surplus electricity, does not have complete 100 per cent of its vehicles running on electricity.
This, Pradeep avers, is a temporary factor. Other factors are more severe in nature. While steel as an industry is prone to cyclical downturns, this time there is a structural angle as well.
Companies have taken up debt indiscriminately, and when offtake slowed down, those companies resorted to slashing prices, even selling at a loss, to avoid inventory stock pile up.
This impacted the entire industry and then even healthy players found pressure on margins and difficulty in servicing debt obligations. This has therefore transformed into an industry level malaise.
For this situation to be remedied, industry rationalisation is the way out, where certain capacities would be weeded out, some would be taken over and so on.
Here Pradeep states though the NCLT concept is excellent and in general Micro, Small and Medium Enterprises (MSMEs) are more protective than earlier, this clean up process will need time as well as intent. This addresses a very big issue for SMEs in general—debt collection and related redressal procedures.
Enforcement on these matters has hitherto been very weak, tedious and time-consuming process. While the judicial path has been laid down, it is equally essential for the judiciary at the helm to understand the importance of timely action.
Not doing so, has lead to businesses being affected, inventory piling up at different points in the chain and then the cost of capital becoming a killing factor.
Strategy of the company
Keeping in the mind the industrial scenario, the company is not chasing rapid growth. Pradeep claims if an effective redressal mechanism is in place, the company can go ahead confidently with its expansion plans.
Even otherwise the promoters do have a growth plan in place, to be able to leverage the goodwill of five decades of operations. Today, besides the three warehouses owned at Kalamboli in Navi Mumbai, the company is in the process of putting up five more in the same locality.
The overall storage capacity planned is 10,000 square feet, which would also include a facility for cutting. The company plans to invest in mechanical material handling facilities across the planned five locations, which is globally the standard practice.
In doing all this, Pradeep is clear that the reliance on debt would be marginal, thus avoiding a major concern area. It has to be noted that at present the company is quite comfortable with its debt-equity position and in fact aims to knock off debt over the next two years.
Yet another interesting anecdote about company is that it has had the same banker, Canara Bank, for 50 years. “...And there have been no complaints on either side,” Pradeep asserts.
Amidst turbulence in the steel industry, the pillars on which the company is building its growth plans are long-standing market presence, access to quality material, reputation as a service-oriented supplier and a good ecosystem of processors. It is brave but equally well thought-out.