Ladies and gentlemen, good day and welcome to JSW Steel Limited Q2 FY23 results conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ashwin Bajaj, Group Head of Investor Relations, JSW Steel Limited. Thank you, and over to you, Mr. Bajaj.
Yeah. Thank you, Neeraj, and a very good evening, ladies and gentlemen. This is Ashwin Bajaj, and it's a pleasure to welcome you to JSW Steel's earnings call for Q2 FY23. We have with us today the management team represented by Mr. Seshagiri Rao, Joint Managing Director and Group CFO, Mr. Jayant Acharya, Deputy Managing Director, Mr. Rajeev Pai, CFO, and Mr. Gajraj Singh Rathore, Chief Operating Officer. We'll start off with opening remarks by Mr. Rao, and then we'll open the floor for Q&A. With that, over to you, Mr. Rao.
Good evening, and we welcome you all for the briefing session of the second quarter FY23 performance of JSW Steel. The world is going through two major crises, twin crises. One is very high inflation, which in some countries is 40-year high and very high elevated energy prices. To address these two twin crises, the macroeconomic stability and reducing the surging inflation have become the key objectives of many countries in calibrating their monetary and fiscal policy. Since the starting of 2022, over 90 central banks in the world aggressively increased their interest rates. The fallout of that is very tough financial conditions, narrowing liquidity in the global market, which also is having an impact on the overall outlook for growth going forward. This aggressive monetary policy is not addressing the supply side issues.
Inflation remains stubborn in countries, and the central banks continue their path of increasing the interest rates. This is the kind of scenario which we are seeing as far as the global market are concerned. In India, the domestic demand remains stable and strong, and the credit growth is getting accelerated with over 18% year-on-year growth in the credit. The manufacturing industry, the capacity utilization is around 74%-75%, which is the highest level in the last three years. Even though there are headwinds in the domestic economy by way of slowing external demand, geopolitical risks and very high energy prices. Even with those headwinds, we are seeing a good traction and momentum as far as the domestic market is concerned. Global steel sector considering fall in the ore or slowing demand in the steel industry.
There is a rapid cutback in the steel production in number of countries. In the first eight months of the calendar year, the total steel production cut was 68 million tons. Out of that, 42 million tons is in China and 26 million tons is in the rest of the world. What is interesting here is that even though there is a drop of 26 million tons in the rest of the world, there are two places where there is a positive growth. That is India and the second is Middle East. Well, where the India story lies when you look at the numbers globally as regards to steel production cuts that are happening across the world due to slowing demand, falling steel prices, elevated raw material costs, squeezing margins where 29% of the steel companies in China are very close to bankruptcy.
If that is the situation where we are seeing a very positive outlook in the Indian growth story. In India, the consumption even though year-on-year in the first half it has grown more 11%. The quarter-on-quarter, if you look at the production growth was only 1.55%. It's really very small. The production quarter-on-quarter it was negative by 3.25%. There was some slowdown in the quarter, mainly attributable to very severe monsoon that was seen in India in the last quarter. The imports are increasing. That is a matter of concern. If you see quarter-on-quarter, it went up by 23% and at the same time exports have fallen by 37.5%.
In that context, if you look at the story of JSW Steel, I think it is a volume story in the last quarter. We have achieved 4.95 million tons on a standalone basis, the production. 5.58 million tons production after including Bhushan Power & Steel. Here what is very important and interesting is the total sales volume. Sales volume on a standalone basis is 5 million tons, 5.01, and in a consolidated basis it is 5.63 million tons. The sales volume went up by 47%. Over and above that, out of this 5.63 million tons, we have sold in the domestic market 5.07 million tons, which is a growth of 47% quarter-on-quarter.
This is the first time where we have crossed 5 million ton mark, and we have increased our market share to 18% in the domestic market. Even though exports have fallen by 37%, our volume of exports in the last quarter was 560,000 tons, 5.6 lakh tons, which is 10% of the total sales. Our value-added sales volume has gone up by 24% quarter-over-quarter. Our retail sales, our sales in the renewable sector, our sales to automotive sector, all have gone up in the last quarter. That has made us to increase our overall sales volume in the domestic market. In spite of increasing sales volume, the margins were under tremendous pressure as is prevalent in the steel sector globally. The reasons being very steep fall in the net sales realization.
Net sales realization on a blended basis have fallen by 14%, which was INR 10,000 lower than Q1. Here, costs have not kept pace with the fall in steel prices as they have been lagging in the last quarter that we had high-cost raw material inventory that they were to be consumed in Q2, therefore margins will be under pressure in Q2. In line with our guidance, the costs have fallen by only INR 5,200 per ton. There is a pressure or a drop in the margins to the extent of INR 4,800 per ton in Q2 on a standalone basis. Because our costs have not gone down to the extent where steel prices have fallen, the margins got adjusted to that extent.
The coal price in the last quarter was $381, which went into consumption as against $421. Even though it was lower by $40 per ton, it has not neutralized the fall in the steel price. With that, on standalone basis, the EBITDA was INR 1,742 crore in the last quarter. EBITDA per ton was INR 3,479. As far as the other subsidiaries are concerned, particularly domestic subsidiaries, Bhushan Power & Steel has negatively contributed in the last quarter. They have made INR 698 crore of EBITDA in the Q1, which turned out to be a negative INR 183 crore. The kind of challenges we have faced in Bhushan Power & Steel in the last quarter were majorly due to monsoon.
Very heavy monsoon in Odisha, we were not able to transport the iron ore and coal from the ports and the mines. One problem was availability of iron ore. Because of the duty on iron ore, many of the independent mining companies, they stopped mining, so overall availability reduced in Odisha. Over and above that, logistics constraint. Adding to that is the heavy monsoon. These three together, we could not operate the plant in the smooth manner in the last quarter. That is the reason why the costs really have gone up. Fuel consumption has gone up. Costs were very, very high. That is why the company did not do well. The EBITDA from BPSL was -INR 183 crores. Same story in the coated. Coated, there was high inventory of hot rolled coil, which were at higher levels.
The high-cost inventory was to be absorbed. That is why even coated has shown a negative EBITDA. Even though there is a positive EBITDA from other subsidiaries like ARCL and JGPL, net-net, after netting off the negative EBITDA from Bhushan Power & Steel and JSW Steel Coated Products, the contribution to the overall consolidated EBITDA from domestic operations unfortunately was negative to the extent of INR 48 crore. Overseas, also similar story. That is why you would find that the consolidated EBITDA was only higher by INR 10 crore over standalone. In the overseas, the Baytown in USA has done reasonably well because the plate prices have not fallen to the extent the HRC prices have fallen even though demand was weak in the year.
The Baytown facility showed an EBITDA of $24.7 million, whereas Ohio, because they had high cost raw material inventory like pig iron and the scrap, which was to be marked down because prices have come down. There was inventory losses which were there in Ohio. That is why the operating EBITDA loss in Ohio was $40.26 million. Net we have lost in US $16.54 million. In Italy, there is a positive EBITDA of EUR 1.02 million. Net even overseas have not positively contributed, negative EBITDA of INR 191 crores. Even on consolidation basis, there was some positive contribution in the consolidation earnings. The net incremental contribution on consolidation of overseas and domestic subsidiaries together is only INR 10 crores only.
The consolidated EBITDA is therefore was INR 1,752 crore, which is INR 3,052 per ton. There are two more items below the EBITDA line, which are exceptional items. That is relating to our sale of 70% holding in TM Mine. As you know, in the previous year, we have fully provided for the Chile Aramar Mine, and we stopped operations there. Subsequently, we have sold our holding of 70%. During these three years, there was foreign currency translation reserve as per the accounting standard as and when we sell, we can reverse to P&L. That amount was INR 335 crore. Because this is an exceptional item, we have shown below the line. This is that one item which is appearing as exceptional, INR 335 crore.
The second is relating to Bhushan Power & Steel. Bhushan Power & Steel had a coal mine which got canceled. They had incurred certain expenditure. They made a claim. Those claims were admitted, and part of the amounts were received. That's why we have booked as an exceptional item, which is INR 256 crore. There are two items together is INR 591 crore. I'll spend one minute on the exceptional, on the one-off items in the Q2. The way I explained in the Q1, there is approximately INR 1,480 crore in the consolidated accounts, which are one-off items. These one-off items are NRV, inventory losses, foreign exchange losses on account of translation of outstanding foreign currency debt, and the export duty paid on the exports.
All these four together is INR 1,480 crore, which will translate to INR 2,578 per ton. If these one-off items are not there, the consolidated EBITDA, which is INR 1,752 crore, could have been INR 3,232 crore, which would have covered full interest and depreciation. With this exceptional item and one-off items, plus negative contribution from domestic and overseas subsidiaries and fall in the margins in the standalone operation, the profit after tax was -INR 913 crore in this quarter. The debt as on thirtieth June was INR 65,719 crore, which is lower by INR 1,502 crore.
The foreign currency translation has increased the debt for the first half of the financial year by INR 2,584 crores. That means if foreign currency translation loss is not there, debt could have been lower by INR 4,000 crores. Whereas this INR 2,500 crores translation loss increased the debt to that extent. that is why the debt as on thirtieth September was INR 65,719 crores. The acceptances on the revenue account is INR 2,484, and the capital account, $31 million. The debt to equity is 1.04. Debt to EBITDA is 2.7. We have spent CapEx of INR 6,694 crores. We have commissioned P2. We have commissioned our CAL2 in our downstream unit.
We have also commissioned Battery A of our coke oven plant. Whatever coke we are buying in the Q2, a significant captive coke is available now. There is no need for us to buy the coke. Similarly, we have commissioned the power plant at Bhiwandi, so our power cost also will come down in the Q3. These are the units which we have commissioned in the Q2. The project under implementation, the 5 million ton at Vijayanagar is going on as per schedule. It will complete by 31st March 2024. Similarly, downstream, color coating line at Rajpura and also Jammu and Kashmir is going on. They're all on schedule.
We are looking at as far as the Q3 is concerned more positively, because we have given the guidance of 25 million ton production, and we also said 24 million tons of sale. Whatever production we have achieved, 11.19 million ton of total crude steel production in the first half of the financial year, we will be able to achieve the balance in the second half. We will be very close to our guidance of 25 million ton. Similarly, sales, we have given the guidance of 24 million. We have done 10.12 million ton in the first half. We will do the balance in the second half, and we will complete. We will achieve our guidance for the full year.
With that, I will stop here, and any questions, we are here to take. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Participants are requested to restrict to two questions per participant. If time permits, please come back in the question queue for a follow-up question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. The first question is from the line of Amit Dixit from ICICI Securities. Please go ahead.
Yeah. Good evening, everyone, and thanks for the opportunity, sir. I have a couple of questions. The first one is essentially on coking coal cost. While you mentioned that coking coal cost in consumption terms have gone down by just $40 in this quarter, how much do you expect it to come off in Q3 FY 2023? That is the first question. The second one is on the realization drop. While QoQ realization drop was expectedly steep. However, you know, going ahead, there could be certain contracts that could be renegotiated downwards. Do you expect a further slip in blended realization going ahead, despite spot prices remaining broadly stable QoQ? These are the two questions, sir.
Yeah. I think on the coal side, as far as Q3 is concerned, we see a drop in the coal flowing through into our system. The coal on a quarter-over-quarter basis should drop in the range of $80-odd. Quarter two to quarter three. As far as prices are concerned, as you rightly said, the normal prices, the monthly prices have bottomed out. More or less, we feel that contractually also, prices are now stable, except for maybe small quantities which may get recalibrated. We do not see any further drop in blended realizations in quarter three.
Okay. That's great. Thanks and all the best, sir.
Thank you.
Thank you. Next question is from the line of Satyadeep Jain from Ambit Capital. Please go ahead.
Hi. Thank you for the opportunity. Just a couple of questions. One is, I think, a lingering question for the past few months on the export duty. It's been two months now, and all the companies have not recalibrated their CapEx. What confidence is there that, by the time this capacity comes, we're not looking at a situation where the export duty is there and there's an oversupply of steel in the domestic market? Is there anything that gives management confidence to go ahead with this CapEx plan that has come? That's the first question.
If you see the WPI numbers which the Government of India has been giving month after month, if I see the September month, they are showing the inflation in the steel prices in September is 4.5%, as against 27% in the month of April 2022. That means even as per the WPI number, the steel inflation number has come down from 27% to 4.5%. Last time also I was explaining, if you see the same, the SteelMint numbers which have been published for flat steel in the month of September versus September of last year, it has fallen by 14%. Therefore, these numbers are being closely watched even by the government.
They have been telling us that the whole purpose of imposing the export duty is to contain inflation. The WPI is already reduced from 15.4% in the month of April 2022 to 10.7% in the month of September. It has come down drastically. If somebody analyzes the composition of this 10.7%, it is not from manufactured products. Manufactured product contribution is very limited, even though the weight of this is 64.2%. Considering this, we feel that the Government of India will take a call on the export duty because the objective is to reduce the inflation but not to degrade export of steel from India.
Getting the talk to the government on this possibly continue to be constructive. Just a second question, sir. You mentioned imports have picked up in the recent past. Can you remind us where is the import parity? I think some confusion. Are Indian steel prices trading at a premium to import prices and can that last? Related to that would be typically we see some kind of supply response would be. I know demand situation is relatively better here. Given the margin squeeze, where are the high cost players in India, and do you see some response, whether it is plant idling, banking, that we've historically seen in the industry when there's a downturn and there's a margin compression.
Yeah. From an import perspective first. Imports, if you see coming into the country, are arrivals which have been booked also probably two, three months back. Some of them were Russian as well, which have started coming into the market now. Post the depreciation or rather the strength of the U.S. dollar versus the rupee, the bookings from Russia has also dried out. We have seen very little change in the international arrivals coming in terms of price. By and large, prices, offers have stabilized. From a price perspective, I don't see there is too much of change between the current prices of international levels to further, drops. I don't see that eventuality. From a volume perspective, the downstream products we see that the imports have picked up.
That is mostly in this cold-rolled and coated space. We feel that this will maybe even out in this quarter. We don't see too much of imports coming in since the viability of the international market also to supply at low prices is very limited. Going forward, I think imports should also stabilize.
Okay. The second related question to that in terms of supply response within the domestic market.
Supply response from the domestic market. If you look from a domestic growth perspective, 11.5% is the growth in the domestic market in India vis-à-vis last year. Our demand is roughly at 56 million ton range in the first half of this year in India. Going by the growth rates in the past, if we grow at about another 12% rate in H2 as well, we are likely to end with a number anywhere between 115 million-170 million tons of demand in this year. Indian domestic demand is therefore showing a very strong growth driven by we are seeing various sectors contributing to this. Construction and infra is one of the primary sectors here.
In the last two quarters, the orders which have been tendered and basically placed contribute to almost 19 million tons of additional steel requirement, projects announced and projects tendered. If you look at the automotive as well, the automotive, which was, let's say 5 million units in quarter one, has grown to 6 million-plus in quarter two. Going forward into quarter three, it is estimated that it will grow by another 8% to 6.5 million plus. If you look at general engineering side, I think we are seeing very good traction in various equipments like agri goods, infra goods, construction equipments, consumer durables, pumps and compressors, mining equipment. Most of them are well above the pre-pandemic levels. General engineering is also doing quite well. These are basically driving the demand in India.
We therefore feel that in the second half, which is seasonally also a better period, the demand in India will be good. From a supply demand perspective, it will be well balanced. The sector which is likely to be more impacted here is probably the secondary sector, which contributes almost 40% of the total production in the country. That sector will also be facing some pain with respect to higher cost of energy coal and higher disruptions maybe because of higher interest rates, which are likely to pan out in the remaining part of this year. Maybe there will be some outages from those smaller producers which will be there in the market as well to balance the supply and demand situation.
Thank you. Just want to clarify, you're saying, given where international prices are domestic, that you don't see any pressure on domestic prices, at the current international prices or import parity prices?
Yeah. If you know the international price ranges anywhere between $620-$650 in that level in different countries. You will find low offers maybe slightly below that as well, but those are far and few. If you were to really take, these numbers with a depreciated rupee, we are not too far off from the domestic prices. If you take, countries which have an import duty into the country, then vis-a-vis that, I think, domestic prices are well-placed.
Thank you so much.
Thank you. A request to all the participants. Please restrict to two questions per participant. The next question is from the line of Vishal Tulsyan from Motilal Oswal. Please go ahead.
Thank you for the opportunity and wish you all a very happy Diwali. So my question was with regard to the long-term expansion plans. Now, we had in the past seen that, you know, it was expected that the export duty will come off in a month, maybe in two months, but it has not gone off even now. Media reports suggest that probably, you know, this could be at best looked at by the end of this financial year. In light of that, if these projects which we have and the competition has planned over the next two years, if they are still commissioned, we will see a deluge of HRC in the market. So how do we look at our projects from a long-term perspective? This year obviously is challenging.
I'm thinking more from a long-term perspective, how do we look at these projects?
From a hot rolled perspective, if you really look at the new capacities coming in, the current hot rolled flat hot rolled demand in the country is in the range of 22 million tonnes. If it is growing at a rate of about 10%-11%, which we are seeing now, you will be seeing a demand of between 2 million-2.5 million tonnes of hot rolled coil on a free hot roll basis. That is net of captive consumption for cold roll coated downstream consumptions. That is by and large 1 million a year, which is required in India to basically balance the overall demand situation.
The capacities which would be coming up in the country in the next 2-3 years, if you look at it, I think that is more or less matching, if you take a three-year timeframe, with the kind of demand generation we are seeing. Keeping in mind that exports have sharply come down in the last six months. The next few years we'll see a calibrated exports coming back. Therefore, in addition to the domestic demand which we just spoke about, let's say 2.5 million tonnes each year, in three years 7.5 million tonnes, the balance can easily be placed in the domestic market. In the next three years, I think from that perspective, up to 10 million tonnes capacity in India can be easily absorbed.
Thank you for the elaborate answer, sir. Just one more follow-up question on the debt side. Do we have any plans, you know, given the downturn in the steel sector, do we have any plans for conserving cash, reducing debt, or we still would want to proceed with our announced projects with the same aggressive speed as we have done in the past?
As far as debt is concerned on a relative basis, still we are at 2.7 debt to EBITDA, and debt to equity is 1.04. The project which we already kicked off in advanced stage, and by completing by March 31st, 2024, there will be a huge advantage in terms of capacity that will be available with us when India requires more steel in the year 2024, 2025. Therefore, we are not looking at now to stop the project and reduce the debt. The debt we continue to work on how to bring it down from the current levels, as we have done in the first quarter.
In spite of lower EBITDA, lower free cash flow, in spite of spending INR 2,900 crores on the CapEx, we reduced our debt by INR 1,500 crores in 2021. This effort will continue. One important point here is, we have reduced our inventories by 434,000 tonnes in the last quarter, and used that cash to reduce the debt. We are also planning in the second half to reduce our inventories by another 400,000 tonnes in the second half. With that, more cash will be available to reduce the debt. Our effort is to reduce the debt and at the same time complete the CapEx program, which we already announced as per the schedule.
Sir, actually my question was more with regards to the additional CapEx that we had planned beyond 2024.
Beyond 2024, we have not announced anything, so we have just watched the situation. At appropriate time, we will take the call. We have no plans now to announce any fresh CapEx.
Thank you. A request to all the participants, please restrict to two questions per participant. The next question is from the line of Sumangal Nevatia from Kotak Securities. Please go ahead.
Yeah, good evening, and thanks for the opportunity. My first question is on our volumes. So we've done a very good job on the sales front, and in the opening remarks, you mentioned that we gain market share. I just want to understand, as far as what are we doing right here to gain market share and whom are we taking market share from? Is it from the secondary steel sector or also from the primary steel producers?
Yeah. As we said, there are certain areas we have done well in domestic markets. One of them is that, you know, we over the last few years, we have been consistently developing our retail network, both in terms of deeper penetration and increasing our reach. We have been able to now have more than 1,500 branded stores across the entire country. These are direct branded stores in addition to our distribution, in addition to the retail. In the last quarter, we have done about 217 new stores. Out of that, 120 are in the new towns, and about 197 odd are in the existing towns.
Every quarter we continue to add our retail-branded retail network in new towns, increasing our penetration in the rural market. Therefore, you will see the results of this across all our sales in the retail sector across various product lines. Just to give you a feel in Colour CAO. In the total coated business, our in the first half of this year, our total-
Domestic sales have gone up by 64%. Our color-coated SOB is now at 61%+. Our Galvalume, we are almost at 78% level. At tin plate we are at 40%+ level. The entire in the value-added space, apart from these products, we have penetrated in the cold roll market as well, through our retail channels. Primarily again, automotive market doing well, so two-tier, three-tier vendors, replacement markets have drawn in a lot of cold roll as well. The retail market, through an active participation through branded retail, through reaching out to MSMEs, has done quite well in a structured way. In addition to that, we have been able to tap the project markets quite well.
Oil and gas, wind, from our Anjar plate mill, we have been able to tap those markets. Automotive, we have continued to grow our business in automotive. Share of business in automotive has also moved up. We are continuing to do well in the OEM space like appliances, OEM going into solar, OEM, tin plate packaging manufacturers. By and large across the industrial space also we have done well. These two have contributed to an increased domestic share. I would say we have replaced some part of the secondary market where, especially in the long product space, where, the prices of the secondary, if you were to look at rebars or wire rods, are not very different from where the primary prices are.
Therefore, today, given a choice at the same price level, primary is being preferred. Also, the secondary mills had certain outages because of monsoons, because of iron ore supply disruptions in the last quarter. We have been able to replace and dip into those pockets as well. By and large, these are the reasons why we have been able to do well in volumes.
Yeah, got it. That's very elaborate. Thanks. Next question is one on iron ore. Given the lag in IBM prices, I mean, what sort of cost reduction on iron ore did we see in 2Q and what would be in 3Q? And also in the international operations, I mean, against this INR 190 crore odd loss, what is the guidance given that both in U.S. and Europe the macro is just deteriorating further. Just some guidance on the international operations as well. Thanks.
No, on iron ore side, the whatever reductions that have happened in the last quarter, it has happened in phases. It has not happened in month of September. So the full benefit of that reduction will get reflected if not more reductions in this quarter. Number two is, as you rightly said, the IBM prices got revised downwards, particularly low-grade iron ores. So that benefit also will come now from Q3 onwards. I'm not sure to speculate here and say this is that reduction which can happen. But there will be a significant flow of lower cost of iron ore plus lower cost of coal, plus lower cost of power that will come in the flow too. What was the second question you had mentioned? Overseas. Yeah.
As far as the overseas operations are concerned, as I mentioned, the plate prices have not fallen the way HRC coil prices have fallen. There is a huge difference. The difference is not sustainable in our view. When HRC coil price is at around $800-$900 and the plate price is at $1,500-$1,700, there's a huge difference. There will be some correction in our view in the plate prices. The kind of EBITDA we have seen in Ohio may get moderated. At the same time, the losses will not be there in Ohio. Why we are saying there won't be any losses? Because we've already done the mark-to-market of all the raw materials at Ohio as on September 30th.
We don't expect further drop because we feel we have bottomed out for our prices insofar as the U.S. is concerned. With that, we don't expect a very big negative from U.S. If at all, it could be positive from here.
Understood. This exceptional of INR 1,480 crores, that's the consolidated level, right? Is it possible to share the breakup of what is NRV, export duty, NPN?
Yeah. I mean, inventory and NRV together is around INR 1,100 crores. Foreign currency loss is around INR 330 crores, and export duty is around INR 60 crores.
At the standalone level, will it be any different?
It is slightly lower. It's slightly, no, significantly lower. This 1480 number is INR 706 crores.
inr 706 crores. Okay.
Yeah.
Okay. The breakup, if it's possible.
FX loss is around INR 150 crores. Duty is around INR 25 crores. INR 530 crores is inventory loss.
Got it. Thank you and all the best.
Thank you. The next question is from the line of Indrajit Agarwal from CLSA India. Please go ahead.
Hi, thank you for the opportunity. A couple of questions. One on the recent induction to the Board and what is the intended outcome here that we expect from like we have inducted Mr. Fosford from the SMS. Does it anywhere link to our green steel or low carbon steel objective over the medium term?
When we see our Board of Directors composition, we wanted to have each skill that is required to have an effective board. We induct that person with that skill. Earlier, Mr. Malay Mukherjee, who was the technical director on our board, independent director on our board, then unfortunately he expired, so we have filled up this position with a technical director. We have scanned the various candidates. We find that this person whom we have inducted has very good experience in this area. He has credentials, he has Indian experience and overseas experience. He's worked in the steel related sectors for a very long time. Therefore, his contribution, we feel, is very immense to the board. This is how we got induct. Whatever experience he has, I think he will continue to contribute in calibrating the strategy of the company.
Sure. Thank you. Second is on this MOU with Smartex. Any kind of, you know, CapEx or, you know, broad targets we have in this in terms of medium term. I understand we have a $1 billion decarbonization fund. Anything over and above that we can, you know, probably look at over the medium term.
Smartex, it has a lot of potential because it is a very comprehensive ecosystem we have created on one platform. In this platform we not only get the funding, we arrange the funding for the potential projects. We also brought in the entire research ecosystem into the platform, and we also brought the users of that technology on pilot basis and later on to commercial basis. That arranged funding for pilot projects and also is required on a commercial basis. That way it is a very comprehensive end-to-end solution for migrating to green steel solution. We have signed an MOU trying to understand each other better. It will take some more time really to share more details on that, but it has a lot of potential.
Sure. My last question is on IBM price, the kind of disagreement that we have in terms of the surveyed price by IBM about a couple of quarters back. Do you think that is past us currently? Are the IBM price more or less in sync with the market prices, or do you think there's still some bit of differentiation that is still to be corrected?
No, in the MMDR rules, there is always some inconsistency which does not reflect what is happening at the market prices. Because any captive mine supplying for captive purpose, they are excluded. Similarly, the non-captive mines, that is merchant mines, which are bought in auction, supplying for captive purpose, there is a different treatment as per the rules. There are certain inconsistencies which have been pointed out to the government. They are looking into it and there may be some changes which can come in the MMDR rules. That situation will remain, but as on date, if you look at it is better than what it was.
Sure. Thank you. That's all from my side. Happy Diwali to you.
Thank you. Same to you.
Thank you. The next question is from the line of Pinakin Parekh from JPMorgan Chase. Please go ahead.
Yeah, thank you. My first question is if steel prices and currencies remain where they are, can we see a repeat of this FX NRV losses to continue in the third quarter because the cumulative hit in the first half is over INR 3,400 crores on the P&L?
No, as far as the NRV losses are concerned, we don't expect NRV losses will come. As far as the inventory losses are concerned, there is still 1.8 million tons of inventory at the average cost of production of the last quarter as on beginning of this quarter. The costs are coming down. Therefore, I don't call it as inventory loss. I call it as a lower margin on the opening inventory. That could happen. As regards to FX loss, there won't be any FX loss on revenue account relating to revenue side liability. On the capital side, our policy will remain that we will continue to cover our liabilities on the capital account for the payments falling due within the next 12 months to 24 months. That policy not changed.
Whereas the foreign currency liability for longer, if rupee depreciates further from the level as on September 30th, there could be FX loss that could come in future.
Understood. Sir, my second question is just going back onto the balance sheet. If we annualize the first half reported EBITDA, the net debt EBITDA is just over 5x. Now, the first half was impacted by multiple one-offs. At INR 65,000 crore debt, and given the CapEx program that the company is committed to, where should the debt peak out from here and in this current steel margin environment?
Considering our cash flow position and our projections for the next half year, what we intend to do is not to increase this debt. We wanted to reduce this debt and also meet our CapEx program. In our view, we will be able to do it.
In the current steel margin environment, you believe the company will be able to do it, sir?
Yes.
Understood. Thank you very much.
Thank you. The next question is from the line of Kirtan Mehta from BOB Capital Markets. Please go ahead.
Thank you, sir, for giving this opportunity. Couple of questions on the project ramp-up side. Could you guide us on the Vijayanagar expansion in terms of the project milestones which have been achieved and what are the key milestones that we would be looking over next 3-6 months?
Sir, there's a lot of noise. I'm not able to hear you clearly. If you can repeat?
Yes. Hello, sir.
Kirtan, sorry, there's still a lot of disturbance from your background. May I request you to rejoin the queue, please? Thank you. The next question is from the line of Ritesh Shah from Investec India. Please go ahead.
Yeah. Hi, sir, a couple of questions. First for Jayant, sir. Sir, you indicated in the next quarter we expect coking coal consumption basis to decline by $80. Just wanted to have a sense on how should we look at this number into Q4? Have we booked incremental volumes given coking coal did come to $220, $230 levels? Should we see this benefit even in Q4? That's one. Second is basically, sir, you indicated on pricing. If we just look at Korean won, Japanese yen, these currencies are depreciated far more than the Indian rupee. If one had to take a price call even on import parity basis into Q4, how should one broadly look at the spreads? The question is on spreads, partly on coking coal and partly on pricing. Thank you.
That's the first question.
On the coking coal side, visibility beyond the quarter, Ritesh, is very difficult. As of now, what we are seeing is, for the quarter three, and this is where, we feel that $80 will be a change, a drop from quarter two to quarter three. But directionally, as you have seen in the last, few days, coking coal has again climbed up somewhat. Again, it could be a traction for the winter months. We have to see how it goes. Depending on how the situation pans out, it will impact Q4. Very difficult to give you a feel on how it will pan out in Q4. As far as pricing is concerned internationally, yes, there are depreciations of currencies against the dollar.
You know, margins for most of the steel producers are quite stretched. Therefore, the ability to really put across steel at a very low price into India could be for some quantity, but I don't see that happening for large quantities. Domestic point of view, if you see in this volatile market, we notice that most of the customers with depreciation of the rupee and the kind of volatility do not want to take a risk. Two, three months prior to, you know, you have to book and wait for the material to come, not knowing how the situation is going to pan out, gives you an automatic buffer. I think these two things combined, I feel that quarter four being a seasonally stronger quarter should be better from a perspective of both demand.
On the price side, as we said, it has bottomed out. Usually the prices do go up in the quarter four. We will see how the situation pans out from the economic and steel demand point of view.
Perfect, sir. This is very helpful. Second question. I just read up in the JSW annual report, it talks about potential investment into specialty steel. If one relates it to the PLI which is offered by the Government of India, how should we look at this? Like, there's obviously no timeline specified over there. If you could provide some color on how we should understand this?
We have been discussing with JFE from a point of view of certain products to be basically got, or rather, produced in India, and one of them is CRGO. That is still at a exploratory stage, and I think that's the one you may be talking about from a PLI angle as well. Both the parties are discussing the project and the study is on. We will take a view soon and let you know once we have a full clarity on the project.
If I just may squeeze in, for Rao, sir. Sir, would it mean some change in shareholding structure? Or how should we look at the inclusion? Like, are we looking at a separate JV? How should we understand that, sir?
We are still discussing with them the modalities. First, we have to see that there is enough demand and the project is viable, at what cost. These things, there is a feasibility study which is being undertaken by both the parties. I think with this quarter we will have more clarity on this. Once that is done, then we will look at the structure. I don't think it will be any dilution of JSW Steel. That won't be there. We'll see. We'll explain to you the structure once we take the call.
Sure, sir. Thank you so much for the answers. Wish you good luck.
Thank you. The next question is from the line of Abhiram Iyer from Deutsche Bank. Please go ahead.
Hi, sir. Happy Diwali. My question is actually pertain to the FX impact, as you mentioned. Given the fact that, you know, the foreign currency debt. Currency trades quite low in the market, and we continuously sort of see FX and rupee depreciation, is there any plan to initiating buyback here? That's question one. Question two, if I may, our current net debt, if you look at, if you include sort of acceptances as well, stands at around 3.5x. So is there any ratings pressure or is there any agency impact from the rating agencies that you see going forward?
Number one, as far as the buyback of outstanding bonds are concerned, there are a lot of regulations in India if you want to buy back. The loan, if you want to raise, that has to be longer maturity than the outstanding debt, and they should have a lower cost. That'll be very difficult to do. In the meantime, any other window that is available for buyback out of Indian rupee loans or out of cash equivalents, we are examining that possibility for the buyback of bonds. It is on the table. Number two. What is the next question you asked?
Sorry. I mentioned that, if you look at acceptances as well, our net debt has increased sort of to 3.5x level. Given that, you know, upcoming quarters will also be a bit difficult, although this might be a trough, this will increase further. Are we seeing any issue with regards to our ratings of the bonds?
No, from the ratings and the governance point of view, there is no issue at all. Number two is, if you see the outstanding acceptances on the quarter one was $2.74 billion, which is already brought down to $2.48 billion. When coking coal prices started coming down, this number continues to come down. We don't expect any pressure from either point of view on covenants and from rating.
Got it. Thank you for the answer, sir.
Thank you. Next question is from the line of Ritwik Sheth from One Up Financial. Please go ahead.
Hello. Hi, sir. Thank you for the opportunity. My question is regarding the global supply and in that context the supply which is coming from India. If we see, you know, global capacities coming up and production has also dried up and electricity cost is also higher significantly. You know, in that context, once the export tax is lifted, what is the potential that we see in the export markets for Indian players and especially for us since we have a good amount of volume growth coming in in the next two years?
No, as far as the export opportunities are concerned, I think it is possible for Indian companies really to export flat products from India.
Mm-hmm.
Even though the demand is not very strong in the global market for the reasons which I just already illustrated. The Asia and Middle East, there are two places where there is reasonably a good demand. Even the WSA, if you look at it, they are projecting a positive demand growth in these two regions.
Right.
I think it's possible for India to compete and then export from the Indian markets. Number two, as far as JSW is concerned, we have new capacity at Joda, and we also now expanded at BPSL. It is possible to get additional volumes and then take this opportunity of exporting with duty rebate.
On a, you know, FY25 basis, and we have more than 30 million tons at standalone and BPSL level, what would be the ideal mix for our exports?
Exports, if you really see in the past, we came down as low as 10%, and we went up as high as 30%. That is a range we continue to operate. We never exit. At the same time, we don't export too little quantities. That is how we manage based on export realizations and export demand and the domestic demand and domestic price. In that range, we will be there.
Got it.
Also, just to add one point here is if you look at the European market.
Mm-hmm.
The production cuts which have taken place in the last few months, on an annualized basis, it's almost close to 20 million tons equivalent.
Right.
The situation of energy, the way it is going forward, the situation of labor going forward, that space may not change too much. The energy costs will maybe stabilize, but it will stabilize upwardly. There is, once the export duty from India, which will go at some point of time, I think we will be able to get an opportunity into the European market back again, with the kind of product base which we have been doing.
Right. India would be.
Sorry to interrupt you, Ritwik. I'll request you to come back in the question queue for a follow-up question. The next question is from the line of Prashant Kothari from Emkay Global. Please go ahead.
Hi, sir. Good evening, and thanks for the opportunity. Just wanted to understand from you the hedging considerations, whether or not to hedge our forex debt. What is the consideration and how do you think about this? What is the hedging cost generally per annum to hedge, let's say, $1 billion of your forex debt? What's your thought process on this, sir, please, if you could?
No, the cost of forward cover, the hedging cost is also volatile. If you look at few months back, it used to be 4%. Now it is in the range of 2.5%-2.75%. It has come down. Then as far as the hedging policy is concerned, after evaluating various options that are available, we have taken a call that all the revenue liabilities should be hedged 100%. As per the capital account is concerned, your liabilities are spread over a period of time, say 6-7 years. If you look at in the past period, the average rate of depreciation of rupee is lower or equal than the rate of depreciation of the rate of forward cover.
Therefore, if you hedge or don't hedge, if you take the entire horizon of the tenure of the loan, then you don't lose. There could be some volatility because of that factor as far as capital account translation is concerned. That is why we have taken a call. Short-term we will cover. As far as long-term capital account liabilities are concerned, they will remain unhedged. Excepting the translation loss, sometimes it hits the P&L. There won't be any actual loss if you take the entire period of the loan.
Understood, sir. Great, sir. Perfect. Sir, just quickly one second question. Sir, we have done 5 million ton sales this quarter. The effort required to do this is huge, herculean effort. So many plants, so many products, so many raw material movements, rates, et cetera. The EBITDA is not commissioned as you would agree because of the industry constraints, et cetera. Industry is not doing that great, et cetera. We have to continue to grow and continue to meet the aspiration of the country in terms of demand. As a sector also, they should be also leading that. On top of it, there is this decarbonization, et cetera, which may require spending in future.
Sir, would you, is it fair to expect the government also contribute something, to the decarbonization efforts, to the sector and to the industry and to JSW? What is your view, sir?
No, I fully share your view. This decarbonization requires a huge amount of CapEx, which is a big challenge for the entire industry. There are enough representations to the government that they should facilitate either grants or concessional finance for the industry to transition to decarbonization. I'm not sure how much it can happen. In the developed world, it is happening. If you look at either Europe or Canada or other countries, there is a huge amount of support that is being given by the government. Hopefully that will come in, if not by the government, by the various other parties who are willing to support this initiative.
Understood, sir. Thanks, sir, and all the best.
Thank you. I now hand the conference over to the management for closing comments.
Thank you. Thank you very much. As far as Q2 is concerned, the majority of the losses is attributable to one-off items or fall in the selling price. Now that is behind us. In the Q3, we have extra volumes that are coming in, plus the incremental inventory which was built in the first quarter of this financial year. Another 4 lakh tons we will be able to sell. Our BPSL, we have completed another 0.7 million ton expansion. That incremental capacity is there. Dolvi expansion project is operating at 80% capacity utilization, so that can increase production. At Vijayanagar last quarter, it suffered again lack of iron ore. There is a possibility of incremental capacity production that can come in. There will be more volume in the second half.
The reduction in coking coal price and iron ore price and the power cost will come into the consumption in the next quarter. Second half we are looking at much positively. At the same time, Indian steel demand is expected to be better post-monsoon and post festive season. We're looking at more positively the second half. We are focusing on completing the balance CapEx program as we have planned, and everything is going on track. With that, I wish you and your families very happy Diwali. Thank you very much.
Thank you, ladies and gentlemen. Wish you a happy Diwali, and feel free to get in touch if you have further questions.
Thank you very much. On behalf of JSW Steel Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.