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In an interview to CNBC-TV18, Seshagiri Rao, Jt MD & Group CFO, JSW Steel spoke about the increase of prices and debt level.
JSW Steel , which operates a 10 million tonne steel plant at Karnataka is planning to hike steel product prices by 3-3.5 percent in current month following rupee depreciation, hike in international steel and iron ore prices, Seshagiri Rao, joint MD & Group CFO, JSW Steel told CNBC-TV18.
Market was disappointed with the increase in the company’s debt level at the end of June quarter. It reported net debt of Rs 29,200 crore. Rao explained that expenses and rupee depreciation had pushed up overall debt. JSW Steel’s foreign currency debt currently stands at Rs 12,000 crore and rapidly depreciating rupee, which today hit lifetime low of 61.59 against dollar is going to create further trouble for the company.
The company continues to face iron ore scarcity at its Vijayanagar plant in Karnataka. “Only 12 mines are operating, there is no adequate supply of iron ore to meet the industry requirement. We are trying to bridge that gap by procuring part of the quantity from outside Karnataka, still not able to improve capacity utilization to 100 percent,” Rao said. It plans to procure 2.5-3 million tonne ore from outside Karnataka.
JSW Steel hopes to improve profitability in the last quarter of current financial as it will commission a pellet and coke oven battery plant at Dolvi unit in November and December respectively.
Below is the verbatim transcript of the interview
Q: What disturbed the markets most about JSW Steel was the rise in debt despite the fact that not much has been spent on capex - can you give us some details as to why debt rose so much?
A: If I really look at the debt levels on account of merger of JSW Ispat with JSW Steel in the quarter, the debt gross level is higher. Net debt was Rs 29,200 crore. But if one looks at the debt equity ratio is we were at 1.38 debt gearing; for 14.3 million tonne steel company this debt gearing is not very much to be concerned about.
Q: It is not the debt equity ratio that I was talking about from the pre-result reports that we had got people were prepared for Rs 25,000 to Rs 26,000 crore of debt. It was the June end debt coming in at Rs 29,000 that appears to have disturbed the market especially because I think that the capex that you spend was about Rs 1,000 crore- Is this because of rupee depreciation that the notional value of your foreign debt rose or is it inventories what has caused this increase?
A: Basically if I look at it on a proforma basis, if one looks as on June 30, the debt was Rs 25,700 crore; compared to that the debt has gone up. We have to take into account expenditures for all these nine months period which we have been spending. That is one area which we have to look at it.
Second is, yes rupee depreciation that also pushed up the overall debt. These are the two major reasons otherwise there is nothing else where additional debt has been raised by the company to capex or anything else.
Q: We have seen some marginal uptake in global steel prices now plus the rupee at 61.57 all the input cost have gone up what is the update with respect to increasing domestic steel prices because you haven’t done that in the last six months. How much would you consider looking to increase your domestic steel prices by?
A: Domestic steel prices have tracked the landed cost of imports, rupee depreciated and also internationally, prices in China particularly started looking up. Also cost wise, if one sees the iron ore prices have firmed up in the international markets, scrap prices firmed up. So taking into all this into account in order to see that the domestic prices continue to be in line with international prices and the cost and rupee deprecation is passed on, we have started discussing with various customers to increase the prices from August 01. We are planning to increase the price by around 3-3.5 percent over last month.
Q: Will you be able to manage that because you did have a problem of inventory?
A: We started reducing in this month, we have already reduced one lakh tonne in the month of July so whatever accumulation of inventory was there as of June 30, that we are disposing off in this quarter. I don’t think there is a problem as far as inventory is concerned.
Q: What is the current inventory?
A: There was two hundred and ninety thousand tonne inventory accrual in the last quarter out of that hundred thousand tonne we have already reduced, another hundred thousand tonne we are reducing in this month. We wanted to come back to March 31, level by end of this quarter.
Q: Given the fact that iron ore supply is tight in the Karnataka belt is there a possibility that JSW Steel may need to source ore from other places in FY14 to bridge the short fall and that perhaps might increase our cost?
A: This is an area which we have been representing to the Karnataka government and also other concerned government agencies to expedite opening of category A & B mines following the Supreme Court order- only 12 mines are operating so there is not adequate supply of iron ore to meet the industry requirements in Karnataka. There is a short fall as on date so we are trying to bridge that gap by procuring part of the quantities from outside Karnataka and also to procure sub grade material from the e-auction so both together we are able to manage but still not able to improve the capacity utilization to 100 percent.
Q: If you source it from other places will that increase your cost?
A: Cost of procurement of iron ore will go up once we start procuring outside, but it is not possible to procure entirely. Only partially it can supplement our requirements, because there is no logistics available to get the entire requirements of Vijayanagar plant from outside Karnataka.
Q: When you mean partially how much will you need to source from other places and how much will the cost go up by?
A: It is not exactly possible to quantify the increase. What happens is when you get from outside, the quality of iron ore is much better, whereas in Karnataka the quality is not that good. Therefore, you have to take into account the total cost of iron ore taking into account the difference in quality. So it is not easy to quantify the exact amount of increase, but what we can get from outside Karnataka is approximately 2.5-3 million tonnes per annum.
Q: Can you give us some guidance on what will be your volume expansion in the current year?
A: We have already given the guidance. We said in this year we will be producing crude steel production of 12 million tonnes. It is a growth of 7 percent over last year. So that is the guidance. We will be able to achieve that. If I see the first quarter we had achieved 23.5 percent of our guidance. We will be able to make up that 1.5 percent shortfall in the Q1 in next 9 months.
Q: It is not the ability to produce as much as whether you would want to produce given the weak demand conditions. What might be the total volumes you will want to produce in the current year?
A: Even here we have given the guidance of sales. We said sales volume will be 11.55 million tonnes. We are on track. We will be able to achieve that. JSW Steel has unique strength in terms of the reach to the customers, particularly the retail. We are selling 25 percent of our sales to retail. We are also exporting. Our exports in the last quarter were higher. We are continuing to put part of the quantities in the international market, particularly value-added products. So we have an ability to sell whatever we produce.
Q: You are expecting your pellet plant and coke oven batteries at Ispat to be commissioned next year. How will your margins in current year and in FY15 pan out?
A: This is a big upside as far as JSW Steel is concerned, the turnaround in JSW Ispat which is now part of the JSW Steel Dolvi unit. We have initiated 6 projects there, out of that 3 projects have already been commissioned. Another 3 projects are getting commissioned in this year. So in the month of November 2013 we are commissioning our pellet plant and coke oven battery in December 2013. These two items which are very critical for production of steel, they are getting procured today from outside. It will be captively available once these two projects are commissioned. So this will give a huge jump to the profitability of the Dolvi unit. This turnaround will happen this year and in last quarter of this financial year we will see the full benefit of this expansion which we are doing at Dolvi unit.
Q: The rupee is almost at 61.57 as we speak. Can you give us some shorthand way of calculating what might be the upside to your debt? Every rupee increase in the dollar increases your debt by how much?
A: Overall debt-wise if I see 39 percent of our total debt is in foreign currency, so we have Rs 30,000 crore of gross debt, out of that Rs 12,000 crore is foreign currency debt. That Rs 12,000 crore translates to USD 2 billion. USD 2 billion means every Rs 1 increase will translate to Rs 200 crore.
JSW Steel stock price
On March 11, 2014, at 10:59 hrs JSW Steel was quoting at Rs 942.10, down Rs 28.95, or 2.98 percent. The 52-week high of the share was Rs 1046.75 and the 52-week low was Rs 451.50.
The company's trailing 12-month (TTM) EPS was at Rs 45.75 per share as per the quarter ended December 2013. The stock's price-to-earnings (P/E) ratio was 20.59. The latest book value of the company is Rs 811.51 per share. At current value, the price-to-book value of the company is 1.16.
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