Capex cut to not impact growth plans: JSW Steel’s joint MD

JSW Steel reduced its capital expenditure guidance for the 2023 financial year by nearly Rs 5,000 crore while maintaining that its plan to increase capacity from 27 million tonnes (mt) to 37 mt. In an exclusive interview with Moneycontrol’s Nickey Mirchandani, the company’s joint managing director and group chief financial officer Seshagiri Rao said the company has only postponed Rs 5,000 crore of discretionary capex but kept its growth and sustenance capex plan intact given its belief in India’s growth and steel consumption outlook.

Rao also said the company is open to evaluating different M&A opportunities in the sector, for instance National Steel and Agro Industries, which is currently undergoing corporate insolvency resolution process under the Insolvency and Bankruptcy Code (IBC).

Here are the edited excerpts of the conversation.

Your first-quarter earnings missed consensus estimates due to several one-offs. But, overall, what factors led to the miss?

The last quarter was a very challenging one due to the Russia-Ukraine war. It created a huge amount of uncertainty and volatility in the commodities markets, particularly steel. So, in April and June, there were significantly more supplies of steel in the market, even as demand remained weak. And above that, the Chinese exported more steel into the markets.

The exports from China in April and June went up by almost 53 percent compared to the previous quarter. So, all these together had pressure on overall steel prices, which came down by over 20 percent. On one side prices have fallen, on the other side the costs went up, particularly for energy-related commodities.

Adding fuel to the fire was the export duty imposed in May by the government, leading to an overall fall in the export of steel from India by 26 percent and from JSW Steel by 35 percent. There is also the rupee depreciation. So whatever loss there was on the capital account, it also hit the profit and loss (statement). These are some of the factors we saw that led to the fall.

Talking about the export duty, by when do you expect it to be rolled back?

It was clear that the government imposed the duty on the steel industry to contain inflation. This is an indication that it is a temporary measure. According to SteelMint (an online aggregator of news and numbers pertaining to the industry) data, HR (hot-rolled) coil prices in June 2022 compared to June 2021 slid 7.6 percent. The prices corrected very steeply and went down 20 percent after peaking in April. All this points to a review of the decision.

At the same time, we are also seeing Indian exports falling, while Chinese exports have been increasing, meaning we as a country are losing out. But the Indian steel industry is very competitive. Some of the capacities which we have created are only intended for exports. So that's why we are looking to the government to take a call on this export duty.

So do you think the duty will be rolled back this quarter?

Most steel companies that have declared results have been showing a very negative impact of lower volumes due to weak demand and falling steel prices combined with a higher cost of production. This in itself is an indication that the steel industry was very severely impacted by this measure. We are hopeful that the government takes a call on the export duty front.

Has some amount of relief come with the rupee weakening?

The fall in global prices is much deeper than the rupee depreciation. Whether it is offsetting the fall in steel prices, I don't agree with that, because the fall is more than 20 percent in steel prices when the rupee depreciated by 4-5 percent in the last quarter. So I don't think it will offset but in the medium term, it will increase the competitiveness of all exports from India.

What kind of impact can one look at just from the rupee depreciation?

We continued to export 20 percent of volumes in the last quarter. Even in this quarter, it will be in the range of 10-12 percent. We never exit the global markets, we will continue to be in the export markets because these markets are not easy to develop and establish, it takes time. So we continue to be in the exports market notwithstanding the rupee depreciation, export duty and other challenges.

Your capex guidance has gone down from Rs 20,000 crore to Rs 15,000-odd crore. What are the factors underpinning this particular revision? How much of that is attributable to something like macroeconomic conditions weighing on the industry?

We are reasonably optimistic for the second half with macroeconomic conditions resetting to normalcy in the steel sector in India, particularly JSW. But the high-cost inventories are yet to be absorbed in this quarter. So when the two quarters are not in line with what we had planned, there is a need to look at our capex. But growth and sustenance capex has not been touched. We will look at the discretionary capex and any special projects which were initiated during the year. We have put approximately Rs 5,000 crore of capex on hold. We will review that when the situation improves, that is how we have guided to moderate capex from Rs 20,000 crore to Rs 15,000 crore, without compromising on our growth plan of increasing the capacity from 27 mt to 37 mt because we are confident about India's growth story and steel consumption will continue to grow in India.

Prices have taken a knock of more than Rs 8,000 per tonne from the time the export duty was imposed, and are now around the below Rs 60,000 mark.

As far as prices are concerned, if you look globally, in the US, prices have come down from $1,600 in April to around $900 in the short term. It is a similar story in Europe. Chinese FOB (free on board) prices also got corrected. But if I see all the markets, including India, is there any further fall in the price? Or is it stable or range-bound? If you ask me, they are range-bound, I'm not seeing a big pressure on the downside. That is why we are seeing inquiries increasing not only in India but even from global markets.

There was destocking for a few weeks, during May and June. Now it will be coming back to buying steel. So we are hopeful that this is stabilised at these levels. The downside to steel prices from here on is very limited. One is the demand coming back. Number two is cost. Coking coal prices are also not coming down the way they crashed from $600 to $238 or $230 per tonne. Similarly, we are seeing that type of stability in iron ore, at around $100 per tonne. I don't expect any steel company can afford to reduce prices further.

So you expect HRC prices in the range of Rs 55,000-60,000 per tonne?

Yeah, over and above that we're also seeing supply readjustments. If you see in June, world steel production has already come down to 158 mt from 169 mt. China has reduced production in June from the 97 mt peak in May to around 90-91 mt. There is an adjustment that is happening, mill after mill is advancing their shutdowns and reducing supply. Supply-side adjustment is also happening and inventories have gone up. So with that, I don't expect further downside to steel prices.

If prices go below Rs 55,000 a tonne, would the company consider production cuts?

If you see the history, as and when the steel prices fall, raw material costs will fall or go up with a lag. That is exactly what happened in the last year. In the month of the first quarter of last year, steel prices went up, raw metal prices were lower—that's where companies made a good amount of money. But thereafter, raw material prices picked up. Now steel prices have fallen—you ask if steel prices will further fall to Rs 55,000 a tonne. I'm not saying it won't. But at the same time, you can't say that coking coal and iron ore prices, and steel production, will remain at the same levels. It can't happen. If you see the past, steel production will get adjusted and input prices also will fall. Converters like JSW Steel continue to be in good shape.

Apart from the export duty, was weakness in the Chinese property market a factor in trimming capex? Or were there other factors?

We have not touched our growth capex, it indicates that we are positive about the growth of India, what we have done is only postponement of some discretionary capital expenditure. We continue to watch the situation, but we feel that the lower costs will get reflected from the third quarter onwards. Margins will get normalised from the third quarter onwards.

Do you anticipate some pressure in Q2 before the normalisation kicks in?

In the second quarter, there is high-cost inventory that has to have to be sold. So we don’t see margins normalising in this quarter.  It is very difficult to guide on margins.

When you say normalise, it's going to be some stability coming into margins, right?

We cannot expect normalcy in Q2 due to very high-cost inventory. But the low raw material prices would get reflected in Q3. Not only will margins get normalised by the time, even the export duty could have been reviewed by the government.

What is your estimated standalone EBITDA (earnings before interest, tax, depreciation and amortisation) per tonne performance from Q3 onwards?

If you take the average of the last five years before 2017 to 2002—excluding to 2022, which was an exceptional year—it was around Rs 8,000-9,000 per tonne. Thereafter, the company has spent large amounts of money in creating downstream capacity and in several cost-saving measures either on coke, coal or power plants, which led to lower fixed costs per tonne. So with these cost-savings, and notwithstanding the ups and downs in one quarter, Q3 will be better than that.

Are you looking at M&A opportunities now, given the demand scenario? If so, would that be more from the technology side or the capacity side?

India is the only market showing positive growth not only in GDP but also in steel demand. We continue to evaluate the options—for instance, National Steel, which is available today. It has gone into IBC, JSW is one of the EOI (expression of interest) applicants.

How does the group intend to finance these? Your net debt has gone up by a good Rs 1,100 crore on a consolidated basis. Do you think any acquisition will have a bearing on the financials?

JSW Steel has been very conservative.  It grew from 1.6 mt in 2000 to 27 mt and the aim is to grow to 37 mt. We have been guiding tonnes to EBIT at 2.75 even after the debt has gone up in the last quarter our debt to EBITDA was around 2.

So there is enough headroom available to JSW Steel to grow this business, both organic and inorganic. And we are very conscious about what we're guiding to the market, so we will be within that range.