Galvanised again

Hailing from a well-off family, he started his business as a hobby, with no grand vision. First came trading, then manufacturing. Today, Rajinder Kumar Miglani, Chairman & Managing Director of Mumbai-based Uttam Galva Steels Ltd., is a partner of Lakshmi N. Mittal, CEO of ArcelorMittal, the world’s largest steelmaker, which picked up a stake of 5.6 per cent in the galvanised steels major in September.

Who is this man on whom Mittal has such faith at a time when his own showpiece projects in India are stuck on the drawing board? Miglani, 63, is not your typical hotshot dealmaker, but the two have known each other since their teens. So, when Mittal came looking for value-addition in India, it was natural for him to seal a deal to become a co-promoter of Miglani in Uttam Galva and schedule an open offer for November to take his stake up to 35 per cent.

Miglani started off in the sixties by importing galvanised steel—or steel with a coating of zinc to make it corrosion resistant. Galvanised steel is used by white goods manufacturers and in the general engineering and construction space. Uttam Galva’s consumers today range from Videocon, Whirlpool, LG Electronics and Bajaj Electricals to Tata Motors, General Motors, Piaggio and Fiat.

At that time, the Indian market was puny. By 1985, he had become the largest importer of galvanised steel, feeding half the total consumption of 2,00,000 tonnes. “During those days, the demand for galvanised steel was growing stupendously,” recalls Miglani. “Since I was importing huge quantities and had expertise in marketing it, I thought it would be logical to put up a production line.”

Miglani had to negotiate hurdles put up by the integrated steel majors, who did not want a local rival, and bureaucrats who were reluctant to give a manufacturing licence to a trader. Getting the licence (it took a year) turned out to be the easy part; to manufacture galvanised steel, Uttam Galva had to either buy cold-rolled steel sheets from local producers or import them in the face of duties of up to 150 per cent.

“Today, we have the luxury of placing orders over the phone, but there have been times when I had to personally visit different steel mills across regions,” recalls Miglani. As a new player, Uttam Galva had a credibility problem. Going abroad was equally tough. “Restrictions on visas and foreign currencies only aggravated the problems,” he says.

As a manufacturer, Miglani remained the first mover for just three or four years. When the government de-controlled steel prices and cut import duties, all steel players had to check production costs and focus on quality.

“As the market turned dynamic, everybody— small and big players—went about doing rapid capacity expansion and backward integration. Survival… was challenging,” recalls Miglani.

He also set up his own cold-rolling facility and went downstream into colour-coated steel. “The idea behind setting up a CR coils unit was to minimise the wastage of raw material and speed up execution,” says Miglani. Facing tough competition from the integrated players, Miglani specialised into niches.

“Historically, the cost structure of an integrated steel mill is competitive compared with players like us,” Miglani says. So, Uttam specialised in sizes and grades that nobody could match. Besides, Uttam has never added capacity on one product, preferring to diversify its product mix constantly.

The Mittal Connection
It was during his days as a trader that Miglani got to know L.N. Mittal through his father. “He was a friend of Mohal Lal Mittal, father of L.N. Mittal. In fact, M.L. Mittal taught me a lot of things about this industry when I was young,” Miglani says.

“When L.N. Mittal thought of establishing his first manufacturing presence in India, he chose us. I think his interest in Uttam has emotional sense as well,” adds Miglani.

Uttam Galva’s small galvanising capacity of 30,000 tonnes per annum in 1985 has grown to 7.5 mtpa. It also has a 1mtpa cold-rolled coils line, equal to 11 per cent of India’s total, and a colour coating line.

For Mittal, however, it is not just emotion that got him into Uttam Galva. “With a one-million tonne capacity, Uttam Galva is a fairly good-sized value-added steel company... Over the last few years, the company has shown excellent growth with high levels of productivity. The alliance will be an important component of our overall strategy for India,” Mittal says.

Big consumers like Videocon’s Venugopal Dhoot swear by Miglani’s business acumen. “His in-depth knowledge about the steel industry and understanding of the client’s demand is excellent,” says Dhoot, also a close friend of Miglani. Videocon buys galvanised and colour-coated steel for the bodies of the domestic appliances that it makes.

Miglani is betting on Mittal’s Midas touch to improve the stakeholders’ value in Uttam Galva. “Our long-term goal is to replicate the success story of Italybased secondary steel giant Marcegaglia…Except scale, we are quite similar to them in terms of product line and clientele,” he says.

Under the deal, done in the first week of September, the stake takeover will happen in three stages. In the first, ArcelorMittal bought 5.6 per cent for about Rs 80 crore. In November, the Mittals are scheduled to buy about 35.2 million shares or 29.4 per cent in Uttam Galva. This will turn ArcelorMittal and Uttam Galva’s stakeholders into equal partners. If the open offer gets poor investor response, the Miglanis will offer ArcelorMittal such number of shares that will ensure that both have an equal stake (22.5 per cent).

Says Rakesh Arora, Associate Director, Macquarie Capital Securities: “If you go by the size ($100 million), it is not a very big deal for ArcelorMittal. However, for the Miglanis, the deal means a lot.”

The deal gives ArcelorMittal its first manufacturing presence on the ground. Mittal’s plans to set up integrated steel plants in Orissa and Jharkhand are stuck, largely because of issues related to allocation of raw material sources, land acquisition and environmental clearances.

Alliance Benefits
For one, Miglani has to import the HR coils that he cold-rolls to feed his galvanising line. And half his imports are from ArcelorMittal. “We buy bulk of our raw material from various facilities of ArcelorMittal and expect this deal to ensure supply priority,” says Ankit Miglani, son of Rajinder Miglani.

“In recent times, HR coils prices have jumped significantly higher because of an artificial shortage,” says Ankit. India has imposed safeguard duties, with international prices lower than domestic ones. “The deal will ensure that we continue to serve our customers at competitive prices,” says Ankit.

Second, the Miglanis now have easy access to ArcelorMittal’s know-how and technology. Uttam Galva produces galvanised sheets ranging from 3mm thickness to as thin as two sheets of A4 printer paper, and exports its products to 142 countries. By value, exports accounted for almost half its total sales in 2008-09.

“There are many high-end technologies that we are not able to use currently. It would have taken years for us to adopt these as a standalone company,” says Ankit. Uttam Galva will also be able to ride ArcelorMittal’s global distribution network.

ArcelorMittal will get a ready market for its products. The global downturn has forced ArcelorMittal and many of its rivals to run at half their capacity in the first half of 2009-10.

“ArcelorMittal is committed to building an operational presence in India, which is an exciting growth market for steel consumption... there is an additional strategic benefit as we will be able to provide hotrolled coil from our greenfield projects in Jharkhand and Orissa,” says Sudhir Maheshwari, Member, Group Management Board, ArcelorMittal.

ArcelorMittal expects developing markets such as India, China, Brazil, Eastern Europe and Turkey to drive demand, especially for value-added products.

“As demand for consumer durables, automobiles and industrial machinery grows, we expect demand for speciality cold-rolled steel products to grow at a fast clip,” says Miglani.