Expect steel, power demand to pick up in 2nd half of FY17: JSPL

Jindal Steel and Power Limited (JSPL) reported mixed set of first quarter earnings where its revenue increased 6 percent to Rs 4,655 year-on-year (YoY) and its finance costs remained almost flat at Rs 853 crore.

In an interview with CNBC-TV18, Ravi Uppal, MD and CEO of JSPL said that net steel relaisations took a beating in the first quarter due to weak demand and May, June have seen a sharp drop in prices.

He said that the steel inventories were down to 3 lakh tonnes but expects to see a demand pick-up in the second half of the fiscal.

Power demand was weak in Q1FY17 on a YoY basis but post monsoon demand is expected to pick up, he added.Below is the transcript of Ravi Uppal’s interview to Sonia Shenoy, Anuj Singhal and Latha Venkatesh on CNBC-TV18. Sonia: What were the steel realisations in the past quarter? A: In the first quarter, the demand was surprisingly less compared to how the sentiment was in Q4 of the last financial year. You will be surprised to know that the demand grew only by 0.4 percent during this quarter. So, with tepid demand, the prices took a beating. They were strategy rising up to April, but come May and June, the prices started to decline. So, the net sales revenue (NSR), during Q1 was not at the same level as the previous quarter and that did affect the earnings before interest, taxes, depreciation and amortisation (EBITDA) levels and the earning levels. If the demand would have been more robust than we experienced, I do not think that would have been the case. Latha: Have you noticed any pick up in steel demand or in steel prices post the first quarter that is in the current quarter? We have seen some price hikes I believe. A: The second quarter is basically the monsoon quarter and this year, the monsoon has been pretty heavy. Therefore, second quarter there was not any recovery of prices. They were, in the best case, at the same level as the end of first quarter. But I do foresee that the prices are recovering starting from September right up to March because the projects which are in discussion, the enquiry bank, both of them have improved compared to what it was 2-3 months ago. So, it should look good in Q3 and Q4. Anuj: What are the current inventory levels for you? A: The inventory levels have really come down in JSPL as a part of our campaign for financial efficiency. Both the receivables as well as the inventory has been focused on and if you look at the end of June, our inventory level had come to a level close to 3 lakh tonnes. It used to be much higher earlier, but progressively, we have brought it down. And same thing, we have done with receivables to cash out the receivables and it touched almost its all-time low of nearly Rs 450 crore only in receivables. So, working capital has received a lot of attention in our company as a part of the capital efficiency programme. Latha: But why were your volumes flat year-on-year (Y-o-Y) and they were actually down 20 percent sequentially? A: There are two factors. Number one, the demand was tepid and secondly, we had taken a shut down for six weeks in our Angul facility which is manufacturing the plates and therefore, we could not produce to the level that we do in a normal quarter. But there will definitely be recovery in the subsequent month. But the other thing that you would notice that our plant in Oman has done extremely well. That has been operating at a level of 80 percent and it has also posted a very impressive EBITDA at 26 percent in the last quarter. Sonia: Your pellet sales have rocketed. Can you break it up for us into export and domestic sales? A: We are quite happy with the way pellet market has developed, especially the export market. Our production of pellets is continuing to rise. It touched a level of 7,00,000 tonnes in that particular quarter and 50 percent of that is being exported. The export demand right now is very good, so at this moment, we are not selling much in domestic market except meeting our own capital requirements. But the export prospects are looking very promising. The prices are constantly increasing, it used to be at a level of about USD 60 free on board (FOB), today the price levels are at about USD 92. So, it has gone up by nearly 50 percent. So, I am sure we will see a positive impact of it in the subsequent quarters. Anuj: Let us focus on your power business as well. What explains these weak plant load factor (PLF) levels? A: You have just hit it on the head. The main culprit is demand. The demand has not been high. We were surprised that this summer, that from April to end of June, the demand was considerably less than what we had in the same quarter last year. So, it took the entire profit industry by surprise. But I am sure this kind of phenomenon is not going to continue for very long. We do see that once the monsoons are over, there will be an uptick in demand for power. Sonia: So, what were the power realisations then for Q1? A: The realisation depends on how you sell the power. If you sell the power through power purchase agreements (PPA), the NSR is average about Rs 3.50, but if you sell it in the merchant market, the merchant market rates have been very low this year. It has really hurt the power industry and there the realisation is about Rs 2.70-2.80. Anuj: How much of your current capacity has been tied up by PPA route and also if you could tell us your targeted power capacity. A: As I said, by November, we will have the complete 1,200 megawatt secure and we are also expecting short-term contracts for the third island which is 1,200 megawatt. I reckon that in the third and the fourth quarter, that is especially from the middle of October or end of October, we should be running as much as 2,400-2,500 megawatts.