Steel baron Sajjan Jindal beefed up capacities and turned around sick steel mills during the commodity downturn.
Recent economic turbulence has made steel magnate Sajjan Jindal resilient and wiser. In 2015/16, when demand was picking up in India, he shifted JSW Steels focus to the domestic market, widening its footprint in the south and developing new markets in the east and north east. Besides, he enriched the product mix with new steel grades, enhanced quality benchmarks and rationalised cost structure to reduce erosion of margins. But the steel demand scenario changed after the central government demonetised high value currencies in September 2016. Jindal demonstrated his agility by boosting exports and changing the product mix to offset the domestic slowdown. Consequently, export volume sales rose by 153 per cent in 2016/17. The export turnover increased by 295 per cent to `10,922 crore.
During the lean phase in recent years, Jindal has initiated performance improving initiatives. He introduced a diversified sourcing strategy; optimised logistics and procurement costs and refocused on improving yields and productivity. As a result, the standalone operating profit (earnings before interest, tax, depreciation and amortisation or EBITDA) for 2016/17 grew by 81 per cent to `11,543 crore, and the EBITDA margin increased to 22.1 per cent from 17.4 per cent. The sales of high margin value-added steel, which comes to a sizeable 34 per cent of the overall sales, climbed 17 per cent to 5.06 million tonne (MT). Net debt to EBITDA improved to 3.41 from 6.39 and net debt to equity improved to 1.85 from 2.18. In the last financial year, JSW Steel produced 15.8 MT crude steel - highest ever for the company - after the addition of new capacities at its plants in Vijayanagar, Dolvi and Salem.
Jindal told Business Today that JSW Steel will add capacities organically and inorganically to stay ahead of competition. "Today we are the largest steel producing company in India and we will continue to be in the same position in future. We have a very aggressive growth strategy and a very efficient project monitoring team. It ensures that we continue to build steel plants at nearly 50 per cent cost compared to our competitors globally," he says.
JSW Steel has also outlined a `26,800 crore capital expenditure (capex) programme to expand overall steelmaking capacity to 23 MT by March 2020, up from 18 MT. "These key projects will be set-up at a very competitive capital cost and will improve our return ratios," Jindal said in the companys annual report. The capex plans have been outlined to achieve backward and forward integration, capacity expansion and cost reduction.
Jindal's JSW Steel had contrasting fortunes when the steel cycle slipped twice in the past two decades. In the late 1990s, when the young Jindal was building the steel plant at Vijaynagar in Karnataka, the industry was in the doldrums and steelmakers had become loan defaulters. Jindal's Jindal Vijaynagar Steel Ltd (later merged with JSW Steel) was one among them and it took five years for the company to come out of corporate debt restructuring (CDR). The second time the steel industry crashed, post the global financial downturn, JSW Steel was financially sound enough to play the predator, scouting for sick assets. JSW Steel acquired Ispat Industries and Welspun Maxsteel and evinced interest in acquiring sick steel assets like Bhushan Steel and Monnet Ispat before they were taken to the National Company Law Tribunal by its lenders for defaulting on loans. The struggle of the steel industry hasn't reflected much in the financials of JSW Steel in these years. The company has always posted operational profits - even after the global financial crisis and fall of commodity businesses. Since the downturn (between 2008 to 2017) its standalone revenues have grown nearly five times to `56, 913 crore and its profit more than doubled to `3,576.5 crore. It has expanded its range of steel from flats, long, special and value-added categories to include high value-added, auto and electrical grade steel as well. It had a net debt of `41,549 crore at the end of last fiscal.
"Between 2009 and 2012 a lot of capacities were created in India in various sectors. This led to excess capacity in most industries," says Jindal. Even though the Indian steel sector is one of the most competitive in the world, the strategy of distress exports by China - it dumped steel at predatory pricing - over the past few years was hurting the domestic industry, he elaborates.
Overall, the import duty on Chinese steel products helped the Indian industry recover. However, JSW Steel was always better placed than its peers. "Our company can convert iron ore into steel at a cost of $115 per tonne, which is the worlds most economical," said Seshagiri Rao, Joint Managing Director and group CFO of JSW Steel, recently. The average cost of the players without mines in India is above $250 a tonne.
The Supreme Court's decision of August 2011 to ban mining in Karnatakas Bellary-Hospet region was one of the major hurdles for JSW Steel. It was sourcing 50 per cent of the iron ore for its Vijaynagar plant from there. It was a lesson for Jindal and he pursued acquisition of iron ore and coking coal mines thereafter. JSW Steel acquired five iron ore mines in Karnataka with an estimated reserve of 111 MT in October 2016. These are expected to meet around 20 per cent of the Vijaynagar plants requirements. The company also won a mine in Jharkhand, which has extractable coal reserves of 30 MT.
Jindal believes that there are enormous opportunities in India. "JSW Group has performed well in a challenging environment. I always tell my colleagues and team members to look at each crisis as an opportunity," he says.
Why is Jindal bullish on steel? JSW forecasts a shortage of steel in 2021. The effective capacity of steel companies is 110MT in the country. Last year, the country consumed 97 MT of steel and steel demand is growing at 4-5 per cent. With an incremental demand of 5MT a year, the surplus of 13 MT available today will be absorbed in the next two years. So, there will not be any capacity available to meet the growth in demand by 2021 and will lead to imports, underscores Jindal.
Indeed, nobody is investing in steel despite the price pick up. Steel prices have risen 10 per cent in the past six months. "Banks are not funding steel because of NPAs. Steel companies are not being able to spend on new projects because of stress in balance sheets. There is a problem. JSW Steel is financially well positioned to take a call on investments. So we can be ready by the time there is a demand growth," Rao recently told Business Today.
JSW is doubling crude steel capacity at Dolvi to 10 MT at an investment of `15,000 crore. The company has taken up revamp and capacity upgradation of third blast furnace at Vijayanagar at an estimated project cost of `1,000 crore. The company is also investing in downstream projects - cold rolling, galvanizing, tin plate and colour coated.
JSW is mainly into core sectors and with GDP growth estimated at 7-8 per cent "enormous opportunities will come our way", believes Jindal.