Large proceed from oxygen plant disinvestment will go towards debt repayment: JSPL

Jindal Steel & Power (JSPL) had a good day in trade on Monday after receiving over Rs 1,100 crore in divestment of its oxygen plant assets at Raigarh and Angul units.

Most of the proceeds from oxygen plant disinvestment will go towards debt repayment, said Naushad Akhter Ansari, CEO-Steel Business at JSPL in an interview to CNBC-TV18.

We have an option of buying back the oxygen plant assets, so in good time we can get it back, said Ansari.

Internal rate of return (IRR) for this project is 11 percent, he said.

Talking about promoter warrant, he said the board has approved for Rs 4.8 crore convertible warrants, which can be converted into shares. However, price of warrants issued to promoters not yet decided, he added.

He expects to get approximately Rs 600-700 crore via shares/warrants issued to promoter.

On power business, he said power plant load factor currently is at 45-50 percent.

He is optimistic that power tariffs will hold at current levels.

On steel front, he said prices have moved up in past quarter and expect it to trend higher.

Sales have been in the range of 1 million tonne on a quarterly basis, he mentioned.

Below is the verbatim transcript of the interview.

Anuj: With this deal you will be getting Rs 1,120 crore. Will this entire money be used for debt repayment?

A: Yes, most of it is going for debt repayment. That is our single most important work to do and that is what it is going for. Most of it will go for that.

Let me also explain that we have this option of buying it back. So in good times, we can get it back. So this cash is going to be used for debt reduction.

Latha: You said that you will have to lease it back for the moment, how much will you pay per annum to lease it back?

A: Internal rate of return (IRR) is less than 11 percent. So you can work on this. At the moment, I am not going to give you the exact number but primarily the IRR is less than 11 percent.

Surabhi: We know what is the kind of cash outflow for leasing and then therefore what is the inflow because of the sale, we are just trying to get the numbers?

A: There is a cost of capital, which is going to go in and that is there but we have already factored that in our cash projections and we think it is quite workable this way to manage because this debt reduction - debt also has a cost. Therefore, it works out quite okay for us. I don't think it will have any major impact on our profitability.

Anuj: You will save Rs 110 crore on interest but what will be the net impact on net profit?

A: The IRR is working out to be around 11 percent. If we look at the debt cost these are also in the similar kind of range. Therefore, there is not much of a difference between the two and it is going to help us in debt reduction. So there is hardly any appreciable reduction in the profitability.

Anuj: I want to know the net impact because in terms of the earnings per share (EPS) impact, how much would you be saving, how much will it add to the EPS?

A: I am not quite sure of that as of now, I don't think I can tell you that.

Surabhi: Let us move to a different issue, at what price have promoters been issued warrants recently?

A: As of now the board has approved for something like Rs 4.8 crore of convertible warrants which can be converted into shares. The price is going to be determined by Securities and Exchange Board of India (SEBI) once the shareholders' approval is also there. Therefore, this number can be talked only after the SEBI has cleared that but what I can tell you is that 25 percent of it is going to come up front.

Latha: Can you give us some idea what is that 25 percent? What amount?

A: You are asking me the actual warrant cost. That is what I am saying that this number will be finalised by SEBI. We don't know as of now.

Latha: Not even a range? If you can give us an approximate range?

A: I imagine it will be somewhere between Rs 600 crore and Rs 700 crore. These are approximate numbers.

Anuj: Does this move impact the JLF status of the company?

A: Not at all. Why should it impact? It only shows our sincerity that the promoters are putting in the money in the company. Earlier also we have taken some steps. Therefore, only from that point of view but physically I don't think it is impacting the JLF, it is only showing our sincerity in making sure that we come out of it in a very successful manner.

Latha: In that case if you can tell us what is the targeted debt reduction plan of the company this year, next year?

A: What we are saying for sure is that whatever are the repayments which have been agreed by the bank, we would be in a position to honour that and repay that as per the agreed schedule primarily because our Angul plant also, in other couple of months, the basic oxygen furnace (BOF) should be operational and good cash flow should start coming in from that.

Surabhi: What is happening with the power business? What PLF are you operating at? Have you signed any power purchase agreements (PPAs)? Have you taken advantage of the recent spike in merchant tariffs?

A: The spot prices of power were reasonably good in September compared to what they were operating earlier. The PLF as of now is not as good as it is close to about 45-50 percent range. We are certainly hoping that more and more PPAs can be pegged upon and spot prices can continue being good, so that we can be able to sell that.

Anuj: A word on steel prices?

A: The steel prices are quite steady, in fact in the last quarter they were quite up and they are holding. So as of now the numbers are reasonably good. In steel business, in some weeks, you will find that marginally prices are softening and so on but then they again pickup, so if you see what is happening in the last two weeks or so, the billet prices worldwide had come down but I see they strengthening. So by and large, I would say steel prices in this quarter should be similar to the last quarter.

Anuj: A word on volumes as well?

A: This quarter because Angul is still going to be commissioned by November end or so, the basic oxygen furnace (BOF). So, I do not think there would be substantial production increase in Angul at this point of time. Therefore, I would imagine that for this quarter our overall production will be close to a million tonnes maybe a little marginally higher than a million tonne.

Latha: And in the quarter gone by, what were the production and sales numbers and prices as well?

A: That was similar and that is what I am saying that these two quarters, if you look at the production wise and I am talking about India operations only, so both will be in the same region of a million. However, prices are very difficult to say because prices depends on what product we are talking about but all we can say that prices are reasonable, fairly remunerative.