Good day, ladies and gentlemen, and a very warm welcome to the Q2 FY 2020 earnings conference call of JSW Steel, hosted by IIFL Institutional Equities. 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 the 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. Urvil Bhatt from IIFL Institutional Equities. Thank you, and over to you, sir.
Thanks, Ali. Good evening, everyone. On behalf of IIFL Institutional Equities, I welcome you all to the Q2 FY 2020 earnings call of JSW Steel Ltd. I will now hand over the call to Pritesh Vinay, VP Corporate Finance and Group Investor Relations at JSW Steel. Over to you, Pritesh.
Thank you very much, Urvil. A very good evening to all the participants, and we welcome you to the second quarter of fiscal 2020 results earnings conference call of JSW Steel. We have with us today the management team of JSW Steel, represented by Mr. Seshagiri Rao, the Joint Managing Director and Group CFO, Dr. Vinod Nowal, Deputy Managing Director, Mr. Jayant Acharya, Director of Commercial Marketing and Strategy, and Mr. Rajeev Pai, CFO. I'm sure you have had the chance and opportunity to go through the results, the press release, and the presentation, which is already uploaded, and the links of that will be in your inbox. We will start with a few minutes of opening remarks by Mr. Rao on the broader sector market and performance of the company, and post that, we can open up for Q&A. With that, over to Mr. Rao.
Good evening and Happy Diwali to all of you and your families. This quarter is one-off the toughest and challenging quarters we have seen. In the context of the escalating trade tension, what is reflected by USA's slowing global economy and disruption in supply chains.
Sir, I'm sorry to interrupt. We cannot hear you.
Disruptions which also we have seen are experienced in the last quarter. The reaction by various governments and also the Central B ank in response to the escalating trade tensions was to ease the monetary and fiscal policy. Because of the massive stimulus that has been announced in China, that created a huge disruption in the steel market. When the entire world, in line with the falling demand, adjusted the production, China continued to produce more. That is why more of raw material demand from sales. The import of iron ore has gone up by 10%, is almost 65 million tons. More demand for iron ore and at the same time, more demand for coal. This all led to disruptions in the market where raw material prices have not corrected, whereas steel prices got corrected because of the slow demand, other than China is limited.
Adding to that, in the domestic market, there was a credit squeeze from the banking system, weak government spending, falling consumer demand, and also prolonged monsoons. Those are the four major reasons where the demand in India also started showing weak trend. As for JPC numbers, even though in April, the consumption number was over 6%, it came down less than 1% by September. Steadily, constantly, it has been falling, the steel demand in India. In these challenging circumstances, exports from FTA countries is once again a concern, went up to 65% in this quarter. In spite of these challenges, if I look at JSW Steel numbers, we have produced 3.84 million tons, which is lower by 8% year- on- year and lower by 3% quarter- on- quarter.
Operator, I think there seems to be some problem in the line. We are getting feedback that the audio is very weak. Can you please dial us back into the main conference ?
Sure, sir. I'll do that. One moment.
Yeah.
Participants, you are requested to stay connected while we reconnect the management. We have the line for the management reconnected, so you may please go ahead now.
I'll just continue where I left as regards to the numbers of JSW Steel in the backdrop of what is happening globally and also in Indian markets. The production number was 3.84 million tons. Sequentially, you find a drop of 3% and year- on- year a drop of 8%. The drop is majorly attributable to monsoon impact at Dolvi and also automotive slowdown, which impacted the Salem unit and also some plant shutdown at Vijayanagar unit. That's why we have moderated the production in the last quarter in line with the market conditions. The sales standalone number was 3.6 million tons, which is sequentially lower by 6%, and in the year on year, it is down by 9%. When the domestic demand was weak, what we have done is we have pushed more quantities in the export market.
That's why exports went up by 68% year on year basis, and it was 31% of the total sales were exports, so 1.09 million tons. When the global steel prices fell in line with that, domestic prices also corrected. Domestic steel prices fell by 16%. Costs, we tried our best to manage our costs. Costs came down by 9% on a year on year basis. The EBITDA margin per ton was INR 7,768 per ton. In these results, there are three important points which I would like to highlight. One is there are four wholly owned subsidiaries which got the approval from NCLT for merger into main parent company, that is JSW Steel. This approval has come, and we have given the effect of the merger in the books of accounts. They are all wholly owned subsidiaries, so consolidated numbers, there is no change.
The standalone numbers, you see the impact of merger of these four subsidiaries into JSW Steel. These four companies are Dolvi Minerals and Metals Pvt Ltd, Dolvi Coke Projects Ltd, JSW Steel Processing Centres Ltd , JSW Steel Salem Ltd. These are the four companies which are merged. The second important point was the earlier 3.3 million tons steel plant at Dolvi was enjoying the sales tax incentive, which is GST incentive after GST was introduced. That incentive scheme expired on 5th August 2019. In the meantime, as you're all aware, we expanded our capacity from 3.3 million ton to 5 million ton. The incentive relating to the expansion project, we received the in-principle approval.
In fact, this project expansion was completed in May 2016, but we have not booked in the books of accounts the benefit of this incentive due to non-receipt of this approval from the Minister of Industry, Government of Maharashtra. That approval is in place in this quarter. The amount accruing from May 2016 up to 30 September 2019, amounting to INR 512 crores, is accounted in this quarter. To give a breakup, out of these INR 512 crores, INR 466 crores was pertaining to the period before 31 March 2019. Balance INR 46 crores belongs to this half year. These incentives relating to these 3.3-5 million ton will continue in future also. The next is the corporate tax reduction, which was announced through tax ordinance in September 2019.
The company evaluated the availing the MAT credit, which is available in the books of accounts, and also the outstanding deferred tax liabilities. The company has the option to move to the new tax regime. We have evaluated this new tax provisions for the subsidiaries and also to the main company. In the case of two subsidiaries, that is JSW Coated and also JSW Industrial Gases Ltd, we have opted to go for new tax regime, that is 22% plus surcharges. In the case of other companies, considering the MAT tax credit that is available, we decided to continue in the existing tax regime, but with clear intention that we will move to the new tax regime after availing the MAT tax credit that is available today.
If the intention is moved to the new tax regime, then the deferred tax liabilities earlier provided, the differential temporary differences on account of change in tax from 35% to 25% effective tax rate, that can be reversed. We have taken the reversal of extra deferred tax credit that is available in the books of accounts as on 30 September 2019 was reversed. That amount was INR 2,150 crores on standalone basis, and on a consolidated basis INR 2,207 crores.
With that, if you look at the overall EBITDA for standalone company, it is INR 2,796 crores, which is 18.01% EBITDA margin. The subsidiaries, the Coated, JSW Steel Coated Products Ltd, and JSW Industrial Gases Ltd have done well. They contributed INR 271 crores in aggregate. The overseas companies continued to drag. The U.S. Plate and Pipe Mill showed an EBITDA loss of $11.2 million, which includes $3.5 million of inventory losses.
U.S. Plate and Pipe Mill was doing well at the EBITDA level in the past. Again, this quarter, they came into red because the steel prices in the U.S. have come down, so the capacity utilization was lower. Number two is inventory losses, which we had to take in this quarter. Now, the capacity expansion, which we were doing, the modernization of the Plate and Pipe Mill, which we were doing, the first part was completed. The benefits we expect will start coming in from third quarter onwards in the Plate and Pipe Mill. The coal mines, which we have, it has a positive EBITDA of $1.8 million. The Mingo Junction facility had an EBITDA loss of $31.6 million, including $13.17 million inventory losses. Italy had EUR 6.9 million quarterly loss in the last quarter. All in aggregate, INR 332 crores was negative from the overseas companies.
After netting out this, the EBITDA on a consolidated basis was INR 2,731 crores. The profit after tax on a consolidated basis was INR 2,536 crores, considering the benefit of the deferred tax right back. In the light of what we have done so far in the first half, we have also reviewed our guidance, considering the outlook for the second half. We thought it is not possible to recover the quantities of volumes which we have lost in the first half. Accordingly, we felt that we should adjust the guidance approximately to the extent of around 3%. We will be achieving 97% of our guidance, assuming that the second half, we will repeat whatever we have done in the second half of previous year, that is 2019.
With that, we will be achieving 97% of the guidance, both in terms of production and in terms of sales volume. The next point is CapEx. Capital expenditure, we have given the guidance of INR 15,700 crores cash outflow in the current financial year. We have also reviewed. We are focusing to complete the project at Dolvi, that is 5 million ton to 10 million ton. There are other special projects and also certain downstream projects like cold roll and CAL unit at Vasind, a second Tinplate at Tarapur, and also second coke plant at Vijayanagar. There are some projects which we identified. Those projects, we can slow down the implementation and push it for next year. That's why the CapEx overall cash outflow, we are restricting it in this year to INR 11,000 crores, as against INR 15,700 crores guided earlier.
The overall debt of the company as on net debt of the company as on 30 September 2019 was INR 49,640 crores. The effective interest rate was 6.82%. The revenue acceptances were $1,252 million. The capital expenditure acceptances are $447 million. Debt to EBITDA is 3.23 times. Debt to equity is 1.36 times. As regards to acquisitions, Bhushan Power and Steel and also Vallabh Tinplate Pvt Ltd , both are in NCLAT. The litigations are going on. Whatever modifications we suggested, the hearings are continuing. The case in BPSL is posted for 25th of this month, so hearings will continue. In the case of Vallabh Tinplate Pvt Ltd , all the arguments are completed. The judgment is resolved. Asian Colour Coated Ispat Ltd , we have been declared as a successful bidder, and the resolution plan has been submitted to NCLT. As regards to outlook, I'll spend just a few minutes.
Government has announced a lot of initiatives in the last one and a half months. They said they will be investing total INR 100 lakh crores to INR 20 lakh crores per annum in the next five years, which is very positive for steel industry if these investments happen. Similarly, they also announced a lot of financial sector stimulus. Either NBFCs or capitalization of banks are INR 50,000 crores for improving exports, INR 1,45,000 crores for tax concessions. There are a lot of things which government has done. If I have to talk about specific to steel industry, they have done anti-dumping duty on the Galvalume on China and South Korea and Vietnam.
They have also introduced the Steel Import Monitoring System, which will really help the industry to monitor the imports which are coming in either in the form of defectives or in the form of circumvention of the BIS standards, and also to improve as far as the industry is concerned if some of the products which we are not able to produce to work on that, to improve on that. This is also a great initiative from the government. Draft Scrapping Policy is put on the website by the Ministry of Steel for consultation with all the stakeholders. This will really improve the usage of steel if the scrapping policy is finalized. Whatever we are hearing from the government is government is very committed to finalize this policy as early as possible.
On exports, the remission of duties and taxes on export of products in view of MEIS from 1st of January 2020 is also a welcome step. The last one is the iron ore mining auctions. Whatever mines that would be expiring on 31st March 2020, Karnataka has taken the first initiative. They have done the auctions where the steel could secure three mines. Now, Odisha government has moved in the same direction. They have put 20 mines in the auction. Out of that, five mines are for captive purposes. We have a chance to participate in these auctions. The fear earlier, we all used to have that there will be a disruption. I think government is working to ensure that there is no disruption to the supply of iron ore. Considering these factors, we expect the second half demand will pick up.
We are seeing already some green shoots in the market by way of revival, particularly in the TMT demand. Volumes are moving in that particular segment. Also, solar appliances, the piping sector, we are seeing some green shoots. There is credit flow started coming into the industry. All this together, we expect the demand will not be lower than 5%. It will be at least 5%. If you see the JPC numbers, this is giving six months overall demand is around 5%. If not improve, at least it will not fall below this 5%. As regards to our performance in the second half, one is achieving this 97% of our guidance. The second is the cost savings further, particularly the coking coal prices which are corrected. That benefit will come in in the second half of this financial year.
In addition to that, our captive iron ore mines where we produced 1.25 million ton in the Q2, and the overall first half, we produced around 2 million ton. In the second half, we expect 2.5-3 million ton to produce. With that, our more and more captive iron ore will be available to us. With that, cost reduction benefit will come to the company. With that, second half will be better than the first half. Existing our performance of the first half, we have calibrated the CapEx. We will live within that CapEx expenditure. With that, I'll close my comments and any clarifications we are here to give. Thank you.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone phone.
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. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Amit Dixit from Edelweiss. Please go ahead.
Thanks for the opportunity, sir. I have a couple of questions. The first one is with respect to realization. If you can break up realization in domestic and exports, I mean, how much it went down by in this quarter sequentially, and how much do you expect it to go down in Q3?
The overall NSR, I think drop year-on-year is about 16%, and on a sequential basis, it is 9.5%. This is the blended NSR which we are talking about.
In terms of price indication going forward, as we indicate, there is no further, the price has bottomed out. We do not expect any further drops in the pricing. At the same time, the advantage of lower coking coal will flow in into the next quarter, as well as cost advantages from our own iron ore. Therefore, the spreads to that extent will be improved. The bottoming out of price and maintenance of price going forward.
Is it possible to break it in export, the decline in exports and domestic?
Yeah, it is difficult to give you that at this point. The products are different, and yeah, so it's not exactly the like-to-like products which we would be exporting or selling in the domestic.
Okay. The second question is on the CapEx deferment.
While we have deferred the CapEx for downstream projects, as I understand, these are typically low payback period kind of projects, and that would have given you a higher premium. I just wanted to know the understand the rationale for deferring these. I mean, because do you suspect demand to be tepid for these kind of products, or there is something else?
No, if you look at the CAL project at Vasind, where we are spending almost close to INR 600 crores, this particular project is anyhow to be commissioned in the next year. It is not in this year at all. Therefore, this particular project, instead of spending money in this year, we just said we will do it in the next year. Commissioning will happen in the following year, that is 2021-2022. It is not the question of demand; potential demand is going to come down.
Temporarily, yes, demand is weak. In the meantime, the PLTCM plus galvanizing lines, galvalume lines, color coating lines at Vasind, Tarapur, all are getting commissioned. Those will get stabilized. By that time, this mill will be ready. Similarly, Tinplate one is already commissioned. We are stabilizing the quality and pushing the volumes in the market. Tin plate two, even if it is delayed for some time, by the time tin one gets fully established in the marketplace, tin two will be ready in the following year. The same story even at Vijayanagar or at Vallabh Tinplate , where we are saying color coating lines will postpone for some time. Whatever we are already commissioning, by the time they get established, they get stabilized, the other projects will come in. It is only a postponement from this year. It is not that we have stopped these projects.
Okay. Thanks for the clarification, sir. I will come back in the queue.
Thank you. The next question is from the line of Anuj Singla from Bank of America. Please go ahead.
Yeah, thank you very much. The first question is for Mr. Acharya. So Mr. Acharya, you mentioned that the domestic prices have kind of bottomed out. Could you confirm that we are already lower than the anti-dumping duty level, $489, maybe effectively $500 level? Are we below that level already in the spot market, INR 35,000?
So Anuj, $489, which is the anti-dumping rate, you are right. From that perspective, we are low today. Yes.
Sir, will it be also fair to assume that the price decline which has happened over the last quarter, not all of that has got reflected in Q2?
Some impact will come in Q3 as well. Will it be possible to quantify that?
Yeah, the exit rate will be different rather than the Q2 average. I think rather than talking about an NSR, because we do not know how the quarter will flow, November, December still could hold some potential. I think on a spread basis, as I was explaining, that because of the cost benefits coming in on the coking coal, iron ore side, as well as our own iron ore mines, additional volumes kicking in, we ex pect the spread to improve.
Okay. Sir, on that count only, coking coal prices, the spot levels have come down somewhere around $40-$45 from the peak levels over the last quarter.
Will it be possible for you to guide how much of that benefit we have captured in Q2 and what can flow in Q3?
We have captured about $10 of the coking coal benefit in quarter two, and about $25-$30 will flow into quarter three.
Okay. Okay. Wonderful. Lastly, one question for Mr. Rao. Mr. Rao, is there CapEx guidance you can give for FY2021 as well? What kind of CapEx number should we be expecting?
We will be able to really give the exact number in the month of May 2020. Until that time, whatever numbers we have given earlier, that number will stand for FY2021. We will calibrate that number when we finalize our yearly numbers.
Okay. Any comments on RCEP, sir? Upcoming agreement, has there been any progress with the government on excluding steel out of that agreement?
Whatever we are hearing from the government circles, as and when we interact with them, they are more keen to sign RCEP. As it has been reported in certain press, they wanted to take care this time that enough precautions are there while signing the RCEP, that in case the imports into India of any product go up substantially, automatic triggers will come in, and there will be duties will come into force. That type of mechanisms they would like to build in. I think they are moving in that direction. How far they will be successful, we are not sure about it. They are negotiating very hard. In my view, they will sign the RCEP with certain precautions.
Okay. Okay. Wonderful. Thank you very much, sir.
Thank you. Participants are requested to limit their questions to two per participant.
Time permitting, you may come back in the queue for a follow-up. The next question is from the line of Sumangal Nevatia from Kotak Securities. Please go ahead.
Yeah, good evening and thanks for the chance. Just a clarification on the CapEx. Our total CapEx of around INR 49,000 crore, that stays. This year, we've pushed INR 4,700 crore to next year. Are we talking about almost INR 20,000 crore to be spent in FY2021? No, it is not in that manner. Out of the total INR 48,000 crore of capital expenditure program, when we really looked at what are the commitments that have been made, where commitments are not made, there are INR 7,000 crore commitments yet to be made. Therefore, we are focusing on those projects where commitments are not made.
These INR 7,000 crore, still we have a chance that we can push some of these projects to 2021-2022. No, sorry, 2020-2021. Therefore, that is why we are commenting that we will come back with the numbers for FY20-21 in the month of May. It is not that we are increasing the number of 2021. Okay. I mean, after this INR 11,000 crore in 2020, out of 49, we will be left with around 24. Is that the right number, INR 24,000 crore?
Yes.
Okay. All right. Sir, the CRM mill, we were expecting to commission October onwards. That is witnessing around six-nine months delay. Is that the right understanding?
We said we will do in three years. The CPL line is already commissioned. Balance also in advance stage. It will get commissioned. The galvanizing lines are there. They are getting commissioned.
If not in this quarter, early next quarter. There is good progress as regards to CRM. Okay.
Understood.
Okay.
One question with respect to prices. Is it possible to share what would be the exit price versus last quarter average price?
It will be difficult to give you that. As we said, the exit price is something which we feel has bottomed out because of various reasons which we discussed in the call. Going forward, since the supply chain has restocked inventory to a reasonable extent, and the international anti-dumping duties are prevalent on some of the products, we do feel that there is a possibility of prices stabilizing with a positive bias in quarter four.
Understood. Just one last small clarification with respect to the incentives. First quarter was around INR 36 crore, and only INR 10 crore is for the second quarter. That's the right calculation?
Yeah, yeah, that's correct.
Quarter average should be closer to INR 10 crore, INR 15 crore, or it would be lumpy towards few quarters?
No, no, it will not be lumpy because when Dolvi Coke Projects Ltd, which got merged into main parent company, there were certain input credits outstanding which are not set off. That is why that got set off in the quarter two. That's why the overall incentive came down in the Q2 relative to Q1. Okay.
So run rate is INR 36, I mean, around INR 140 crore, INR 150 crore annually, right?
No, we have to take on an average around INR 25 crore per quarter.
Understood. INR 100 crore. Okay. All right. Thanks and all the best.
INR 25 crore per month. INR 25 crore per month.
Okay. INR 20 per month. Yeah.
Thank you.
The next question is from the line of Ritesh Shah from Investec Capital . Please go ahead.
Hi sir, thanks for the opportunity. Sir, my first question is, in the press release, we do say that we have sought certain reliefs on Bhushan Power. Sir, can you please explain what reliefs have we sought and what it would mean to us going forward?
There are certain modifications which were done by the NCLT while approving the scheme. Those modifications, we took it up with NCLT that they are not acceptable. Number one, relating to Prevention of Money Laundering Act, we said the specific relief is required, particularly in the context where the banks have reported there was a fraud. We said we wanted specific relief. That is one, which is not granted by NCLT. We took it up with NCLT. The second one is the resolution plan does not talk about any closing adjustments. Closing adjustments, what I mean to say regarding working capital.
The working capital is by way of increase in current asset, net current assets. That kind of provision is not there in the case of Bhushan Power and Steel. We offered as-is very basis, including everything. NCLT has asked, has modified that resolution plan and said that the profit that accrued during CIRP period, they use the word profit, that belongs to the lenders. We did not have any idea what it meant. Is it closing adjustment? Is it EBITDA? Is it a profit? Whatever it is, it cannot be pertaining to the lenders. It has to be only to resolution applicant. We took it up with second issue. The third issue is relating to the resolution plan. There is certain clarification which we needed relating to the litigations that would come in from any other authorities.
That one is not very clear in the resolution plan approval. We wanted a clarification on that. There are three areas where basically we went back to the NCLT.
Sir, is it possible for you to quantify first on the second point that you said, that is the working capital and net current assets? That is one. Secondly, you indicated under PMLA Act. Is it something that JSW Steel and its promoters are entirely seeking, basically ring-fencing of all the liabilities or anything of that sort?
No, we are not looking at promoters or erstwhile promoters of Bhushan Power and Steel. What we are basically looking at is JSW Steel and the corporate debtor, that is Bhushan Power and Steel. We want immunity to these two.
Whereas it was clear as regards to JSW Steel, but it is not clear as regards to corporate debtor, that is Bhushan Power and Steel assets in future. That is what we wanted. As regards to the second question which you wanted, we also do not have information that how much EBITDA accrued during the CIRP period, how much current assets that are there right now in the company. We have no idea on that. Whatever amount that could be, we have a claim on that as per the resolution plan. It does not belong to the lenders.
Sir, would it be fair to assume till we have clarity on these three aspects, basically we will not take a hard stance to go ahead on Bhushan Power? I will just relate it with the lower CapEx guidance. I just wanted clarity on this first.
Yeah, it is clear from our side that we are committed to this acquisition, subject to the resolution plan as we submitted gets approved.
Okay. That helps. Sir, second question is for Jayant sir. You indicated that we don't expect prices to drop. Now, prevailing steel prices are already below 80D. We are trying hard for exports, but exports, if it is difficult, I'm not sure of the system inventory numbers. Even if I look at our inventory data standalone, it has actually bumped up by nearly 15 days. How should we look at one is our inventory days and secondly, inventory at the system level and consequently impact on local pricing?
Inventory in the channel, Ritesh, I think has moved down because over the last few months, people have been destocking.
The exports in the last quarter in general, if you look at the industry data, if you look at JPC numbers, it shows sequential increase in exports from India by 75%. The inventory from the channel, I think in this last quarter has substantially corrected. That is one. Secondly, the imports in some of these products, I think have gone down. The stock levels have gone down, and the risk appetite for making fresh imports is limited given the anti-dumping duty in some products and the current weak economic scenario on the other side. International prices have also by and large bottomed with iron ore internationally remaining elevated. Coking coal has come down to some extent, but still is not supportive of the steel prices today.
Therefore, you will see a supply side correction possibility in international markets from steel volume side, and that should be helpful for maintaining price stability in the international market. Similarly, in the domestic side, I think the current inventory status and a slight uptick in H2 in terms of demand and sentiment would help us to stabilize the prices from here on.
That's helpful. Sir, just a follow-up.
Ritesh, I'm sorry to interrupt. May we request you to come back in queue for follow-up questions? Participants are requested to limit their questions to two per participant. Time permitting, you may come back in the queue for a follow-up. The next question is from the line of Pinakin Parekh from JPMorgan. Please go ahead.
Yeah. Sir, thank you. Sir, two questions.
My first is if I look at the, I mean, the export growth volumes, the implied domestic sales volume decline is nearly 24-25% on a year-on-year basis, while the actual domestic consumption did not decline by as much.
To that extent, sir, did JSW on its own did not sell volumes in the market or were there specific issues? Should this trend continue in the next two quarters, or should this domestic sales volume normalize for the company? Sir.
it will normalize. One is that over the last two years or so, we have been consistently focusing on improving our value-added mix, and a large focus had gone into automotive and high tensile strength for various construction segments, etc. Unfortunately, both got impacted in terms of domestic demand. Automotive directly and indirectly, especially the commercial vehicle, had a big impact on us.
Therefore, that area went down sharply. The other reason is that in the retail segment also, we saw liquidity squeeze restricting purchase and consequent month inventory losses leading to deferring of purchases. We did not want to push consciously the markets with lower pricing and thereby accentuate the fall further in terms of inventory losses. We thought it more prudent that we take the material out and take out the quantity through the export route. The other thing is that we had domestic government orders for which, unfortunately, some of these orders were put on hold or adequate funding was not available, which we expect that the funding should start and the hold should be removed in H2. That would pick up. Domestic expenditure from infrastructure side, oil and gas pipelines and water pipelines, we are already seeing some movement happening. We should regain our market share. That's not a problem.
Sure, sir. Just to understand what you highlighted in terms of the domestic market, has that somewhat changed into October, and are you seeing signs of that in November, or are you thinking this is more three, four months down the line?
We are seeing improvement in the construction side. Let's say typically TMT bars, we are seeing the pickup has already started in the last few weeks. The movement is better. Wire rods, it is better. The appliances sector, even in the last quarter, we did quite well. As a matter of fact, appliances last quarter went up year-on-year by 41% for us. Solar went up by 18%. They continue to do better.
We are seeing some entry of government-funded projects coming in later part of this Q3, which would basically translate into volume gains from the infrastructure space in the second half. It is picking up. Automotive, I would be cautious to say that yes, the improvement in passenger cars and two-wheelers is happening, led by discounts on BS4 vehicles. The retail side inventory is going down. However, commercial vehicle space will take some more time. I think that maybe towards the end of the second half, we may see some improvement there.
Understood. My second question is just if we take a step back, the net debt increased on a year-on-year basis. The company mentioned in the call that it remains committed to the acquisition of Bhushan Power.
Now, sir, assuming that the NCLT accepts JSW's appeals and makes the required changes, and while steel profitability will improve, the outlook is not for it to go back to 12,000-13,000 INR EBITDA per ton anytime soon. In that context, will JSW remain committed to both the large organic CapEx plan, which it had announced six months prior, and Bhushan Power acquisition, or can we see some changes in terms of how the capital will be allocated between organic and inorganic growth in the face of the weaker margin environment?
We have already factored the acquisition of Bhushan Power and Steel while giving the numbers. I do not think that will undergo a change. Only the organic growth, which we already committed, that expenditure we will continue to incur with certain modifications if Bhushan Power and Steel happens.
As I mentioned to you, out of INR 48,000 crores of organic CapEx program, INR 7,000 crores is yet to be committed. That amount will continue to review. Wherever INR 41,000 crore commitment is there, certain projects, special projects, and the projects which we have listed out, it possibly will push it to the following year based on the market conditions and also the kind of EBITDA which company would earn, and also Bhushan Power and Steel acquisition.
Understood. Thank you very much, sir.
Thank you. The next question is from the line of Ashish Kejriwal from IDFC Securities. Please go ahead.
Yeah. Thanks for the opportunity, sir. Sir, two questions. One is on Dolvi expansion. I think because of the heavy monsoon also, is there a possibility of any delay in Dolvi commissioning?
If possible, is it possible to give what kind of volumes we can expect from Dolvi in FY2021? That's the first question. The second question is what kind of export mix still we are seeing or that is in October? Because in the second quarter, we have seen around 31% of the products. In October, have we seen any change in that or not?
If you heard about our calibration of CapEx, we talked about other projects other than Dolvi. The focus to complete this 5 million ton expansion project at Dolvi is a priority. Is there any slippages? If you ask me, monsoon really affected the overall progress of the work. We are just reviewing and trying to expedite. I think we'll be able to give the correct picture maybe in the next quarter.
But still, when we review the project, it can be commissioned by March 2020 as planned. The monsoon should stop. Still, we are seeing it is raining. Even yesterday, there was a heavy rain in Dolvi. We are expecting that now monsoon is not there. No rains will happen. We will be able to mobilize the contractors and workers. When rain happens, everybody will leave the site. That is the problem. As per the current progress, we're still on the line to complete by 31st March 2020. That is what we are working for.
Export, your question regarding 31% in this quarter, I think the average for first half is 24%. Our exports, if you see the last few years, we have been hovering in the range of 20-25% most of the time.
We will be in this range going forward as well. We will look at H2 in that light.
Sir, one more thing. In fact, when we are talking about RCEP, you said that there is a possibility that government will go for it, and there will be automatic trigger which can come if some imports increases. When we are looking at the total imports data, more than 80-85% of the imports are coming from these countries where we will not have any duty. Is it safe to assume that whatever import duty, 12.5%, which we are enjoying right now for some of the sub for many of the products or many of the countries except FDA, that will no longer be valid going forward if we find RCEP in that range?
Jayant, included what you are saying is right, but we have to see what type of auto trigger mechanisms that would be agreed upon in RCEP if anybody gets, whether it will be a three-year average, it will be a two-year average, or a five-year average, or last year. These are all negotiations finally what would come in. What is comforting to us is government is negotiating on this particular point after having seen the fallout in the FTAs, which has happened. That is one positive step which we are seeing in this direction. When is the last date for that? It's 30th November, I just. What we understood is 4th November. If it is not settled, then there will be a high-level meeting at very senior levels. In that meeting, they will conclude whether it will be done or it will not be done.
Okay. Understood. Thanks and all the best.
Thank you. The next question is from the line of Saumil Mehta from BNP Paribas Mutual Fund. Please go ahead.
Yeah. Thanks for the opportunity. Sir, my first question is, since the auto contracts are six months in a half, we finalize on our auto contracts for second half, and what would be a very qualitative approximate reduction what we are looking at?
The auto contracts are under discussion and negotiation, they should be finalized in this quarter.
From the initial talks, it suggests that there can be a decent 5-10% reduction or probably it's difficult to comment at this point in time.
There would be some correction because the first half prices have been stable for the automotive customers. There would be some drop in the H2 for the automotive. That discussion is on.
It would be preemptive to comment at final number now.
Sure. My second, with respect to your exit prices now, from our channel checks and dealer checks, I guess that the exit prices were closer to INR 2,000-INR 3,000 lower versus the quarter average. How different would we looking at probably our exit prices versus a quarter to average?
I think rather than handling the price side, as we would like to put it, that it is from a cost perspective, we are reducing our cost in the next two-three months on account of coal and iron ore coming in from our own mines. Also, some cost initiative efficiencies which are being worked out. The spread in the next quarter would improve. We do not expect prices to drop further. Therefore, the spread would improve. If that satisfies your answer.
Okay.
My last question is, have we seen some reduction in prices for October as well and start of November?
No, actually, in the long product side, the prices have stabilized quite well. As a matter of fact, on the retail side, there is an uptick on the longs. As far as flats are concerned, currently we see a stable price environment. I am expecting that it is bottomed out. There was no price cut over the last month or so. Is that a fair assumption? Yeah. Our last price corrections happened in the month of September.
Sure. Sure. Perfect. Thank you very much and all the best.
Thank you. The next question is from the line of Indrajit Agarwal from Goldman Sachs. Please go ahead.
Hi. Thank you for the opportunity.
I just have one question more on the industry side. Of the 8 million ton annualized imports that India generally has, can you help us understand for how much MIP or ADD has already been triggered and how much of it is special steel, which in spite of ADD, India will compulsorily have to import? I want to understand that how much of that exports can actually go off because of ADD?
So, The hot rolled imports usually are in the range of 2 million odd in a year. Hot rolled and cold rolled are the items which are under ADD right now. To that extent, they would get shielded.
All right. That helps. Thank you.
Thank you. The next question is from the line of Vishal Chandak from Emkay Globa l. Please go ahead.
Yeah. Thank you very much for the opportunity, sir.
Sir, if you could just turn over to slide 17, where you have a slide on the bridge of EBITDA for the second quarter of last year, second quarter of this year. We see three elements. One is volume decline, NSR decline, and there is a cost improvement. If you could just help us, I understand the efficiency part would be hidden somewhere between the cost side. If you could just help us on what elements of cost are included over here in terms of breakup coal, iron ore, electrodes, etc., and how much is the efficiency parameter over here?
It would be difficult to give the breakup of these INR 1,165 crores. How much is attributable to price? How much is attributable to usage? How much is attributable to other factors? This is a composite information where cost reductions are happening due to various factors attributable to the elements.
Sure. Okay. Lastly, you mentioned that there are two one-off items in this result. One is the grants which you have taken for the past period as well as the reversal of the DTL. If I were to normalize this on a like-to-like basis, what would be the operating profit after tax for this current quarter? See, the total profit before tax incentive, that is PBT, if you look at it, is INR 688 crores, if I recall correctly.
The INR 688 crores includes the tax incentive. One point which we have to understand here is that it is not just a one of item. 5th of August 2019, INR 70-80 crores per month incentive which used to come up to 3.3 million ton, which is not there for the month of September. It is not there for most part of August.
Seventy into two, 140 crores, which was there in the earlier quarter, is not there under 3.3 million ton. That has gone. In view of that, this INR 512 crores has come in. Out of that, INR 46 crores pertains to this year. Balance INR 466 crores pertains to previous year. I do not call it as a one-off item because if you see every month now we are giving the guidance of INR 2,025 crores will come in. So this amount itself is INR 300 crores. From that point of view, this will more or less I should consider as operating profit, operating PBT in going forward in future because one compensates the other.
Got it, sir. Got it. Thank you very much, sir.
Thank you. We will take the last question from the line of Sumangal Nevatia from Kotak Securities. Please go ahead.
Yeah. Thanks.
Just one follow-up on the cost savings you shared about the coking coal cost savings. If it's possible to quantify what cost saving we'll have in iron ore and other some cost-saving projects which will contribute from 3Q?
There are a series of items which contributed to the cost savings. One is iron ore captive and also not using the imports are from Odisha. Coal side, which we already told about that. Similarly, natural gas prices have come down. That has contributed. Thermal coal prices have come down. That's why cost of power, producing power has come down. Stores and spares, there is a lower stores and spares consumption. There are several areas where cost reduction has happened.
No, I'm talking about 3Q in terms of expectation of cost reduction. What will be if any quantification is possible for iron ore and other cost efficiency projects?
In the Q3, major is the captive iron ore. That is one area where we can get lumps and fines from our own mines. It is 1.25 million ton was what we have got in the Q2. In the Q1, we have got only 0.75, so total 2 million ton. That will go up to 2.5 million ton. That is one advantage of 500,000 ton which will come in. Iron ore prices have come down in the Q2. That impact will come fully in the Q3 and Q4. Plus the ferroalloy cost, electrode cost, wherever reductions have happened, refractory cost, wherever it has happened, the impact of that will come in. In the monsoon period, particularly in the Q2, whatever efficiencies in the fuel side, that we could not achieve in the Q2. Because in the monsoon, there will be high moisture.
Fuel cost will be high. PCI injection will be lower. All that will get corrected in Q3 and Q4. Again, fuel efficiency will be very, very good in Q3 and Q4. Understood. When we're talking about spread improvement, is it from spot or exit spread, or is it from the 2Q spread levels? 2Q spread levels.
Okay. Okay. Just last question on the auctions. You said, I mean, you are encouraged with the government initiatives and maybe disruptions won't be there. Just as plan B, is there any restocking happening by us or by industry? If you can share any thoughts on that, sir.
Disruptions, let us say it is divided to Karnataka and Odisha. As to Karnataka, we don't expect any disruptions in the state of Karnataka. Only we expect something positive will happen in the Donimalai mines.
Therefore, there could be more iron ore coming into the market in Karnataka. In the case of Odisha, there is one more change which is expected to come in, that the automatic transfer of existing approvals to the new lessee, at least for two years, we can operate under the old approvals. Even that is in advanced stage. If that comes in, we do not expect disruption. If auctions happen and these approvals are transferred for two years, then there is no issue. Assuming that it will not happen, there is some problem will come in. There are two comforts which we have, one is they permitted against sale to Steel Authority of India Ltd. 25% of the dumps which they have, they can sell in the market. This is also quite substantial quantity. Our understanding is they have around 40 million ton. 25- 40.
This is the number which we hear in the market. They have these kind of stocks. There will be auction of those materials from Steel Authority of India Ltd. Over and above that, the material which is lying with various mining companies, they are not able to evacuate because the logistics will not permit. Once existing mines stop, logistics will permit to move that material. These two will come into the market. In either way, we feel that the disruption possibility is limited. We are cautious. We are steady. If there is a problem, Q4 we will take appropriate steps.
Understood. Understood. All right. Thanks and all the best.
Thank you. That was the last question. I now hand the conference over to Mr. Rao for closing comments.
Thank you very much. In regards to Q3 and Q4, we are quite optimistic.
Demand will revive and come back. It will be far better than what we have seen in the H1. Second is we will be able to reduce costs in the quarter in quarter three and quarter four and able to maintain, if not improve, the margins much better than what we have seen in the Q2. We will be completing the project expansion at Dolvi. We will be focusing mostly on that expansion project by calibrating the capital expenditure program. We make all the efforts to meet our revised guidance of 97%, which we have given. The last one is we are working very hard to ensure that Q3 and Q4, we focus our efforts in bringing stability and improvement in the overseas operations. The last one is participate in the iron ore auctions and secure more and more iron ore going forward.
Thereby, we will be able to get from captive sources to run our Dolvi and Salem units. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of IIFL Institutional Equities, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.