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JSW Group sees opportunity in a sectoral crisis

| | Updated on: May 30, 2016
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Its peers are selling their crown jewels to retire debt, but the Sajjan Jindal-owned group is going bargain-hunting

When the going gets tough, the tough get going. And sure enough, at a time when many metals-and-minerals companies have been brought to their knees by a downturn in the commodities cycle and an adverse turn in the regulatory tide, and forced to sell their crown jewels in what has been billed as the ‘Great Indian Fire Sale’, one corporate group has emerged relatively unscathed from all this, and is in fact looking to pick up some prime assets on the cheap.

That group –– the Sajjan Jindal-owned JSW Group –– has been well served by its prudent invest-what-you-save strategy. The Group may be debt-heavy and may have gone on an acquisition spree, but it has managed to meet most of its capital requirements across its operations –– steel, energy, ports and cement –– through cost savings, by improving operational efficiency and by preserving cash for future expansion.

On a bargain-hunt

Today, while its peers are selling their assets to retire debt, JSW is on a bargain-hunt: it is looking to acquire power projects and has even made an exploratory bid for rival Tata Steel's loss-making asset in UK.

Not everyone has a sanguine view of JSW’s debt burden. Just last month, credit rating agency Fitch Ratings downgraded the Group’s flagship JSW Steel, citing declining profits and rising leverage during a prolonged period of weak international steel prices, coupled with debt-funded investment in capacity expansion.

However, Seshagiri Rao, Joint Managing Director of JSW Steel and Group CFO, who spearheads the Group’s strategy, is not excessively worried about the ₹38,460 crore debt (as of the March quarter). In fact, even after adding four million tonnes to take its annual steel capacity to 18 million tonnes in the past two years, the company’s debt level has come down.

Debt level ‘comfortable’

“We are absolutely comfortable with the current debt level. Despite massive capacity expansion, our debt position has remained almost stagnant as we are raising fresh funds only to the extent of the loans we repay,” he said.

In fact, he added, the company has prepaid a few rupee loans to raise fresh funds and bring down the overall cost of borrowing by 60 basis points.

“We can free up more cash for expansion by focussing on efficient use of working capital. We have reduced our inventory by 1.40 lakh tonne to free up working capital for new projects. Going ahead, we intend to borrow only to the extent of our loan repayment,” he said.

Although the extent of JSW Steel’s leverage will moderate when newly added capacity goes on-stream, Fitch expects the company to be hit if it goes on a debt-funded expansion and the government decides to lift the regulatory protection. Given the heightened competition among domestic producers to support utilisation rates, the rating agency sees constraints on further steel price hikes in the near term.

Eyeing Tata Steel UK’s plant

JSW Steel’s bid for Tata Steel UK has come as a surprise, particularly since Jindalk’s company itself has taken an impairment charge of ₹2,100 crore on its global assets in the December quarter.

Rao told BusinessLine that the company’s interest in the UK asset of Tata Steel is just at an exploratory stage, and that no concrete plans have been finalised.

“Our intention is to find what kind of optimal synergy we can work out between our Indian operations and the UK steel plant that is on the block,” he said.

Asked what JSW Steel could do differently from the Tatas, Rao said the company is well aware of the difficulties of manufacturing in developed markets, and that a deal would be finalised only if there was synergy.

The debt hangover

Banking on buoyant global and Indian economic growth, metal companies made huge investment on expansion and acquired assets overseas with borrowed money.

In 2007, JSW bought three pipe and plate mills owned by Sajjan’s elder brother PR Jindal for $940 million and followed it with the acquisition of iron ore and coal mines in Chile and the US. Unfortunately, the global acquisitions have not added any meaningful profit to JSW’s bottomline. In fact, the situation would have been worse if the company had acquired Italian steel maker Lucchini SpA in 2014.

Much of the debt on JSW Steel’s books has been inherited from the sick companies it acquired over the years. In 2010, JSW bought debt-ridden Ispat Steel at Dolvi in Maharashtra with a capacity of 3.3 million tonnes and subsequently merged it with itself to claim deferred tax benefits of over ₹2,088 crore. In a bid to secure the raw material needs of the Dolvi unit, JSW bought over sponge iron unit Welspun Maxsteel in an all debt-deal of ₹1,000 crore.

Mining ban

In 2011, the metal industry was caught unaware when the Supreme Court, in an effort to root out illegal mining, issued a blanket ban on mining.

Domestic economic growth also failed to keep pace with capacity expansion.

The clampdown and the strictures by the Supreme Court led the Government to enact the Mining and Mineral Development and Regulation Act, which effectively pushed up the cost of mining in India.

Adding fuel to the fire, cheap imports from China and from trade partners such as Japan, Russia and South Korea rattled the steel companies already groaning under debt.

Reacting to the large-scale dumping, the Government levied a ‘safeguard duty’ and fixed a Minimum Import Price on steel imports.

While JSW Steel has so far managed to wade through the troubled waters that have swirled around the sector, its ability to take advantage of the anticipated revival in steel demand will face a reality check.

Published on January 20, 2018

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