Ashwin Muthiah pulls Spic back from the brink

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An article from
http://www.business-standard.com

Ashwin Muthiah pulls Spic back from the brink

T E Narasimhan | Chennai Nov 09, 2015 09:17 PM IST
Six years back, Spic was considered by many as a lost cause. The debt on its books had ballooned to Rs 3,200 crore, lenders had taken it to the courts, and its suppliers were not ready to give raw material because they weren’t getting their payments on time.

Today, not only is Spic a debt-free company, it has also signed a memorandum of understanding with the Tamil Nadu government to expand its urea plant in the state with an investment of Rs 6,000 crore. And its promoters reportedly plan to invest $1 billion in the US.
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The man behind the turnaround is 48-year old Ashwin Muthiah who took over as chairman in 2009: he pumped money into Spic, restructured its debt and sold non-core assets. “All the unfortunate circumstances are now behind us. Things are looking good and would continue to do so,” he says.

The start of the fall
But how did the company land in this mess?

Spic started life as Southern Petrochemicals Industries Corporation in 1969 as a joint sector project with Tamil Nadu Industrial Development Corporation (TIDCO) to make synthetic fertilisers at Tuticorin. At its peak, Spic had a market share of 70 per cent in urea and 65 per cent in other fertilisers (DAP et cetera) in Tamil Nadu.

In the early 1980s, it partnered with TIDCO once again to make linear alkyl benzene, the raw material for detergents (in Tamil Nadu Petro Products) and soda ash (Tuticorin Alkali Chemicals & Fertilisers).

More diversifications -some related, others unrelated – followed: petrochemicals, computer magnetic tapes, pharmaceuticals, logistics, and finance. It joined hands with Henkel to launch detergents in India.

The then chairman (and Muthiah’s father), AC Muthiah, justified these diversifications on the grounds that price controls over fertilisers limited the company’s prospects, and these investments were all in high-growth sectors. All large businesses did this, said Muthiah Senior in an interview then.

Ashwin-Muthiah-pulls-Spic-back-from-the-brink
Most of these diversifications backfired. Thus, Spic Petrochemicals, which was supposed to put up a purified terephthalic acid and polyester filament yarn project at Manali (in Tamil Nadu) took a heavy toll on its finances.

The Rs 1,500-crore project was supposed to be a partnership between Spic and Chennai Petroleum Corporation, until the Madras High Court stayed it after Chennai Petroleum Corporation went to court. The project was getting delayed due to regulatory clearances. AC Muthiah, therefore, decided to go solo but without the concurrence of Chennai Petroleum Corporation, which, in turn, took the matter to the court.

To make matters worse, the public issue AC Muthiah had planned to raise funds for the project did not happen, and consequently Spic’s liabilities began to rise.

Then there was the political factor: as Spic’s growth had come mostly when the AIADMK was in power in the state, it was hurt adversely when DMK came to power in 1996. Spic’s cash reserves were invested in companies like Madras Refineries, Manali Petrochemicals and Tamil Nadu Petroproducts- all joint sector projects. While some succeeded others did not. As a result, Spic’s debt rose to Rs 1,200 crore by the late ’90s.

To add to its woes, Spic needed to invest money to switch the feedstock at its fertiliser plant at Tuticorin from naphtha to gas.

Thanks to the build-up of penal interest rates on unpaid loans, Spic soon accumulated debt of Rs 3,200 crore (both secured and unsecured) to a consortium of 30 banks.

The interest payout choked its cash flows. As a result, the operations of the Tuticorin plant came to a halt in 2007. Spic, though its manufacturing assets were intact, faced liquidation due to financial and legal complications that ensued.

To bail out the troubled company, Asset Reconstruction Company (India) offered to acquire 75 per cent of Spic’s dues from the secured creditors, amounting to Rs 2,042 crore, for an immediate settlement for Rs 1,300 crore within a timeline. However, the settlement scheme could not be put through because Spic could not fulfil the entire obligation. Once again, Spic got the approval of the CDR Empowered Group, wherein Rs 1,425 crore was needed to be paid to the secured creditors in a phased manner as full settlement by September 2013.

Spic also sold quite a few assets, which included its stakes in EDAC Engineering (an oil & gas and chemical company), Indo Jordon Corp (a chemicals manufacturer) and Manali Petrochemicals (producer of propylene oxide, propylene glycols and polyols). The divestments fetched Rs 1,070 crore.

Besides, the promoters infused Rs 165 crore into the company: Rs 65 crore as equity and the rest as loans.

Thus, in March 2014, Spic finally paid off all its secured and unsecured creditors. Its net worth, which was Rs 1,039 crore in the negative in March 2011, became positive in three years.

Streamlining operations
Apart from financial restructuring, Muthiah also worked on the operational challenges .

An agreement with Indian Oil Corporation in 2010 for naphtha and fuel oil helped Spic to restart the Tuticorin plant after three years. After 18 months, as the Centre stopped the disbursement of subsidy to fertiliser companies due to budgetary constraints, the company’s cash flows got squeezed and there were unpaid dues to Indian Oil, which in turn affected raw material availability.

Thus, Spic’s capacity utilisation fell from 100 per cent in 2011-12 to 46 per cent in 2013-14. Muthiah then decided to import naphtha. “It was not easy to convince our suppliers,” he recalls.

Meanwhile, the ‘start-stop’ naphtha subsidy policy of 2014-15 has given way to a stable naphtha usage policy till natural gas is made available. Muthiah says Spic is now geared up to take advantage of the stable policy regime and has a clear roadmap for growth in the next three years, including expansion worth Rs 6,000 crore.

Muthiah says that once Indian Oil will start its Ennore terminal next year, there will be no dearth of gas, and because of that Spic plans to expand its Tuticorin capacity of 600,000 tonnes by two-thirds. While analysts have raised doubts if banks would give loans for the proposed expansion, Muthiah insists Spic is now in their good books.

Muthiah is also targeting a bigger pie of the urea market. Spic currently has 5 per cent share at the all-India level, while in its key market of Tamil Nadu it claims around 30 per cent market share. Going forward, Muthiah wants to double it.

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