Better times ahead for steel, JSW Group to continue expansion: Group CFO

There have been some positive macroeconomic developments in the last few days. The prices of energy– both electricity and gas– have come down substantially in Europe. The fall in prices is not small; it’s almost a 65 to 70 percent fall.

At the same time, inflation numbers, which were bothering not only central banks but every government and every person, is moderating gradually.

The third point is the Chinese relaxation of the Covid norms and also the kind of stimulus they have given to the property sector. These three are very positive macroeconomic developments that are very positive for the industry.

We can't just rule out recession in Europe because some people believe that it has already entered into recession. Interest rates have gone up and inflation is still not within the range that central banks would want. To that extent, the global economy may take some more time to come to normalcy.

As far as India is concerned, domestic demand is quite strong. The government's infrastructure thrust is driving growth on one side, and real estate construction, which was not doing so well for the last 10 years, is seeing green shoots.

The auto sector was not doing well due to the shortage of semiconductors; there is a very good recovery there. After the Covid relaxation, the services sector in India is doing reasonably well. These are all positives but at the same time, India's economy is integrated with the global economy.

India’s exports are sizable – over $400 billion of goods and another $200 billion-plus of services. If we need to accelerate growth from our current level of around 6-6.5 percent, we need a kickstart for which global economic recovery is very important. India is resilient from that point of view because of the very strong domestic demand and the kind of very growth-oriented policies the government of India has taken. But at the same time that kickstart is essential for accelerating our growth rates and solving various issues like unemployment.

What is the kickstart that the government can provide?

Capacity utilisations are at a three-year high, which is an indication that the investments can come in, particularly in core industries in India. Capacity utilisation and export recovery in the manufacturing sector can help the economy. Export recovery is also very important for the manufacturing sector to invest further and create more capacity in India. Many of the sectors are dependent upon exports, particularly the engineering sector, which had exports of $112 billion last year. So it is important that the exports are also recovering for the private sector to spend on capex and create more capacities.

The steel industry was hit by high input prices and a decline in exports. You said earlier the second half of FY23 would be better. How do things look?

Steel demand in the current financial year has been quite strong. As far as domestic demand goes, there was 8 million tonnes of incremental demand in the first eight months… So if I take the entire financial year, it is expected to be 12 million tonnes of incremental demand over last year. That means 106 million tonnes of consumption in India is going up to 217-218 million tonnes of consumption, close to 10-11 percent of incremental growth. I don't think there's anything to complain about as far as the steel industry is concerned regarding domestic demand.

Close to 18.5 million tonnes of steel was exported last year. The fall in exports this year is over 50 percent. That means 8 to 9 million tonnes of lower exports. Even though export duty was removed in November, the global economy is not doing so well. The kind of opportunities to export, which existed last year, are not possible today.

At the same time, our imports have gone up by 0.75 million tonnes in the first eight months. It is growing at a rate of 15-20 percent over the last financial year. There is 5 million tonnes of incremental production in the first eight months of the year. If you take the same in the next four months, maybe we will add around 7 million tonnes of incremental production.

There is more import, less export, and more production at the same time. So even though demand is growing, we're not able to absorb this entire quantity in the domestic market. That is why there is inventory increase, either with the producers or with the retail channel. So that is where I think there is some pressure, which we are seeing in the steel sector in India.

We have repeatedly highlighted the importance of the global economy to recover for the steel industry to ensure that their capacity utilisation will be reasonably high and they will be able to export large quantities.

You have maintained your guidance for FY23. Given the inventory build-up and the continuing margin pressure, how is 2023-24 looking?

I expect domestic demand to grow the way it did in FY23. Domestic demand is expected to be higher by 10-12 million tonnes in FY24. We are not seeing any big capacities coming into the market. Whatever surplus is there today can be absorbed in the next financial year. Even though the global markets may not recover, the financial pressure we face due to inventories may not be there.

There is now focus on decarbonisation. The EU will implement the carbon border tax by 2026. Can you share details of your decarbonisation strategy?

JSW Steel has taken a lot of steps. As far as environmental penalties are concerned, it is very important what these penalties are linked to. If they are linked to carbon emissions in one particular industry in a particular country, then any steel that enters that country and does not match their emissions goals will get penalised.

Instead of that, our suggestion, which India should negotiate in my view, is that we have nationally determined contributions… As long as we are within those norms when we are exporting our products, there should be no penalty. If we are not able to meet our national standards, then there should be a penalty. I think that maybe a fair way of looking at things, because developed economies have already emitted enough in the past which we are suffering today.

Therefore, penalising for not matching the standards of either Europe or the US today may not be fair for India. We are requesting the Indian government to ensure that developed economies do not use environmental tools as trade barriers. It is very important for India to continue to be competitive in international markets.

JSW Energy Ltd is building a significant renewable energy portfolio. How is the energy-guzzling JSW Steel tapping into this resource?

Our target is to reduce carbon emission intensity by 42 percent compared to 2005 and by 23 percent compared to 2021 by 2030. To achieve this, one of the things we are doing is to transition towards renewable power from fossil fuel-based power.

We have entered into a long-term power purchase agreement with JSW Energy for 958 megawatts (MW) of renewable power, which will replace part of the fossil fuel today. But if we look at our 2030 target, I think we may have to do similar power purchase agreements with JSW Energy to set up more capacities for JSW Steel. By 2030, more or less, we will avoid fossil fuel usage in the company.

Over and above that, they're also looking at producing green ammonia and green hydrogen. So if they are successful in making this particular fuel available at an affordable price, that will enable JSW Steel to accelerate its programme of transition and decarbonising the industry.

Given the energy crisis, countries have renewed interest in coal. What is your energy strategy?

We cannot ignore the decarbonising theme. Wherever we have already made investments and have coal requirements, we will have to meet it.

Will JSW Group participate in the auction for commercial mining for coal by India?

Yes, we will participate in auctions of mines which will be useful to us.

JSW Energy recently acquired the renewable assets of Mytrah Energy. Is JSW Energy looking for more acquisitions?

JSW Energy has already announced that they will continue to grow only in the renewable space. They are investing money not only in organic growth, but in inorganic growth also. They are continuously scouting for new opportunities in that space. They are also looking at pump storage, battery and the entire value chain and also at green ammonia and green hydrogen.

JSW has some smaller businesses – cement, paint and infrastructure. Are there plans to expand them into sizable businesses?

They are small with reference to their contribution to the group because steel is very big as a part of the group. But if I just look at JSW Infrastructure, it is the second-largest private sector port company in India, so it is not small. It has an over 150-million-tonne capacity and they continue to expand. It has a reasonable size and a critical mass. There are plans for that company to go public.

Same with JSW Cement, which has a 17-million-tonne capacity and is expanding. They have plans to really grow to a reasonably big size from the current levels and eventually go public.

As for JSW Paints, we have started very recently. I think it is doing reasonably well and it will pick up in maybe one or two years. It will be able to establish its brand quite well across India.

So which of these companies could hit the market with an initial public offer first? What is the timeline?

They have to mature before we go public. We have not decided the time. We will take a call as and when the markets are favourable.

Would you consider listing the renewable assets of JSW Energy?

No plans to list JSW Energy’s renewable assets separately.

JSW Steel cut capital expenditure for FY23 by Rs 5,000 crore. But then JSW Group announced investments of Rs 1 lakh crore each in Odisha and Karnataka. What investment strategy and timelines are you looking at?

JSW Steel has announced capex of Rs 48,000 crore where we are expanding our capacities from 27 to 37 million tonnes in India. We are investing in the Odisha mines Rs 3,500 crore as part of this Rs 48,000 crore.

So, our reduction in capex in the current financial year is temporary, considering the steep fall in margins and cashflows in the first six months of the financial year. We have just moderated from Rs 20,000 crore capex at the beginning of the year to Rs 15,000 crore. The overall Rs 48,000 crore of capex we have committed for three years is unchanged. We will come back and spend whatever shortfall is there in this year in the next financial year.

Your peers like the Vedanta Group and the Tata Group are diversifying into semiconductors. Are you interested in this space?

No, as a group we are present in five core sectors of the economy. We are evaluating new businesses, but they’re all at the drawing board stage.

How do you plan to manage the group’s debt given the investment plans, especially in an environment where interest rates are likely to remain high. 

If you look at the overall group EBITDA (earnings before interest, tax, depreciation and amortisation) versus group debt, we are very comfortable. Each business can stand on its own. A lot of cashflow generation is there within the existing operations. The cashflows without straining the balance sheet, with very comfortable financial ratios, we will be able to expand our businesses. That is how we have structured the entire group’s future growth plans. I don't think that is a concern at all, notwithstanding interest rates which can go up because of inflationary conditions right now. We have structured our plans in a way that our cashflows, combined with the debt we raise in the market, do not strain the balance sheet and we are comfortable with the financial ratios in each business.

In each of our verticals, we have communicated the comfortable financial ratios. In JSW Steel, we aim for a 3.75:1 debt-to-EBITDA ratio. We are much less than 3 point something as on September 30th. We have enough room that is available for us to continue to grow our business. It is the same story in each of the verticals.

You are a veteran who has seen many commodity cycles and ups and downs in business. Many startups are downsizing and many young entrepreneurs and employees are feeling the heat due to what’s happening in the global economy. Please share your mantra to deal with such turbulence.

We are all guided by our founder’s values. Mr. (Sajjan) Jindal always brings agility in the organisation – agility is part of our culture. When a change is happening in the market, you should always accept that change and adapt to it. We have learnt this over a period of time and it is a part of the group’s culture. You wouldn't find many of our executives getting worried about events or the volatility within the market.