Ladies, and gentlemen, good day and welcome to the JSW Steel Q3 FY 2019 Earnings Conference Call hosted by SBI Cap Securities Limited. 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 touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Dayanand Mittal from SBI Cap Securities. Thank you, and over to you, Mr. Mithil.
Thank you. Thank you, everyone, for joining in. We have with us the senior management team of JSW Steel. With this, I would like to hand over the call to Mr. Pritesh Vinay, who's the VP Corporate Finance and Group Investor Relations. Over to you, Pritesh.
Thank you, Dayanan. A very good evening to all the participants. We welcome you on behalf of JSW Steel to the third quarter fiscal 2019 results earnings call. I'm sure all of you have had a chance to go through the results, the press release, and the presentation, which has already been on the website for a while and the links in your inboxes. We have with us today the senior 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 Commercial, Marketing, and Strategy, and Mr. Rajeev Pai, CFO. We will start with a few minutes of opening remarks by Mr. Rao, and then we'll open the floor for Q&A. With that, over to Mr. Rao.
Good evening. Good evening to all of you. As you know, the Q3 was a weak quarter for the steel industry, where the prices have fallen and the demand was weak. That was the circumstance under which these results were announced by JSW Steel. What is interesting in the last quarter was, India has become the second largest producer, the third largest consumer, and the fastest growing consumer of steel. That is one good feature in the overall events which has happened. Even though the world as a whole has produced 1.8 billion tons, where there is a growth of 4.6%, a significant portion, over 70%, has been contributed by China. China remained a dominant factor with regard to the steel industry.
Starting from November, because of the surplus, steel which was looking for markets, which is outpacing that growth in demand, and also tight financial conditions, escalating trade tensions, all these factors led to weak demand, falling prices, and destocking. These are the outcomes we have seen, starting from November. If I look at India, India's exports in the Q3 have fallen by 40%, and the imports went up by almost close to 8%. In spite of that consumption, there is a good growth of over 8%. Basically, in India, the imports remained a concern, particularly the FTA countries are exporting more and more to India. There is a significant growth from Asian countries because the duty is 0%. In spite of that, JSW Steel production numbers are impressive. We have done 4.23 million tons of production in the Q3.
For nine months, the overall production was 12.52 million tons, which is a 5% growth. It is exactly in line with our guidance of 16.75 million tons. As regards to sales volume, we have done 3.68 million tons, which, a decline of, around 7%, year- on- year and also quarter- on- quarter. If I really just break up, for your information, the sales volume, we have done extremely well as regards to the domestic sales. Domestic sales volume we have grown by 15%. We have consolidated our market share to 13.7%, as it was 12.9% in the previous quarter. The auto sales, so there is a growth of 23% when the auto growth was only 7.6%. Our retail sales have grown. Our branded sales have grown. Our value-added special products remained at 54%. There are a lot of positives as regards to domestic sales.
When domestic sales grew by 15%, our overall sales volume, there was a decline because mainly of imports, mainly of exports. As I explained to you, the weak demand globally and also the restrictions that have been imposed by various countries on exports, India as a country, the exports fell by 40% in Q3. For the overall nine months, also there is a drop in the overall exports from India. That also translated into a drop as regards to the proportion of export sales to the total sales to 10% of JSW Steel. With the lower volume and a very strong domestic sales, if I look at realization-wise, year- on- year, there is a growth of approximately 20% in the net sales realization. Even quarter- on- quarter, in spite of the fall, we are able to just maintain a slightly up net sales, net sales realizations.
The costs have gone up because of higher iron ore cost and coal cost. The EBITDA per ton for the quarter was INR 12,063 per ton on standalone basis. All this translated to an increase in net sales and EBITDA at INR 4,438 crore on standalone. Profit after tax is INR 1,892 crore. As regards to our subsidiaries, our U.S. Plate and Pipe Mill, the capacity utilization in the Plate Mill improved. Overall, we made $4 million EBITDA for a nine-month period. In fact, the overall EBITDA doubled to $20 million, as it is around $10 million in the corresponding period, nine months in FY 2018. Similarly, the coal mines are doing well. There is a $2.43 million EBITDA, clocked in, Q3. Overall, we made a $4 million EBITDA for nine months in the coal mines.
The quoted products made an EBITDA of INR 97 crore, Amba River Coke INR 108 crore, Salav INR 40 crore, Industrial Gases INR 15 crore, and also our other service unit, INR 9 crore. This is the EBITDA where we have made. The consolidated EBITDA was INR 4,501 crore, which is 22.2%, and EBITDA per ton was INR 12,441 crore per ton. The profit after tax is INR 1,604 crore. Consolidated for nine months, again, is a very impressive number. The EBITDA is INR 14,511 crore , 53% growth. The net profit on a consolidated basis is INR 6,028 crore . In fact, whatever amount of net profit we have made in the entire year of FY 2018, I think more or less we have achieved in nine months in this financial year. The total debt of the company stood at INR 46,030 crore as of 31 December 2018. The acceptances revenue was INR 1,381 crore , and the CapEx acceptances are $112 million.
The debt equity was 1.40. Debt to EBITDA was 2.32. As regards to Monnet, we are operating the DRI plant at full capacity of 0.5 million ton. The pellet plant of 2 million ton was commissioned. It was operating at 1.2 million ton. Certain spares are required. We have ordered. In this quarter, we will be able to commission, so it can work up to 2 million ton. We are increasing the capacity of the pellet plant to 2.5 million ton. That also gets completed in the next financial year. In addition to that, another stream of production units, which were operating earlier and closed, we have restarted the sinter plant, the blast furnace, electric arc furnace, and the bar mill. These were commissioned. The phase one and phase two of our turnaround plan we tried to complete in this quarter.
After that, we would like to focus on completing the incomplete project. That is, the EAF-2 Plast Plate Mill. That will get commissioned. The turnaround plan of Monnet is on expected lines, what we have planned. The other two acquisitions we have made in Ohio and USA Mingo Junction, we are on the ramp-up stage. In each place, there is around $10 million negative EBITDA. In the next financial year, we will be able to turn around these units and start contributing positively. In the results, only one point I would like to draw your attention. That is, VAT incentives in the post-GST scenario. The Maharashtra government, after GST was introduced, they have announced by a web notification that whatever incentives they have extended, they will continue to be available at the revised rate of 9%, as it is 5% of VAT in the pre-GST scenario.
Based on that notification, we continue to book the incentive benefit in our books of accounts. The various state governments have not announced the procedure for claiming these incentives from the government. One by one, the state governments now started announcing the procedures. Gujarat state government has already announced. It is on the same lines as it used to be in the pre-GST scenario. On 20th of December, surprisingly, Maharashtra government has issued a notification. As per that notification, the incentives will be available only to those companies where the sales are done other than related parties. The point there which we have taken up strongly, subsequent to the issue of notification, is that it cannot be excluded as regards to related parties when there is a value addition.
Because the incentives are given when there is an investment made in the state, and when there is a value addition by buying either HR coil in that particular unit, notwithstanding it is a related party, the incentives have to be extended to those companies. Pre-GST, there was a clause that if there is trading happens between the two companies, they are not eligible for incentive. While drafting this new procedure, instead of restricting the disallowance of incentive for trading companies, they extended to all companies of related parties. This anomaly we have pointed out to the government. We are expecting that they will favorably consider our request and issue appropriate modification. Pending that, we continued our booking of incentives in the books of accounts. Appropriate disclosures have been made.
We are reasonably confident that we'll get a favorable reply and modification from the government of Maharashtra. As regards to capital expenditure is concerned, we are on track. We spent, total INR 6,570 crore for the nine-month period. We have commissioned our coke oven battery A and declared commercial production from 1st of November. The coke oven battery B at Dolvi has also started trial run. The tin plate is ramping up at Vasind. The pipe conveyor still trial runs are going on. On the capital expenditure side, we are quite on line. Only one point I would like to highlight here. We have announced one expansion at Dolvi from 10 million-10.77 million tons by increasing the DRI capacity. The environmental clearances have not yet come. That project is under review right now. That project, we are not going ahead as on date.
Once all the clearances come in, we will again come back to you. The project cost of that project is INR 1,375 crore. The next point is this Bhushan Power and Steel. Now there is a judgment which has come from NCLAT, put at rest the litigation which was going on. They have advised the COC to get the successful bidder's resolution plan, that is JSW Steel, to NCLT for adjudication. We are expecting that process to commence. If NCLT gives the clearance in the due course of time, subject to there are no litigations, we will be able to go ahead with the implementation of the resolution plan as and when it happens. As regards to the outlook for Q4, we have given the guidance of 16.75 million ton production. We are confident that we will be able to achieve production guidance.
As regards to sales is concerned, we have given the guidance of 16 million ton. We achieved 11.46 million ton, up to nine months. Whatever we are producing in Q4, we have to fully sell that and also reduce the inventory accretion, which has happened at approximately 300,000 tons. That is why we make all the efforts to ensure that we'll be able to unwind this inventory accretion. In case there is an issue, I think we caution that there could be a slippage to the extent of 2%-3% with reference to sales volume. Even though prices started falling from November onwards, we have seen in the last few days there is an improvement in the steel prices globally. The increase almost close to $40 per ton.
This is triggered initially by the event or accident which has happened in Brazil, with that iron ore prices went up as high as to $90 per ton. With that, all the input costs, prices have gone up. That has triggered again a price increase in the, for the steel, steel product. After Chinese comeback, after 11th of this new year, we expect even the demand to pick up because of the stimulus measures within China. Considering these factors and the landed cost of imports into India, we have also announced an increase in price for from 1st February.
With that, this quarter, that is Q4, we are making all the efforts to meet our guidance of production and sales numbers by unwinding the inventories that are accumulated in Q3 and maintain the margins as much as possible in spite of drop in prices, starting from November and December and January. With that, we take any queries or clarifications. Thank you.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may please press star and one on the touchstone telephone. If you wish to remove yourself from the question queue, you may please press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. The first question is from the line of Amit Sinha from Bank of America. Please go ahead.
Yeah. Thanks for the opportunity, sir. Firstly, I just wanted to get some color on the realizations. You mentioned there have been significant decline in the months of December. What kind of price decline can we expect on a quarter-on-quarter basis for the January to March quarter?
Yes. Prices declined on the spot market in November and December, and some part in January as well. In the last quarter, we could basically mitigate the fall in prices by virtue of long-term contracts which we had in place, contractual orders, sales to automotive, increased geographical presence in South and West, and reduced exports. However, the prices have dropped internationally. Therefore, there is a play out in the domestic market happening. We see there could be an impact of maybe INR 3,000 crore-INR 3,500 crore which would play out in this quarter, which would be partly mitigated by cost reduction.
Okay. Secondly, sir, on the Bhushan Power and Steel, firstly, is it possible for the opposing party to go to a higher court like Supreme Court? Is that an option? Secondly, is there a structure in place for us in case we were to go ahead with the deal, like we have done for Monnet, we took a minority interest, or we will be taking it on our books, the full asset on the books?
The first question, yes, the party always has the option to go for appeal or to increase the offer, one of these two options available to the opposite party. As regards to JSW Steel going ahead and implementing the resolution plan, we have put the structure in place in a manner that, at least on the year end or the quarter end, there is no need for us to consolidate in the books of JSW Steel. At least that structure is in place, that we can explain once the resolution plan is approved by the adjudicating authority.
Okay. Sir, lastly, this is with regards to the US operations. We have been hearing news regarding the expansion of the US capacities and a shortage of graphite electrodes in that market. Is our ability to ramp up operations there also constrained by this, or do we have avenues like some Chinese electrodes which can help us tide over the shortage?
Can you just repeat this question once?
Yeah. As I can answer, that way, the electric arc furnace we have already commissioned at Mingo Junction. We are not facing problem with regard to electrode. We are able to manage as regards to electrode is concerned. Ramping up is taking a little longer time because the major issue which we have faced in commissioning of this unit is the availability of gases. It is not the availability of electrodes. As far as the gases are concerned, we have made an arrangement with Linde, one of the reputed international gas suppliers. They have to use some pipeline which is where the right of way has to be given by another steel company. It took a little longer time than what we had anticipated to get that clearance from them.
That's why instead of starting this electric arc furnace, in the month of September and October, we could do it only in December, late December. Now it is in ramp-up phase. It is taking time to ramp up. These are the reasons why it took time, not because of electrodes.
Okay. Sir, lastly, if I may, what is the savings we can expect from the pipe conveyor once it's fully ramped up?
See, basically, the capacity, as we have been saying, is 20 million ton. In this year, there is one small portion which got delayed. That's why the benefit is not coming in this year. We expect the full benefit of this will come in the next year. At least minimum side, we expect, to start with, INR 200 crore per ton.
Of INR 200 crore per ton of iron ore?
Yes.
Okay. Thank you very much, sir.
Thank you. The next question.
Yeah.
Sorry, sir. Go ahead.
It's INR 200 crore per ton on the total, 11.5 million-12 million ton for next year. The following year, it goes up to full capacity of 20 million.
Okay. Thank you, sir.
Thank you. The next question is from the line of Sumangal Nevatia from Macquarie Capital. Please go ahead.
Yeah. Good evening. First question is on volumes. Now the 7%-8% decline, was this back-ended largely in December, or was it a phenomenon throughout the quarter? Has volumes recovered or stabilized in January? The last part is, do you see any stress emerging on domestic demand as well, or that continues to be robust?
If you see this drop of 7% which has happened, volumes is primarily, by and large an industry phenomenon which is taking place, in most of the parts of the world globally as well as in the domestic market. Big sentiments, drop in prices, lower priced imports, liquidity, all coupled together, has impact. The major part of the drop started in November and December. January numbers are slightly better. The other positive part in January is also that international prices, as Mr. Rao was also explaining, due to certain events and otherwise have picked up by $40. You see the international export market also gathering some momentum. We do expect that in January to March, the volume-wise movement will be better. Domestic is usually seasonally a better quarter. We see long products already.
If you see the long product market, on the spot today, in the last few days has already reacted, by INR 700 crore-INR 800 crore per ton upwards. We have also increased our prices in the local market by INR 500 crore-INR 2,000 crore depending on product in the month of February in the spot market.
Even if you look at our export numbers, in the Q2, we did exports of 650,000 tons, whereas in the Q3, it came down to 350,000 tons. Therefore, even exports which normally we do in the Q3, it came down majorly due to change in the situation globally starting from November, weak demand, weak prices, weak sentiment.
Understand. What would be your assessment for domestic demand growth in, in, say, this quarter in FY 2020?
7%, I would say that 7%-7.5% for next year is something which looks possible on the back of college spending on infrastructure which the government is doing. The interim budget has also announced, as you would have seen, more outlays on railway design, and infra. Real estate is also getting some tax space, and that will push that area. The consumption growth will be stimulated by the INR 100,000 crore of direct income support pension and the tax space which are coming in. We see both from an infra side and a consumption side domestic push, like this. 7%-7.5% kind of demand could be possible.
Understand. Sir, second question is with respect to iron ore prices. Now just wanted your views on how the domestic balance is appearing because the recent cut by NMDC was a bit surprising, given the surge in seaborne prices. Do you see this cost tailwind because of these cut to reverse quickly, given the international price scenario?
No, there is a lot of supply coming into the market, at least in Odisha. Because there are total, I understand, 280 mines which are getting, expiring, in March 2020. Not only iron ore, all together. Iron ore, bauxite, manganese, all together is 280 mines. Therefore, all the mining companies, they want to extract as much as possible to the extent of approval under environmental clearance. That is why, if you see even the production numbers this year is expected to be 210 million tons. That is leading to drop in prices, particularly in Odisha, and then resulting in NMDC releasing the price. We do not expect in FY 2020 the situation, at least in the domestic market, changing.
Okay. Given the lease is expiring next year, the supply intensity will, could further increase, is what you're saying, right?
Yes.
Understood. All right. Thanks, and all the best.
Thank you. Ladies and gentlemen, in order to ensure that management is able to address questions from all the participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we request you to rejoin the queue. The next question is from the line of Ritesh Shah from Investec Capital Services India Limited. Please go ahead.
Hi sir. Thanks for the opportunity. Sir, just to refresh your memory, if you can please explain how the structuring for Monnet Ispat was done.
Monnet Ispat, restructuring, JSW Steel holds minority in the equity of the company. The balance is held by private equity firm. That is AION Capital. It is a joint control. Therefore, there is no need for consolidation. That is the structure.
All right. We have around 25%-26% stake, right?
Initially, it is 23%. There is an instrument, which is outstanding, a convertible instrument. If that is converted, JSW Steel holding will go up from 23%- 27%.
23%- 27%. Hello?
Yeah, yeah. That's correct.
Correct. Correct. Correct. Sir, is there some scope or optionality over here in the structure wherein the stake can be further increased or we might merge the entity into JSW at a later stage, say, after two years, three years, five years?
Each party has a right to ask for the merger, subject to two conditions, complying. That is, the EBITDA of Monnet Ispat should be INR 6.5 billion crore, and the debt to EBITDA in that company should be 3.5 times. If these two conditions are satisfied, either of the parties has a right to ask for the merger into JSW Steel.
Sir, this is on which year of operation, INR 650 crore and 3.5 times?
Any year, any one single financial year, if we achieve that, then this is possible to ask for.
Okay. Sir, this helps a lot. Sir, my second question is, would it be okay if you could, if you provide some color on Bhushan Power, basically the rationale behind going for it? Secondly, the structure, what we had for Monnet, do you think it's something broadly similar to what we have for Bhushan Power, so that the balance sheet doesn't get under any stress?
A lot of questions you asked. As far as Bhushan Power and Steel is concerned, as I explained in my opening comments, the approval of NCLT has to come for the resolution plan. Thereafter, assuming that there are no further litigations, it can be implemented. We have a structure in place. As you are all aware, which we have been sharing with you, the bidding has been done JSW on its own name, JSW Steel on its own name. Subsequently, we wanted to add private equity as a partner, which the COC was not willing to accept. That is why, as of date, we have to implement as JSW Steel and complete, if at all we are a successful bidder, and we have to implement the resolution plan. Thereafter, opportunities we have to explore to bring in a new partner.
That is why our effort is, when we are doing the transaction before end of the quarter of the respective quarter, that, there will be a structure which will enable JSW Steel not to consolidate. That is the kind of view which we have, in Bhushan Power and Steel.
Okay. Sir, last question. Sir, how should one look at the Duferco transaction which has been spoken about, cash for steel prepayment? I think we did something similar a decade back. Sir, if you can explain the terms and how does it work, it will be quite useful.
No, it is a normal transaction which we have done three times earlier. We have done a one-year transaction. We have done a seven-year transaction. It is an advance which will come from the prospective buyer, a long-term advance under a commercial contract, of commitment to export steel. Under that contract, the advance received, along with the interest thereon, has to be paid by supplying the steel products at the prevailing then prices. These prices are agreed in advance, in advance in the sense at the beginning of the quarter or month, as the case may be. At those prices, so much of quantity will get exported. The value of that export will get adjusted towards the advance.
Perfect.
The transaction, the transaction which is getting contemplated, is a long-term contract with Duferco.
Thank you so much for the answer, sir. I'll join back the queue.
Thank you. The next question is from the line of Amit Dixit from Edelweiss Securities. Please go ahead.
Yeah. Thanks for the opportunity, sir. My first question is on the iron ore and coking coal cost. What cost went in the P&L in this quarter? What cost do you expect in the current quarter?
Iron ore, sorry, coal, coking coal, we had last time guided that, quarter two, we had a $195 blend, coking coal, CFR, into our plan. We have had a similar number in quarter three. Although we expected that quarter three numbers will be higher, because of some drop in between, we managed to maintain at similar levels. Quarter four, the impact will come in with a lag because of a higher price which played out in October, November. Quarter four, we expect about $10 more, so to be about $205 CFR coking coal.
What about iron ore, sir?
Iron ore, I think, as a blend, we have not been giving any detailed number because plant-wise, unit-wise, it is different. However, investor relations can help you with whatever details you need.
No problem. Sir, the second question is with respect to the Ramp-up at U.S. and, you know, Italian subsidiaries. In the current quarter, while we saw EBITDA loss, to the extent of $10 million, what do you see? Does it, first of all, does it include any startup cost? Secondly, what kind of sustainable EBITDA pattern do you expect from these subsidiaries and the Ramp-up plan?
Look, today, yes, you're correct. There is some startup expenditure which is included here. That is one. Number two is, capacity utilization is very low. Fixed costs are high. That is why the EBITDA is negative. Ramp-up will take time. As I explained in my opening remarks, I think in the next financial year, both the units will contribute positively to the EBITDA.
In Italy, just to give you a little bit of color, in Italy, all the three mills, they are Rail, Wire Rod, and Bar Mill. All the three mills have been started. The latest mill, the Bar Mill, has just started in the month of January. We expect these products to get, you know, absorbed in the local market. Approvals take time, so the Ramp-up will go mostly into the next year. That should be, you know, taking the Italian operations into a higher volume. We also have recently got a railway tender from the Italian government, which is planned for about 180,000 tons over a period of two, two and a half years, which is currently undersupplied.
As far as U.S. is concerned, again, the Ramp-up and I think a sentimental impact which came in because of the drop in prices, seasonal downturn because of the winters, electric arc furnace Ramp-up, which got delayed. These have resulted in a slightly delayed volume response. Quality is getting accepted. People are recognizing that quality over the last two, three months in the HSM has improved. We should get, again, better results as we go into the next financial year.
Great, sir. Any possibility of giving revenue number for these two units? You have given EBITDA,
Not as yet. I think in the Ramp-up mode, it's difficult to comment on that.
Fair enough. Thanks so much.
Thank you. The next question is from the line of Sanjay Jain from Motilal Oswal Securities. Please go ahead.
Thanks. My question is, I have two questions. One is on the status of captive iron ore mines. And second question is on acceptances. What are the acceptances at capital account and the revenue account?
Acceptances on revenue account, INR 138.1 million crore, and capital account, INR 112 million crore. The mines talked about.
Regarding captive mines, we got six mines in auction. Already three mines are in production. The total, all six, will give us 4.5 million. Two more mines we are very much confident to commission this month. We are trying another one more. Six mines will be next month. Total this year, we are hopeful actually to get around 3.5 million production from that. Next year, we are hopeful that we will get 4.5 million.
When you say this year, you're talking about FY 2019, right?
Yes. March, after the March.
How much we got already in, up to December? I mean, basically, what is the volume in fourth quarter in a way?
It is around, how much? Yeah, we just do, our investor department will do the information. Because the three mines which are operational, that capacity is 2 million, okay? This 2 million within this financial year, we can do entirely. That will come. After that, we are planning to start two more mines. With that, the number, we will achieve. This 2 million ton which we are supposed to get from these three mines, we'll give you the number.
Okay. Thank you very much.
Thank you. The next question is from the line of Pinakin Parekh from JP Morgan. Please go ahead.
Thank you very much, sir. My first question is on steel prices. You mentioned earlier in the call that you want a decline of INR 3,000 crore-INR 3,500 crore per ton, given what has happened in December and January. My question is, does this assume that steel prices stay at these levels for the next two months, or does it bake in some kind of steel price increase once China comes back into the market, given the cost push that we have seen?
Yeah. Steel prices have already bottomed out, and internationally, prices have started moving up. In the U.S., Europe, and China, we have seen prices in the range of $40 going up. That is number one. Number two, in the long product market in the domestic, in the last few days, we have again seen prices move up. We are seeing a bottom out of steel prices and prices correcting, to some extent, both internationally and the domestic. Domestic, because of the lower export out of India and because of, therefore, the supply-demand equation getting skewed with the imports coming in, there was an inventory overhang which most of it has corrected, I think, at the customer's end by now. We expect even inventory restocking demand along with better pricing sentiment seasonally to kick in in this quarter.
Sir, if domestic steel prices were to rise from here, assuming Chinese HRC export prices rise post the Brazil accident, then will it be fair to assume that the actual Q-o-Q ASP decline is lower than the three, three and a half thousand rupees per ton commented earlier?
It is basically, it is something which needs to be seen as we play out the prices between February and March. It is possible that there could be some positive impact on this something.
Thank you, sir. My second question relates to Bhushan Power and JSW. I mean, you mentioned earlier that, while the COC was not keen to have a PE partner, once JSW were to acquire the asset, it will look at structures where it need not consolidate. Sir, my question is, why would JSW Steel not look to consolidate Bhushan Steel 100% into its own balance sheet, given that Bhushan Power would require CapEx to ramp up capacity and hence would require more investments? I am just trying to understand, sir, what is the priority of JSW, to acquire and keep the asset 100%, or to acquire and bring in partners, and reduce the stakes?
If you see the JSW Steel past track record, we have kept the assets in a separate company until turnaround happened. Then we brought into the fold of JSW Steel. Starting from 2005, that is how we have followed. The moment we have today, as you know, we have a large organic growth plan, where the capacity is going up to 24 million tons. There is a lot of expenditure involved. Capital expenditure is involved. At the same time, Bhushan Power and Steel is reasonably a big asset. We would like to keep it in a vehicle until turnaround happens. Thereby, it will not block our future plans, either organic or inorganic. We will continue to grow the way we have grown.
Just to have that opportune window open for us, we are keeping Bhushan Power and Steel also in a similar structure like Monnet, as and when it happens.
Sure, sir. Lastly, net debt has gone up by INR 8,000 crore on a year-to-date basis, sir. If we keep Monnet and Bhushan Power aside for a moment, sir, how do you see this number trending over the next two to three quarters? We have a CapEx pipeline that we are committed to. We have recently made acquisitions, 100% in JSW. Given where the steel market is, should this number increase further from here?
Our effort is not to focus on the absolute number. That's why we have been guiding about relative ratios. We are quite, quite headroom as regards to the overall ratios are concerned. The slippages in the overall number is concerned in this year is majorly attributable to working capital. More money we have to put into the working capital. That's why there is an increase in the debt. Our effort is not to increase, but any event of this nature, either due to increase in the raw material and steel prices or due to accretion of inventory in some quarters, there could be an increase of this nature. Whatever we have guided, that 3.75 and 1.75, we will be well within those norms, in spite of the organic and inorganic growth.
Understood. Thank you very much, sir.
Thank you. The next question is from the line of Indrajit Agarwal from Goldman Sachs. Please go ahead.
Hello, sir. Thank you for the opportunity. I have two questions. First, in light of the recent floods in Australia, do you see any disruption in our coking coal availability, or how do you see the prices move?
Yeah. In the recent last week or so, there have been some disruptions in Australia. As of now, we do not see that impacting us immediately. We are watching the situation and will have to revert. However, there are some signs that China is slowing down a bit of the Australian purchases. To some extent, that will also neutralize the impact from Australia.
Sure. Thanks. Secondly, our other expenses have remained elevated at least for the last three to four quarters. When Mr. Acharya talked about cost-saving initiatives, is it more on the other expenses side? What exactly are we doing, and what could be a quantum of these initiatives?
The initiatives, which we have taken, location-wise, if I see in the case of Dolvi, the major initiative is this coke oven plant commissioning. In that, it is 0.75 into two, two batteries. 0.75 is already commissioned. Commercial production started on 1 November. 0.75 is ramping up, second one. Today, we are buying the coke in the market so that we need not do in future. As you know, the landed cost of imported coke, buying coke in the market, we start with captive coke. There is a INR 4,000 crore-INR 5,000 crore per ton difference. On the 1 million ton, we'll be able to save that type of money. There is INR 400 crore-INR 500 crore per annum. That is a saving from coke oven alone.
Similarly, we have converted our lime plants which are there at Dolvi from coal firing to fuel firing, gas firing. That will save a lot of cost and improve productivity. We also increased the capacity of the lime plants where we were buying calcined lime earlier. Now we need not buy that in Dolvi. The next point in Dolvi where we are achieving the cost saving is that the coke oven gas now we are using in a big way to replace the natural gas. That reduction in the cost is happening at Dolvi. There are three areas where we are getting the benefit.
Sure.
In addition to that, one very important change, which we are doing at all locations is to increase the input of PCI in the overall fuel consumption. We are reducing the coke and increasing the PCI. That is done across the locations, all of Vijayanagar, Salem, and Dolvi. That also reduces the cost. Pipe conveyor, as you know, that benefit will come from the next year onwards. There are a lot of series of measures which we have taken to reduce the cost.
Thanks. That answers my question. Thank you, sir.
Thank you. The next question is from the line of Bhavin Chheda from Enam Holdings Private Limited. Please go ahead.
Yeah, good evening, sir. So regarding the VAT refund, has the state government, both Karnataka and Maharashtra, paying it in time? What has been the outstanding number from the government on this account? In continuation, as you said, that there is a change in policy where the related party transaction, they are not including it as a part of a VAT refund. Is this a prospective effect or a retrospective effect?
As far as the refund of VAT is concerned, that is, before 1st of July 2018, those are coming in regularly. After 1st of July 2017, when the, when 2018, when the introduction of GST happened, these refunds are not coming. They have not announced the procedure for claiming refund. One by one, states are now declaring the procedure for refunding the incentives. As regards to Karnataka, they have not yet announced. Only Maharashtra has announced. In that, this problem has come. This is 20th December, retrospective effect, retrospective from 1st of July 2017. As I explained to you, in the drafting, their intention is to exclude the transactions of trading between the related parties.
Yes, sir.
Instead of blocking that, they said all the related party transactions are excluded. I think that will get corrected in our view.
This entire VAT refund, post GST from July 2017 to December 2018, which is almost like 18 months, is still outstanding receivables from government and would be standing in your loans and advances?
Yes.
And.
As per the procedure, yeah, that's correct. It is outstanding. That is amount approximately INR 1,200 crore.
INR 1,200 crore is standing in your balance sheet as receivables?
Correct.
Okay. That's also the one reason why your working capital has been going up for the last two, three quarters, right?
True.
Okay. Regarding the overseas entity, you have shared the number of losses for U.S. and Italy. What would that number be for nine months?
Okay. This one.
Acero and Aferpi , if any, in nine months number in the accounts at the EBITDA loss level?
It started very recently, Bhavin. I think it is EUR 14 million at Italy.
EUR 14 million?
EUR 14 million, in Italy, cumulative for nine months.
U.S. would be?
U.S. is same. U.S. is, we started only very recently. That is for the total result.
Okay. Okay. Thank you, sir. Yeah. Thank you.
Thank you. The next question is from the line of Tejas Pradhan from Citig roup. Please go ahead.
Hi, this is Rashi from Citi. Just coming back to pricing, you had indicated that JSW has taken some price hikes. Is that, number one, across board as in long and flat support first? Second is, how are prices today versus the import parity prices for the free trade agreement countries?
Yeah. We have, in line with the movement of prices internationally, prices have gone up by, as I said, in flats, $40. In India, we have taken a small hike in the month of February in the vicinity of, let's say, INR 750 crore on an average. Both for flat and longs. In the longs market also, in the domestic, we have seen prices moving up in the recent past to this level. Markets are absorbing this kind of an increase. As it goes along into the month of March, we will be monitoring how the international markets and domestic markets move. We will be looking at suitable price corrections wherever required.
Just to understand this right, that currently, the Indian prices would be at a slight premium to import parity on the free trade agreement countries at least, Japan and Korea?
It see, Japan and because this $40 has now moved up, the prices of Japan and Korea delivered to the customer vis-à-vis domestic, there is not much of a domestic premium. Maybe it's marginal, which is there. It's similar.
Okay. Just one more question. You had indicated that this INR 3,000 crore-INR 3,500 crore correction that we see in the next quarter could be offset in part by lower costs. Are you referring to the iron ore costs or is there anything else as well?
The prices which, you know, we have, just to clarify this point, in the month of November and December, spot prices had gone down. In the last quarter, we have mitigated that through various means which we explained to you. Therefore, some part of that drop is going to play out in this quarter for us. However, I think a large part of this would be mitigated by various costs initiated as Mr. Rao is explaining. In addition to that, the iron ore prices in the domestic market have also moderated. You would have seen NMDC prices have moderated to some extent. That will also help. Therefore, while the prices will go down, I think a larger part of this drop in prices will be made up by saving in cost.
Okay. Thank you.
Thank you. The next question is from the line of Kamlesh Jain from Prabhudas Lilladher. Please go ahead.
Yeah. Thanks for the opportunity, sir. Sir, just one question on this incentive part for the related party transactions. Would it be fair to assume that if those all facilities would have been put up in one bucket, then those incentives would not have been available to us, like Samba River Coke and like Coke products and all that?
No, on sale of finished goods, we'll have it will be the same. For instance, HR coil, let us say I am selling at INR 40,000 crore. And then galvanized coils, I'll be selling at INR 45,000 crore per ton. You will get incentive on INR 45,000 crore.
Yeah. Like, say, now Amba River Coke selling a coke to your Dolvi unit, then in that income product, you are getting the incentives. Those would be covered once, if this particular provision gets implemented.
No, the incentive is not linked to the structure of the company. Incentive is linked to total investments made. For instance, when we make investment in galvanizing, I'm physically making investment for setting up that factory. To that extent, I am entitled to get the incentive.
Mm-hmm.
The question is the intention is not to take away the incentive.
Mm-hmm.
They want to take away the incentive where there is no corresponding investment on the ground.
Mm-hmm.
In this case, there is an investment in both the cases. There is a value addition happening.
Okay. Okay. Sir, lastly, this INR 1,200 crore is only related to the related party transactions or is it the total incentive in terms of GST, total GST incentive, like including both related and non-related party as well?
Both together.
Both together. Lastly, sir, on the iron ore part, like a lot of mines are going to be auctioned in Odisha. What would be the planning for, of JSW Steel on bidding for those mines which would be far off from our plants and, in terms of logistic issues as well? What would be the plan going forward for those set of mines which are coming under auction?
Dolvi, even today, procures a significant portion of their iron ore from Odisha.
Okay.
Therefore, we will actively participate in the auctions in Odisha.
Okay.
Either for Dolvi or to supplement, Vijayanagar and Salem.
Okay. Lastly, sir, with the mines which are coming in auction, like the 3 million ton of new mines which would come in auction, which are operational now in Karnataka and would get expired by 2020, those would also come for auction. In total, out of, like say, Karnataka's requirement, how much would be met through these captive mines in percentage term?
Karnataka, the mines are located in and around 20 km. Therefore, we wanted to have, if possible, 100% captive mines. We will continue to participate, as regards to Vijayanagar, particularly in Karnataka, in almost all the auctions where it is viable. Small mines, capacity which is very, very small for us to operate, only those mines we are leaving. Otherwise, everywhere we are participating in Karnataka.
Okay. Great, sir. Thanks a lot, sir.
Thank you. The next question is from the line of Pallav Agarwal from Antique Stockbroking. Please go ahead. Mr. Agarwal, your line is on talk mode. Please go ahead.
Yeah. Good evening, sir. Sir, I just had a question on Bhushan Power. You know, sir, the media reports are mentioning about INR 19,000 crore as what would be a, you know, investment in that. Does this include the equity contribution or the payment to operations creditors? Or, you know, we could end up paying more on account of that?
No, we'll not be able to comment on the total bid amount or anything. It is not public yet. Once we get the approval of NCLT for the resolution plan, then I think we will share all the information, whatever is required.
Okay. There could be an, I mean, there could be an additional equity contribution that can happen?
I have no comments on this.
Okay. Sir, okay, the second question was, you know, when we look at a consolidated EBITDA, you know, so we I would be eliminating all these intercompany sales from Amba River Coke, you know, and JSW Salav?
Only the stocks which are unused. Only profit on those stocks will be eliminated.
Okay. The other portion would be still flowing through in our consolidated EBITDA?
It will not be worth it. Yes.
Okay, sir. Right. Yeah. That's it.
Thank you. The next question is from the line of Vikas Singh from Phillip Capital. Please go ahead.
Good evening, sir.
Yeah. Good evening.
Sir, I just want to understand that in your opening remark, you said your realization has been protected by auto segment also. What portion of that would come is actually getting repriced in next quarter or when it would be repriced at a lower price? For the contract renegotiation, what portion would be coming in the next quarter?
Automotive accounts for about 16%-17% of our domestic sales. The negotiations for the automotive for this half have also been a little delayed and are majorly going to kick in in this quarter. The repricing of contracts will happen only from April 1 for the next half, that is from April 1, 2019 to September 2, 2019.
Okay. Sir, secondly, in Bhushan Power, like we said that we do not want to consolidate, but, as per the COC, we have to give the cash from our books. How is the plan to refinance that debt and, for that bid financing, how long that INR 19,000 crore or whatever the amount would be stay in our JSW Steel book?
No, this we already explained. First, JSW Steel has to complete the transaction. Thereafter, in that quarter in which the transaction gets complete, we will have a structure to enable consolidation is not required. That is how we are structuring the transaction. How it will be done, what is the structure, this we can explain once we have the successful bidder and we have the resolution plan approved.
Is it safe to assume that some portion of the debt initially we have to put from JSW that would inflate our overall debt even if we are not consolidating?
That depends on the relevant time, whether we have sufficient money available to do it or we need to raise debt for that. We will be able to say only when the transaction comes to close.
Okay. Lastly, if I may, sir, in U.S., steel pipes, as other players are talking about a great outlook and all that. Our plate and pipe is still lagging somewhat in terms of their utilization. Any comment on that?
Sir, the mill, we are revamping, thereby the quality and the costs come down drastically. It is on the way. Number two is, melting and manufacturing within the U.S. has weightage in terms of getting orders from the government. That is why the backward integration is happening. It is a matter of time that there will be a big turnaround in the US Plate and Pipe Mill. Even then, if you look at the numbers, last year, we have got just around $10 million per nine months. Whereas in this year, we have posted $20 million. It is almost double. The capacity utilization in the plate mill at least has gone up. It is 38% capacity utilization in this quarter.
Okay. That's all from my side. Thank you for taking my question, sir.
Thank you. The next question is from the line of Ashish Jain from Morgan Stanley. Please go ahead.
Sir, my question was again to Bhushan Power. No, whatever structure you're talking about, I assume it will lead to a decline in our equity interest in the entity?
Yeah. Both, you know, once the equity interest will decline, the requirement of funds also will decline. Both will happen.
Okay. Okay. Okay. Fine. Sir, that's useful. Thank you so much.
Okay. Sir.
Sir, Mr. Parekh, your line is on talk mode. Please go ahead.
Yeah. Just one small clarification. You know, once you acquire Bhushan Power, the IBC would allow you to sell down, right? That's not a problem as per the regulation?
As per the regulation, sell down is prohibited only to 29A disqualified people. Otherwise, there is no issue.
Okay. Thank you very much. Thanks. Best wishes. Thanks.
Thank you. Ladies and gentlemen, that was the last question for today. I would like to hand the conference over to the management for closing comments.
Sir, thank you very much. We are making every effort to meet the production guidance that has been given for FY 2019. We also make every effort, even though we have given a caution of 2-3% lower sales volume achievement with reference to guidance, to reduce our inventories and meet our guidance for sales. We are also making every effort to preserve the margins by reducing the cost and changing product and geographical mix. With that, we are making all the efforts that are required. Our CapEx plan is on track. Thank you very much.
Thank you. On behalf of SBI Cap Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Payback is complete.