Jsw Steel

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Company Background JSW Steel Ltd, the flagship company of the JSW group, is a fully integrated steel maker and is ranked among the top 5 in India. It is the only manufacturer in India to use corex as well as blast furnace technology for steel production. The company’s upstream steel-making facility is located in Vijaynagar, Karnataka, and downstream in Maharashtra producing products ranging from MS slabs and hot rolled coils to value-added products like galvanized coils/sheets and cold rolled coils/sheets. The company offers hot rolled coils, plates, and sheets; cold rolled coils and sheets; galvanized sheets, coils, and corrugated sheets; pre-painted galvanized coils, sheets, and profiles; and galvanized corrugated sheets under the ‘Jindal Vishwas’ brand name. Its products are used for applications in automobile, boiler and pressure vessels, ship building, railways, transmission towers, oil and petrochemicals, marine containers, coal and mining, heavy engineering, white goods, cold rolled formed sections, general engineering and fabrication, packing, drums/barrels, furniture, household appliances, and roof, wall cladding, and other building products. It has operations in India, the United Kingdom, and the Republic of Mauritius. The company, formerly known as Jindal Vijayanagar Steel, Ltd., was founded in 1982 and is based in Mumbai, India. JSW Steel Limited is a part of O.P. Jindal Group. The company is on the threshold of a major expansion plan of adding 3 million tonnes (MT) to its current capacity of 3.8 MT by 2008 and further to 10 MT by 2010.

Source: JSW Steel India Steel Outlook Indian steel sector has shown one of the highest growth rates in Asia after China with domestic production and consumption increasing at a CAGR of 12.6% and 9.3% respectively during 2001-06. With GDP growth rate of more than 8% during this period and likely to sustain going forward, the positive correlation between economic growth and steel consumption leaves little doubt about the growth trajectory of the sector. Globally, India is expected to boost its current position of as the 5th largest consumer of steel in FY06 to second largest producer by 2015-16.

Capacity addition The steel ministry has set up a target of 124 MT of capacity by 2012 and 200 MT by 2020 which would be achieved through both brown-field and green-field expansions against the existing steel production capacity of 56 MT. Brownfield expansions are likely to contribute the major chunk of 62.5% at 40 MT by 2012, whereas green-field expansions would relatively add lower capacity at 28 MT due to land acquisitions problems faced by various steel companies including Arcelor Mittal and Posco for setting up their proposed steel plants. The proposed expansion plans would make India the second largest steel producer by 2015-16 after China, displacing Japan, US among others. These capacity expansions would entail an investment of Rs 276,880 crore (US$70 billion) by 2012 and Rs 870,640 crore (US$218 billion) by 2020 assuming investments of Rs 4,000 crore per MT. Factors driving growth Steel sector plays a pivotal role in a nation’s development and per capita steel consumption is considered as a good indicator of this development. Today, an under developed nation has per capita steel consumption in the range of ~5- 50 kg while a developing country would have it in the 50-250 kg range. Developed countries have per capita consumption of above 500 kg while select high population density small countries like Singapore (542.5 kg) and Taiwan (860 kg) are closer towards saturation point. India’s current per capita steel consumption is a dismal 40.1 kg. This is the level of an under-developed country and much below the world average of 184.5 kg. This is a good indicator that no material infrastructure development has occurred in the country in the past. China improved its steel consumption per capita remarkably from 83.4 kg in 1997 to 270.6 kg per capita in 2007. Fig: Per Capital Steel Consumption (in kg)

Steel being a core sector tracks the overall economic growth in the longer term. Also, the demand for steel is derived from other sectors like infrastructure, automobiles, and consumer durables and its fortune are dependent on the growth of these user industries. The growth of the infrastructure sector is primarily driven by the investment made into it. The ongoing & proposed road construction of both residential &commercial projects, airport privatization, port development, power and river linking projects are fundamental long-term growth drivers for the industry. The burgeoning investments of nearly $ 220 billion envisaged in infrastructure (airports, ports, roads, power generation) during FY07-12E are set to drive a major demand led boom in the steel sector. The Indian auto industry is also an important source of demand for the steel industry. The industry has shown a double digit growth in last few years and is expected to grow at the same pace on the back of rising disposable income, easy financing facility, new launches and many others. However the current recession has taken a toll on current automobile sales as well as investment in real estate and this is expected to translate to the steel industry as well. Company Performance through the Recession The metal sector, as a whole, is undergoing a tough time in terms of demand slowdown and fall in prices as a result of that. The unprecedented global credit crises have been putting pressure on economic activities of all the countries. Along with the US and Europe, where the recessionary signs are evident from their recent economic data, other major countries like Japan, China, Russia, etc are also facing the heat. The effects on the Indian economy have also been evident though on a relatively smaller scale. Being capital intensive, construction projects have been

worst hit in all these countries, as banks worldwide are facing a liquidity crunch and are reluctant to lend easily. Since construction contributes to more than 60% of steel usage, globally demand for steel also has been facing a significant blow. Also, automakers worldwide are facing falling sales due to lower disposable income of the people and, thus, have also been cutting down their production. This, in turn, has proved to be another setback for the steel sector. It is expected that this challenging scenario to continue for some more time. Thus, the steel sector, as a whole, would remain under pressure in the near future. In this context, the real threat for the sector might be China’s policy. Due to their lower cost of production, resulting from the easy availability of coking coal and coke, the domestic selling price is also lower compared to the prices in other countries. In this situation, the worst problem for the global steel industry would be if China starts offloading their products in these markets. Fig: Relative Price Performance

Q2 FY09 JSW Steel witnessed a satisfactory performance in Q2FY09 despite mounting pressure of raw material prices and other impediments. On a consolidated basis, the topline of the company came at Rs 4684.10 crore whereas, PAT stood at Rs 252.44 crore On a standalone basis, the company’s core EBIDTA rose in Q2FY09 by more than 22% YoY to Rs 1130.20 crore as against Rs 928.46 crore in the corresponding quarter of the previous year. On a consolidated basis, the core EBITDA margin fell by 738 bps QoQ to 25.61%, while the NPM margin dipped by 23 bps to 5.4%. The forex loss stood at Rs 264.32 crore on a consolidated basis.

Source: JSW Steel

The kind of performance the company saw in Q2FY09 can be attributed to the following reasons. Steep rise in cost of production:- The blended cost of production rose 86% YoY on a standalone basis. Prices of imported coke for the Vijaynagar plant saw an unprecedented rise of 91% YoY. Iron ore prices also surged by 62% YoY for the same plant. The effect of higher coking coal contract prices from $98 per tonne to more than $300 per tonne also had its effect felt during this quarter. Also, during this quarter, China hiked its export duty on coke by 15% to 40%. Since JSW imports its coke requirement from China, this added to further cost pressure. Depreciation in INR :- The continuation of sharp depreciation in the INR against the USD and other major global currencies during this quarter again forced the company to incur a substantial though marked to market (MTM) forex loss. Hurricane effect :- The pipe and plate mill facilities in US were hit because of the damage caused by the hurricanes. The company had to halt production temporarily during September 08. Demand slowdown :- The global credit crisis almost paralysed most of the economies in recent times. This led to a slowdown in most developed countries like the US and Europe. The emerging markets were also not spared. As a result of this, the whole metal sector has been facing the problem of a significant demand slowdown, which resulted in a sharp fall in steel prices. A comparatively less fall in the most important raw material i.e. coking coal/coke, on the other hand, has been putting pressure on margins. JSW is also no exception and its falling margins are testimony to that. During this quarter, inventory rose by 15% of the total production and it expects another 7-8% addition to that in October 08. Q3 FY09

JSW Steel reported a very disappointing set of numbers for Q3FY09. The company posted a net loss for the first time since 2001-02. Net loss for the quarter, on a consolidated basis, stood at Rs 187.83 crore (down 167% YoY and down 174% QoQ). The company faced severe margin pressure due to higher raw material costs and lower sales realisations. A significant drop in sales volume in this quarter also affected negatively. Consolidated numbers , on a QoQ basis, the topline showed degrowth of 29%. The EBITDA and EBITDA margin fell sharply by 58% and 1146 bps, respectively, over the previous quarter. Saleable steel production fell 18% YoY and 1% QoQ.

Source: JSW Steel

Lower demand raises inventory levels:- The company witnessed severe pressure in terms of very low demand for its products during the quarter under consideration from all of its consumer segments starting from automobiles to infrastructures i.e. construction and real estates. The company, in fact, could not sell any quantity during October. The sharp and sudden drop in demand resulted into higher inventory, which went up to 4-4.5 weeks for the finished goods as compared to a comfortable average level of two weeks. This forced the company to cut its production by 20% in November saleable steel for the quarter also came down 18% YoY to 0.711 MT in Q3 FY2009.

Margin continues to shrink:- Higher coking coal prices and a sharp fall in realisation continued to put pressure on the margin. The EBITDA margin, on a consolidated basis, fell to 15.23%, down by 1146 bps on QoQ basis. EBITDA/tonne also fell accordingly and way below the company’s comfortable target level of US$200-300/tonne.

Falling raw material prices:- An unprecedented rise in raw material prices has been denting the profitability of the company for the last few quarters along with other steel producers. Thus, five to six months back during the boom period spot prices of iron ore and coke went up much higher than their contract prices. Since JSW Steel purchases most of the raw materials from the spot markets, e.g. 55% of its iron ore requirement, its cost of production had gone up substantially during that period. However, for the same reason the company is in a better situation now as raw material prices have started falling from their peaks sharply during the last couple of months. Spot prices have become much cheaper than the contract prices.

Measures Taken by Company to Counter Challenges Other than the fall in raw material prices, the company on its part also has been taking several steps to combat the challenges posed by the sharp slowdown in

demand. The relevant steps that the company has been taking to remain competitive can be divided into two types a) cost saving measures and b) improved strategies. a) Cost saving measures:i) The company has been cutting its cost of production by Rs 8500 per tonne, of which Rs 3500 would be on account of lower raw material costs and the balance Rs 5000 has been saved by way of increasing operational efficiencies, mainly through several cost cutting measures. ii) Use of scraps was increased to 10% from the earlier 5% in the blast furnace due to much sharper fall in scrap prices against coke prices. iii) The company, at its current capacity, does not need to purchase coke from the market and can convert full coking coal requirement into coke in its coke oven batteries, which now have a total capacity of 2.7 MT. At the increased capacity of 7.8 MT the company will, however need to buy around 20% of its total coke requirement from the market. iv) The iron ore beneficiation facilities have also been set up to reduce efficiency loss due to lower grade of iron ore. b) Improved strategies i) The company is targeting the oil and gas sector and also the rural markets as its new focus area, as there lies a good opportunity in these sectors. ii) Due to very lacklustre demand from the auto segments JSW is turning its focus from HRC and other auto related flat products towards more value-added long products and bar and wire rods. iii) The company has set up its wire rod mill during this quarter and is able to produce 2.5 tonnes of wire rod, which is the heaviest and unique in India. Also, JSW is focusing on producing API grade slabs and plates (300 mm wide) to tap the demand from the oil and gas sector in the south-western part of India. iv) To keep its inventory at comfortable levels and to ensure sale of its products after increased capacity the company, in this challenging situation, is aiming to substitute imports. Seeing the recent volumes, import substitution can create a demand of about 4-5 MT annually from domestic steel mills. v) Due to higher debt gearing (1.25 for standalone and 1.75 for consolidated) the company has rescheduled its expansion plans. The 3 MT capacity expansion was delayed and is now likely to be commissioned during March 2009. The 10 MTPA expansion that was earlier likely to be commissioned in March 2009 has now been currently rescheduled between October 2010 and March 2011 along with the 300 MW power plant.

Conclusion The global economic situation is still very uncertain and is likely to remain so for a few more quarters at least till H2FY10. Global GDP growth is also likely to shrink

further from 0.5% according to the IMF in its latest forecast. The developed countries will continue to be the worst affected. However, the developing countries cannot remain insulated from the slowdown though the extent is likely to be lower comparatively. In this scenario, steel demand will continue to be hurt. However, the stimulus packages being announced by most of the major economies including India are mainly aimed at the infrastructure sector. This is a ray of hope for steel companies including JSW Steel in this cloudy environment.