Expect steel demand in India to accelerate: JSW Steel

Seshagiri Rao MVS is the Joint Managing Director and Group CFO of JSW Steel.

Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel, sees a big revival in construction in the country. He says the auto industry is doing very well, and the renewables sector is also consuming a lot of steel.

“So, altogether we expect an acceleration in demand. Considering the landed cost of imports today into India, I think there is a scope to increase domestic prices,” he tells Moneycontrol’s Amritha Pillay.

Rao also shared his views on the company’s backward integration plans, capital expenditure and auctions.

Edited excerpts:

Q: The company is back in the black in the December quarter -- definitely a sequential positive. However, year-on-year (YoY), it is still a steep decline. Take us through the numbers, what factors contributed to it and when do you see that YoY gap bridging?

A: Last year was exceptional. That's why you find a YoY decline. If you look at it sequentially, there is a big improvement. We have operated all our plants at a very good capacity. The average capacity utilisation in the last quarter was 91 percent. So, the highest-ever crude steel production was made by JSW Steel.

At the same time, if I look at the sales volumes, they're quite good YoY. If I look at it, sequentially, they're slightly lower, because our export volumes have come down by almost close to 32 percent.

Exports were hit by export duty. It was lifted only in the latter part of November. So, exports have fallen on a YoY basis by 62 percent, and by 32 percent quarter-on-quarter (QoQ). That is why sales volumes are slightly low, QoQ, in the last quarter. At the same time, our domestic sales were the highest-ever in the last quarter.

In volumes, we have done extremely well. At the same time, when global prices started falling, Indian steel prices also corrected in line. On an average, our net sales realisation (NSR) has come down by 5 percent.

At the same time, we could work on the cost of production. It came down by 14 percent. Coking coal prices have also come down. We have guided a benefit of around $80 per ton from that. In fact, we got $100 per ton, even though we could not get any benefit in the last quarter from iron ore prices. They were a little higher, compared to Q2, but costs have gone down in other areas like power, etc.

Net-net, we have gained because of lower costs and the higher volumes. So, together, our EBITDA per ton improved by almost Rs 5,000 for the quarter, on an average basis.

If I look at it, subsidiaries, both in India and overseas, which have lost money in the last quarter, have turned positive. So there was a good contribution. Net- net, over Rs 500 crore have been added by overseas operations and domestic subsidiaries together. I think these are the main reasons that helped us show a better performance in the last quarter.

Q: On subsidiaries, Bhushan Power & Steel still remains loss-making for this quarter, right? You were expecting a turnaround. So, is that a delayed expectation?

A: In Q3, there was high-cost inventory. They were used in Bhushan Power & Steel. In spite of that, it made operating profits, at the EBITDA (earnings before interest, tax, depreciation and amortization) level. EBITDA was negative in Q2.

In this quarter, we'll be able to make it up because high-cost inventories are normal, and operations have stabilised. They have also increased capacity from 2.7 to 3.5 million tonnes (MT). So, with more volumes, stable operations and no high-cost inventories, BPSL should be profitable at the net profit level in Q4.

Q: Taking the inventory point forward, you have seen the highest crude steel production for the quarter under review. You have earlier mentioned about high inventories in the Indian steel market and also about weak steel prices. So, what is the rationale behind pushing out more volumes? Is it a strategy to ensure you keep the market share, despite lower profitability?

A: In the last quarter, because export volumes have fallen, there was an accumulation of inventory to the extent of 1,80,000 tonnes, compared to Q2. But after the announcement by China about the COVID policy relaxation, commodity prices have gone up, including those of steel. So, steel prices went up in January by over $100-$150 per tonne.

Even domestic prices are looking up in India. Over and above that, what is very encouraging to us is that the domestic steel demand is very, very robust. In the first nine months, there was an incremental demand of 9 MT. We expect further acceleration in this quarter. So, there is good demand and increasing steel prices both globally and in India.

At the same time, though coking coal and iron ore prices are going up, we don't expect any increase in this quarter in the consumption side. We have already procured coal, more or less for this quarter. So the impact of higher coking coal price will come in the next quarter. With more volumes and increasing steel prices, there will be no impact of higher coking coal prices in this quarter. Definitely, we expect a better margin than in Q3 and Q4.

Q: On exports, 4 percent is also lower than what you have already guided -- in the 10-30 percent range of your total sales. Do you see that increasing? Also, what is your outlook for the export markets? Your press release warns of a mild recession in some of the developed economies. So how does this play out for your exposure to the export market or would you be restraining it to the four percent levels?

A: In the last quarter, our export volumes, on a consolidated basis, were 7 percent. If I take the entire nine months, it was 12 percent there too. We are in that range of around 10 percent, but in Q4, our ability to export is better. So we'll be able to export to some of the ASEAN region and also to Latin America and partly to Europe. So, we'll be able to improve export volumes in this quarter.

Q: Give me some guidance on your capital expenditure. Your press statements say you have spent close to Rs 10,000 crore as capital expenditure till December. This is against the revised target of Rs 15,000 crore. So, you remain confident of meeting the remaining Rs 5,000 crore in the current quarter?

A: Yes, we have spent close to Rs 10,600 crore up to December 31. We believe we will be able to meet the entire capex in the current quarter.

Q: Would you be more aggressive on the capex side for the next financial year, now that you have some ground to cover this financial year?

A: We have guided a total capital expenditure of Rs 49,000 crore. Out of this, we have guided Rs 20,000 crore for the current financial year. We moderated it later, considering the steep fall in margins to Rs 15,000 crore.

For the next year, we have guided Rs 20,000 core. We will review it in May and give the exact amount for the next financial year but we will be in the range of around Rs 20,000 crore itself.

Q: Is there an internal target for coal mine auctions? What amount of mines are you aiming and how do you see the pricing? And how do you plan to fund this?

A: As far as auctions are concerned, there is no upfront payment which is substantial. They bill you over a period of time as and when coal is extracted. It is only the premium which we have to bid for in the auction.

As far as coking coal mines are concerned, we will be participating in those auctions if we want to have backward integration. So, we will work on that.

As far as thermal coal is concerned, we have certain captive plants. So, for that, if at all any mines are available, we will be participating in the auctioning of those mines. Our focus is more on coking coal.

Q: Is there a ratio or a strategy you're aiming for -- in terms of coal, both thermal and coking, and in terms of a bifurcation of what should be captive, domestic and import-oriented?

A: Today, we import coking and thermal coal entirely. So, our strategy should be to help some backward integration, which leads to the extent of 50 percent of our requirements. We have been scouting for mines overseas for a long time and could not get any. We are also looking for the right opportunity to acquire some coking coal mines, at least to have some backward integration.

Q: Is there a number you have earmarked to meet this 50 percent backward integration, in terms of capital expenditure?

A: Today, our coking coal requirement is in the range of 18-19 MT. So, if it is 50 percent, we should have 8-9 MT of coking coal backward integration.

Q: Given the global scenario, is it a good time to be a buyer of mines? Are you expecting some good deals out there?

A: Coking coal prices, generally in the past, if you see, used to be in the range of $100-$150 per tonne. Because of this decarbonisation plus the Russia-Ukraine war, coking coal prices are at elevated levels. I don't think there's a long-term price. We expect prices to correct.

You are asking me if it is the right time to acquire at this price. I don't think this is the right time to acquire a coal mine at the current prices.

Q: So, that will also weigh into your strategy and you're not in a hurry?

A: We are not in a hurry.

Q: Give me some colour on your debt. Where does it stand? Are you comfortable with it? Or do you have debt-reduction plans?

A: We have been guiding to have a debt-to-EBITDA ratio of 3.15:1, as on December 31 we were at 3.51:1. We wanted to bring it down as far as these ratios are concerned, further down. So, considering the kind of cash-flow generation, that would happen in Q4 due to inventory dilution, and also expected EBITDA.

So, we feel that we will be able to bring down our debt below Rs 69,500 crore. This includes the overall foreign-exchange rupee depreciation impact of Rs 3,500 crore. If the rupee appreciates, some of it will get reversed. If I take out that Rs 3,500 crore of FX, actually, the debt is Rs 66,000 crore.

So, the net increase in the current financial year is Rs 9000 crore, as [inaudible] the capital expenditure we have incurred close to Rs 10,700 crore is majorly due to the capex.

Debt has gone up and so has the inventory accretion. This has happened in the financial year up to now. So in Q4, we are diluting our inventory and releasing working capital and working on cash-generation. With all these, we'll be able to bring down our debt.

Q: When you say you're diluting inventory, is there a level or are you expecting to clear all inventories in Q4?

A: Our inventories, as March 31, 2022, were 1.35 MT. Now, it is over 2 MT. There are at least half a million and we wanted to reduce this.

Q: Very recently, you said the group is also looking at electric vehicles for the second time, after considering it a couple of years back. Will this be considered under JSW Steel or any other listed entity? Are there other details you can share?

A: It is not any of the listed companies. It is being done at the promoter’s level, at the sponsor level. So, this is being evaluated by the group at the promoter level.

Q: Final question. Can you give us an outlook for prices and how do you see things moving in the next one year?

A: When the overall production of steel has come down by almost 80 MT in the last calendar year, in line with the fall in global demand, prices were also falling, domestically, and margins were under pressure. There were certain triggers which have happened, particularly the announcement by China.

So, due to this trigger, all commodity prices have gone up and the outlook suddenly changed. So, it is expected that in the calendar year 2023, even steel production may not go up, overall, because Europe is not doing so well and people are talking about mild recession both in the US and Europe.

So, considering that there may not be a big revival as far as global demand and production are concerned, for steel, as far as India is concerned, it is a completely different story. In the first nine months, not only did our production go up, even demand went up by 11.5 percent -- almost a million tonnes every month -- that is incremental demand, which will happen.

We expect it to further accelerate as far as India is concerned. One is because of the infrastructure thrust by the government, which is seeing more and more spending.

We are seeing a big revival in construction. The auto sector is doing very well. The renewables also consume a lot of steel. So, altogether we expect an acceleration in demand. So, considering the landed cost of imports today into India, I think there is a scope to increase domestic prices. The domestic demand is strong and prices are reasonably, okay. In our view, I think next year may not be as volatile as we are seeing in the current financial year.