Hail SC move; hope category B mines cleared soon: JSW Steel

As the category 'A' mines received a nod from the Supreme Court, Seshagiri Rao, joint MD and Group CFO of JSW Steel said it is a welcome step and the company was eagerly looking forward to it.

Rao also hopes that the category 'B' mines are also cleared soon so that it can help to improve supply. He also believes, e-auction prices may fall due to correction in international iron ore prices.
Besides, JSW Steel recently merged with JSW Ispat and Rao emphasised on the fact that he is not worried about leverage on the combined entity post merger. Here is the edited transcript of the interview on CNBC-TV18. Q: Yesterday the category A mines were cleared by the Supreme Court. How much of a positive do you see for JSW Steel?
A: It is a welcome step, it is a great news and we have been eagerly waiting for it. Once these 18 mines get operational, it will have a capacity of 7 million tonnes. Out of that, 6 mines will take some time for production. There are also some additional conditions.
If we take into account the remaining mines, it will have a production capacity of close to 5 million tonnes. It will definitely improve the situation in the months to come and also it will pave the way for opening up the remaining category A mines. We are also hopeful that the Supreme Court will take a view and permit mining in the category B mines also in due course of time.
Also read: JSW Steel, JSW Ispat merger ratio at 1:72 Q: By when do you see utilization improving in your Vijaynagar plant and how much will the utilization levels improve now with more availability?
A: Right now we are working at 80% capacity utilization. NMDC has been operating its mines at around 9 million tonnes per annum. Once this 5 million tonnes comes into the market, almost 14 million tonnes of incremental iron ore will be available. In addition to the stocks which are being auctioned, what is already auctioned and not used, those stocks will be taken into account. There will be sufficient stock for sometime but at the same time opening of category B mines is also essential in order to see that the industry would get sufficient iron ore to run their units.
The industry requirement in the state of Karnataka is 30 million tonnes per annum. That is what is approved or what is recommended by the CEC and also ICFRE. Therefore, opening up of the category B mines and normalization will take some more time. Once the situation becomes normal we expect to improve the capacity utilization. Q: Even if utilization improves, will costs go down or will the increased availability now be funneled through the auction route in which case the prices that you pay will continue to be quite high?
A: Today if we see the auctions, majorly the auction prices are based on the international prices and also the domestic prices. Based on that, it can't be different from the international prices. International prices have come down quite substantially in the last few weeks. We expect the prices to come down even more in the auction going forward.
_PAGEBREAK_ Q: Now that the merger is through with JSW Ispat the one concern is that your combined debt will go up quite significantly. Are you worried about that and the ability to service it?
A: The debt has to be seen in the context. For instance if you say we have Rs 25200 crore of debt, we also have to look at what is the net worth of the company. It is almost Rs 21,900 crore with a debt gearing of 1:1.5. So it is a company with Rs 45,000 crore of gross block and Rs 43,000 crore of turnover and Rs 7800 crore of EBITDA.
They are all very strong numbers and make a very strong balance sheet for the merged company. There are economies of scale, there is access to different technologies, PAN India presence, different products, opportunity to do ground field expansions and that is a win-win situation for both the shareholders and the company.
I don’t think we have to look at only debt in the absolute number. We have to look at relative context. A company of 14.3 million tonnes having a debt of Rs 25,200 crore, is not at all a worry in my view. Q: What kind of synergies do you expect from this merger and what are the principle savings and synergies you can drive post it?
A: One, there is almost close to Rs 350-500 crore of synergy we will be able to get either in terms of administrative cost or salaries and wages, rationalization of people or common procurement. The procurement itself is Rs 30,000 crore per annum.
Even if you save a small amount in this Rs 30,000 crore, there is a huge amount of opportunity for the merged company to bring down the cost. Same for the interest cost. There are a lot of benefits which will come into the merged entity. In addition to these synergies there is an opportunity for accelerating the existing projects in JSW Ispat where the benefit of the doubling of EBITDA in JSW Ispat can come quite quickly in the merged company which will be beneficial to both the shareholders of JSW Steel and JSW Ispat.
JSW Ispat is now implementing a pelletization plant, power plant and all these projects are suffering because of lack of money. With the support of JSW Steel we will be able to complete these projects quite quickly and then it will be beneficial for both the companies. The EBITDA of JSW Ispat is in the range of around Rs 1200-1300 crore right now. There is a possibility of almost doubling it once these projects are completed.
In an accelerated manner, it is possible to complete these projects and then get this benefit in the merged company and reduce the interest cost, squeeze the synergies, reduce the cost and also do brownfield expansions in both locations and marketing on a pan India basis. There is a huge amount of opportunity in the merged company.