Good evening, ladies and gentlemen, and a very warm welcome to the JSW Steel Limited Q2 FY 2019 conference call hosted by IIFL Capital. As a reminder, all participant lines will be in the listen-only mode. 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. Anupam Gupta from IIFL Capital. Thank you, and over to you, sir.
Thanks, Ali. Good evening, everyone, and welcome to the 2Q FY 2019 earnings conference call for JSW Steel. I hand over to Pritesh Vinay, Group Head Investor Relations for JSW, to take the call further and introduce the management. Over to you, Pritesh.
Thank you, Anupam. A very good evening to all the participants who have dialed in for the second quarter of fiscal 2019 results 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, the Deputy Managing Director, Mr. Jayant Acharya, Director of Commercial, Marketing, and Strategy, and Mr. Rajeev Pai, the CFO. I'm sure you've all had the chance to go through the results, the press release, and the presentation, which has already been uploaded on the website, and the links are in your inboxes by now. We will start with a few minutes of opening remarks by Mr. Rao, and then we will switch over to Q&A. With that, I hand the floor over to Mr. Rao.
Good evening, and welcome you all for the briefing of our performance for the second quarter of the FY 2019. This quarter is a very, very important quarter for us because we have achieved some important milestones in this quarter. Our Vijayanagar unit got a Deming Quality Award, which is considered in the area of quality as the gold medal. This is a very, very prestigious award in the steel industry, if you look at it. Outside Japan, there are very few companies which secured a Deming Award. What it establishes is that JSW Steel has very, very established practices and the processes and activities, not only in terms of products and services, but entire processes are quality-oriented, with the major objective of serving the customer. That is the objective which gets established through this award, which we are all very proud of.
The second very important development is JSW Steel has been added to the Nifty 50 list. That is also one big milestone for JSW Steel in its history. The third one, we have completed some acquisitions in the last quarter. One is the Mingo Junction in the U.S.A.. We finished the acquisition, and we have taken control of the company, and we are working on how to turn around as early as possible. Similarly, in Italy, we have completed the acquisition in the previous quarter. We are working on now to turn around again as early as possible. As of 1st September 2018, we took control of Monnet Ispat & Energy Limited as a part of the NCLT process. We have now planned to turn around as early as possible over a period of two years, implementing whatever we have mentioned in our resolution plan.
As regards to the operations side, as we have been saying, we have committed a lot of expenditure for backward integration and product improvement projects. Our Coke Oven Plant at Dolvi and Lime Plant at Dolvi have been commissioned, and they are under trial runs. At Vijayanagar, we have commissioned our water reservoir and the pipe conveyor. They are also under trial runs. Water reservoir, we have started filling it up. In the next summer, we will not have any problem for water at Vijayanagar. Pipe conveyor will get commissioned in this current quarter fully. At our downstream, we have our Tinplate commissioned; it is under trial run. These are the projects which have been commissioned, and the balance projects are on track in its implementation. We have spent in the first half of this year close to Rs 4,300 crore on the CapEx.
There are certain auctions of iron ore mines, which have happened in Karnataka State. We participated. The premiums were very, very high. There were five mines. Eventually, we could secure one mine which has reserves of 9.7 million tons, and it has annual capacity of 0.435 million tons. As we have mentioned earlier, out of the five mines secured in the first auction, we operationalized two mines, total capacity of 0.7 million tons. We will produce a complete 0.7 million ton in this year. Balance three mines we are working on. There are some issues relating to the forest clearances, which we expect they will come in in this quarter, and we'll make those three mines also operational. These mines can be done very quickly.
There are six mines which will aggregate to close to 5 million tons of total captive capacity that will be available to JSW. In the case of U.S.A., last time we said we have committed $500 million for backward integration and also for upgrading the existing plate and pipe mill. We're happy to say that now we received environmental clearances, so the project now can be taken up at Baytown in the U.S.A. As regards to the quarterly performance, the guidance which we have given, 16.75 million tons of production, we are more or less in line with the production guidance. Sales, we have given the guidance of 16 million tons. Off-yearly numbers, if you see, were slightly lower than our guidance, but we will catch up in the second half of this financial year.
Overall numbers are concerned, the production numbers, we have shown a growth of 6% in group steel. On the sales side, what is very relevant to note, volume-wise, it has gone up by only 1%, but our domestic sales volume went up by 11%, and India grew by 6.8%. There is a substantial increase of sales volume in the domestic market. There is one important change which we have made. Our exports year-on-year have been brought down to 17% versus 26% in the previous quarter. Our sales in the auto industry went up substantially. Our share in the South and West market has gone up. These are some of the changes which we have made in the geographical and product mix that has contributed to better NSR in the quarter. Net sales realizations year-on-year went up by 25%, and quarter-on-quarter it is flat.
Cost of production quarter-on-quarter also went up, and year-on-year also went up. Because of this cost pressure, quarter-on-quarter you will find our EBITDA was slightly lower than the Q1. In the Q1, we have shown an EBITDA of INR 12,589 per ton. In the Q2, it is INR 12,141 per ton. This INR 300-INR 400 is majorly attributable to the increase in cost of power and fuel. Majorly is the reason. The crude oil prices went up. Natural gas prices linked to that. In Dolvi, the cost of production for natural gas went up. That has a pressure. Similarly, the thermal coal prices were higher. Refractories, electrodes, these are the costs which could not be absorbed fully in the last quarter. That is why the quarter-on-quarter, there is a reduction in the overall EBITDA per ton. Operating EBITDA for the quarter was INR 4,802 as against INR 4,822 sequentially if I compare.
It is more or less a flat quarter on the operating EBITDA side. Profit after tax, there is a 170% growth, INR 2,284 crore on the standalone number. Our subsidiaries have done quite well from that point of view, particularly domestic subsidiaries like Amba River; INR 110 crore EBITDA. Salav has done well. And the coated products, the EBITDA was lower than Q1 or even sequentially, which is at INR 88 crore. The main reason for the lower EBITDA in the JSW Coated is that when HR coil prices went up, the same extent, the downstream product prices have not gone up. That is one of the reasons why we had a higher EBITDA in the coated products. Otherwise, other domestic subsidiaries have done well. Overseas, U.S. Plate and Pipe Mill contributed $5.5 million. It is lower than Q1. Q1, we had $11 million.
Whereas in the Q1, there was inventory which was not subjected to 25% duty, whereas the steel prices went up in the US because of 25% duty. That's why the inventory benefit has come in the Q1. In the Q2, we were expecting that we would get exemption on import of slabs, which was not given, even though still we are pursuing on that. That's why we paid 25% duty on the fresh import of slabs. That has brought down the overall EBITDA to $5.5 million over Q1. Coal mines in the US again contributed close to a million dollar EBITDA. All this together, the consolidated EBITDA increased by INR 100 crore, INR 4,908 crore. Then the why INR 100 crore only when we add all this together, there is some drag from the recently acquired facilities in the US and Italy.
It will take some time to turn around and absorb this fixed cost. We expect the Q4 it starts contributing to the positive EBITDA from these newly acquired facilities overseas. With that, the profit after tax on a consolidated basis is INR 2,085 crore, which is 150% growth. Our debt as of 30th September , 2018 was INR 44,919 crore. It has gone up relative to 31st March 2018 or 30th June 2018. The major reasons for increase in the debt is INR 1,900 crore on account of translation losses, roughly depreciated by 11% in the half year. INR 2,700 crore is the amount which we have put in the working capital. Another INR 2,300 crore due to various acquisitions we have made in the last quarter. All these three together, there is an increase in the debt.
What is important here is our debt to EBITDA has come down to 2.35 in the last quarter. Even though it is higher compared to June, if you compare to 31st March 2018, it improved over that period. There are two important decisions our board has taken today. One is how to simplify various subsidiaries we have, where it is not necessary to maintain them as a subsidiary in the future. They have given the approval for a scheme of amalgamation of four of our subsidiaries. One is Dolvi Minerals and Metals Pvt Ltd, Dolvi Coke, JSW Steel Processing Centers, and JSW Salav Limited. These four subsidiaries under the scheme of amalgamation will get merged into JSW Steel. In addition to that, there is an enabling resolution which has been approved, authorizing the finance committee to take a call on the rights issue up to INR 5,000 crore.
The timing and the size and the terms of issue will be decided by the finance committee based on the requirement of funds in future. These are two important decisions which I would like to communicate. Going forward, we feel as far as this quarter is concerned, there is a roughly depreciation number one. Global steel prices, there is some correction which is happening. The WSA has given a very favorable guidance, saying that the steel demand globally remained resilient. 2.9% have revised the steel demand of course in the current calendar year. Next year, they have guided excluding China. 1.4% excluding China, what I am highlighting is that 2019, they expected zero demand. There is no growth in demand in China. Even after that, there is a 1.4% growth contributed by other than China.
These are two positive factors as regards to the world of global steel demand outlook is concerned. India, the infrastructure demand expected to be strong. Even though liquidity is very, very tight, which can slow down to some extent, the acceleration of demand growth, which we are all anticipating, will grow beyond 7%. That may to some extent slow down, which we are seeing already. Even after that, we expect the steel demand in the range of 6%-7%, and the steel prices will be in that range down going forward. That is how we expect going forward. Thank you. I'll stop it here. Any questions are there, we will be able to clarify.
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 attached on 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 Anirban Sinha from Bank of America. Please go ahead.
Yeah, good evening, sir. I'll ask a couple of questions. Firstly, you mentioned that on the subsidiary side, there was some drag from the recently acquired facilities in this quarter. Is it possible to quantify what kind of impact it was?
Yeah, it was INR 83 crores. Drag is there from over the subsidiaries in this quarter that has been absorbed as a part of this session.
Sir, this would be for the full quarter, or this is for the portion of the quarter, and we should be expecting a higher number going into the next quarter, a couple of quarters?
As far as Italy is concerned, it is for the full quarter, whereas in the case of Mingo Junction, full quarter? Okay. Italy two months and the US three full quarter.
Okay. Okay. Sir, secondly, on the decision on the rights issue, like you rightly pointed out, on the net debt to EBITDA front as well, we are very well placed. It's not very highly levered. What is the thought process behind this rights issue? Is this building up some kind of flexibility for inorganic acquisition in India or maybe on the stress asset side? I just wanted to understand the thought process on that.
Yeah, basically, we wanted to create more headroom for the company to accelerate the growth plan. That is why it is an enabling resolution. If you see, we have got approval from the board and the shareholders also to do a QIP and also to do FCCB and also to do MCD with warrant and also now rights issue. All instruments are available with us. Based on the requirement of funds, we will take a call at appropriate time. Exact timing is not decided. One point I would like to make it clear is that to complete our INR 45,000 crore organic growth, we do not need any equity, including rights. If any inorganic growth, 25, or if we wanted to take up further organic growth plans, then we wanted to create enough flexibility depending upon, of course, market conditions. That is, it is majorly an enabling resolution.
Okay. Lastly, sir, can you share an update on Bhushan Power and Steel? We get a lot of media updates, and it's a bit confusing at this point of time. Where we are in the process and what is the next milestone we should be looking at in terms of decision by maybe NCLT or NCLAT?
Based on the court directive, the CoC has asked all the resolution applicants, which are three in this case, to revise their financial offers or to improve their financial offers by 14th August 2018. Accordingly, in my view, all the resolution applicants, including JSW Steel, have improved their financial offers and submitted to the CoC. This has been done based on the directive of the NCLAT. Thereafter, the plans which have been submitted, again, as per the court directive, have been evaluated, and then the outcome of that evaluation has been put in a sealed cover, and that has been given to NCLAT for their decision. The matter is in the court, and hearings are going on. We do not know what is in the sealed cover as of date. The next hearing is scheduled on 1st November. Once court decides, I think the cover can be opened, then we will know who is the successful bidder.
Thank you. Thank you very much, sir. Thanks for announcing and all the best.
Thank you. The next question is from the line of Indrajit Agarwal from Goldman Sachs. Please go ahead.
Thank you for the opportunity, sir, and congratulations for a good set of numbers. I just have one question. On the cash outflow on working capital, how should we look at it for the rest of the year? Should we expect some of it to reverse in the second half?
We are not seeing a big reversal of the working capital because the prices of steel have gone up. With that, the absolute number-wise data has gone up. Inventory volume-wise, quarter one versus quarter two, absolutely there is no increase. The value-wise, it has gone up. Because of roughly depreciation plus prices went up together, it is demanding more working capital. That is one. Number two is there are very tight liquidity conditions in the market. Therefore, a lot of customers are approaching us for extending the credit period. That also has increased debtors to some extent. These two together, we have put INR 2,700 crore. We are not seeing a reversal of this INR 2,700 crore in the near future.
Sure. Just one additional question. In terms of steel prices currently, how do you see the current prices versus two-tier average?
The quantity prices have been by and large. If you see on the flat sector, they have been flattish. In the months of July and August, there was a small correction. In the month of September and August, there was an increase. It balanced out. There was some impact on the ground because of the seasonal trend. In the month of October, there has been again a small increase, which has happened. Buying back, if you take these two sets, I am thinking that it will be overall similar to quarter two.
Sure. Thanks, sir. Thank you.
Thank you. The next question is from the line of Amit Dixit from Edelweiss. Please go ahead.
Thanks for the opportunity and congratulations for a good set of numbers. Two questions here. The first one is on auto sales, on the product mix particularly. While auto sales grew 36% year-over- year, currently we have seen some weakness in auto. How do you see this auto sales going ahead?
Automotive sales, they have moved at 36% in this quarter. Overall, in the half year, also the growth has been quite good. The growth is happening on two areas. One is the alloy steel long, where from them, we are seeing a good traction from the commercial vehicle side. On the passenger vehicle side, we have got a lot of new approvals for new products, new models, especially in the high-tensile area, the galvanile area, which is also taking up our share. To some extent, what you're saying about the passenger vehicles, there has been a month-on-month drop in the last one or two months. Maybe seasonality , and a little bit of the Kerala impact.
The auto industry is expecting that in H2, they will be able to make up. We will monitor that. Our chances, because of our new approvals, because of the alloy steel norms and the commercial vehicles movement, we should be in a range more in the matter of the positive in terms of automotive growth. Our current, we have done about 548,000 tons in quarter two. I think we have done about 540 plus in quarter one as well. We are maintaining more or less the similar kind of volume in quarter one and quarter two both, in spite of seasonal variations.
Great. The second question is, in other operating income, there is some incentive of INR 309 crore post the notification of incentive schemes. Now, how much of it is sustainable, or is it totally one-time? It is sustainable. It is not one-time.
We are only one point. Here is earlier when the incentive scheme was operating prior to GST, there was a circular which was issued by the Government of Maharashtra particularly, in that that incentive amount can be discounted and pay discounted value to the government. Thereby, it is not a loan in the books of the company. That was earlier provision in the state of Maharashtra. Today, that circular is not there. That means the 9% VAT, which is applicable, so that 9% VAT, when we collect from the customer, and we have to collect back from the government, we pay to the government, and we have to collect back from the government.
Once it is given as a refund to us, we have to repay at the end of 14 years. The circular, paying the net present value to the government, circular we are avoiding. It is still to come from the government. In the meantime, as the books of accounts are concerned, as per the India's accounting standards, we will account at the fair value of that amount which we have to pay at the end of 14 years. From that point of view, it is sustainable. We wanted to take out this liability by paying the net present value. We are waiting for the circular from the Maharashtra government, which we have been pursuing.
Okay. Is there any particular range to this, or it would be like 7%-9% of VAT, as you said, I mean, that kind of a number?
No, there is no change in this. Only if the Government of India issues a similar circular as they have done in the past, I do not think there is any issue in this.
Okay. Fair enough. I have a couple of more questions that will come back in the queue. Thank you.
Thank you. The next question is from the line of Sanjay Jain from Motilal Oswal Securities. Please go ahead.
Hi. My question is, on the total cash outflow that you highlighted of INR 2,300 crores on M&A, I assume you talked about this cash outflow in the first half of this year. When I total up the amounts that you have mentioned in the press release, there is a gap of INR 6,700 crores because that amount only totals up to INR 1,600 crores. Can you help us reconcile this?
Yeah. Our investors, I would say, will be able to tally that number. It is actually the investments made by us in the three acquisitions which we talked, including the working capital adjustments. You must have seen the number, what we have paid for acquiring the company. There is a working capital adjustment which we need to do, so the amount will go up beyond the acquisition value.
Okay. Okay. The total amount is INR 2,300 crores in the first half. Correct?
Correct.
Okay. Great. Second question is on CapEx part. You talked about INR 4,300 crores CapEx. This is the number for the first half. Correct, sir?
Yes.
Now, since we have acquired these assets overseas, how much additional CapEx are we looking at? In the US, you talked about Baytown has got an EC to expand capacity. What kind of capacity addition are we looking at there?
I think last time, we have given all the details about the acquisitions and their CapEx involved in the turnaround. Let us go item by item. Again, Baytown, for instance, we said total $500 million is required. $ 150 million of the $500 million will be funded from India out of its cash flows for the company. $350 million we will raise in debt in the Baytown facility itself. How it gets funded. Similarly, in the Mingo Junction, whatever amounts we have to pay for acquiring the company has already been done.
We need $40 million for starting the operation. That we already indicated that amount will be funded from India. The third one is relating to Italy. Italy, we needed EUR 55 million plus working capital together, approximately EUR 75 million, which we already invested. There is not big CapEx that is required. Only working capital is required to make them operational because they are rolling mills. They buy the slabs and then they buy the billets and then roll it. Working capital is only required as regards to the Italian facility. We do not anticipate any big CapEx in Italy.
I mean, this is the total CapEx for the plan, but I was more referring to how much you could have spent in FY 2019 or FY 2020, year-wise breakup if you have finalized.
Excepting the Baytown facility of $ 350 million, that is spread over a period of 24 months. Not a big expenditure in this year, the majority of which is spread over in FY 2020 and partly in 2021. Balance will be spent in Italy.
Okay. Got it. One last question here. When you look at track the steel prices and the raw material prices, what we are seeing in the international market is the steel prices are trending a little bit down, whereas iron ore and coking coal prices are actually going up. As such, it is squeezing the spreads. How will this play out for us in coming quarters?
Iron ore and coke, you are right, have gone up a bit in the recent past. Historically, inventory demand actually went down because China, because of the winter season, the activity goes down. Therefore, the buying goes down and the iron ore prices will come under pressure. Similarly, on coal and coke and sinter plant or those activities. This time, it is working in a different direction. That's something which could be calculated in afterwards and see. There's no fundamental reason why it should move in this way.
As far as steel is concerned, I think, again, the prices have softened marginally. There will basically be factors of uncertainty, risks which have emanated from various emerging economies, trade tensions, currencies, have impacted sentiments and have impacted price to some extent. I think it will be range down because fundamentally, the cost of raw material will hold the steel prices to a particular level. The other reason is that in general, the growth, economic growth across regions, is still quite good. Therefore, the ability to sustain these numbers going forward should be range down according to me.
Okay. Would you like to share coking coal cost as you share most of the quarter last year? I mean, how much is for the second quarter and what increase you are looking at in third quarter?
This quarter, water grew over $195 for CFR India. And we maybe expect uptick on this for October to December to about $205 , over $10 up there.
Okay. Okay. Thanks so much, sir.
Thank you. The next question is from the line of Pinakin Parekh from JPMorgan. Please go ahead.
Yeah. Thank you very much, sir. Just a few questions. The first is on Bhushan Power. Given, I mean, obviously, it's not yet been finalized, but trying to understand, would the company go alone in its bid on acquisition of Bhushan Power, or will it look to induct a strategic partner to reduce the leverage from any potential acquisition?
If you see the strategy of JSW Steel right from the beginning in acquiring the stressed assets, is that to keep the stressed assets in an SPV until turnaround happens. After that, only we would like to bring into the fold of JSW Steel. In the case of Monnet Ispat , we followed the same policy. In the case of Bhushan Power and Steel, we have not identified at the time when we submitted the bid, any party with whom we will collaborate. The effort, if at all we become a successful bidder, is to work on similar structures as we have done in the past.
Understood, sir. Just coming back to the net debt question, given where we are at INR 45,000 crore broadly as of now, excluding expectations, now from year through March, given the visibility that the company would have on the capital plan and keeping Bhushan Power and Steel aside for a moment, if steel prices were to hold out at current levels, would the net debt move up or down over the next six months, sir?
It is very difficult to say an absolute number will move up or down because if you see the first six months, the EBITDA is INR 10,011 crore. That is the kind of EBITDA which the company has posted. At the same time, we have incurred INR 4,378 crore of CapEx during this period. Even after that, the majority of the CapEx and all other commitments have been met out of the cash accrual for the company. Whatever debt increase that has happened is attributable to acquisitions or working capital or the translation losses. Assuming a similar situation will continue in the next six months of the year, we will have enough cash generation to meet all our commitments, assuming that there is no acquisitions would come in.
Understood. Sir, lastly, given that the new global steel prices or regional steel prices have come off around $50-$60 per ton, domestically in India, do you think the industry would need to reduce steel prices over the next two to three months? I mean, we are hearing of HRC bookings from Japan and Korea at 610, 620, which would imply landed price of INR 44,000-INR 45,000 a ton. Do you see that price would need to come off in India?
Actually, the prices from where it was to where it is, the prices in India were to discount the international numbers. Now, the correction, given that it's currency numbers, the international prices are similar to what they were. Otherwise, we were to discount the international prices. I think from that perspective, it doesn't seem that there would be any requirement to do any correction on it.
Understood. Thank you very much, sir.
Thank you. The next question is from the line of Abhijit Mitra from ICICI Securities. Please go ahead.
Yeah. Thanks for taking my question. I just wanted to understand the change in supposed next for iron ore that would have happened over the last two quarters. I'm in between domestic procurement and imports. With the commissioning of the conveyor, how do you think that's changing over the next few quarters? Also, given the current exchange rates and the global prices and the discounts that you see on account of steel and alumina, do you see the value in yours for imports with the domestic iron ore? Yes. That is all from my side.
As regards to the availability of iron ore to meet the entire demand, today there is no barrier because the demand is outstripping the supply. That is a problem due to which JSW has to get some outside Karnataka, either from Odisha or from imports. Now, we have assumed that in this year, our captive mines will do INR 4.5-5 million ton, whereas that amount, based on today's condition, is 0.7 million ton. Balance three mines will become operational by end of this quarter.
We will be able to avail the benefit of even getting 4 million ton from captive mines in Q4. We will reach the target of 5 million ton, what we have planned as per the initial planning. If that is a scenario, if captive mines are not getting operational, that means category C mines are incremental coming in, then the supply will be more or less at a similar level. Therefore, we have to rely upon outside Karnataka to get iron ore. We evaluate the method to get from Odisha or imports, based on which we take a call in sourcing iron ore. Second question is, because of pipe conveyor, will we get the benefit or not? Definitely, some benefit will come, but real benefit we'll see in Q4.
Okay. Given the premium that you have bidded for, this 4.5 additional 4 million ton that you're expecting to start, will it be at a significant discount of the current price, which is prevailing in Karnataka, or would it be at par? What's your sense?
Premium at which the mining concessions were secured, I don't think it will give a benefit in the overall cost, except in transportation because of the pipe conveyor. The average premium is 90% for these mines. Plus, mining cost, if we add, I don't think there will be a saving on account of captive mines. Pipe conveyor will definitely reduce the overall cost of transportation. At the same time, if we have our own captive mines, it will act as a lever for us to negotiate or buy or get at a better price for the balance quantity we will be buying in the market.
You are maintaining that 20% import mix now, or has that changed?
Those are changing. It is not constant. As regards to Vijayanagar, I think now it has gone up about 20%.
Okay. Okay. That is all from my side. Thanks.
Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Hi, sir. Thanks for the opportunity. Sir, my first question is specifically on the P&L side, if you could highlight the potential of US, Italy, and Monnet Ispat, and if you could help us with some timelines to reach the goals that we are having over there.
as Monnet is concerned, it is a positive EBITDA even in this quarter, but that is not sufficient to cover interest and depreciation. You must have seen the results. As far as Q3 and Q4 are concerned, we expect we will be able to start the balance units. Just to elaborate a bit, what is working today in Monnet is only the DRI plant. The balance are not working. What were working, we have to first commission. That is what we are attempting in Q3. What is it that we would like to commission is a pellet plant, sinter plant, blast furnace, caster, and the TMT bar mill. These are the units we would like to commission. That is phase I. Once we do that, there will be a good reasonable EBITDA.
The second level which we are doing, phase II, is that the project which is stuck, that project we would like to complete, thereby the capacity will go up to 1.5 million ton. That is phase II. Then the phase III, is there any possibility to go beyond 1.5 million ton? These are the three phases we are working for turning around Monnet. So our effort in the Q3, that is October to December, is to commission these units which were operational area. That is how we are working on Monnet. Second, as regards to the Italian acquisition is concerned, Q3, it will be neutral as regards to EBITDA. Q4, it starts contributing to the EBITDA. That is how we are seeing the Italian acquisition. In the case of Mingo Junction, from December onwards, it starts contributing to the EBITDA.
Sir, is it possible to quantify specifically for Italy and U.S. operations, and how do we see the trajectory going forward?
Yeah. I think this will be able to give more clarity in the next quarter because we are working on now to commission all these units and start operations. I think more information we'll be able to give in the next quarter on the overseas acquisitions. What we can right now say is it starts contributing from Q4 to the EBITDA.
Okay. Thanks for this. Sir, my second question on U.S. incremental investment, you had earlier indicated that $500 million will only be subject to the exemptions that we receive on imported slabs. Sir, is that correct what I recollect, or is there some change to that?
No, we said total $500 million of that, $150 million for upgradation of the existing facility. That is $350 million. We requested the government of the U.S. to give exemption for two years on import of slabs until new facility comes in operation. The indications which we got at the time, once we get all the clearances, including tying up our funding, they would look into this. That is what we communicated. We have now got environmental clearance. We have tied up the funding. We can now approach to give exemption.
Okay. Sir, I just have a few more questions. Sir, there are other assets at Monnet Ispat, including limestone leases, and there's also iron ore leases. Sir, what's the status on that, and how should one look at it?
Iron ore leases are very insignificant. I think it is less than, in my view, 6 million or 7 million ton reserves. That is also under dispute. Therefore, dispute means there are some showcase and all those issues going on. Mine is not operational. Therefore, we can't say anything about that iron ore mine. As regards to limestone mines, which have gone, that is cement-grade limestone mines. Those mines are linked to, again, investment in the cement plant. Therefore, that value also today, we cannot factor anything here.
Okay. Any scope of this being transferred to JSW Cement or any group company on market basis?
As of date, there are no plans. We have to look at in the future once we complete our medium-term plans, which I just mentioned.
Okay. Sir, just last question. I just wanted to check on the valuations for Dolvi Minerals & Metals Pvt Ltd I think it's at INR 109 crore. It's a very small number, but we just wanted to get a sense on how we have arrived at this particular cost of acquisition.
Sir, based on the valuation report, if you see, Dolvi Coke has entered into a take-up agreement with JSW Steel with a fixed return on equity. That is the model which we explained when we set up this capacity. In order to avoid at that relevant time the consolidation in the books of JSW Steel, then this 40% is held by JSW Steel, 60% was held by financial investors. That was the structure we followed. When Ind-AS came in, based on the take-up agreement, it got consolidated into JSW Steel. Therefore, it doesn't make any sense for us to continue, number one. Number two is the 60% based on take-up agreement valuation, the equity valuation has been arrived at. That is how the INR 109 crore has been paid for an investment of INR 60 crore.
Okay. Sir, I have no more questions on this, so we'll take it offline. I'll join back the Q4 more. Thanks.
Thank you. Participants are requested to limit their questions to two per participant. Time permitting, you may come back in the Q4 follow-up. The next question is from the line of Bhavin Chheda from ENAM Holdings. Please go ahead.
Yeah. Good evening, sir. Sir, in the first half CapEx of INR 4,300 crore, how much would be in India and how much would be overseas?
It is fully in India.
This is fully in India. Okay. And for the full year, I think we were looking at INR 10,000 crore CapEx on India. So that guidance remains, right?
Yes.
Okay. And over and above that, how much you think in 2019 would be the overseas CapEx?
Overseas CapEx, $40 million in the case of Mingo Junction and another $50 million in the case of U.S., U.S. Baytown.
There is a INR 200 million on.
Yeah.
Okay. This is the outflow on account of CapEx, and you gave the figure INR 2,300 crore we have been paid for acquiring all these subsidiaries in India as well as overseas, right? No other payment is pending to close the transactions?
No.
Okay. Second thing, sir, regarding the incentive figure, you mentioned that 9% VAT is collected from client, paid to government, then again refunded back by government to you, and eventually, you will have to repay back to the government after 14 years, the same figure, right? You will have to account the NPV as a liability in the balance sheet side. Am I correct there?
Yeah. You're right.
Okay. What you said is that the Maharashtra government circular has not been issued yet, but are you accounting for that future liability on NPVs in balance sheet, and how much is that account and under which head it comes?
It comes as other operating income.
That is in the profit and loss account for the liability side which will be payable after 14 years.
It comes under unsecured loan in the balance sheet.
It will be in the borrowings figure, right? Hello?
Yes. Yes.
Okay. Sir, my last question, what was the figure of the revenue and capital acceptances at the end of September 30?
Revenue is 1,384.
INR 1,384 crores?
$1.3 billion.
Okay. Okay. And capital?
INR 60 million.
Capital is INR 60. Thank you, sir.
Thank you. The next question is from the line of Tejas Pradhan from Citigroup . Please go ahead.
One question has been answered. Thank you.
Thank you. The next question is from the line of Sumangal Nevatia from Macquarie. Please go ahead.
Yeah. Good evening. Two questions. One, continuing on this merger of the subsidiaries, Dolvi Coke, Minerals, Salav, etc., is there any other financial, any significant financial benefit from the tax angle or anything which we should keep in mind?
There are incidental to merger. There could be some benefits.
But nothing significant to discuss, right?
We are only one subsidiary.
Okay. Okay. Understood. Okay. Second question. Now, this quarter also, we've, I mean, reduced exports and substituted that with better or higher domestic sales. And this, I believe, has impacted positively on the NSR. Now, next year, given that we are very close to capacity and overall, so absolute terms, sales volume growth might just be a few percentage points. Should we expect this trend to continue in FY 2020 as well, and to what extent do we plan to reduce exports? Could it be like zero exports and completely domestic sales?
We usually maintain a certain percentage of exports if we are not going to try to play at the head of. We will maintain, so that we have a presence in key markets where we have been there for a long time. We may moderate the balance, but by and large, I think this will be a number we would like to maintain. The other thing which we have to keep in mind is that downstream business is having a large portion of exports, which we continue to be there. That is the corporate business, so that accounts for a major chunk of your exports. The moderation happens, let's say, at the base fee level from whichever unit.
From current mix of 17% exports, what would be the division in downstream and primaries?
Something we watch on a regular basis because the prices are volatile. The situation becomes more interesting as we go on. As we said, that 10% is something which we will maintain. It will move between 10%, 15%, 17%, and this trend continues.
Understood. Thank you and all the best.
Thank you. The next question is from the line of Bhaskar Basu from Jefferies. Please go ahead.
Yeah. Thanks. A couple of questions. Firstly, on the other operating income, just now, again, want to understand this clearly, how are you exactly accounting for it? When you get the refund back from the government, what exactly flows through the P&L?
I think this question will be taken offline. How we're accounting is whereas the benefit 9% incentive that would be given by the government, where this will be a loan in the books of the company which has to be repaid at the end of 14 years.
Yeah. That's clear. I think in the previous answer to the previous question, you mentioned this is sitting as another liability on the balance sheet. Just to clarify that, it is not part of your debt number which you're giving?
I can explain offline how we do it.
Okay. My second question is on the working capital increase. Just wanted to clarify how much of this pertains to general working capital at the new acquired entities. I mean, as you're kind of acquiring them, you need to get some working capital in place as you ramp up those operations. How much of it is that initial working capital, and how much of it is actually pertaining to your India, the organic business?
This is all Indian operations.
Okay. The CapEx numbers which you mentioned for overseas, in addition to that, would there be any additional working capital requirement which would be needed at these effects?
Overseas working capital requirement?
Yeah. Especially when you start the Mingo Junction and the Italian unit. Would you need to infuse some more working capital there, or that's all done?
There will be additional working capital requirement. That we need to see to raise money there only.
Okay. That is something which you need to build over the CapEx numbers which are clear.
Correct.
Okay. That is all from my side. Thanks.
Thanks. Can we take the last question, please?
Sure, sir. We'll take the last question from the line of Kamlesh Jain from Prabhudas Lilladher. Please go ahead. Kamlesh, if you have self-muted, please unmute and speak.
Yeah. Sorry for the disturbance. Sir, just one question on the part of the export volumes. The export volumes are down 35% year over year. Given the fact that Europe is almost closed with regard to the quota part, even in Southeast Asia, we are facing problems. Do not we see the case that in India, we need to bring down the prices substantially to offload that additional volumes which we are getting because of lower exports?
No. If you see our exports, if you see quarter two of last year to quarter two of this year, there is a drop of 37% or so. If you see wherever there is a requirement like seasonal, domestically, there are certain issues with the long product side. Our quarter one to quarter two exports have actually gone up by 40%. The numbers are at around 650,000 tons or so. The ability for us to switch as per the requirements of the market is there. As far as domestic is concerned, the additional volume which we have brought in has been brought in in areas where the requirement in India has also facilitated us to enter that market.
If you see our investment in terms of a product mix strategy, we have over a period of time enabled products into the market which have been value-attractive. Our electrical steel has consumed, all consumed, so we are producing full. Our CAL lines are by and large fully operational. We are producing full. Our galvanized lines are getting fully operational, but the GI lines are running full. Therefore, our crude is getting diverted into consumption in these areas. That automatically is reducing your exports.
Okay. Okay. The last part will continue to be there, which is the part of the strategy. Yeah. Sir, Rao, you talked about that INR 83 crore hit on account of those acquired overseas subsidiaries. That relates to the capital level or is it still the PBT or the PAT level?
EBITDA level. EBITDA level.
Lastly, like I say, with regard to Bhushan Power, you have increased substantially. What has changed in that particular case? Though in the Bhushan Steel, we have bid it very low amount there, though the quality of assets were far better compared to the Bhushan Power. What has triggered that particular sharp increase in the bid in case of Bhushan Power?
I will explain to you the rationale once where the concerns will be there because matter is subjudice and a lot of litigations are going on. At this stage, we do not want to comment on that.
Thank you, sir. I appreciate that.
Thank you.
Thank you very much. That was the last question. I now hand the conference over to the management for their closing comments.
Thank you very much. As the October to December quarter is concerned, our effort is to meet our guidance in production and sales and also turn around the acquired units as early as possible. This is the focus. Also get the benefits on the completed projects. This is the third area of focus. To meet the guidance of 16 million tons of sales and 15.7 million tons of production, we continue to work on this and improve the product mix further from here on. Thank you very much.
Thank you. Ladies and gentlemen, on behalf of IIFL Capital, that concludes this conference call for today. Thank you for joining us, and you can now disconnect your line.