What a year it has been for Sajjan Jindal. First came the Karnataka anti-graft watchdog’s report allegedly linking the steel maker with illegal iron ore mining in the state. Then, a mining ban subsequently rendered JSW’s critical long-term ore supply contracts with state-owned miner NMDC invalid, thereby exposing the company to volatile and escalating spot market prices for nearly a fourth of its requirement. A month later, in early October, the CBI paid a visit to JSW’s offices to seek details of ore procurements. Finally, on May 11, 2012, the Supreme Court ordered a CBI probe into JSW’s donations to a trust owned by former Karnataka chief minister BS Yeddyurappa.
These developments have been nothing short of calamitous for one of India’s top steel makers that was on an astronomical growth trajectory, outpacing even the Tatas to emerge as the top private sector steel maker in the country. But thanks to the Karnataka fracas, the company had to forego Rs 3,000 crore of additional earnings before interest, depreciation, tax and amortisation (Ebitda) as well as a million tonnes of steel production in the last fiscal. Consequently, the JSW Steel stock has lost more than half its original value since July. At the day's close on May 21, the market capitalisation of JSW is around Rs 13,000 crore, approximately half of what it was in the last two years when the scrip touched a high of Rs 1,185 per share.
| SAJJAN JINDAL’S ORE PROBLEM |
| * Current steel capacity: 10 million tonnes at Vijayanagar, Karnataka |
| * Requirement based on capacity: 16 million tonnes* |
| * Revised production target for 2012-13: 8.5 million tonnes** |
| * Ore requirement in 2012-13: 13.6*** million tonnes |
| * NMDC to produce 10-12 million tonnes in Karnataka, JSW to buy 60% (6-7 million tonnes) |
| RELIEF AROUND THE CORNER? |
| * Category A Mines to produce 9 million tonnes |
| * Category B Mines can produce 11 million tonnes. Awaiting Supreme Court go-ahead |
| * JSW hopes to procure 6-7 million tonnes from category A+B |
| * 1 tonnes of steel needs 1.6 tonnes of iron ore; ** Total steel production in Karnataka: 19 million tonnes; *** Total ore requirement in Karnataka: 30 million tonnes |
“Where have we gained? We are actually victims,” says Sajjan Jindal. “All that we got after investing Rs 50,000 crore in the state to make the largest steel plant are broken promises. For seventeen years, we have been waiting for mining concessions which were promised to us,” he adds.
Here’s how bad the situation is for the steel maker. If JSW Steel was able to source iron ore fines at Rs 1,200-1,300 per tonne before the mining scandal, the bill is now three times larger. Ironically, the days prior to the price rise were supposedly the company’s ‘darkest phase’ when production plummeted by 30 per cent and two blast furnaces had to be “idled”—a body blow for any steel mill.
No surprise, then, that the impact of this average 30 per cent higher raw material cost have squeezed margins in the last three quarters. From 23.5 per cent a year ago, it’s down to 17.3 per cent in the fourth quarter alone. On an annualised basis, end March, JSW Steel’s total raw material bill stood at Rs 20,960.11 crore compared to Rs 14,803.09 crore just 12 months ago. Fortunately for Jindal, both coking coal—used to fire the blast furnaces—and iron ore prices have been cooling off.
Shortage of ore also means that Jindal has been forced to put the brakes on his aggressive expansion plans in Bellary. Even though JSW is spending Rs 6,000 crore on capital expenditures to take its current capacity to 12 million tonnes, any further scaling up to 16 million tonnes (mt) and then to a staggering 20 mt, has been mothballed. “We can run the 12-mt plant with the 30-mt iron ore cap (SC panel recommended ceiling), but no further expansion will happen if this cap is not relaxed or we are given iron ore mines,” Rao says emphatically.
Is the worst over then? “We are still passing through it,” he adds, candidly.
There is, however, a silver lining to these dark clouds.
JSW needs 16 mt of ore to make 10 mt of steel. But with its plant running at 80 per cent capacity, that requirement has come down to 13 mt. The apex court has fortuitously approved a partial lifting of the mining ban, allowing someone like NMDC to now produce 10 mt locally. JSW plans to buy 60 per cent of NMDC’s supply to feed its own blast furnaces. The residual 6-7 mt will come from the local mines that will gradually open up.
“Mining had totally stopped in July last year but recently the SC ordered opening up of the category A mines which will bring in additional iron ore,” adds Seshagiri Rao, Joint MD and Group CFO, JSW Steel, and arguably the group’s second-in-command. “It will take 2-3 months time to open these mines. We are also expecting the SC to order to open category B mines as well,” he adds.
If category B mines are also opened, then the Karnataka steel sector will see a further influx of 11 mt of ore. Even then, JSW is playing it safe by outlining a conservative production target of 8.5 mt, higher by a million tonne compared to what it produced last fiscal.
Jindal’s investments in technology will also come in handy, allowing it to produce high-grade steel with low-grade ore (The Fe content in ore varies. It would be very difficult to give an accurate number but could be roughly in the range of 52-55 per cent). “The captive sintering/pelletisation facilities should be a key beneficiary once mines are reopened and pricing left to market dynamics. JSW Steel has a 10-mt beneficiation facility, a 14.5 mt sintering and a 9-mt pellet facility. These will enable JSW to utilise cheaper low-grade fines and substitute it for high-cost lumps,” says Ritesh Shah, metals and mining analysts, Espirito Santo Securities.
Yet, many analysts still remain a sceptical lot. “The timing of a resumption of mining is unclear. Production from category A mines will likely be 10-12 mt in a steady state, insufficient to meet requirements of Karnataka steel plants. The Supreme Court has not passed any orders with respect to resumption of mines in category B,” wrote the analysts with Kotak Institutional Securities in their May 15th note. “While we agree with JSW’s assessment of 7 mt of visibility, the grade of ore remains a question,” the analysts add.
Through all of this, the captain of the ship remains an optimist. “Our short-term pain will give us long-term gains. With no exports, the situation is bound to get stable in the end,” says Jindal. So far, he has braved the odds: Standalone revenues, a better indicator of the Karnataka knockout, have gone up 35 per cent year on year, and so has steel production—up 16 per cent, despite the September quarter crash. But at the end of the day investors will only draw succour from profit figures, and that is still down.
Net profit for the fourth quarter ended March 31, 2012 stood at Rs 752.18 crore as against Rs 832.66 crore in the same period FY11. For the entire year 2012, the company recorded net profit of Rs 1625.86 crore as against Rs 2010.67 crore in FY 11.
For JSW Steel to restore the lustre of its past, these numbers will have to improve.
