JSW Steel sticks to sales, capex projections despite weak Q2

Interviewer: Please talk about your Q2 volumes? What is expected going forward?

Seshagiri Rao: Quarterly performance is all about volume. We have clocked excellent volumes, and registered 30 percent growth quarter-on-quarter (QoQ). What is also interesting is that our domestic sales have crossed 5 million tonnes, and domestic sales volumes have increased 47 percent. But our export volumes have fallen 37 percent QoQ, 62 percent year-on-year (YoY). We will sell more in the domestic market as it’s a reasonably good market.

It’s important to note that we not only sold whatever we produced, but also reduced our inventory by 4,33,000 tonnes this quarter. So, we are very close to the guidance we gave at the beginning of the year, about producing 25 million tonnes and selling 24 million tonnes this financial year.

Interviewer: The company has posted a loss for the quarter, partly due to one-off items. Could you please detail this?

Seshagiri Rao: The one-off items are there due to three reasons. One is inventory losses of approximately Rs 1,100 crore. The second is foreign exchange (forex) losses, which is about Rs 350 crore. The third element is the export duty, also a one-off in my view as it’s a temporary measure taken by the government. This amounts to approximately another Rs 60 crore.

Interviewer: Export volume growth has registered a sharp decline this quarter. When do you expect the export duty to be rolled back?

Seshagiri Rao: The export duty has been imposed to contain inflation. WPI (Wholesale Price Index) inflation in the month of September is around 10.5 percent. It has already come down from a peak of 15 percent.

Steel has a weightage of 3.22 percent in the WPI. In September, steel prices, particularly those of flat steel products, fell 14 percent. Thus, the purpose for which the export duty was imposed, to contain inflation, particularly in the steel sector, has been achieved. Based on that, we expect the government of India to remove the duty on the export of steel.

Interviewer: Any expected timelines for the rollback?

Seshagiri Rao: The government of India will take a call. I'm sure this is a temporary measure.

Interviewer: Do you expect these one-off items to recur in Q3 and Q4.

Seshagiri Rao: We cannot have zero exports. Even in the last quarter we have exported 5,60,000 tonnes. Which is a sizable quantity given that there’s an export duty.

If we are to retain certain customers, it is impossible to switch off when export duties are imposed. Our exports have fallen from around 30 percent of sales to 10 percent in the last quarter. We are there in the export markets. And we will continue to pay the export duty as long as it’s there. So yes, that’s one item which’ll be there even in Q3.

Interviewer: How about your margin guidance and cost pressures?

Seshagiri Rao: In Q3, the price of coking coal will come down by $80 per tonne. Iron ore prices have fallen in the last quarter and will get reflected in Q3. Power costs will also reduce in Q3. Those benefits will be visible this quarter, along with additional volumes that we are seeing in the second half. While we're not guiding about EBITDA per tonne, it will be better in Q2.

Interviewer: Could you give a picture of your net debt? Would you still like to confine debt to 2.7 times the EBIT? What’s the number you are targeting this financial year?

Seshagiri Rao: We pared debt by Rs 1,500 crore in the last quarter. However, had there not been exchange rate fluctuations that impacted foreign currency liabilities, we would've been able to pare debt by Rs. 2,500 crore.

We incurred a capex of Rs 6,800 crore after paying a dividend of Rs 4,000 crore. Our debt has increased by Rs. 5,000 crore in constant currency terms. In the second half, we want to pare debt and bring it down roughly to the level it was at on 31st March ’22 , plus the impact of the exchange rate fluctuation.

Interviewer: What number are you looking at to end the year?

Seshagiri Rao: We had 57,000 crore of debt as of 31st March ’22. As of 30th September, it is 65,700 crore. The company plans to reduce it by around Rs 5,000 crore by the end of the financial year.

Interviewer: Of a planned capex of Rs 15,000 crore, the company so far has spent around Rs 6,593 crore. Are you looking to revisit the capex numbers as well?

Seshagiri Rao: We will incur the balance expenditure in the second half. We will be sticking to our target of Rs 15,000 crore for the financial year.

Interviewer: Let's talk about your overseas subsidiaries. How has the performance been so far, and what are you expecting from those subsidiaries?

Seshagiri Rao: As far as the US is concerned, steel prices have corrected due to weaker demand. In Europe too, both demand and prices are down.

The global situation is not very encouraging right now. Inflation and interest rates are up in both these economies, and the problem may continue for some time.

Our US operations incurred a loss of $15 million, one of the major reasons for which was substantial inventory losses. Otherwise, we may have clocked a decent profit.

In Europe, we have had a positive EBITDA of EUR 1 billion in the last quarter. I think it will be at that level in this half-year also.

Interviewer: Any more negative surprises from the US?

Seshagiri Rao: Depends on how prices move. All raw material prices have been marked to market as of 30th September. We're assuming there won't be any further correction in steel prices. If they fall further, then there could be mark-to-market losses, but we don't expect prices to fall. In fact, we feel the prices have already bottomed out.

Interviewer: What is your view of the Indian steel sector right now? What do you think the prices are like? How do you expect the next 12 months to be for the industry, and how different from the last 12 months? Could you give some guidance?

Seshagiri Rao: If you see the global situation, when demand is weak, we see rapid correction on the supply side. The supply-side adjustments happen quite quickly, responding to the fall in demand.

Globally, we don't expect steel demand to see a significant revival in the short term. In India, if I look at the first six months of this financial year, consumption has grown by close to 11.5 per cent. Therefore, Indian steel consumption is vital for the industry. There is government expenditure, demand from the auto and construction sectors, and various other industries which are doing quite well.