Sajjan Jindal on rationale behind JFE Steel deal

Tata bought Corus a few years ago. More recently, Uttam Galva signed up with Arcelor Mittal through a stake sale and now JSW has entered into a strategic partnership with Japan's third largest steel company––JFE Steel.

In an exclusive interview with CNBC-TV18, Sajjan Jindal, Vice Chairman and Managing Director of JSW Steel, spoke on the nature and rationale of this partnership and where it is headed.

Below is a verbatim transcript of the exclusive interview with Sajjan Jindal on CNBC-TV18. Also watch the accompanying video.

Q: Can you share with us more details of the rationale behind this strategic alliance. What is it going to bring on the table for JSW?

A: JFE is one of the world's largest steel producers, especially, of very high quality of steel producers supplying to the automotive sector in Japan and world over. As India’s production of automobile increases over the coming years, already automobile is growing 20–25% a year, they are keen to come into India to produce this high quality, high end product. We have been related or connected with JFE for last many years now in improving our performance and benchmarking with them. So we are in this agreement that we have done today is we are expanding our canvas and we are bringing them on various fronts but the main focus is to produce high quality automotive grade steel for the outer body parts, so forth.

Q: I understand the collaboration is limited to the domestic market. How will it pan out because you have aggressive expansion plans in terms of capacity? You want to go up to 11 million tonne by 2011, and possibly 30 million by 2020. So is JFE going to be a partner in some of these expansion plans, for instance, your plants coming up in Jharkhand and West Bengal? How is the collaboration going to work on ground?

A: As of now, our major focus is on the technical aspect of the two companies but also we are looking at having a stock swap where we will hold some part of JFE and they will hold some part of JSW Steel equity. Therefore, all future expansions whatever will happen, the JFE will be a part and parcel of those expansions. There could be a possibility also when we develop these projects as SPVs in Jharkhand as well as in West Bengal that they come in as a larger equity contributor in those projects.

Q: What you are saying is it is a larger equity contributor specifically in each one of those projects which you are structuring as SPVs, is that correct?

A: That is correct, larger in the sense not the majority but more than what they would be able to do it in JSW Steel.

Q: Let's talk about the equity swap. Can you give us some sense of the timeline, the broader equity swap between the two companies, are you close to any kind of change now immediately, what kind of stakes or percentages are you talking about, what is the timeline?

A: We haven’t yet finalised any of those numbers. We haven’t even discussed yet about what kind of numbers they are going to invest into our company. We will invest into their company. These are very initial days, early days and what we have done is that we have set up two strategic teams for respective companies and in the coming days they are going to meet in Japan and in India. We will take forward various issues, including technical as well as equity. But I cannot give you any timeline because these things could take long time but right now I am not sure where and when this will happen.

Q: Is it safe to say that this will probably occur in the next 6–12 months or is it a longer timeframe, may be 2–3 years?

A: No, it should happen earlier than that because both of us want to bring in the two companies closer together faster.

Q: So when you say earlier, do you mean earlier than six–twelve months or earlier than two–three years?

A: No, earlier than six–twelve months.

Q: Your promoter holding in JSW is around 45%. How will you structure the equity swap? Will there be a promoter stake sale involved as well or will it just be the company, that is JSW issuing shares in exchange for JFE Steel’s shares? What will the consequent dilution be? How much of a dilution below 45% promoter’s stake are you comfortable with?

A: I don’t think I am concerned about promoter stake into the company. My major interest is to see that JSW Steel becomes one of the best steel companies in the world and to that goal whatever is needed will be done. So I am not going to be the stumbling block in the growth of JSW Steel but while I say that I must add that l don't think that would be needed, we don't need to dilute our stake to take JSW Steel to the world beater.

Q: I wasn't even indicating that you might be some kind of stumbling block. I was asking what level you are comfortable with, because you would not want to expose JSW to some sort of a hostile takeover right? What I was trying to understand is, is above 40% a level you are comfortable with or you would be insistent on or are you willing to go all the way down to 26% or 30% because that would help us understand the magnitude of the dilution that is facing us in the next three–six months as you pointed out.

A: I haven’t thought about what level we will go down to or what is going to be the situation. We haven’t yet figured out. What is my comfort level, I don't know as of now but yes 40% could be a comfort level. I don't know.

Q: So when you say that there is going to be an equity swap between JSW and JFE that indicates that the two corporate entities will be exchanging shares in each other. As in JSW will issue shares to JFE and JFE will issue shares to JSW. So the structure doesn't involve a promoter stake sale of any sort, although there will be a consequent dilution in promoter stake, am I understanding this correctly, I just want to understand the nature of the transaction.

A: Yes, that's correct, absolutely.

Q: You did mention that the primary objective is to strengthen your offering in the automotive steel business. Can you give me your assessment of demand in that industry because that industry has been substantially hurt in the last two years, at least, in the developed markets like Europe and the United States (US)?

A: Very interestingly, the Chinese market, which is growing very rapidly this year is going to become world’s largest automobile producer at about 10 million units of automobile and Japanese are very excited about India because they believe that the next big market is going to be India in the automobile sector. They are very convinced about it. This year India would produce close to 2 million automobiles in our country. They feel that this is the market which we need to enter right now because we are just about entering because China produced 2 million about five years ago and in five years they have reached from 2 million to 10 million. So they believe that India may not expand at that pace but it won’t be very much behind China.

Q: One quick last question then that is your outlook on steel prices and demand. Are you seeing a real pick up in demand because till now we have heard that the price upward movement that took place was because of inventory re-stocking. Are you seeing a real economy pick up or demand catch up both globally as well as in India?

A: Globally, markets are not very strong or robust though the capacities are getting restarted whether it is in Europe, US or Japan. They are restarting the capacities and that is a big threat because as you restart the capacities, the demand is not so strong to absorb all the excess capacity, which is getting restarted. Therefore, we are going to see prices to remain under a lot of pressure in the coming days.

Coming to the Indian situation, I would say that demand is strong and robust but the prices are going to remain under pressure because of the threat of imports coming in from China and other countries because everybody is trying to increase their capacity and they are looking at China and India as the major markets. China has its own very large capacity whereas India is still a net importer. So the threat could be that there will be huge imports coming into India. I think the steel markets would remain subdued over the coming days.