Moulding markets to changing mindsets: How Vedanta revived Electrosteel
The second of a four-part series on the Insolvency and Bankruptcy Code takes a look at how Vedanta restored faith of suppliers and customers, and updated products to turn around the stressed plant
Building a new steel mill takes a long time. The path is strewn with challenges. Getting approvals is painful. When Vedanta acquired a running concern, Electrosteel Steels, in June 2018, it could have been forgiven for congratulating itself on taking the easier option.
In the 18 months since, Vedanta has realised that turning around a stressed steel plant can be as hard. A blast furnace gone kaput, raw material suppliers loath to risk their inputs to an insolvent unit, and markets not keen to absorb its products.
“Electrosteel was being run by a team led by Pricewaterhouse Coopers when we took over. Suppliers were nervous, not knowing if they would get paid for their material,” said Pankaj Malhan, deputy chief executive officer of Electrosteel.
Vedanta’s management realised they had a lot of ground to cover to win back the confidence of suppliers. “We straightaway entered into longterm contracts with these big ticket miners. We assured them surety in this form. From advances, we moved to payment terms. That was the confidence the suppliers got,” said Malhan. By clinching long-term agreements, Vedanta made the raw material suppliers their partners. It also reassured the smaller units of the conglomerate's vision. The Vedanta management met the units every quarter.
Having convinced the suppliers, Vedanta's next major step was to get Electrosteel's products back to the markets. The entire senior leadership reached out to customers.
“Initially, customers were not sure whether the products they were buying would be delivered on time and in the desired quantities. We streamlined terms and conditions. There was a huge amount of marketing activity.
IBC A NEW LEASE
Soon, we turned one of the preferred suppliers to public sector and navratna units”, said Malhan.
He introduced benchmarking, so that performance was compared with the best steel producers. With a mix of strategy and vision, Vedanta delivered outcomes quicker than anticipated.
When Vedanta acquired Electrosteel, the latter had a modest Ebitda (earnings before interest, taxes, depreciation & amortisation) of $55 per tonne. By the end of FY19, it was $135-140 a tonne. Even in FY20, when fragile global demand has subdued steel prices and crimped margins,
Vedanta is still hopeful of $100-105 Ebitda on average.
In parallel, Vedanta has recast the product portfolio. The steel plant’s current portfolio is made of TMT bars and wire rods. Within TMT, it was producing 500d and 550d variants.
“We are going to a second level of tensile strength, which is 600d. These products will fetch us better margins. Moreover, we were finding it difficult to achieve volume sales in automobiles and infrastructure due to the slowdown. So, we moved into the industrial segment, consisting of electrodes. Today, we are the only player in India which is making 75 per cent high-carbon products, where net sales realisation is higher by $25-30 per tonne,” said Malhan.
To bolster margins, Electrosteel has forayed into the retail segment in TMT bars. The company looks to tap the franchise model for the retail business format by engaging a two-tier dealership network.
Apart from a product rejig, Vedanta is hoping to double capacity. The ailing unit had an original capacity of 0.7 million tonne pa (mtpa) in steel making but Vedanta swiftly ramped this up to 1.5 mtpa. Plans are to expand this to three mtpa, at a cost of ~4,000-5,000 crore.
Such a performance would not have been possible without a repositioning of the workforce. Vedanta refused to retrench any employee. It continued with the same pool, except that it injected its own performance culture.
A core team of staff from both companies was given the task of reviving the unit and delivering results. Every person’s task was spelt out. The COO had to ramp up output and sweat the assets right. The CCO had to engage suppliers in such a way that Vedanta did not end up fixing a lot of inventory. The CMO’S role was to get customers back. The CFO had the more gruelling role of ensuring the compliance structures were rigorously followed with respect to an Insolvency & Bankruptcy Code asset.
Something called a ‘CEO Connect’ was started with 21 villages on the periphery of the Electrosteel factory. Another initiative, Pragati, involved the senior management connecting online with 1,500-odd people every month.
“Motivation doesn’t always come from challenges. We were also responsible to the pockets of the employees. Apart from crediting salaries on the first of every month, we introduced the variable salary concept. This fuelled motivation to perform better,” said Malhan.
A Business Excellence & Innovation Centre was set up. Within two months of the takeover, Vedanta had collected over 7,000 suggestions for cutting costs, all from the workforce and implemented 5,600 without any extra cost.
There’s more to the turnaround story, of course, than ramp-up or higher efficiency in operational parameters. It’s a mindset change. “Today, we have got a chief sustainability officer, led by a woman….and she is doing a phenomenal job in keeping up that changed mindset,” said Malhan.