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FIs, banks must recast HPL debt: Tarun Das

Haldia Petrochemicals Ltd is on the recovery track and will emerge as a viable entity once problem areas like the cost of raw material and cost of money are sorted out, according to Tarun Das, non-executive chairman of the board of HPL.

In a detailed interview to Business Standard, Das outlines the issues facing the company and predicts that one day it will be a listed company on stock exchanges. Excerpts:

How optimistic are you about Haldia Petrochemicals Ltd?

A strong conviction which has emerged over the past 8 months is that HPL can be profitable and prosperous and be a strong, viable company in West Bengal.

We need a little help to make it so and get HPL's head above water. And, this help, this support, is not unreasonable or unimaginable. If the banks and financial institutions restructure HPL debt and bring down the interest rates and reschedule the repayment terms, a great part of the problem is over. They have done it for other companies and corporate groups so there are many precedents.

While two of the promoters have brought in over Rs 5.20 billion of additional funding beyond their original Rs 10.10 billion commitment, financial institutions have not concomitantly restructured any of the interest rates; this is rare in Indian corporate history.

Also, if HPL could get naphtha at imported prices, or whatever is the lowest price, another part of the problem is over. And, if both happen, truly, HPL's problems are much less.

It is possible that, as we move to the future, HPL will not only get fresh equity from a new strategic partner but the people of West Bengal and the Indian middle class will put part of their savings into HPL and will get a good return.

Then, the general public will have a share and a stake. This must happen so that HPL is a public company, listed on the stock exchange.

Would you agree that a lot of time has been lost?

With the company so much in the public eye, everyone expects solutions overnight. Solutions are evolving steadily and, given some cooperation, it will be out of the woods.

The most encouraging part is the constructive cooperation between the two principal promoters - the government of West Bengal and The Chatterjee Group - who are thinking through all the issues jointly and working together for the best interests of HPL.

Both have demonstrated steadfast commitment to HPL's viability and growth without undue interference. This new ethos in their partnership is a harbinger of good news for the future.

What is the level of investor interest in HPL now?

It is a measure of the quality, strength and potential of HPL that there are other private and public sector companies and groups which have shown clear, positive interest in participating in HPL and bringing in fresh equity as part of the tie-up. These are Indian companies as well as foreign companies.

This is a matter of great satisfaction and does away with the feeling that no one is interested in HPL, or no one wants to bring in new equity into HPL, that HPL is born sick and will remain sick and will die.

The truth is that HPL has a choice of partners and alternative structures to work out.

Can HPL make a profit given its cost structure?

One issue here is related to supply and pricing of naphtha. Because of the shortage of working capital, HPL was in dire straits to pay for naphtha. And, it is to the credit of IOC that it supplied naphtha on terms of extended credit. IOC's support to HPL has been extremely important.

There is however one fact which needs to be highlighted and this relates to the price. Against IOC's credit of Rs 3 billion, the total purchase of naphtha by HPL would be in the region of Rs 20 billion per annum.

And, the price charged by IOC has normally been higher that the international, imported price. This has had a material impact on HPL's working capital and financial requirements.

If HPL could have got naphtha at the same price at which naphtha can be imported, then HPL would have been able to pay its dues and clear its debts to banks and financial institutions. There would have been little or no problem of cash.

What about the banks and financial institutions on whom HPL has also been very dependent for financial support to begin, and to continue, operations?

It needs to be stated right upfront that the banks and financial institutions, as a group, and individually, have been extremely supportive of HPL.

If it was not for them, and their support, HPL could not have happened, the state of art plant could not have happened, the 20 per cent plus market share for HPL could not have happened.

The problem is that when the company entered into agreements with banks and financial institutions, rates of interest agreed mutually were extremely high because those were the rates prevailing at that time.

However, thanks to policies of the government of India and, especially, the ministry of finance and Reserve Bank of India and institutions, the rates of interest have been steadily declining. Today, it is around 11 per cent.

But, HPL continues to pay at the original, higher rates of interest and has not had the benefit of the reduced rates. It needs to be known that HPL has paid over Rs 14.50 billion by way of interest and commission to banks and financial institutions already and is committed to pay an additional Rs 2.50 billion. These are not small numbers.

If the interest rate had been reduced, to help HPL, in keeping with the decline in interest rates nationally, and in keeping with similar help given to several other companies, then HPL would have saved much by way of payment to banks and financial institutions.

This reduction in interest payment is particularly essential as the government of India and the Reserve Bank of India over the years have brought down the duty protection for this industry. A globally competitive industry needs globally competitive interest rates.

But there is enormous public attention on HPL...

This public attention is not new. It has been there since the time, many years ago, that HPL was conceived and has continued through the process of potential investors coming in, investors withdrawing, and, then, during the last few years, when HPL actually became a reality. This is so because HPL is really the only major investment in West Bengal for decades.

The importance of Haldia has also to be seen in the context of drawing investment into the eastern part of India and the need for financial institutions, government and businessmen to all create a conducive atmosphere for investment and growth in a region that has 40 per cent of the population of India.

It is not to make out a case for an individual company. HPL is a reflection of a much larger regional and national developmental issue.

What are the factors that can make HPL a success?

First, HPL has created a state-of-art 466KTA naphtha cracker with integrated downstream capacities for HDPE, LLDPE (swing), polypropylene, etc. Its products are of high quality and well received in the market.

In a very short time, HPL has established, for itself market share of over 20 per cent. So, the first point to be made is that it is a company whose technology and products are competitive.

Second, HPL is the only company in the private sector in West Bengal which has come up in recent decades with substantial investment.

It represents foreign direct investment of over $145 million from The Chatterjee Group which is a significant amount by any standards. HPL has drawn significant FDI into West Bengal.

Third, this company has a good management team and workforce and, together, they have built a strong foundation for this petrochemical complex. This is the measure of the commitment and professionalism of the entire team in HPL, and they work under difficult circumstances.

Fourth, I want to correct the impression that the company has always made losses and will always make losses. In March 2002, HPL achieved sales of Rs 3.04 billion which was outstanding.

And, what is more significant, EBIDT of Rs 300 million. Not small, particularly when one considers there was adequate naphtha supply for only 24 days of the month.

Fifth, it has become clear that, with continuous naphtha supply which is the main raw material, the monthly sales performance of HPL could exceed Rs 3.50 billion with EBIDT of Rs 400 million to Rs 500 million per month.

This means, HPL could have a EBIDT of Rs 5 billion per annum if it received steady naphtha supply and at real international prices.

This performance can go up further if the global petrochemical cycle turns around from its current depressed state. This is expected to happen.

If there are so many positives about HPL, what is the problem?

To answer this question I need to go back into history because history determines the present and, today, we are trying to change that history a little bit so that HPL has a great future.

The total investment that HPL required was more than could be raised when the company was started a few years ago. It was just after the South-East Asian financial crisis and it was difficult to raise money in the capital market.

Therefore, while the three promoters, government of West Bengal, The Chatterjee Group and the Tata Group, put in significant amounts as investment funds, the company had to borrow heavily from banks and financial institutions, to get going.

This is a crucial factor of history which has affected HPL and which we are now trying to correct by bringing in fresh equity and a new partner.

The negotiations and discussions with an outstanding public sector company, Indian Oil Corporation, have been with this objective. Everyone felt IOC would be an excellent new entrant into HPL and there was commercial sense in them coming together.

Unfortunately, though we achieved agreement on almost all issues, these negotiations could not be concluded to mutual satisfaction. The IOC / HPL relationship can still be mutually beneficial as supplier-customer.

Just who is running HPL now?

It is customary in India and abroad for joint sector companies which involve government and the private sector, to be managed and run by the private sector. Looking at what happened it is clear that there was confusion and lack of clarity about who actually was running the company.

There were three promoters in the past - the state government and The Chatterjee Group who took the same investment position and the Tata Group who took a smaller investment position.

Here, it is necessary to record appreciation of the Tata Group's commitment to West Bengal and HPL. This was not their line of business but, because of a commitment made by the late J R D Tata, the Tatas supported HPL which is perhaps unique in commercial history.

And, their involvement was not insignificant either in financial terms or in terms of moral support to the company.

Which promoter was in-charge? Who was calling the shots? Who was taking the key decisions? There is no doubt in my mind that this confusion was due to lack of experience with joint ventures and not due to any malafide intention on anyone's part.

There were three promoters, there were different perspectives and there was lack of clarity. It is known that joint ventures between two partners are difficult.

There are numerous examples even in India, over the last 10 years, where joint ventures have not worked out. Joint ventures have had to be concluded prematurely because the two partners did not agree on business strategy or how the company concerned should be run.

Looking at HPL, this problem was probably compounded by the fact that there were three partners instead of two.

There is no gain in apportioning blame. I mention this only to say that it seems to have been a determining factor in the working and functioning of HPL at this quite common in India and the world over.

Today, there is harmony between the promoters. Tatas had always made it clear that they would exit over a period of time and this process is underway.

There is now harmony in the board of directors which includes very senior, able representatives of the financial institutions who extended support to HPL to enable it to get going.

So, this is not an issue anymore. The induction of a new partner has to be done with great care, learning from lessons of the past.

If we look at history, and we look especially at the price at which HPL has been buying naphtha and the rate of interest at which HPL has been paying the banks and financial institutions, it is clear that these are two key factors which have impacted on HPL, on its liquidity, on its ability to pay all its dues to creditors, to buy naphtha and be a prosperous and profitable company.

So, to conclude, here is the agenda of action for HPL : reduce and restructure debt; bring in more equity; work out a long term arrangement for supply of naphtha at international prices; construct new commercial arrangements for marketing and, finally, build a new confidence in HPL.

The good news is that we are working on all of this and we hope to achieve success.

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