The Hindu Business Line : `Orissa project crucial for cutting down raw material imports'

JINDAL Stainless has ended the 2003-04 fiscal on a robust note. The company expects to sustain its topline growth primarily on continuing strong demand for stainless steel, Mr Arvind Parakh, Director (Finance), told Business Line. Excerpts:

A comment on your full year performance that just ended.

This has been one of the best years for the steel industry. We have been able to grow much more than the market. In the last five years, our topline has grown by 20-25 per cent even as the market was in a negative phase.

We have been able to grow our exports and capture markets. Our domestic market is also growing. The other major factor that helped us was the decline in interest costs.

Most companies had high interest costs of 10-14 per cent; they are all now below 10 per cent. The year ended was one of the best years financially; our average cost of debt has come down to under two per cent from 10 per cent at the beginning of the year.

Rupee appreciation and active treasury management helped us to bring down interest cost. Four years ago, our average interest outgo was around Rs 130 crore; it has come down to Rs 20 crore.

What is your outstanding debt position at present?

Our long-term debt is around Rs 530 crore. About one to one-and-a-half years back, 25 per cent of our debt was made up of foreign currency loans. Now the foreign currency loans form 60-65 per cent of our total debt. We have large exports and it is viable to convert liabilities into foreign currency.

You recently announced capex plans of Rs 950 crore and an ECB of $100 million? Where would they be deployed?

Our capex plans of Rs 950 crore is for our Orissa project. We are going in for backward integration primarily to capture the raw material supply. Going forward, a big risk facing Jindal Stainless is the raw material availability and costs.

As our expansion has gone through, we will be subjected to the fluctuations in raw material cost. For this project, our debt equity ratio would be 2:1. The debt portion would be a combination of ECB of $100 million and Rs 250 crore long-term rupee borrowings.

We have acquired the land and have made critical orders for the ferro chrome project.

This project will be completed in various phases; the first ferro chrome plant will be completed by March 2005. By June 2005 we should be completing this entire project.

We are completing this project speedily, because, in addition to strategically giving us the raw materials, it will also give us tax leverage.

How much do you expect to save on raw material costs from this project?

Our own ferro chrome facility with a capacity of 40,000 tonnes helps us to meet requirements of 30-35 per cent. The rest we have to import. Ferro chrome prices have gone up from 28 cents a pound two years back to 55 cents. If we produce our entire raw material requirements we will be able to improve our margins.

In the event prices of raw materials coming down, would you lose out? Would that be a disadvantage?

We feel that with demand from China remaining quite robust for the next 2-3 years, there will be a shortage and tightness for raw material availability. We do not foresee any major decline in raw material prices in the near term.

Over long-term period you could expect prices to soften but so would the prices of finished goods. On an overall basis our margins will improve because of this project.

Even if these raw material prices come down, the integrated nature of the project will act as a hedge. It also makes us globally competitive.

Can you explain the synergies between ferro chrome, ferro manganese and silico manganese, which you plan to produce at your Orissa greenfield project?

These are all raw materials for our stainless steel. There are three categories of stainless steel - 200 series, 300 series and 400 series.

In the 300 series, the nickel component is high, while the 400 series has no nickel component but a lot of ferro manganese and ferro chrome. The 200 series uses nickel but ferro alloys form the major component.

Stainless steel of the 300 series is used for high-end use - pressure vessels, underground vessels, water treatment plants, etc.

The 400 series is used in crockery, appliances and for catalytic converters for cars, while the 200 series is prominently used in utensils, piping and tubing.

How promising are the export markets for stainless steel?

Over the last 3-4 years we have been focusing on the export market. Exports, which stood at less than 10-20 per cent, have risen to 45-48 per cent for the year ended March 2004.

Asia was the major driver and within Asia, it is China. Demand for stainless steel in China has been growing at 25-30 per cent. Stainless steel production is unable to keep pace with the demand and imports are significant.

In a 4.2-million tonne market, China's imports are close to three million tonnes. New capacity will take at least another 3-5 years to come up. We have a three-year time period for sustained exports. Even as we are reducing our dependence on China, we are entering other South East Asian markets.

How have you been able to cope with the rupee appreciation considering that you have large exports?

The rupee appreciation would have hurt us normally but because we import nickel and scrap we have been able to nullify the impact of rupee moving up against the US dollar.