Buoyed by a growing polyester market, the company is planning a mega project. But its stretched financials could be a big hurdle.

By  Ranju Sarkar

About four kilometres north-east of the Mangalore Port off the Mangalore-Goa highway, a hundred-odd acres of barren industrial land is being acquired by polyester major, Indo Rama Synthetics. This is where the company's brand new dream-a Rs 1,500 crore, 3 lakh tonnes per annum (tpa) polyester unit-will take shape.

Mangalore is a long way from the company's Delhi headquarters. But, then, Om Prakash Lohia, Indo Rama's 51-year-old CEO, isn't the one to be hemmed in by barriers of distance or a lack of money. And never mind that his four-year-old plan of turning his company into an integrated polyester major, with its own refinery and raw materials supply, at a cost of Rs 3,790 crore, was a non-starter. Worse, the 1997 crash in Asian markets pummelled polyester prices, sending the company's financials into a downward spiral. Even today, it is reeling under the effect. Last year, it turned in a net loss of Rs 7.6 crore on sales of Rs 1,751.36 crore. The culprit: a staggering interest payment of Rs 170.65 crore.

Lohia says that this time round the impact will be different. For one, he says, the demand for polyester is growing at a rate of 5 per cent per annum, and India is one of the fastest-growing markets globally. Says Lohia: ''We are expanding our capacity to service a growing market.''

The Demand Drivers

The domestic demand for polyester, at 1.4 million tonnes per annum (tpa), more or less matches the domestic supply of nearly 1.6 million tpa, with an estimated 0.2 million tpa (of Orkay and Haryana Petro) lying defunct. This is also reflected in growing imports, which have begun to trickle in from across the Indo-China border. With demand growing at 5 per cent per annum-and expected to grow at 8-9 per cent this decade-Indo Rama wants to create capacity before others do so.

What's encouraged Lohia is that international prices have firmed up. Polyester prices have risen from $550 per tonne in January 1999 to $850 per tonne (November, 2000). Prices of purified terephthalic acid (PTA), which is a key polyester raw material, have also moved in tandem, increasing from $320 per tonne to $480 per tonne during the same period. Lohia expects domestic polyester prices to firm up, as no new capacity is expected to come up before 2003. That's also the year when his plant will be ready, financiers willing.

On paper, the statistics tend to favour Indo Rama: the per capita consumption of polyester in India, at around 1.4 kg, is less than that in Pakistan (3.5 kg), or in China (4 kg). Lohia expects this figure to increase to nearly 4 kg by 2010, as polyester becomes a preferred fabric. Adds Anant Kishore, 51, Vice-President (Projects), Indo Rama: ''There's no other fibre which beats polyester in terms of cost and durability.''

One Too Many?

But is there room for fresh domestic capacity in the polyester segment? Currently, there is a 10-15 per cent overcapacity in the Asia-Pacific region, primarily in countries like Taiwan and South Korea. Worse, China is also planning to add nearly 10 million tonnes of capacity over the next decade. Most of the capacities in Taiwan and Korea were created with a view to catering to the Chinese market. Now, with China upping its own polyester production, the excess capacity will likely spill over into India. Lohia thinks otherwise. ''It would not be viable for Korean or Taiwanese to export to India, pay duty (27.5 per cent) and freight costs (8-10 per cent). We have learnt to survive and make money even with this skewed duty structure,'' says he.

Today, the official polyester import into India is around 60,000 tonnes per year. But experts expect the figure to increase and reach 0.3-0.4 million tonnes by 2003. More importantly for Indo Rama, any prospective financier will want to weigh his decision against the demand-supply situation. Lohia says that, so far, the company has not approached any financial institution for funding. But convincing them may not be easy. Says P.V. Narasimhan, CEO, IFCI: ''I don't think institutions would be willing to fund any polyester project right now. We believe there's still excess capacity and prices are unremunerative. If prices go up, may be then we could look at such projects.''

Argues B. Ananthraman, President and CFO, Indo Rama: ''Lenders have to see if the demand is there. Some FIs may be sceptical, but there is opportunity and that's why we are operating our plant at 120 per cent capacity.'' Adds Lohia: ''If we could manage Rs 2,000 crore of investments on a turnover of Rs 100 crore in 1992-93, I am sure we will manage to fund a Rs 1,500 crore project on a turnover of Rs 1,000 crore.''

Lohia had better be right. For, a bad polyester project, after an ambitious non-starter, is the last thing he needs.

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