'Hindusthan National Glass will open two plants this year'

Mukul Somany, vice chairman and managing director of Hindusthan National Glass and Industries Ltd, looks relieved these days. Almost 15 months after acknowledging that India’s largest glass container maker is actively scouting for overseas acquisitions, success came on May 12, when the company announced that it has bought Agenda Glas AG of Germany for €50 million.

Agenda Glas’s 320 tonnes a day plant is located at Gardelegen, famous for its Garley beer, and it makes bottles for Jagermeister herbal liqueur and vodka Gorbachev. But the plant became unviable ever since it started operations in February 2010, and the company went into bankruptcy a year later. The “buyers from Kalkutta”, as the Somany brothers were described by the local media, then bought the facility through a short and quick insolvency proceeding.

The Somany bothers, Sanjay and Mukul, are known for turning around sick companies: in fact most of HNGI’s capacities have come via the inorganic way, acquiring and converting sick units of Owens Brockway in 2003, Larsen & Toubro in 2005 and Haryana Sheet Glass in 2007. Mukul Somany spoke to DNA about the industry, his company’s strategies and the way ahead. Excerpts from the interview:

You acquired Agenda Glas for €50 million. Is this the acquisition cost only or it also includes investment to revive the plant?
Given the fact that the plant was losing money and we needed to invest to set it right; euro 50 million is not only the cost of acquisition but also the capital expenditure that we have to make in six to nine months. The money that we had to pay as acquisition cost was about 75-80% of the €50 million, the balance will be invested in reviving the operations. We have acquired the fixed as well as the current assets.

Agenda Glas is a relatively new plant, commissioned only in February 2010, and it went bankrupt in such a short period. What went wrong?
The plant was not being run properly. Its pack-to-melt ratio, a benchmark for efficiency in our industry, was a low 71-72%, much below the industry break-even level of 83-84%. In comparison, Indian plants run at 89-90% ratio.

So how difficult would be for you to revive the plant?
We consider ourselves as industry specialists. We know what’s wrong with the plant and that’s why we have budgeted the cost needed to rectify the weaknesses. The quality of asset is good and the only major flaw that we found is that the battery limit was not designed properly and there was a mismatch. Battery limit in relation to vendors defines up to where a particular vendor’s supply end and where another start and connect. That was not set properly for the plant.

There is problem on the marketing front as well. When production and quality suffer, you need to improve perception in the market. That wasn’t done. The plant was running cash loss of close to 7-8% of turnover over the past three months, the period which is relevant as before it was passing through the initial gestation period. At full capacity, the plant was capable of generating €35-40 million a year. The plant was being run at 75-80% capacity utilisation.

Agenda’s product range covers mostly the alcho-bev segment. Any plans to expand it?
They mostly make bottles for liquor and processed food. The addressable market is Germany while a little bit is exported to other European countries via land route. The German market for alcohol and beverages is quite saturated, growing by 2-2.5% against Indian growth of double digits. The plant has enough land to expand, and within the next 2-3 years we might put up another furnace.

Some analysts have expressed apprehension that HNGI is losing market share in the domestic market, from 60% plus to about 55% now...
In a fast growing market you have to bring capacities online fast. In the last 10 years we have expanded mainly by acquisitions and brownfield investments, and in the last couple of years we have not been able to get into the organic route to grow. But now we have embarked on a major expansion of capacity at a cost of Rs1,000 crore and also to get newer technologies.

Majority of the capacity would come at Nasik and at Naidupeta where we are building the largest glass manufacturing complex in Southeast Asia at an initial investment of more than Rs700 crore. It will have the single largest furnace in India having a capacity of 650 tonne a day. Both these plants would get commissioned this year.

Any plans for your subsidiary HNG Float Glass?
The plant that makes float glass for user industries like automobiles and construction has a capacity of 600 tonne a day and we plan to take it to 1,000 tonne a day at an investment of Rs 600 crore. It is still on the drawing board and would probably take another two years to commission.

Do you for see any drop in consumption of glass containers in the country due to likely slowdown in the economy?
When you look at sectors like alcohol, beverages, pharmaceuticals and cosmetics, we see them as by and large non-cyclical sectors, not part of discretionary purchases anymore. At least there wouldn’t be any major climbdown in demand. We see alcohol demand coming down from the normal 12-15% yearly growth to high single digit because of slowdown.

Do you need to rework your product portfolio keeping in mind any probable slowdown in some or all sectors that you serve?
We are relatively de-risked through the product portfolio. We have been exporting only 4% of our turnover. If scenario deteriorates, we might start exporting more. The advantage for us is that our three plants in Nashik, Puducherry and Naidupeta are close to ports.

Which technological innovations you are planning to bring into your product offering?
We continue to focus on developing lighter weight containers having higher strength. We are the only producer of narrow neck bottles. We have been using this technology so far in Bahadurgarh plant and plan to take it to other sites also. Hopefully within the next 2-3 months, we would start selling in India single-use beer bottles to be manufactured using the narrow neck technology, which is now the global industry standard. Currently, all beer bottles are recycled in India. Close to 15% of our supplies to the beer market go into replacing bottles. Our next target is to use such bottles for packing soft drinks also.