Inorganic growth of any reasonable size looks unlikely, says JSW Steel’s Seshagiri Rao

We are a growth-oriented group and we want to be a 40 MT steel player over the next decade. We have been evaluating various options. But what we are also very conscious about is our financial ratios.

In 2016, these ratios went haywire due to exceptional market conditions and provisioning of the investment we made overseas. If you see our FY17 guidance, we have been saying we would like debt/EBITDA at 3.75x and debt/equity 1.75x.

In FY17, we worked on bringing down these ratios. The ratios went haywire because EBITDA came down. In December 2016, we brought down debt/EBITDA to 4x and debt/equity 2.1x.

Our aim is to bring financial ratios down to guided levels. Any acquisitions in future will have a capital structure that will comply with these ratios. Our cash flows for the nine-months period, our EBITDA was Rs 9,100 crore. In nine months period, we had free cash flows of Rs 5000 crore. Spending for capex or acquisitions, without increasing debt, is not a problem.

So, are you planning to bring down debt in FY18?
We have said we will bring down our debt/EBITDA ratio down to 3.75x or below.

You have shown interest in some stressed steel assets. Any progress on that?
We are evaluating stressed assets and made a bid for a few but have not seen any progress so far. Banks have to take a call on it. For any new investor to come and take over the entire debt is a remote possibility. A significant amount of haircut is involved to make these companies sustainable and profitable going forward. It may be a difficult decision for banks to take haircuts.

How do you intend to become a 40 MT steel-maker and by when do you plan to achieve this?

If you see the Draft National Steel Policy then you will see total steel capacity is expected to be 300 MT by 2030. India’s current installed steel capacity is 128 MT and we are 18 MT (approximately 15 percent of India’s installed capacity). To maintain our marketshare we need to have 45 MT capacity seeing the demand growth in India.

If you look at our plan, we have environmental clearances to increase the capacity of our Vijaynagar plant from 12 MT to 16 MT. At Dolvi, we have approval to double capacity to 10 MT. This means we have the approval to increase from 18 MT to 27 MT. Capacity expansion is in place at a very good investment cost per tonne. The 27 MT to 40 MT capacity expansion could be inorganic growth or through green field projects in Jharkhand or Odisha.

Do you see inorganic growth?

We do not see inorganic growth of any reasonable size happening in India.

What is the expected growth for steel demand in FY18?

Demand growth in FY17 was 3.5 percent and we expect demand growth to expand 1.2-1.3 times of GDP growth if investments pick up. This will take steel demand growth to 9-10 percent, implying incremental steel demand of 9-10 MT per year. That is when a lot of capacity is required in India. In line with growth in demand, we will create capacity of 40 MT. Over the next 13 years we will be a 40 MT company.

How do you see growth in steel demand during this fiscal year?

We expect steel demand to grow by 4.5 percent and this will be driven by government expenditure in metro rail, roads and tunnels along with solar.

The volatility in raw material prices is a big concern for the steel sector at this point of time. What is your view?

Disruptive volatility is a good way to describe it and that is causing a lot of concern to the industry. Total coking coal trade is 300 MT and two-thirds of this is index-based trading, but what is interesting is how the index is fixed. The index is fixed based on 400 transactions that are reported in six months, which translates into 60 million trade. So, effectively 400 transactions are determining the price of 200 MT of coking coal. Of these 400 transactions, China constitutes 40-50 percent of this trade alone. That shows the speculation that is coming into the market which is driving the prices. This is not only true in the case of coking coal but also any other material used in steel sector.

How is JSW Steel managing this risk?

One way to manage this risk is through hedging. Second is backward integration. Third is through advance planning of adequate inventory pile-up. Fourth is through reducing dependency on one country. Australia accounts for more than 50 percent of all sea-borne coking coal, sea-borne trade, and diversifying that is important.

What is your game plan to counter the event risk and volatility in raw material prices?

In 2011, 97 percent of coking coal imports were from Australia. Now, our dependence on Australia for coking coal is down to 60 percent. The level of inventory has been increased to 60 days now. Third thing we do is hedge coking coal prices. We are also looking at backward integration. We have participated in auctions and got a coking coal mine and we will make it operational in December 2018. Our coking coal mines in the USA have restarted in April. We want to increase focus on backward integration. Again, five mines are coming up for auctions in Jharkhand and we will participate in those auctions.