Modi making the right noises; breakeven likely before Sept quarter: JSPL Chief
Moneycontrol met up with Uppal in his office where the man, known for turning around low-performing units, talked on what India's priorities should be, the success of Modi government, debt reduction at JSPL, public private participation and asset sales.
Jindal Steel & Power Managing Director and Group Chief Executive Officer Ravi Uppal’s repertoire is wide and deep. An infrastructure sector veteran of more than 37 years, Uppal boasts of degrees from IIT, IIM and Wharton and long occupancy at top positions in Larsen & Toubro, ABB India and Volvo India.
With such impeccable credentials, it is thus natural that a chat with him that lasts more than an hour is not just going to revolve around his current employer – he joined JSPL in 2012 – but also be a learning in economics, business and administration and life in general.
Moneycontrol met up with Uppal in his office where the man, known for turning around low-performing units, talked on what India's priorities should be, the success of the Modi government, debt reduction at JSPL, public private participation and asset sales. Edited excerpts:
As a country and an economy, what should be India’s priorities?
We may mourn the fact that we have not grown to the point that others have done -- the Japs, the Americans, the Europeans. But at the same time, we should have a sense of glee that we still have so much more to do, which others don’t have. I think we should take a desired view that we are busy, we have a lot to do. We have so much to do to lift the standards of people’s living.
Look at your per capita consumptions -- they are a fraction of what the global averages are. Whether you take electricity, steel or you take any commodity. And, you know, sometimes we are talking very loftily but we haven’t met the basic needs of our people.
We have people using the most modern iPhone but we forget we have about one-thirds of our population living without a proper roof over their heads and who don’t get a square meal, who don’t have a cloth to cover their person.
The industry is saying we should go for a highly engineered segment, technology-oriented products. A fourth revolution is coming or shall we go for low-cost products. I said, What choices are you making? You got to do both. You know, you have to do the first one so that you don’t become irrelevant and disconnected from the world. You’ve got to do the other because you have to meet the basic needs and aspirations of the people.
India has to define its own needs and requirements and accordingly a strategy of growth. We don’t have to blindly emulate the western world or the third world. We have to move out from under the shadows of both of them and carve out a path for our own selves and I am very excited about India. I think we are in a sweet spot.
How would you rate the Modi government on steps taken so far?
The Modi government, of course, is addressing issues. I think this is the first government which has really held the bull by the horns. At least they have identified all the areas we need to address. Whether it is about skilling India, digitizing India or building smart cities or building the infrastructure. Now, the question is how fast we can really execute those intentions.
Why is private investment in infrastructure projects not picking up?
Private industry, for multiple reasons today, is not in that frame of mind. They don’t feel secure in making investments of mega bucks. For a million-tonne steel plant, it takes an investment of USD 1 billion. A thousand mega-watt plant costs you USD 1 billion. A billion is a lot of money and any promoter who has to come in puts in 15-20 percent of his equity.
How many guys in this country have USD 200 million in cash with him and if he has cash, he wants security. At the end of a 3-4-year project, he doesn’t want to be told that there is no demand for your product. So he is doomed. Therefore, today, we have a kind of a paralysis. Private sector is so over-leveraged in debt.
They have not been able to get the returns and the net outcome is that they don’t have the wherewithal to spend any more money. I think that’s where we are a little bit caught.
What should be done to bring back private sector in infrastructure?
Money is hard to come by, especially as these projects are vulnerable because of the gestation period involved.
We as a company are in the core sector. Whether we do steel, we do power or we do mining or construction, all of them are long-gestation projects. I think the government has to really back up these sectors.
They should put checks and balances, put their people who oversee the investments. It’s a good collaborative model. They have 40 percent, other people have 60 percent and 3:2 board of directors -- one can be MD, one can be Chairman.
Whether it is PPP or a collaborative model, it's very important for the growth of infrastructure in this country. That’s the way we think. At JSPL we very much appreciate the policy the present government is following because we think they are raising the right issues and making the right noises.
I am of the view that if you want to invest in all capital-intensive sectors, you must follow the hybrid model. You find out the promoters who are capable of doing it. Check on whether you have a need for it. Thereafter, you say 60 percent is your equity, 40 percent is ours.
And, we will undertake the debt guarantee programme which you need. They sit on the board of the company. Let the private sector manage it. So you combine the resourcefulness of the government with the enthusiasm, exuberance and the speed of the private sector. That hybrid model is very important.
How do you see steel prices in the coming quarters?
The thing is the steel market has been very fluid. Prices are influenced by demand and they are also influenced by input material. Coking coal went from USD 85 to USD 330 and now to USD 135. It had a profound impact on the total cost of steel production and consequently the prices.
Then, iron ore has also been very fluid. Iron ore prices have been increasing; pellet prices have been increasing; then they started to fall last week. It has been erratic. We should tune the policy. We will try to see that we keep our conversion costs to the lowest and then it will be predicated on all the prices of raw materials. That’s how it will be.
How much of your demand for coking coal and iron ore are you importing?
The whole lot of coking coal, more or less, is imported; whether it is imported from JSPL’s own mines or a third party, it is fully imported. Everybody imports. When it comes to iron ore, it is 100 percent local. Thermal coal is all local. We import only a very small percentage of thermal coal which is required for the coal gasification plant but the rest of it we source locally.
After 8 quarters of losses, when can we expect JSPL to start reporting profit again?
Last quarter (October-December) was a turnaround quarter. I think we are starting a new trend. The upward journey started from the last quarter. God willing, we should be following the same track quarter after quarter. We hope to break even soon. It could happen even earlier (than September quarter). It depends on prices in the market vis-à-vis costs etc. From our side, we are making every effort to see that JSPL turns around very quickly.
How's the progress on debt reduction? How do you plan to bring it down?
We have completed 5/25, which was there for both power as well as for steel. It went through but it covered a small portion of the total debt that we had. We still have a much bigger piece of debt.
And now of course things have started getting better. I think in future we should be able to sustain ourselves. May be small divestments here and there, some structural changes. Our main agenda is going to be reduction of debt.
Refinancing option is always there. We have lived with high-cost debt in the last couple of years. We are still paying 10.5 to 11 percent in debt-servicing costs which is a huge burden. We will now obviously like to keep our options open on refinancing. As the interest rates are tapered down, as we get into the investment grade in the next couple of months, I am sure the financial institutions will once again offer us low-cost debt.
The company will obviously try to go for a much higher EBITDA. Our EBITDA actually came down quite dramatically in the years of crisis. We would like to see that we double our EBITDA in the next one or two years and we will reduce our interest costs. Whatever saving we have from EBITDA which is called your PAT, so PAT plus depreciation is the amount that you can use to return your debt. Depreciation plus PAT is your debt servicing. And we are going to use the amount for repayment of debt.
Our basic target is that in the next three to four years’ time, although all efforts will be on, we should be in the range of Rs 25,000-Rs 30,000 crores which is affordable debt.
You talked about divestments. What are the assets you could look to sell to cut down your debt?
We will clean up the portfolio. If there are any assets that are there, we will try and get out of them. It is very difficult to say. We have sold off some wind assets. We had some market security investments; we sold off those. And power assets. Big one. 1000 MW. That we sold.
We will never sell any part of our core assets and we will never sell anything that we don’t think is getting the value we deserve. Sometimes people think if the company is in a crisis, it might be doing slump sale. We are not doing that. We have made huge efforts to build our assets. They are highly productive assets, world quality, world class assets; we will never sell them at a slump price. Never.
If your core asset includes power, then why did you sell off a 1,000 MW plant?
At that point in time (at the time of selling off the 1,000 MW asset) we had some financial compulsions that we had to meet; I told you that we never wanted to become an NPA. We had to make sure that we keep our heads above the water and sometimes under stress you do take a decision, which you would not take normally. We had to. We are possessive of our power assets. We think they are great assets but at that time we had to honour our commitments. We are on the uptrend. Why should I sell (any power asset now)?
You have mining assets in several foreign countries -- Australia, South Africa, Mozambique. Could they form part of your asset divestment?
We also have mines in Cameroon; we have iron-ore mines in South Africa; we have the coal mines in Indonesia. We have mining assets at several places but only three assets are being commercially used right now. The Australian one, the one in South Africa and the one in Mozambique.
As the demand perks up, we will also look at other assets. It depends on the market and how it behaves. Anything where we can get more value by using the mineral out of these mines, we might retain them and use it. If we feel that we will get a better valuation outside our own mines, then we sell it. So I think it is very difficult to take a position. So many factors depend upon the options you get in the market at a point of time.
We have a mine; we have got a 500 million trillion iron ore mine in Cameroon. It's not operating. as iron ore prices had fallen to such a low level, it didn’t make sense for us to start when the iron ore was available. The future of those mines will depend on market conditions and how the markets move.
What’s going to be your capex in FY18?
We have cut down on capex. We are at the tail end in Angul (Odisha). I would say it’s a fraction of what we have been doing in the past. It’s going to drop to a trickle in the years to come. Only efficiency, cost improvement projects will be there. You know, small projects with a big yield. That would be a big stress going forward.
Can you give some examples of such low-cost, high-yield projects?
At our Oman plant, a part of the pellets which it needs comes from India; there are pellets we buy from Brazilians or from a company in Bahrain. There is a strong case that we should, may be, set up our own pellet plant, next to the Oman steel plant so that we can produce it ourselves rather than buy it from outside at a premium. These are the options.
In Angul, they are going to bring iron-ore and also the iron-ore fines and pellets from outside. May be they could come from our Barbil plant which is about 400 kms by track and so forth. It makes eminent sense for us to set up a slurry pipeline from Barbil to Angul plant.
Today, it costs me Rs 800-Rs 900 per tonne to send iron ore and fines by train. If I set up a slurry line, my costs per tonne to bring [them] to Angul from Barbil is Rs 80. I save Rs 700 per tonne.
How is the current product mix between flat and long products at JSPL?
We have gravitated more towards long products whereas our other players have gone towards flat products. We believe when the country’s infrastructure is in the making, it needs more long products.
And when the country is developed, it requires flat products because flat products are used more in automotive units and electrical industry. Whereas, you know, all the roads, the buildings, the railways -- they all need long products. We gravitated more towards the long products.In terms of the turnover we have 60-65 percent of the long products, and about 35 percent in flats. It may change over a period of time because, you know, downstream we can always add some units if required. And as India becomes more developed, we might also put up here some flat product lines downstream. Mills. Steel we have. Crude steel, finished steel. We have slabs and billets. We can use them to produce what we want. Long products or flats products.