Steel to go strong from Oct, prices will rise: Monnet Ispat

Monnet Ispat recently received the forest clearance for the Utkal coal block in Orissa and the company now has set the target for March to start mining. In an exclusive interview to CNBC-TV18, the company executive vice chairman and managing director Sandeep Jajodia says that the company plans to mine about three million tones from Utkal. "Also, we will mine 5 million tonne from Madakini block which is close by to fuel our 1,050 megawatt power plant," Jajodia adds.

Despite the negative global cues he says going forward the company is looking forward to a good time in steel business. "A lot of projects are held up but they should come along. Considering all the factors, steel should behave better and come October the prices should start looking up," he adds.

Below is an edited transcript of Sandeep Jajodia's interview to CNBC-TV18. Also watch the accompanying video.

Q: When are you expecting to start production now that you have received the environment clearance at the Utkal coal block in Angul in Orissa? How much are you planning to produce from there? When does it commence production?

A: We received the environment clearance about two years ago and we recently received the forest clearance as well. There are few formalities left where we just got assigned the mining lease and get the approval from the director general of mine safety. It is a small clearance that we are awaiting and which is going to be done towards the end of the calendar year. Therefore, March is the target month where we start mining and we plan to do about three million tones out of that mine. We have got another mine close by, which is called Madakini where we will do 5 million tonne. Therefore, we want to fuel our 1,050 megawatt power plant coming up there.

Q: Tell us about your operations at the steel plant itself. Do you expect your sales in the second quarter as well in the second half to be a shade better than what you did in the first quarter? How is demand looking at the current juncture, given the fairly negative cues received in terms of growth?

A: We expected the markets to behave better and demand to be better but that has not really happened. One of the factors is monsoon because during monsoons, construction activities are low and it is traditionally the steel markets also go down. Secondly, all the money is allocated for large structure projects have not really kicked off. Hence, if India has to grow at 8-8.5% this infrastructure growth has to happen and of course will result in steel consumption as well.

However, we are looking forward to a good time in steel business and come October the prices should start looking up. We understand that a lot of projects which are being held up for whatever reasons but they should come along. Hence, considering all of that steel should behave better but in the first half I don’t think it is going to be that good.

Q: Your revenues in the first quarter were flat. What should investors assume for the full year or specifically, for the second half? How do you expect your raw material cost to proceed and how much can be passed on?

A: The raw material costs have reached the peaks. I don’t think there is scope for either iron ore or coal to go up any further because they have gone up dramatically in the last few months. The demand is not that great at this point, the market prices have been relatively flat and I don’t see any big change happening at least till the first half of October, which means that this whole half year has been quite flat.

The other reason for monetary results being flat is because also that the power rates have gone down. We had a good bottom line from the power business and the merchant power rates have come down in almost the whole year. The last quarter which went by we were selling it at about Rs 7 last year and this year we averaged about Rs 450. Hence, the power business being tough and steel has been relatively flat; the first half I would not say was very encouraging or will be very encouraging.

I am quite hopeful of the second half because steel will perform better and the rates are likely to go up by at least by 5-7%. Also, the raw material prices not going up any further because they have reached the peak and I also see the power business doing better. Hence, I am hopeful for the second half rather than the first.

Q: When do you think you will unlock your valuation of Monnet Power and more importantly would therefore be a need to raise more debts than you planned? What are your debt plans from now to say the next 12-18 months?

A: In Monnet Power, we plan to put up about 3000 megawatt by about 2014-15. The current project, which is a 1050, is completed funded. We have got 12-12.5% by black stone and their equity, the balance is owned by Monnet Ispat and we are fully funded on the debt side as well. The power project of Rs 5300 crore is fully funded and is under good progress. We hope to commission the project by December 12, 2011, which is the first phase.

We also want to add another 660 megawatts at the same site and another 1320 megawatts elsewhere as a coast based project, hence the total of 3000 megawatts. Therefore, the 660 and the balance 1320 megawatts were not required, we had some gap in equity and we wanted to raise some more equity at appropriate time.

The markets are a little dull for power and the equity market is also low. It is not really the right time to approach markets. However, I believe that Monnet Power projects have probably one of the best bottom lines in relative terms to other projects because it’s got its own coal mine, the stripping ratios are very low, hence, the coal costs are very low and the project is very ideally located in close proximity to the mine. Therefore we have got very low freight cost.

Overall, our fuel cost being extremely low we fare much better than most of the other projects in the industry or in my peer group. If there is any investment going to happen in the power business Monnet Power remains to be a very attractive kind of an investment opportunity for any fund or investor. Hence, during an appropriate time when the moods are better, about a year down from today, it’s should be the right time to approach or raise equity.