JSW plans big expansion, banks on cash flow to limit debt
JSW Steel is on the cusp of a major expansion, aiming to double its capacity to 36.5 million tonnes per year. Taking advantage of the persistence of record earnings, the company says it may no longer need to go into debt if it continues to generate at the current rate.
The CEO and CFO of the company Seshagiri Rao tells The telegraph that there is no way JSW will slip into the red even if the steel cycle is spinning. Rao also spoke about cost pressure and pitched the idea of ââlevying a surcharge to cover soaring coking coal prices.
JSW Steel’s EBIDTA (earnings before interest, taxes, depreciation and amortization) increased in absolute terms but EBIDTA per tonne declined in n Can you explain?
Our combined sales achievement increased 5 percent while costs increased 19 percent. Coking coal prices have tripled; from $ 110 to $ 120 per tonne, it rose to $ 400 per tonne. Iron ore prices have fallen globally, but not to the same extent in India. All other input costs, power, ferroalloy, etc., have increased. As a result, EBIDTA per tonne has fallen by around Rs 2,500 per tonne. However, sales volume increased, which contributed to the increase in absolute EBIDTA. The same story will continue in the future as the new 5 MT expansion at Dolvi goes into production. Absolute EBIDTA will increase (this year).
What production do you aim for in 2021-22?
Our production will be 22.9 million tonnes (mt), of which 18.5 mt from JSW Steel, 2.8 mt from BPSL, 0.6 mt from Monnet and 1 mt from the US operation. Sales forecasts are 21.6 million tonnes. The second half will be better thanks to the expansion of Dolvi and the integration of BSPL.
Why did JSW integrate BPSL when it was not planned at the time of acquisition?
BPSL did very well. He made an EBIDTA of Rs 2,020 crore in the second quarter. There was a debt of Rs 13,300 crore at the time of acquisition. We have already paid off Rs 3,300 crore from cash flow plus there is a cash balance of Rs 2,000 crore. The net debt is Rs 8,000 crore which means almost a debt of 1: 1 compared to annualized EBIDTA. Thus, the need to have a separate structure does not make sense.
JSW now owns around 87 percent of BPSL. Will it be merged in the future?
We keep a separate business until the turnaround. In the case of BPSL, a case is pending before the Supreme Court. Until the judgment, he will remain separated.
JSW is considering additional raw materials to ease cost pressures. Can you explain the proposal to us?
We have to find a way to deal with volatility. Globally, the surtax exists in the United States where steel prices are tied to scrap prices. In Europe, a large producer announced an energy surcharge of $ 50 per tonne. But it is new in India. The success of the idea depends on customer acceptance. We will discuss it with them.
Do you only look at OEM customers who have long term contracts for the supplement?
Yes, but not in the retail or export market. (OEM accounts for 50 percent of JSW’s sales).
What will be the impact on the Q3 coking coal account?
It will be a cost pressure of $ 100 per tonne versus $ 30 per tonne that we had absorbed. For the supplement, we will take a base price on July 1. Then we (the supplier and the buyers) must agree on the impact of any increase in the base price per tonne of steel.
The prices of iron ore are falling. Will JSW benefit from it?
Iron ore prices have halved from a high of $ 230 per tonne to $ 110-120 per tonne globally. In India, prices have gone from Rs 6,500 per tonne to Rs 1,800 per tonne, this will be reflected in the third quarter.
How is the demand scenario expected to evolve over the next two quarters?
The recovery in demand in the second quarter was not good. But we are very optimistic about the recovery in the second half. Solar, household appliances, packaging will be doing well and construction is resuming. We anticipate strong demand for steel from the transition to renewable energy globally.
What is JSW’s roadmap for the next three years?
We will go to 36.5 meters by 2024 from 18 meters. Operation Vijaynagar will be 19.5 mt against 12 mt, Dolvi will double to 10 mt. In Bhushan, the capacity goes up to 5mt.
This means that JSW will not be able to reduce its debt …
I don’t see it that way. If the company achieves an annual EBIDTA of Rs 50,000 crore (it reached almost Rs 24,000 crore in the first quarter), the cash flow will be sufficient to finance the expansion, after taking into account dividends, interest and taxes. The debt is not increasing.
But what if steel prices fall from this historic level?
JSW’s annual interest and depreciation cost is 5,000 crore rupees. Our Ebidta was Rs 26,000 per ton. This business will never fall into the red even if steel prices go down. Considering the average EBIDTA of the last 7 years, taking into account the structural changes made during the period in terms of increasing the share of value-added products in sales and cost reduction programs, JSW is a foolproof company.
JSW may still have to go into debt to grow if prices fall?
Our net debt to EBIDTA is 1.58 times that of September 30, 2021, but our commitment is not to go beyond 2.75 times. So there is enough margin for us (in the event of a drop in cash generation or new debt). The total cost of the expansion (from 18 to 36 million tons) will be Rs 51,500 crore while the net debt will be Rs 65,000 crore (assuming there is no new borrowing) . It’s very competitive. There is no way this business could falter.