Interview: Seshagiri Rao MVS - Director-finance, JSW Steel

(FE 26/11/2006) Mumbai - The Indian steel industry is in the limelight on account of the intensifying consolidation and rising raw material prices. With the entry of new foreign players, the domestic players are strengthening their presence, increasing capacities and working towards integration. JSW Steel is one such integrated player with focus on flat products. Seshagiri Rao MVS, director-finance, JSW Steel speaks with Jitendra Kumar Gupta of The Financial Express about the recent developments in the industry and the company.

How much is your current market share in comparison to your immediate competitors?

JSW steel is a major player in flat steel products in India and the second largest steel company in the private sector. We have various flat steel products with different applications in different industries such as automobiles, housing, tubes and pipes, LPG cylinder and white goods industry.

We have a 3.8 million tonne steel capacity as on date. While in terms of market share, we have 12% market share in HR coil, in case of galvanised steel we account for 14% in the domestic market. We have the largest galvanised steel facility in India, in fact larger than SAIL. We have 9,00,000 tonne pa capacity.

The Indian steel industry has been in the limelight recently as the Indian players are acquiring companies globally. Do you intend to step up some of the organic or inorganic initiatives to grow?

India has the distinctive advantage of low cost base and we want to make India as a manufacturing hub for basic steel making. We have been on the lookout for acquiring value added facilities close to the markets. However, in the case of basic steel making capacity acquisitions overseas, we will not go for acquisitions until it is very attractive, having raw material linkages.

As far as the business model we propose to follow is concerned, JSW will continue to process basic steel in India and if any value added facilities are available overseas, we would like to make acquisitions in those areas. These facilities will be used for converting basic steel produced in India into value added products and selling directly in those markets.

Have you taken any step in this direction?

We have been working on these initiatives for the last one and half to two years, and looked at certain facilities, and are evaluating them. At this point in time the proposals are at various stages of evaluation.

Which are the demand drivers for the industry and how do you plan to grow?

The Indian steel industry has a bright future. The demand drivers are strong and these will increase the steel consumption in India. One of the major steel consuming industries, the automobile industry, is growing at more than 19% in India. The infrastructure sector is growing quite fast and a huge amount of investment is lined up over the next five years. Similarly, the housing and white goods sectors are showing a double-digit growth in India.

Last year, the flat steel demand has grown at about 17% in India. Generally, in an economy the steel demand grows in line with the GDP growth for some time and then it takes off and surpasses the GDP growth. Today in India we are building up our economy from an infrastructure angle. In the years to come one can expect the Indian steel industry growth surpassing the GDP growth. The Indian steel demand from the existing 40 million tonne today is expected to grow at not less than 10% pa in the years to come. By the year 2010-11 the industry will have at least 65 million tonne of demand.

As coal and iron ore happens to be key raw materials for making steel, the rising raw material prices have compelled most of the industry players to secure supplies. What are your initiatives to subdue the soaring prices?

We have one of the most integrated steel plants and our cost of production is significantly low. Our EBDITA margin is the sixth highest in the world as per our internal estimates.

We have the advantage of operating our plant in the iron ore rich belt in the state of Karnataka; about 11% of the total iron ore reserves of India are located in this state. While as far as our security of the raw material sources namely iron ore is concerned, we have about 25-30% of our total requirement being met from our captive sources.

Being in this rich iron ore belt we do not find any difficulty procuring rest of the iron ore requirement at a competitive rate, because of the locational advantages we have. However, we are also making efforts for increasing our captive sources from 25-30% in the years to come.

JSW currently imports coal from Australia and we have taken several steps such as signing a long-term M-U assuring supplies with the Australian companies. We are also looking at other countries like Indonesia and Canada to ensure that we secure the coal that will be required by the company in the years to come. We are also working to own coal mines, which will further save the cost of production.

What are your expansion plans? How are you planning to finance the same?

In India we have been growing and aggressively expanding our capacities. We were a 1.6 million tonne steel plant in 2003. Within just four years time, we have today become close to 4 million tonne capacity and are further expanding it to 6.8 million tonne. We aim to become a 10 million tonne steel plant by 2010. Considering the infrastructure growth in India we are also diversifying into long products having application in construction and infrastructure industry. We have incorporated 1.5 million tonne of long product capacity in our existing capacity expansion plan.

As the global steel majors are anchoring grounds in Indian steel market, how have you planned to take on the threat of the intensifying competition?

India needs about 65 to 70 million tonne of steel by the year 2010, and if we consider the brown field projects alone it would not be possible to meet the growing demand by the year 2010-11. So there is enough room for the green field projects in India, whether it is from the existing players or new players.

Steel prices have been stagnant for a long time. Besides this, there is ramping up of capacities in the industry. What is your take on this?

Compared to other commodity companies, steel companies are looked at in isolation, with low P/E multiple in the market. As aluminium companies command higher P/E multiple, due consolidation happened in the aluminum sector which has not happened in the steel sector. Now the activity of the consolidation is intensifying in the steel sector. The consolidation will result in stability in the prices of steel. Earlier, Japan used to lead price negotiations for buying iron ore. Now, it is China, being the largest steel producing and consuming country and accounting for almost 40% of the world steel production. Therefore, the power of negotiating increases being the largest player.

If we look at the recent past, the consolidation in the steel industry has helped in stabilising the steel prices. Whenever there was a fall in prices there has been discipline from the production side, nobody was willing to sell at low prices. This in turn resulted in prices again picking up in the market.

The steel prices cannot be expected to remain at $600-650 per tonne. The limited supply of iron ore and coal in the world keeps the cost of steel making with less scope for huge correction in the steel prices. In the long-run, I think $400-450 is the range in which the steel prices will stabilise. As far as additional capacities are concerned there is enough demand in the domestic market. India can absorb it and we will not have to rely on exports.

What is your take on full year revenue and margins?

If there is correction in the steel prices the margins will be under pressure. But we will continue our efforts to preserve our margins at current levels, as we are focusing to bring down the cost of production. And as our new capacities will be commissioned, our fixed cost, cost per tonne will come down drastically.

We have given our yearly guidance while announcing FY06 result, which we may not be able to achieve, because our expansion project of 1.3 million tonne was delayed and now it will be operational in November 2006. Due to this our full year production of crude steel or saleable steel will be in the region of 2.8-2.9 million tonne as against our earlier guidance of 3.1 million tonne, still showing a growth of 25% over the previous year. Considering the kind of plans we have, the company in the future can grow at 25-30% in volumes till FY09.