Cumi delays Russian expansion plans by 6 months on power cost woes

CHENNAI: Carborundum Universal ( Cumi), part of the $4.4 billion Murugappa Group, has decided to delay its Russian expansion plan by six months, hit by a 16% increase in power cost there, a top official said in an investor call.

The industrial abrasives maker had bought an 84% stake in Volzhsky Abrasive Works (VAW), Russia, for Rs 148 crore in 2007, which made it the second biggest producer of silicon carbide in the world.

The project that's been postponed now is a Rs 250 crore plan, envisaged in 2008, to build 100,000 tonnes of new silicon carbide capacity (to add to the existing capacity of 750,000 tonnes).

"The 16% power cost increase in Russia from July is way beyond our expectation and unacceptable. So, we have delayed our expansion by six months and see what happens, as there as been an Industry-wide protest and we are hoping for a partial roll back," said Cumi's MD K Srinivasan in the call.

Though the current price of 1.74 rubbles per unit (or Rs 2.9 per unit), he said, is lower than the Indian power cost, and hence profitable, the hike has affected capital plans and hurt the cost advantage.

According to a report by Kotak Institutional Equities, power cost is the largest expense item for VAW Russia and is 30% of sales. It forecast that a 16% increase in power cost would impact the Russian unit's Ebitda by Rs 20 crore annually.

"It is a worrying trend and a further increase in power costs could create structural issues for VAW as the whole business is built on availability of cheap power in Russia, which makes it one of the lowest cost producers of silicon carbide in the world," it added.

To an analyst query on what will happen if the cost increase is not rolled back, Srinivasan said the company might decide against increasing further capacity at VAW. Kotak has said it isn't hopeful of a roll back.