/ The ICFAI University

Haldia Petrochemicals – Finally Out Of The Woods

Introduction

“A project has been on the drawing board for 17 years. People are going in and going out and nothing is being done about it.” “I want to get Haldia standing, and going and growing.”

Purnendu Chatterjee

Purnendu Chatterjee (PC) the scion from the East was never particularly in the public eye until he took head on the challenge of getting Haldia Petrochemicals Ltd. off the ground. He is known for his links with George Soros and how he has the King Midas touch when it came to making money. He has always maintained a low profile. He has a large portfolio of interests both in India and abroad. To name a few: real estate, software, technology, entertainment and, of course, petrochemicals.

He had his grooming at Mckinsey & Co in New York. Gifted with a never-say-die attitude there was talk in the Mckinsey circles that he would one day be responsible for the revival of the Bengali entrepreneurship.

Purnendu started his business career in the US with real estate and an investment in a small computer hardware enterprise named Beall. Understanding the role fund managers play he aligned himself with Soros, one of the most successful fund managers of the 21st century.

The US Security & Exchange Commission (SEC) shows 234 entries for Purnendu Chatterjee. It’s a large number. (Of these, 152 have a George Soros association.) Under the TCG(The Chatterjee Group) umbrella and linked to it are companies like Winston Partners, LP; Chatterjee Fund Management, LP; Winston Partners II LDC, a Cayman Islands–based company; Winston Partners II LLC; Chatterjee Advisors LLC; Chatterjee Management Company; S–C Rig Investments; Soros Fund Management; Amati Communications; Beckman Instruments; Boole & Babbage; CCC Information; Critical Path; DSC communications; Focus Surgery; Indigo; Outsource Partners International (formed in 2002 through a merger of KPMG’s backoffice operations with the New York–based it Accounts); PE Corp… The full list runs to several pages.

Chatterjee took a major stake in Haldia Petrochemicals Ltd (HPL). Initially, he brought the bulk of the funds from managed funds. But at a later stage, as the project progressed, he replaced and augmented the original funds invested.

He is today best remembered for his perseverance while handling HPL. Those were the days when no one, including giant PSUs, was ready to invest either in Bengal or in petrochemicals, Purnendu, probably for son of the soil reasons, made those significant investments.

HPL today stands revived and some say was the most profitable petrochemicals company in India. Purnendu has another feather to his cap: he has successfully bid for Basell NV. The $5.7 billion bid is the largest ever by an Indian. The Basell tie will mean a great deal for HPL in the same vein as HPL means much for Bengal. Purnendu deserves all accolades. His vision and drive has made Haldia a reality and the Basell link will definitely be of immense help.

The Industry Backdrop

The Indian petrochemical industry is concentrated among few players. Reliance along with its 51% subsidiary IPCL accounts for more than two thirds of the entire industry. GAIL is the other major player and Haldia Petrochemical (HPL) post restructuring has also become a main stream player.

Domestic capacity is small vis-à-vis global capacity. USA is the biggest player accounting for more than a quarter of the global capacity of about 115 MMTPA. The second largest player Japan accounts for fewer than 7% of the global capacity. India on the other hand constitutes just about 2% of the world capacity.

As no sizeable capacity addition is expected globally in the next two years and demand is growing at a fast pace, there would be narrowing of demand supply gap. A shortfall of 5mmt and 4.5mmt of polyethylene (PE) and polypropylene (PP) is expected in Asia in the coming two years.

The reduction of import duty over the years has led to global competition. This apart, the duty differential between final products and raw material (naphtha) is narrowing down, and companies are facing increasing pressure on margins. The relaxation in customs duty on project imports will however, provide relief by way of reduction in project costs for future expansion. The industry is crucial for the Indian economy as it caters to the needs of major industries like power, telecom, cables, plastics, textiles etc.

The per capita consumption of polymers, synthetic fibres, synthetic rubber and plastics in India is very low – at 2.5 Kilograms, 1.6 Kilograms, 0.2 Kilograms, 3.0 Kilograms respectively (whereas the global consumption is 17.3 Kilograms 3.9 Kilograms, 2.1 Kilograms, 17.0 Kilogramsrespectively). The growth rate of the Indian industry during the last four years has been around 15 percent whereas it was 4 percent in the global industry. This substantiates the huge potential that Indian petrochemicals market offers.

In the petrochemicals industry, over the last two years, profit margins of domestic producers have shown an upward trend. The domestic margins, which are linked to the international margins, are also expected to show a similar trend. The prediction is strong financial performance over the short-to-medium term. The domestic demand for major petrochemicals, although slower than in the past, is expected to continue to increase at around 7-10 percent CAGR in the medium term.

According to another report prepared by Cris Infac, in the long term, the peak demand – supply balance is expected to be interrupted by the commencement of operations from 2008 onwards in the Middle East. The prices and margins are expected to decrease, significantly, following the commissioning of large Middle Eastern petrochemical capacities, based on cheap feedstock (ethane).

Predictions made by most petrochemical analysts show that ethylene cash margins from a typical naphtha cracker will decline ‘sharply’ from 2008 onwards. This could lead to an increase in the payback period for projects commissioned post 2008 – especially in the case of IOC. However, as IOC’S petrochemical complex would use surplus naphtha that would be available at its Panipat, Mathura and Koyali units the margins can be preserved.

The Plastics Sector

Polymer is a superior replacement material and the demand for the product is only to go up. The country has an estimated production capacity of 4500 thousand metric tons annually. Of this, 60-70 per cent accounts for the production of (PE) and (PP). As compared to 22 kg per capita consumption of polymer in China, the corresponding figure in India is only 4 kg. So there is a huge potential out there waiting to be tapped. The world average of consumption is 20 Kgs & the consumption of developed nations is above 100 Kgs.

Major consuming industries include amongst others packaging and plastic moulded products. India ranks eighth in the world in terms of consumption of plastics and is expected to be the third largest consumer of plastics after the US and China by 2010. According to Multi Commodity Exchange (MCX) data the industry demand is expected to touch about 7.3 mt by 2006-07 and 12.4 mt by 2010-11.

The polymer industry is growing at about 12-15% annually Over the last few years, the Indian Petrochemicals industry has witnessed a consolidation phase. The top players – Reliance, IPCL, Haldia Petrochemicals (HPL) and GAIL – hold the majority of the polymer capacity in the domestic market. Buyers in the industry have very little bargaining power against the suppliers. Buyers are all highly vulnerable to raw material prices, which are highly influenced by international demand and supply conditions.

The HPL Saga

Those were the times when the growth of industries had been concentrated in the north to west corridor (Ludhiana to Delhi to Mumbai) and the west to south corridor (Mumbai, Pune, Bangalore, Chennai). Entrepreneurs forgot that the entire base for the industrialization of India was established in the east – in Bengal and Bihar.

As a step in the direction of regaining its past glory the West Bengal Government set its sight on four hardcore sectors to power its industrial resurgence. Topmost on the priority list was the iron & steel sector, followed by petrochemicals, agro business, food processing and IT.

Haldia has therefore been chosen as the site for a major petrochemical hub by the Union Government. HPL a Rs.5,170 crore petrochemicals project has become the showcase project for the state. Japanese major, Mitsubishi Chemicals which has already set up one unit in Haldia is planning to add a second one. IOC is evincing interest in Haldia.

The company was jointly promoted by the West Bengal Industrial Development Corporation (WBIDC) & Purnendu Chatterjee 11 years back. It was a result of the Left Government’s latest industrial philosophy of development and partnership. HPL started as a three-way joint venture between Purnendu Chatterjee of Chatterjee Petrochem (Mauritius), WBIDC and the Tatas, with WBIDC and the Chatterjee group being equal partners in the company and the Tatas holding a minority share.

For over two decades, HPL had been in the news for not so happy reasons. It has seen several industrial houses enter and exit. The Goenkas backed out in 1990. It was then that the Tatas entered the fray (They just hold a token stake of 3% and may exit any time.). Finally the Chatterjee group, headed by Purnendu Chatterjee (PC), completed the project. It took 17 years for the commencement of commercial production.

It was the then Chief Minister Jyoti Basu who had actually requested Chatterjee to look at HPL in 1994. For various reasons, the promoters were abandoning the project, and therefore, a worldwide search was on for entrepreneurs. There were no takers. The situation was getting desperate, with duties coming down. The project, was started when the duties were of the order of 150 percent. The rupee devaluation added to the woes contributing to cost escalation. The last salvo came in the form of high interest rates. Chatterjee belief was strong–From a rich man to a common man, everybody requires plastics.

In spite of the threatening presence of the giant Reliance in the petrochemicals industry, Chatterjee took the plunge in 1994. He started from scratch, selected the latest technology, negotiated with the financial institutions (He continues to do so even today).In sum, he totally redefined the scope of the project and made it profitable.

His doggedness kept him going especially in a state where only very few entrepreneurs would invest money. As per the original plan, the project size was 3 lakh tonne per annum (tpa) of ethylene, estimated at $1.2 billion (at Rs.31 to a dollar: Rs.3, 600 crores). Chatterjee changed the scope of the project. He added more capacity at a revised cost of $1.3 billion – and, today, the plant produces 5.20 lakh tpa of ethylene. Not everything was rosy. The times were bad and the plant went on stream at the bottom of the cycle. Market and investment sentiments were low; therefore going public was ruled out. Perforce HPL had to depend on the financial institutions for high-cost loans. The company was also hard pressed for working capital. The interest rates were at a high of 18-19 per cent. Chatterjee relied on debt and completed the project. The gearing/leverage ratio was as high as 4.5:1.

The Rs.5, 000 crores HPL, which was on the verge of liquidation at one point of time, is therefore referred to as the sharpest turn–around in recent times. So strapped the company was for working capital that they had to manage with raw material levels of two days. Today HPL generates an EBITDA of over Rs.100 crores per month. The company has come a long way. HPL’s PAT has done a somersault – from losses of Rs.518 crores in 2002–03 to profits of Rs.521 crores last year (In two years’ time). The net sales during this period more than doubled to Rs.5, 365 crores. (2004-05).

Chaterjee followed a conscious strategy of differentiation. It yielded rich dividends. HPL’s polypropylene is the only material that Samsonite uses. Exide depends on HPL’s material for its batteries. The company is the monopoly supplier of one of the materials used for intravenous packaging.450 plus companies today liaison with HPL. This includes the likes of Supreme Industries and Nilkamal Plastics.

An Icra research report says the improved profit margins in the petrochemicals industry over the last two years has helped HPL to turn around. The other major reasons for the turnaround in financial performance include the CDR and an extraordinary income of Rs.75 crores coming from a one time settlement with contractors, coupled with increased capacity utilization from 80-109 percent…In the days ahead the investment per tonne of product will go down and HPL should continue to be highly efficient to guarantee its profitability even during the downturn. The authorities at HPL feel that there excellent performance will not peter off for at least another three to four years.

The entire credit for making HPL a bankable project goes to Purnendu Chatterjee.

Will The Basell Connection Help
PC made a successful bid along with US based Russian born investor Leonard Blavatnik for Royal Dutch/Shell and BASF’s polymer company, Basell NV but backed out. Had he not withdrawn by now he would have been busy enhancing the competitiveness, operational efficiency and functional performance of Basell. The size of the takeover was $5.7 billion (Rs.25080 crores).RIL also made a bid but was not even short listed.
The State Government did not agree to leveraging the assets for funding his part of the Basell deal. The bid however, was made with the blessings of the State Government. The question therefore that comes immediately to the fore–Did the CDR steering committee stop this?
West Bengal Government did not allow Chatterjee to encumber HPL’s assets to the Basell takeover bid as such association in the Basell deal would have additionally geared/leveraged the company which turned the corner only last year.
The major strengths of Basell are innovation and leadership in intellectual technology. The Dutch plastic company had a mind–boggling 8,522 patents until 2004. Resultantly, they are able to offer a wide and deeper product differentiation with engineered solutions.
HPL would certainly be looking up to the low–hanging fruit that Basell has to offer by way of its advanced polyolefins business (APO). Basell’s huge basket of applications could be easily applied to the nascent Indian market, to begin with. Take, for example, the automobiles sector. Basell provides solutions to enhance performance of vehicles by substantially reducing the weight through its patented product ‘Catalloy’. Another of their products, polybutene, used for specialty packaging like ‘seal and peal’ and hot water distribution pipes is another hit.
For Basell R&D is bread and butter,” says an expert in polymer technology. It being its core strength, Basell is not dependent on business cycles. India being a base of qualitative manpower, it could easily become collaborator in developing low–cost technologies. A lot of R&D work could come to India, which would insulate it further from business cycles. Clearly, there is matching of interest here.
Most important of all, HPL today is a stand–alone entity. But, the Basell link could enhance the giant’s purchasing power, especially with regard to naphtha and chemicals. There is a big network to be leveraged upon. In sum, while HPL is in for a dream run, Basell could help it go places.

At one time precisely in 2002–03, GAIL was interested in taking a 10% stake in HPL. Gail had a marketing alliance with Haldia and planned to widen the scope of the partnership. The deal however, did not fructify. The petroleum ministry preferred IOC who has a refinery in Haldia over GAIL.

The Corporate Debt Restructuring Phase

One very vital contributor for HPL’s success is the corporate debt restructuring (CDR) package, where 62 lending banks and financial institutions persevered meeting after meeting. From a point of time when a rehabilitation package seemed not possible, the IDBI–led consortium finally arrived at a settlement. The double whammy was the CDR and the upward trend in the industry. The turnaround effort started around 2002 and, by mid to late 2003, profits started (Thanks to the next boom in the petrochemicals industry).

Capacity utilizations shifted from poor to over 113 percent. The debt–equity ratio of the company, which stood at 3.87:1 in March 2004 came down to 1.94:1 by December 31, 2004.

The final letter giving the nod for the corporate debt restructuring programme was signed on February 12, 2004. The entire debt recast under the package was riveted on many conditions to be complied with by HPL.

As per the Rs.3,200 crore CDR package which came into effect from April 2003, the equity base of the company had to rise. Consequently TCG holds around 59 per cent, WBIDC, 38 per cent and the Tata, 3 percent (down from 14 per cent). The debt burden stands reduced from Rs.4,341 crores to Rs.3,119 crores while the interest rate has been scaled down from an average of 15 to 8.75 percent. The scheme also envisaged converting Rs 100-150 crores debt into equity and conversion of the Rupee loan into Foreign loan. HPL’s equity post–restructuring should be about Rs 2,000 crores. “For a company as squeezed for resources as HPL, there could not have been a better arrangement”, says an IDBI source.