Mr. K P Chhabria

What is your view of Indian PVC resin capacity, production, consumption, export and imports? At what rate is the domestic demand growing?
The Indian PVC Resin capacity currently stands at around 1.3 million MT p.a. as against this the domestic demand has been growing steadily and has reached almost 2.0 million MT p.a.. The gap of 0.7 million MT p.a. is filled by way of imports. There are no significant exports of PVC from India. The domestic demand is growing at over 10% CAGR.

What is your view of the tolling margins through Ethylene / EDC route and VCM route, and do you expect the same to improve, considering rise in global ethylene capacities and strong growth in domestic demand for PVC resins.
The tolling margins through Ethylene / EDC route are higher than the same through VCM route. However, the capital cost of both the routes differs and accordingly the return on investment is also different. Considering the strong growth in domestic demand the Company is expecting that the domestic selling price will remain favourable over the import parity.

What % of the PVC resin producer's requirement of Ethylene, EDC and VCM is met from imports? India is bestowed with surplus production of chlorine, which is available at a discount to global prices in many regions, and our ethylene production also improves with many petrochemical projects coming on stream. In this context, what factors do you feel are responsible for lack of interest in setting up EDC / VCM production capacity in India, either by refinery cum petrochemical majors or by stand alone PVC resin producers.
The Indian producers of PVC Resin have different routes and different sources of raw material. There is no merchant trade of Ethylene within India. Producers like Finolex Industries Limited [FIL] import Ethylene. Part of the VCM is manufactured captively and part is imported.

Though there is availability of Chlorine in India, safe transportation of large quantities of chlorine for PVC manufacture is the issue as it is hazardous. Ethylene is produced by naphtha and gas crackers. Besides, considering safety, distance between producers and PVC production units, the option of ethylene and chlorine transport is ruled out for production of EDC / VCM. For stand-alone PVC producer the investment in an Ethylene Cracker will be massive and it also requires investment to consume the co products from ethylene unit, such as propane and butadiene ; this also will completely change the product line. Thus it is economically not favourable to set up EDC / VCM production capacity.

Finolex Industries has been gradually raising PVC pipe capacity and as a result, the share of PVC pipe capacity in the PVC resin capacity has surged from 26.8% in FY 2007-08 to 37.4% in FY 2008-09, which further leaped to 43.9% in FY 2009-10. Considering the plans to set up another 50000 tonne rigid PVC pipe capacity in Gujarat, the captive usage of PVC resins is set to rise further. Kindly share the company's game plan in enriching its product mix.
FIL started as a PVC Pipes manufacturer and the setting up of PVC Resin plant was a step towards backward integration for securing raw material. Even today FIL continues to be India's largest producer of Rigid PVC Pipes and Fittings and the Company would like to maintain this position.

We find that the conversion margins (excess of PVC pipe prices over PVC resin prices) has been increasing from Rs 10706 per tonne in FY 2006-07 to Rs 14682 per tonne in FY 2009-10, and these conversion margins as % of PVC pipe prices too have hardened from 19.6% in FY 2007-08 to 21.5% in FY 2008-09 and to 24.0% in FY 2009-10. What factors are responsible for healthy and rising conversion margins in the PVC pipe business?
Though the difference between PVC Pipes prices and PVC Resin prices is higher there are number of other factors like certain ingredients to improve the quality of Pipes, which goes into the manufacturing process. This consistently high quality and strong brand equity is what enables FIL to charge a higher price in the market.

Are there plans for diversifying into other downstream products finding application of PVC resins, including doors and windows, drip irrigation systems, uPVC pipes, Chlorinated PVC pipes etc.
Finolex Group is already into Drip Irrigation business through its Associate Company, Finolex Plasson Industries Limited. FIL will soon be entering into Chlorinated PVC Pipes business. As regards PVC Doors and Windows FIL is watching the growth in the market and will take a decision at an appropriate time.

India is the net importer of PVC resins and the company has its own jetty. Its PVC resin sales are coming down, as captive usage in production of PVC pipes and fittings are going up. In this context, is the company looking at trading opportunity in importing PVC resins and marketing them, considering its strong knowledge of the domestic markets, especially in regions where it is strong?
We have taken note of your suggestions. We thank you for the same.

What is the current status of plans to convert the company's jetty into an all weather jetty? What is the cost of this project, and incremental revenues likely due to use of the Jetty by other corporate for a fee?
The project to utilize the Company's Jetty into an All Weather Port by construction of a Breakwater is at preset on hold. The Company will take a decision to restart the project at an appropriate time.

Considering rising demand, and increasing imports, are there plans to expand PVC resin capacity?
Considering the large demand / supply gap for PVC Resin in India, FIL is evaluating the expansion of its PVC Resin capacity.

What are the total derivative contracts outstanding, and whether the entire mark to market losses have been booked so far. What are the triggers and key points, at which the company will start making profits / will break even, in respect of these derivative contracts. Are there negotiations with banks to settle these contracts?
No comments

What % of the ethylene production is from natural gas and crude oil? What % of ethylene is used to produce ethylene di chloride / Vinyl Chloro Monomer for production of PVC resins. Do you expect the share of natural gas based ethylene to go up, and how soon, in the context of many gas based petrochemical projects coming in Gulf.
To our knowledge, in India most of the production of Ethylene is based on Naphtha [a product of refineries]. We do not have much data about the production of Gas based Ethylene in Gulf countries.

In the absence of chlorine as a raw material for PVC manufacture, one chooses to import both ethylene and EDC.

What is the user industry profile of PVC resins? At what rate is the demand growing in each of these user industries. As a result, do you visualize significant change in the share of user industries in the domestic PVC resin demand, going forward?
In India, almost 70% of the PVC Resin consumed is used for producing PVC Pipes. Traditionally PVC Pipes were mainly used for agriculture. However, PVC Pipes are fast replacing G.I. Pipes for Plumbing applications. Together, the demand for PVC Pipes is expected to maintain a very strong growth rate. As such the dominant application for PVC Resin in India will continue to be in PVC Pipes. Further, with increasing focus on infrastructure and building constructions, the demand for Wires and Cables is also growing. This sector is expected to account for a reasonable percentage of the demand for PVC Resin. Another application with large potential is PVC Films for Packaging. With the trend for buying packaged goods increasing even in the rural India, the demand for PVC Films is also on the rise.

India is the third largest producer of coal. Still, coal based chemicals, including production of PVC resin through carbide route is not very popular in India. Why? What is your expectation of the carbide based PVC resin production opportunity in India?
The technology for production of PVC Resin through Carbide route is very old and not environment friendly. It also consumes very high amount of energy.

What are the surplus lands available with the company, and what are the plans to utilize these lands? What is the current status of plans to shift pipes plant at Chinchwad in Pune to Ratnagiri, and to develop / sell surplus lands at Chinchwad?
All land available with the Company is for the purpose of expansion of production capacities. The Pipes plant has already been shifted to Ratnagiri and is fully operational.

What are the total power requirements of the company, and what % of the same is met from captive power plant. At what rate is the surplus power sold?
The Power requirement of the Company at Ratnagiri is 25 MW, which is available from the Captive Power plant, and the balance is sold to the State ( MSEDCL) at prices varying from time to time.

What was the variable cost of power generation in the quarter ended June 2010, September 2010 and December 2010? What % of the company's coal requirements are met from (a) linkage from Coal India and its subsidiaries (b) other domestic sources, including e-auction (c) imports? Considering the increase in coal cost, what is the incremental annual cost of coal?
The entire Coal used by the Company for its Power plant is imported as the necessary marine facility/ Coal Jetty is available . This is more economical than buying Coal locally and moving it to Ratnagiri by surface transport.

What was the capex incurred in the nine months ended December 2010, and planned for FY 2010-11, FY 2011-12 and FY 2012-13. How will the same be funded?
Over the next 2 years the Company plans to spend up to Rs 100 crore on setting up a 50000 MT p.a. PVC Pipes plant at Baroda in Gujarat.

What are the company's initiatives to bring down its debt and interest costs?
The Company continuously monitors its Inventory and Debtors position. Whenever possible the Company takes advantage of lower international rates of interest on Foreign Exchange borrowings [after fully covering the FX risks].

But for the huge forex derivative losses in Finolex Industries and Finolex Cables, the group would have scaled up newer heights in the past few years. What were the lessons learnt from this episode, and how it has changed the way the group manages its business operations in general, and forex fluctuations in particular.
FIL has a tradition to work as a team, and this has enabled us to overcome the difficulty and we expect the Company to continue on growth path in the years to come.

Any other message to your shareholders / our readers?
Finolex believes in giving good quality service and increasing the value of all the stakeholders.