We were the first company in India to successfully develop a fracture split connecting rod and this was a major breakthrough at that time. Our engineering capability is what differentiates us from others because of which we can produce very high quality and high precision products for the customers, says Viraj G Kalyani, Executive Vice President, Kalyani Forge. Excerpts from the interview.
To what extent has the export of higher grade iron ore impacted the forging industry in India?
I think so far there has been a ban or export duty on the export of iron ore. However, there are talks about removing this duty on export. Soon we might see some prices rising marginally. We feel that there should be more freedom which would be good for the economy and would increase our exports. A greater amount of mining and production will see more supply so that the raw material prices could lessen a little.
What is the impact of the current steel prices on the forging industry?
Steel prices haven't moved really much over the last year. Raw material is a major cost element for Kalyani Forge It's about 48 to 50 per cent of our costs. But for many other players in the forging industry, it's much higher. So a big fluctuation could have a major impact. Our customers are steel suppliers and we have a tripartite agreement so we take care of these pricing issues on a relationship level. While the steel prices are stable, some of the other conversion costs are increasing, like power. So that could have some impact on margins too.
How would you consider creating a fund for upgrading technology for the forging industry like it has been done for the textile industry?
Definitely, technology plays a major role in forging. If we have to get to the next level of capability of forging and manufacturing in India, we have to upgrade our technology. So a fund like this would definitely be a good starting point to make technology more easily available to smaller companies as well as entrepreneurs. And it could have a good ripple effect on the entire industry. We definitely want to see more incentives coming in for manufacturing in general. The government has stated that it intends on giving a push to the manufacturing sector, but we need to see some action on the ground.
What are the challenges that you face on the taxation front?
There have been some efforts from the government to make things simpler like electronic filing of taxes and so on. Nonetheless, the entire taxation system is very complicated today with direct and indirect taxes. And it's really increasing our transaction costs and making us an uncompetitive place to do business in.
What will be the impact of the GST on the forging industry?
GST is a great idea. It should have been done much earlier. So it's high time we emphasise that it could be quite a game changer for our economy and add a couple of percentage points to our GDP growth With this we would be simplifying the structure and therefore reducing transaction costs. It will really improve the situation and competitiveness of companies. Once the economy improves, the forging industry will also have a very favourable climate. Ours is a vast country so we should have free flowing trade among all the states. That's what the GST will do. It will remove barriers of trade between states. And that's very important.
What is the current scenario of export of forging and machine components? And will the increase in DEPB help the exporters?
Currently the global slowdown has slightly weakened exports even in the forging industry. But we do see signs of a revival and a lot of promising interest from overseas customers as well as new customers. Of course, the DEPB incentives would definitely help in encouraging exports.
Do you have a level playing field especially in terms of corporate tax when compared to other Asian countries?
No. There are several countries like Malaysia, Thailand etc. which have much lower corporate taxes. Sixty years ago they were also a poor country like India. But today they have gone much ahead of us. The same thing applies to Singapore as well. It has a corporate tax of 17 per cent. Corporate tax is just one part of doing business. The ease of doing business in India ranks pretty low. That's something we have to prioritise so that doing business in India becomes easy.
How do you view the competition and what make you different from the competition?
I think there is healthy competition in the forging industry. There are players known for their niche products. Kalyani Forge is well known for our high precision forging and machine components. In fact, we were the first company in India to successfully develop a fracture split connecting rod and this was a major breakthrough at that time. I think our engineering capability is what differentiates us from others because of which we can produce very high quality and high precision products for the customers.
What are the core strengths and competencies of Kalyani Forge?
It is the engineering and design capabilities. We are always at the forefront of new processes and technologies. We are one of the first major players in India to get into cold forging. We are also an agile company so we can respond faster to changes in the environment.
What is the impact of the continuing recession and slowdown in the economy?
There is definitely some impact due to a slump in demand across various sectors. It is part of life and at Kalyani Forge we are not trying to get short-term results. We are building the company for long term sustainability. When there is a slowdown, we work on a lot of improvements in-house like getting new customers, developing new products, etc, and so we are still able to maintain our margins. In fact over the next few quarters we will be putting in a lot of effort in improving these margins.
As far as the rupee depreciation is concerned, we might see some gain on exports and we don't import too many raw materials. But then the devaluation of rupee could hurt our ancillary players or OEMs. So that can have an impact on demand. Nonetheless, I think there is an overreaction to the rupee depreciation. We have to see it as a symptom rather than as a cause of concern. We have to look more at the underlying issues in our economy.
How do you sustain growth in these troubled times?
As I said, we use these times to our advantage. When there is a slowdown, we can put in a lot more effort on our in-house research and development in developing new products and customers. We are also working in a big way on improving our processes. We want to strive towards operational excellence by using beam systems and we are getting leaner. We are also empowering our people to learn new ways of improving processes.
What are the recent technological trends in the forging industry?
As I mentioned earlier, cold forging is a relatively new technology. It has practically zero material waste which is a major advantage. Kalyani Forge is really leading on this front. We have already increased our sales from cold forging as compared to the last year. And we are seeing some healthy growth in the cold forging business. Overall, there is more focus on value addition and precision components in the forging industry. However, a part of the industry is unorganised and needs to be modernised. Some of these players may be our suppliers. So we are working closely with them so that the whole value chain improves.
To what extent has your association with Zenotech, Japan has helped you assume a leadership position in the cold forging technology?
It's been a pretty productive association. We've had successful development of products, especially developments of dies for our components. We have learnt a lot about the intricacies of cold processes as well as die design for die manufacturing.
Could you tell us about the facilities created by the group for hot, warm and cold forging areas?
Our hot forging has two divisions and we have a variety of press sizes varying from 630 tonne to 2,500 tonne. For the warm forging we have 4-5 presses. For cold forging, we have some new presses which will soon become a fully automated line. We are putting in some more automated lines in some of our presses so as to modernise these facilities.
To what extent have you been able to integrate IT in the production process?
IT plays a pretty vital role in our business model. In terms of energy conservation, we have energy meters that are fixed at various lines not just at the aggregate level. We will be taking this up to our ERP in the future so as to get more real time data on energy. For safety reasons, right now we have not integrated IT into safety equipment. But we have plans to practically connect all aspects of our business using IT.
So IT will be playing an increasingly significant role in our company in future. We also have state-of-the-art labs with CMM machines and testing facilities. Currently the data that we capture is also fed into our ERP system. Thus, we will be working on the next level of analysing this data thereby building analytical capabilities.
What is the export potential and how do you fare in the market?
There is a lot of potential for exports. We have seen an increased interest from our overseas customers as well as new potential customers because India is becoming more of a global manufacturing hub. Currently, we export about twenty five per cent of our sales and we have customers in Europe and the US.
What was your target in 2012 and what is your target for this year?
In 2011, we had pretty rapid growth and therefore it was more challenging to beat that. The first half of 2012 was pretty good for us. In fact, we had record sales in the first half. But in the second half, when the slowdown kicked in, it impacted the meeting of our targets.
We work towards the target but this fiscal year is also pretty volatile. Right now, we just have to be cautious. We have targeted some growth on the top line and more aggressive growth on the bottom line by improving our EBITDA margins as well as net margins.
Tell us about the range of products offered by the Kalyani Group.
We have a big variety of products. We are leaders in connecting rods. We also make axles and gears, tulips, various engine chassis, and transmission components for automobiles. We also make similar components for industrial sectors like construction, power and marine. We also make industrial tool components. We make a lot of engine components for earthmovers and off-road construction equipment. We are focusing a lot more on the construction sector as we want to increase our share of business in the non-auto sectors. So the construction industry is a major area for us.
We want to strive towards operational excellence by using beam systems.