Seshagiri Rao MVS, Joint Managing Director and CFO, JSW Steel, is known for his plain speaking. Being a former banker and now heading a $11 billion conglomerate, he has a holistic view on various issues troubling the economy — and possible solutions for them. Rao is involved in every decision within the group, right from finalising the blueprint for expansion to preparing a strategy for sourcing raw material. He recently visited Business Line’s Mumbai office for a brainstorming session with our editorial team. Excerpts:

Will the new ordinance help manufacturing sector?

The Government has done well to act on the four problematic areas — land, mineral resources, approvals and capital raising — which were constraining the manufacturing industry. On land, it has identified the consent clause, social impact study and compensation as prick points. It left the compensation part untouched for different reasons, and tried to remove the other two hurdles.

Industries in five sectors (security, defence, infrastructure, power and affordable housing) are exempted from social assessment and consent clause. Need to return land after five years was also withdrawn which is a good move. But these moves may not help private manufacturing sector.

The five sectors which get these benefits are basically industrial corridors. I cannot set up a steel plant in an industrial corridor. A manufacturing unit should be closer to raw material source or the market. We have also written to Government not to allow foreign companies or trading companies to take our mineral resources to Korea and Japan and bring it back as finished steel.

Surprisingly, the mining ordinance has made value addition in India an option for access to iron ore. They should follow reverse and forward bidding in iron ore, just like in coal auction. In MMDR (Mining and Minerals Development and Regulation) Act, value addition as criteria comes at a later stage. Today anybody can participate in iron ore auction, if at all it happens. Interestingly, there are companies which today own captive mines free-of-cost.

JSW has to bid for raw material in the auction and compete with these companies with free captive mines. When the steel price remains same for all, one company gets raw material free-of-cost and the other pays through the nose. We said levy the average price discovered in the auction on captive mines for achieving a level playing field. Despite the much talked about ordinance, the government needs to do more to revive investment in manufacturing sector.

Getting approvals and fund raising for new projects eased?

Yes, the government eased the process on the approval side, but the courts have put some restrictions. For instance, if I want to get approvals from Wild Life Board and Environment Clearance, which falls under the same ministry, will it run parallel or sequential? If done sequentially, it will take years. Ministry says it is parallel but courts say something else.

There is a need for the judiciary and administration to be on the same page. There is a restriction on the capital raising. Today, I cannot raise ₹5,000 crore in the bond market. There is restriction on raising funds from the international market. I cannot raise it from non-approved lenders, tenor cannot be less than five years, there is a cap on interest paid and funds can be used only for the purpose mentioned.

What do you see as a major risk to your profitability?

The major risk to Ebitda (earnings before interest, tax, depreciation and amortisation) is the selling price. A one per cent change in selling price will have 10 per cent impact on Ebitda or net profit. It has a disproportionate impact because of high operating leverage in the steel business.

Selling price in steel industry is dependent on global factors. Under the free trade agreement, Japan and Korea can tap our market duty free whereas it is 7.5 per cent import duty in the normal course. If the domestic price is high then the imports go up. The strength of our industry is domestic availability of coal and cheap skilled labour, notwithstanding several other disadvantages including high interest cost and creaky infrastructure.

Of late, India is the only country where there is a growth in steel demand, though it is just 1.3 per cent. There is lot of steel coming into India from China, Japan, Korea and Russia. Imports have touched 6.7 million tonne which is 2.5 mt higher than last year. Imports are coming by way of dumping and that is the threat that the steel industry has to be conscious. We have recently seen huge steel imports from Russia. The rouble moved to 62 from 32 in a span of one month and suddenly Russians have become competitive.

Has our government done anything? To sum it, dumping of steel is biggest threat to profitability of steel companies.

Will investment cycle revive after the RBI bank rate cut?

This is an ongoing debate. If you look at the data, it does not show any strong co-relation between interest rates and investment. But interest rates have an impact on the demand which eventually leads to investments. I think there is no debate on that.

So, even a 0.25 per cent reduction in rates is a big positive for the industry. You go to take any housing, automobile or personal loan it make a huge difference. All these eventually lead to demand in infrastructure and construction which is good for the manufacturing sector.

Why are steel companies prone to debt restructuring?

After liberalisation there were three companies — Ispat Industries, Essar Steel and JSW — which went into making steel. We started our plant in 1995 and finished in 2000. When all these companies went live the market was not supportive with the global slowdown and weak demand. So we had to do a CDR restructuring in 2000. At this stage, we observed steel business is volatile and cyclical. We should have low financial leverage. In 2000, we had 6:1 debt equity ratio. We decided not to exceed debt-equity ratio of 1.5:1. By 2006, we bought it below 1:1. In 2001 we were one mt and in 2006 we touched 4.8 mt.

So we were growing with an eye on key ratio. In 2006, steel companies were on an acquisition spree and we also acquired a unit in the US and the ratio breached our desired level. In 2008, global slowdown hit us then we faced problem and decided that there is a need for equity infusion to pass through this phase. When you want equity nobody would give. This is when we collaborated with JFE Steel Corp of Japan to bring in $1 billion equity. Equity infusion gave us an opportunity to acquire Ispat and turn it around. So the financial leverage is the key and we will focus on it as we grow to 40 mt.

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