Hoping to bring down its interest costs, Seshagiri Rao, the joint MD and group CFO, JSW Steel tells CNBC-TV18 that the company will take the ECB route with the conversion option to raise USD 275 million.
Hoping to bring down its interest costs, Seshagiri Rao, the joint managing director and group chief financial officer, JSW Steel tells CNBC-TV18 that the company will take the external commercial borrowings (ECB) route with the conversion option to raise USD 275 million.
Have you read: JSW Steel to raise $275m via ECB route, stock down 2%
Below is an edited transcript. for more.
Q: What kind of instrument are you leaning towards? How much do you want to raise and by how soon?
A: The FCCBs which we had raised in 2007, it is due for payment in June 2012. We had earlier raised USD 275 million. So we are looking for refinancing of these FCCBs. We have tied up by way of ECBs with a convertible option. It is a new instrument. Generally ECBs are raised without the conversion option or conversion option is only in the case of a default. But taking into account the dollar liquidity in the international markets and also the pricing, we are raising this amount by way of a new instrument - ECB with conversion option. So that is close to USD 275 million, USD 200 plus USD 75 million as a green shoe option.
Q: At this point, what kind of rates does this ECB come with? Does it impact your interest costs? If you do choose to convert what kind of dilution could it lead to?
A: The earlier FCCBs we had raised at YTM of 7.25% per annum whereas the ECB with conversion option we are planning to raise 4% over LIBOR. So even if I do the five-year swap, the overall cost works out to around 5.1-5.2%. So relative to 7.25% it is cheaper, the raising of this money and the conversion price 10% over the floor price is working out to Rs 892. So overall, cost wise it is cheaper. If the conversion happens, the dilution will be close to around 6.55%.
Q: There has been some uncertainty from the Supreme Court with regards to what exactly may happen on the iron ore ban. Are you expecting to hear a final word on Friday? What is the companyís stand at this point?
A: We are eagerly waiting for the Supreme Courtís verdict on this because the CEC has already submitted their report and recommendations. They have classified the mines into various categories and certain mines where there are no irregularities. They have recommended opening of those mines subject to certain conditions. As and when the next hearing happens, we are hopeful that at least the category of mines where there is no illegality will get opened up.
Q: Prices have been cut by your company and some of your larger peers have actually indicated that they are facing some pressure in the domestic market itself. For this calendar year, what kind of price range are you expecting to see? How might that impact realisations?
A: Internationally, the prices have gone up relative to what it was in the last quarter. At the same time, the rupee has appreciated from Rs 53 to around Rs 49-50 range. Therefore, we have not increased the prices in the domestic market this month. But taking into account the kind of shutdowns which are happening across the world in the steel sector, marginal cost producers are not able to continue production because raw material prices continue to be high.
So the production next year is expected to be moderated in the current calendar year or the next financial year. Taking that into account, the downside to the prices is very much limited. Coal prices continue to be higher than USD 200 per tonne. So if it is USD 200 per tonne plus. I donít expect steel prices really to come down from current levels.
Q: So what would be an average range for realisations in that case?
A: International prices are in the range of USD 630-650 per tonne today. The current price which is in the domestic market with 5% duty protection is available. So I donít expect prices to look up.
Q: Debt levels still remain quite high and JFE Steel a couple of weeks back raised some stake in your company. Now that they have the headway to go all the way up to 25%, is that an option that you may consider in order to bring in higher participation from them and perhaps more cash as well to de-stress the balance sheet?
A: Today, the balance sheet of JSW is not stressed at all. If we look at the overall consolidated debt as on December 31, it was 1.08:1. This is taking into account the FCCBs which we raised as debt only. So balance sheet wise we are quite okay.
We have 11 million tonne installed and an operating capacity as part of JSW. We donít need any additional equity to come into the company. As per the current agreement with JFE, their overall equity holding is restricted to 15%. They have recently enhanced only to reach the 15% threshold. Otherwise, there is no plan today that JFE will increase their stake in JSW beyond 15%.
JSW Steel stock price
On July 31, 2015, JSW Steel closed at Rs 837.60, down Rs 9.8, or 1.16 percent. The 52-week high of the share was Rs 1365.35 and the 52-week low was Rs 801.00.
The company's trailing 12-month (TTM) EPS was at Rs 57.75 per share as per the quarter ended June 2015. The stock's price-to-earnings (P/E) ratio was 14.5. The latest book value of the company is Rs 1030.07 per share. At current value, the price-to-book value of the company is 0.81.
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