Thrust on urbanisation augurs well for the steel industry: JSPL MD

Bimlendra Jha.

“It is urbanisation, more than low-cost housing, that augurs well for the steel industry,” said JSPL MD Bimlendra Jha, in a post-budget and earnings interview with Moneycontrol's Nickey Mirchandani.

Budget 2023 has outlined avenues to upgrade Indian cities through investment in urban infrastructure and development projects, including by use of the Urban Infrastructure Development Fund (UIDF).

“The thrust of this budget is the urbanisation of B and C class towns and cities, for which steel and cement are naturally the materials of choice,” he added.

Speaking of the company’s margins, the JSPL MD said that he expected to protect if not increase margins in the next quarter because of the industry’s ability to pass on the price hikes due to growing demand.

Edited excerpts of the conversation below:

Interviewer:

What’s your assessment of this budget: what were the positives for your sector? What’s your take on the Rs 10 lakh crore capex outlay?

Bimlendra Jha:

I think it has been a dream budget for the steel and cement sector, because the Rs 10 lakh crore capex is highly focussed on infrastructure. JSP too is completely focused on infrastructure and construction in its product portfolio.

Additionally, there is also focus on railways. Apart from Steel Authority, we’re the only other company in the country that manufactures railway lines.

There is also a push for the urbanisation for B and C class townships, which consume a lot of steel and cement. In addition to all this, there is a focus on green energy. The steel industry is looking forward to its role in decarbonisation. In that, JSP, which has got CGP-based DRI, has some experience with hydrogen-based reduction. As green hydrogen starts becoming available, we will be very happy to lap it up and use it in our processes.

So it is not just the short term, we are also seeing many long-term positives in this budget.

Interviewer:

The outlay of Rs 2.4 lakh crore for the railways is nine times the amount provided in 2013-14. How does this change things for you? Are you looking at a different product mix?

Bimlendra Jha:

I think this sets the tone for the growth of the rail network and improvement in rolling stock. A good railway network is absolutely essential if a country has to grow. If we aim to produce 300 million tons of steel, then three times that volume has to be transported by way of raw materials and finished goods. Unless rail infrastructure is strengthened, lines are doubled, and rolling stock is available, this is going to remain a pipe dream.

It is not just JSPL that will benefit from the production of railway tracks and the right grades of steel for railway wagons. Other industries, especially those dependent on mining and the movement of bulk materials, will also benefit from this. This (infra capex) is a big push in that direction. Industry will also benefit from the push for green energy, as it will help decarbonise.

Interviewer:

Going back to the same question, do you think this higher allocation towards the railways will lead to any change in the product mix for players like you and SAIL, because you are the only two steel makers which supply railway tracks.

Bimlendra Jha:

Among our portfolio of products, railway tracks earn the maximum revenues per tonne of steel. It is also a difficult product to produce. Since we have that experience, we look forward to further investments in this area.

We are also putting up a rail wheels plant, and are happy to expand our capacity in heat-treated rails, which is going to be a key area of focus for the railways, as it would want to increase the speed of its trains, and for that, they would need heat-hardened rails. We are in a position to supply these heat-hardened rails, and we are already approved for it.

But that is only from the product portfolio perspective. Rail infrastructure is critical to the growth of any industry which moves material in bulk. And that is why the capex for infra is good news for everybody in the steel sector, aluminium sector, power sector, as well as cement.

Interviewer:

How about the allocation for affordable housing? Do you think the budgetary allocation for that has declined since FY22? How does that augur for the sector?

Bimlendra Jha:

Low-cost housing per se doesn't augur well for the steel industry. It is urbanisation that augurs well for the steel industry. The thrust of this budget is the urbanisation of B and C class towns and cities, for which steel and cement are naturally the materials of choice.

In fact, steel has replaced some of the cement used in construction, as a result of which more construction projects are consuming more steel than before. So the push for urbanisation will intensify the demand for steel.

Interviewer:

Your standalone EBITDA, both on a sequential and year-on-year basis, more than a 20% kind of decline (both declined 20%?) has declined. What kind of numbers can we expect next year? Are there any cost-saving measures at play for the next quarter?

Bimlendra Jha:

Year-on-year wouldn’t be a fair comparison. You can see that there was a huge price decline, bottoming out somewhere in November, when we saw prices drop to $520 on the Chinese hot roll coil price index. It started improving thereafter, and by the end of December it hit $620. But that was the time when coking coal prices also started to go up, squeezing margins.

Up to quarter three, our net sales realisation was flattish, just about 1 percent down despite the decline in prices due to product mix changes, etc. But our costs were down 9 percent quarter-on-quarter. As a result, adjusted consolidated EBITDA (excluding forex gain of Rs 820 million, was up 51% QoQ).

Now, coking coal and iron ore prices have gone up. Both OMC (Odisha Mining Corporation) and NMDC (National Mineral Development Corporation) have increased (ore) prices. As a result, there would have been cause for concern if there was any slackness in demand. But demand looks strong both in this and the coming quarter.

Therefore, steel producers can pass on these cost increases — otherwise there would’ve been a problem. This means that margins are going to be protected if not firmed up in the current quarter.

Of course, there is always the China factor. Fortunately, it’s gone well over the past month or so, after Covid restrictions were lifted. China is seeing good demand, and as a result, prices have started moving up.

Interviewer:

How about volume. Now that China has opened up, and export duties have been rolled back, would that be beneficial for the industry?

Bimlendra Jha:

Domestic demand went up by 12 percent in the first nine months of the year, whereas production went up by only 6 percent. That means there was unmet domestic demand that could consume the steel that was coming up. So India was not affected negatively in a big way, although the prices kept on declining.

What happens when the export duty is removed is that a pressure valve is released. In case a particular product category, for example, does not have enough local demand, then the export duty creates an uneven playing field, because imports can happen but not exports. Now that problem is out of the way. But why would anybody want to export when there are domestic customers vying for your products? So exports are not a big factor per se, unless there is pressure on a particular segment.

Now coming to the Chinese market opening up. Of course, we would like to restore our existing relationships (in China), which were disrupted as a result of all this export duty. These relationships are strong given our quality and timely delivery. Therefore, we do not see much of an issue if we want to export. But on the other hand, we do not see the necessity of export because of the strong domestic demand.