In an interview to CNBC-TV18, Seshagiri Rao, Jt MD & Group CFO of JSW Steel spoke about the impact of the rupee depreciation and the impact on the industry if the iron ore royalty goes up.
After the Supreme Court (SC) lifted mining ban in Karnataka recently, JSW Steel says it is currently operating 14 mines in the state and its iron ore availability is approximately 14.15 metric tonne per annum.
Due to the continuous fall in the rupee, JSW may see translation losses in the P&L account said, Seshagiri Rao, joint managing director and group CFO in an interview to CNBC-TV18. The firm imports coking coal for its mining operations.
Rao further said that sluggish demand continued to bother the company.
Below is the verbatim transcript of Seshagiri Rao's interview with CNBC-TV18
Q: Could you outline what impact the rupee depreciation has and with the rupee closing the June quarter at levels of about a 59.5, what could we expect the impact in Q1?
A: There will be translational losses on companies which have foreign currency debt, but as we have been clarifying that JSW Steel economic exposure wise there is no problem. Whether steel sold in India or overseas, it is dollar linked so if rupee depreciates we will be able to get more revenues even in domestic sales so there is a natural hedge that is available. However, at the same time, there will be volatility in the earnings due to very steep depreciation of rupee that will lead to translational losses in the profit and loss account.
Q: First you said that there is this natural hedge since landed steel is also dollar denominated, but given the state of demand in the country will you be able to raise prices even if the landed price went up?
A: It is possible because the pricing in the domestic market is majorly linked to the landed cost of imported steel. If it is so then the pricing will be determined based on the landed cost. So it is possible to do that given that demand is not robust enough. The pricing methodology has been agreed for the last several years which has been followed in the domestic market. So I don't think there will be a problem in working out what is the landed cost if the rupee is at 59.50-60/ USD.
Q: The reason we are asking is we haven't got any announcements from any of you, today is July 1 and you are staring whether on a quarterly basis or on a monthly basis at a deprecation of about close to 10 percent. So should we expect some announcements today?
A: What is important to note is that the iron ore prices internationally are falling. Similarly coking coal prices in dollar terms are falling, at the same time steel prices are also falling. So when the rupee depreciates, when the international prices of steel is falling then we have to see the overall impact - how much we will be able to pass on or should pass on to the consumers. So we are working out with various user industries and the various customers so we will be working out how much would be the increase.
Q: Will you as the finance head of such a large group be preparing for greater depreciation? How is the year ahead looking to you from the kind of exposures and the talk that you are witnessing?
A: I am seeing a lot of commentary as far as the rupee depreciation is concerned, but I personally believe that whatever has happened in the last few weeks I don't think rupee deserves to depreciate so much in just a few weeks time. So if you really analyse even fundamentally, the current account deficit (CAD) per se is not bad for a country like India, which is developing and also 30 percent almost for gross domestic product (GDP) is in the form of investments. So CAD per se is not bad for our country.
Only debate is whatever CAD we had in the last two-three quarters or more than a year ago, is it excess or should we do something on the increasing CAD? Number two is how we are financing this CAD, whether it is financeable or not and whether our external debt is worrying for us. There are the three issues one has to debate, but in my view CAD when it is going a little higher, the adequate steps that have been taken, one is the petroleum products pricing as per market rates in the market. There is a very good development which brings efficiency in utilization of oil. Number two is on the gold side, there are a lot of efforts which are being taken, so these two together in my view will contribute quite significantly for reducing the CAD, going forward.
Also the correction which we had seen in Q4 of last year, it is also an indication that it is trending towards a lower CAD going forward. What is also very relevant to see is this non oil and non gold, it is not worrisome for us as far as the overall deficit is concerned. Similarly, we hear a lot of things about our external debt. In external debt also, we had USD 292 billion of total reserves and everybody talks about what are the future payments in the next 12 months time, which is a large sum then there will be a problem. However, the short-term debt which everybody is talking about this USD 92 billion with reference to USD 500 billion of imports. So if that will become zero, there will be a problem, I don't subscribe to that view at all because when we are importing we are getting six months credit not only as a company JSW Steel, but the entire country.
Q: You all have about nearly Rs 4,500 crore of fx debt. Won't any mark-to-market pass through the profit and loss (P&L), you all have chosen to take it on your balance sheet or will it reflect in the June 30 P&L?
A: There is no discretion available to the company, we have to follow the accounting standards. Based on that, whatever pertaining to the revenue we will take to P&L which we have been consistently doing, whatever is capital it will go to capitalisation. So there are two things that we have been following consistently, we will do even for the last quarter which ends in June, a similar policy which we had followed in the past.
Q: It has been close to about a 10 percent fall in the rupee in the quarter gone by. You perhaps would have calculated the mark-to-market loss that we will see on the P&L. Could you give us a rough idea what could be the forex loss?
A: We are in the process of quantifying that because we also have forex assets. Forex assets means there are some investments which have been met, so there is a positive gain on that. So net-net we have to take into account.
Q: There is also a proposal from the government to increase the royalty rate by close to about 50 percent which means from the current 10 percent of sales price they are looking to increase it to 15 percent. If that happens, what will be the impact on something like a JSW Steel and even for the industry, how do you read it?
A: There are different pricing methodologies being followed in India as far as royalty is concerned, but as far as Orissa is concerned the royalty is being borne by the mining companies, taking into account the net back price calculation. Net back means if the export what would be the realisation to the mining company that is the price which is charged to the steel companies. So if there is any increase in the royalty, it will be borne by the mining companies. It is based on international prices assuming international prices remain the same when you calculate net back what is the realisation to the mining companies. If royalty is high they will get lower realisation therefore it will be borne by the mining companies.
However, a similar principle is not followed unfortunately in Karnataka where iron ore has been auctioned. In that, the pricing methodology has been changed once the e-auction was introduced saying that the royalties and taxes will be to the account of the buyer. Therefore, there is an extra cost if royalty is increased, which at this point has been taken up both with the monitoring committee and the authorities concerned that they should follow a consistent principle across India rather than creating artificial scarcity in Karnataka and penalizing the steel companies which are located in that state, not creating a level playing filed across India.
Q: What is the actual situation now of iron ore in Karnataka, what were the prices at the latest e-auction telling you and therefore what can be your capacity utilization going by the availability of iron ore there?
A: There are 12 mines which are operating in Karnataka right now in addition to the two mines of National Mineral Development Corporation (NMDC). So the total iron ore that is freshly produced, which is coming into the market is close to 14-15 million tonnes. In addition to that as per the Supreme Court order, category A and category B mines are also to be opened and in addition to that there is sub-grade material which is also required to be auctioned. So they are in the process of completing these formalities and getting these mines opened. So in the next few months time, we expect iron ore situation to improve.
At the same time, the prices in the e-auction are higher relative to the Orissa prices and when the international prices are falling we are not getting adjusted because of the scarcity and demand for iron ore from various steel companies depending upon the iron ore and the e-auction. So prices are high in the e-auction.
Q: What about demand itself? If you looked at the way Mahindra and Mahindra’s sales have come, in Mahindra it is a toppling of 20 percent in their total passenger vehicle sales. Are you seeing a fall in demand and do they buy from you?
A: Demand is not robust, but yes auto sector is not doing well, which is why you see month after month decline in trend as far as the auto sector announcements are concerned. However in case of rural and semi-urban areas we see the construction activity still is okay where we are getting good orders for the TMT bars. It is reasonably okay but overall I don't see a huge amount of demand growth. Demand growth is very sluggish, it is in the range of 3-4 percent that is what we have seen in the market.