How is Re depreciation marginally positive for JSW Steel?

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See latest News about JSW Steel See previous management interviews See what other Experts & Brokerages are saying about JSW Steel JSW Steel BSE | NSE 28/05/12 Are Mutual Funds betting on JSW Steel?

It has been a tumultuous year for the rupee. Deteriorating Indian fundamentals have added to the weakness in our currency. The depreciation of the rupee also meant that Indian companies that had borrowed overseas through External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs) would face pressure on repayment.

In an interview to CNBC-TV18, Seshagiri Rao, the joint managing director and group CFO of JSW Steel has said his company is not exposed to the risks of currency fluctuations.

"Our economic exposure is in dollars. Our sales in India which we do in the domestic market are all dollar linked. So considering economic exposure whether the dollar appreciates or depreciates, my sales realisations are linked to landed cost of imports," he says adding that the depreciation in the rupee is marginally positive for the company.

He also said that their FCCB's which are due in June of 2012 will be paid by internal and external resources.

Below is an edited transcript. Watch the accompanying videos for more.

Q: On your FCCB position, how much did you buyback? How much is left to be paid off?

A: We have issued USD 325 million worth of FCCB's in 2007. Out of that we have already bought back USD 50 million in 2008. So what is left today of the outstanding FCCBs is USD 274.6 million. This will fall due for payment only in June 2012. This amount, we'll be able to pay out of our own resources or we'll be able to make arrangements to see that this amount gets paid.

Q: Are you saying that you are covered for the repayment of this balance FCCBs?

A: No. We are not covering as far as our foreign currency exposures are concerned. If you see JSW Steel's balance sheet, our economic exposure is in dollars. Our sales in India even rupee sales which we do in the domestic market are all dollar linked.

So considering economic exposure whether the dollar appreciates or depreciates, my sales realisations are linked to landed cost of imports. We are not exposed to the risks of currency fluctuations. There will be translation losses which will be hitting the P&L in one single quarter but that will be covered by way of extra realisations going forward by way of higher sales realisations.

Q: Is the net-net rupee depreciation positive or negative for you or is it no impact at all?

A: It may be marginally positive if we take the overall time horizon but in one single quarter where there is a huge amount of volatility, the P&L gets impacted. That is why we have always been communicating that it is only a translation loss which will get reversed either by way of exchange fluctuation or by way of a higher realisation.

Q: What is your debt now? What do you think it will actually rise to in 2012 and 2013 in order to meet your capex plans? How will your interest cost pan out for FY13?

A: As on September 30, 2011, we had a debt of total Rs 18,500 crore on a consolidated basis. This includes the FCCB's of USD 274.6 million. If it is a consolidated debt of Rs 18,500 crore our weighted average cost of debt is only below 7%. The total interest cost per annum is only Rs 1,300 crore on a consolidated basis for us.

We have no problem in servicing our debt because we have a very strong balance sheet and a networth of Rs 17,000 crore. We don't find any issues either in raising further money in the market to meet our capex programme or to meet whatever debts that will fall due for payment in the next year, including FCCBs.

Q: How much iron ore have you managed to actually pick so far from the e-auction?

A: E-auctions have been happening regularly as per the directives of the Supreme Court. That's why JSW steel could get close to 7 million tonne of iron ore so far in the e-auctions. Out of that, approximately 3.5 million tonne arrived at the plants. We are operating our plants right now but the point remains is that the total amount of stocks that are available for e-auctions are getting exhausted. So out of the total 25 million tonne, 16 million tonne has already been auctioned and out of that 11 million tonne has been sold.

So taking into account the balance quantity of iron ore that is available for auction out of the stocks getting exhausted. Therefore, there is a need in order to continue the production for steel companies depending upon iron ore in Karnataka. New mining has to be done, new iron ore has to be produced only then sustainability of operations will be there.

Q: According to you, your current inventory will last for how many days going forward?

A: Not days because 25 million tonne out of that 11 million tonne is already sold. The balance left out is 14 million tonne. Another 4-5 million tonne of stock is available to meet the industry needs.

Q: What is your capacity utilization this quarter? Can you give us some guidance as to the capacity utilization that may be possible in the next quarter?

A: Capacity utilization improved from November. In November, we were working at an average of 68% but going forward it is very difficult at this stage to give a guidance as to what the Supreme Court would do, whether they would do mining or not. New iron ore out of the new extraction of the ore is essential in order to have sustainability of iron ore supply. It is not possible from the existing stocks to supply the ore to the industry. It will be only maybe in the next five-six months time.

Q: You had lowered your outlook guidance from 8.75 million tonne in the current year to 7.5 million tonne - do you want to stick to that guidance or would you want to make a further revision?

A: Based on the e-auctions which are happening right now 7.5 million tonne should be possible. We'll be able to get that but beyond March 2012, it is essential that new iron ore mines be allowed to operate. We hope new iron ore will come into the market. If it comes, things will be all right for next year.

Q: In that case are you in touch with the government on this iron ore position or have you just left it to the courts and hence the situation is so uncertain?

A: No. So far the Supreme Court has been giving relief by way of e-auction and by way of allowing NMDC to produce 1 million tonne per month and give it to the industry and not to export iron ore from the state of Karnataka. So, adequate relief has been given to the industry. We are very hopeful that new mining will be allowed at least in the clean mines.

Q: You were expected to start construction of the Bengal plant in December. Have you begun that?

A: We are expecting certain approvals and clearances. We are very much committed to the Bengal project. We will take it up once the approvals are in place from the government.

Q: What exactly is the timeline or the dates when all the clearances will go through and construction will actually start and pick up?

A: No, we have been working on the clearances. Today, if we have to receive any environmental clearances, it will take a little longer time so we wanted to have all approvals in place before we start the project. In the meantime, we are working on developing coal mines and preliminary work, taking possession of land and constructing the boundary wall and negotiating with the supplier. So a lot of work is being done.

Q: Detail out your entire capex plan for FY13? When will all these expansions then come on-stream for the company?

A: Today, we are an 11 million tonne steel company but because of the lack of iron ore, we are only producing 7.5 million tonne this financial year. When 11 million tonne total capacity is there, we will be able to produce full in the next year subject to iron ore supply getting normalized. A very good situation will be there next year. In addition to that, we are expanding this capacity of 11 million tonne to 13 million tonne, another 2 million tonne at Vijaynagar which is in advanced stage of implementation.

We are also getting into value added steel products where we are setting up a 2.3 million tonne of CRM or Coal Rolling Mill capacity. We have placed the order, tied-up the funding and have opened LCs. A lot of work has been done in that connection. That way we are working on expanding capacity and also in moving in the value chain further. This will improve our margins over a period of time.

We have also entered into a service centre joint venture with Marubeni-Itochu Steel Inc which will also take-off in the next year. Overall, we are planning to spend close to Rs 5,000-6,000 crore of capex in the next year.

Q: How do you expect iron ore prices and steel prices to pan out at least in the first half of 2012?

A: We are seeing a correction downward in iron ore prices internationally. Mainly the demand from China is slowing down which is resulting into a correction in iron ore prices where we have seen a peak of almost close to USD 190 per tonne last year. This year, we have seen lowest levels of USD 125. Now, it is in the range of USD 135-140 per tonne. I don't think a big change in iron ore pricing but maybe a slightly downward trend in iron ore prices in the next year.

Why we are saying so is that the Chinese economy is slowing down so steel production is already down in November from a peak of 60 million tonne. We saw a production of 49.8 million tonne, 10 million tonne in a single month lower production in China. 10 million tonne will translate to almost 16-20 million tonne of lower iron ore demand from China.

Therefore, the iron ore prices which have gone up quite substantially in the last few years are mainly driven by demand from China. At the same time, additional supplies of iron ore coming into the market. I do not expect a very big upside in the iron ore prices even in 2012.

At the same time where coking coal is concerned, the prices have not corrected in the same proportion as iron ore because the total availability on the supply side from coking coal is restrained. The coking coal prices continue to be stable for the next year. Iron ore we will see a slightly downward bias - so these are the two things which we are seeing.

The steel prices for the next year overall in the world economy is expected to be slowing down. There may not be a significant growth. In that context there maybe stability in the steel prices, the production will be down for the next year. The trend we have already seen in the month of November where the world steel production has come down from 129 million tonne to 116 million tonne so 14 million tonne of lower production in one single month is an index which will span out in the next year. So lower steel production, stable steel prices, lower iron ore prices and a stable coking coal price is what we see for the next year.

Q: There was a lot of talk about you going to acquire some coal mines abroad. Can you update us when and where are things finalizing?

A: We are increasing our production in the existing coking coal mines we have in the US. We will be increasing production. We are starting coking coal production next month. With that, we will enhance production to 1 million tonne at least next year which is what we are aiming for. We have not really zeroed down on any coking coal acquisition which we can share right now.