Expect steel consumption to rise on better demand: JSPL
Director and group CFO Sushil K Maroo said, margins in the steel division improved on the back of better product mix and its inventory rose by 4% on a quarterly basis.
Jindal Steel and Power’s (JSPL) consolidated net profit increased 2.5 percent to Rs 897 crore in the second quarter of current financial year from Rs 875 crore in a year ago period.
Its consolidated net sales rose lower than expected 4.5 percent year-on-year to Rs 4,606 crore during the quarter. EBITDA margin went down by 270 basis points YoY to 35.6 percent.
Speaking to CNBC-TV18 about the financial performance of the company, director and group CFO Sushil K Maroo said, margins in the steel division improved on the back of better product mix and its inventory rose by 4% on a quarterly basis.
"Product mix played a major role in improving the margins. Besides that, we did cost cutting and improvement of efficiency. Prices more or less remained the same, they didn’t play much part," he elaborated.
Further, Maroo expects steel consumption to rise on better demand due to slash in CRR. "Because of two consecutive CRR cuts liquidity has improved with the corporates. Project activity is picking up. With the rainy season behind, we feel that the demand will pick up and inventory level will go down going forward," he added.
Below is the edited transcript of Maroo’s interview with CNBC-TV18.
Q: The steel division turned in pretty good margins; can you take us through its performance?
A: In steel, we not only maintained, but improved our margins to 35%. That was possible because of our product mix. Palette played a major role primarily because we are selling palettes and also consuming it. Besides that, we did cost cutting and improvement of efficiency.
Prices more or less remained the same, they didn’t play much part. Some steel sale has gone up though we did inventory build up compared to the June quarter. Primarily, product mix played a major role in improving the margins.
Q: Where is the inventory situation at the end of the second quarter?
A: From the first quarter, the June quarter, there is about 4% increase, it is not much of an increase. Normally that happens in the second quarter because the second quarter is rainy quarter and it is very difficult to sell steel because the demand and the construction activity is low. Most of the projects go slow in their activities, so the demand is less in the second quarter. From the first quarter, the inventory increase is only 4% that is not very high and there is nothing much to be concerned.
In the third and fourth quarter demand picks up. In the first half of the current year, interest rate was very high. There was liquidity concern in the market. Most of the projects did not have liquidity with them; they needed steel, but didn't have money, so they were not picking up steel.
Because of two consecutive CRR cuts in the past, liquidity has improved with the corporates. There is optimism building up in the economy. Also, project activity is picking up. With the rainy season behind, we feel that the demand will pick up and inventory level will go down going forward.
Q: Your power business did not do very well; it was pulled down by softer merchant tariffs. What is the outlook for the remainder of the year with respect to merchant tariffs and the power segment?
A: I don't think there is any concern in the power business because in the second half we see the PLF falling because of the rainy season. Most of the people know that during rainy season the power companies do go for maintenance shutdown.
All our plants went for maintenance shutdown during this period, so it was expected that PLF will fall. We had a PLF of 85% in this quarter, though last year we had a slightly better PLF of 92%, but more or less it is inline with that.
In the first quarter, we had a combined tariff of Rs 3.59 and now it was Rs 3.30, so it is not a much big a fall because of the rainy season. It is always expected that the demand of power goes down and that is why we take up maintenance shutdown also. Tariff is inline, 10% fall in the tariff was expected in the second quarter in any case. Going forward, there should be comfortably better tariff than the second quarter.
Q: Can we assume that there will be no maintenance shutdown in the third quarter? How do you see the merchant power rates panning out for the second half of the year?
A: It is very difficult to predict about the power plant. Maintenance shutdown is to avoid any kind of unseen happening, but we have seen in the past quite often that because of some issues in the boiler, many a times all of a sudden there is shutdown. We don't expect, but we won't be surprised if something happens on the plant side.
The tariff going forward should remain between Rs 3.5-4/unit. In any case tariff is on a southward journey as what we have seen over last two years because of the ability of the State Electricity Board to buy power. Though the tariff has gone down drastically, which is a good thing, but still they don’t have money to buy power.
Another major factor is the transmission bottlenecks in various parts in India. In the south tariff is very high, power cannot be sent from north because power is available in north but the corridor cannot carry that kind of power. Tariff should be Rs 3.50-4/unit
Q: Any levies or fines that are being imposed by the Orissa government on iron ore mining for JSPL or the Sarda mines, can you just update us on what's going on, on that front?
A: JSPL has not received any kind of advice about any kind of fines. I cannot really comment for the Sarda mines because that is for the Sarda mines management to comment on dealing with the government and their interactions with the Shah commission.
As far as our mine is concerned in Orissa, we don't have any kind of problem. We have not received any fine letter. There are no irregularities or illegalities in our mines. If anybody asks we are ready to show all our papers and explain it to them.