Ladies and gentlemen, good day, and welcome to the JSW Steel Limited Q4 FY18 earnings conference call hosted by Investec Capital Services. 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 and zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ritesh Shah from Investec Capital Services. Thank you, and over to you, sir.
Thanks, Liton. Hello everyone. On behalf of Investec Capital, I welcome you all to today's discussion. We have JSW top management along with us. I would like to hand over the call to Mr. Pritesh Vinay, Vice President, Capital Markets and Group Investor Relations, to take this further. Over to you, Pritesh.
Thank you very much, Ritesh. A very good evening to all the participants who have dialed in for the fourth quarter and fiscal 2018 results of JSW Steel. I'm sure you've had the chance to go through the earnings release, the press release, and the presentation which has already been uploaded on the website. We have with us today the senior management team of JSW Steel, represented by Mr. Sheshagiri Rao, the Joint Managing Director and Group CFO, Mr. Jayant Acharya, Director of Commercial and Marketing, Dr. Vinod Nowal, Deputy Managing Director, and Mr. Rajeev Pai, the CFO of the company. We will start with a few minutes of opening remarks by Mr. Rao, and then we'll open up the floor for Q&A. With that, over to Mr. Rao.
Good evening. We welcome you all to the Q4 financial performance of JSW Steel.
Oh, sorry to interrupt, Mr. Rao. Sophie, I'm not able to hear you.
Hello? Are you able to hear now?
Yes, sir. Much better. Please go ahead.
Yes, I wanted to take two minutes before we take the questions. There is a clear rebound in the steel demand globally and also in India. Global steel demand, we find there are some structurally positive developments.
Oh, sorry to interrupt once again, Mr. Rao. Sophie, I'm not able to hear you.
Hello?
Yes, sir. We are not able to hear you. You're sounding too soft.
Excuse my voice. Now you're able to hear?
Yes, sir. Please go ahead.
I'm trying to just explain about the steel industry positive rebound in the steel demand in the last quarter. Globally, I'm saying that because of the structural factors like Chinese supply-side reform and the discipline they have followed in moderating exports, we've got a lot of turbulence in the overall demand-supply situation and the price in the globally, further aided by cyclical rebound in the overall steel demand. That contributed for the steel prices to look up. In India, there are two important factors we have seen in the last quarter. India produced very good quantities in the quarter four and became the second largest producer in the world, replacing Japan. The second, which is very positive, is that the elasticity of steel demand picked up, which used to be below the GDP growth rate, picked up to 1.18 times in the last year.
That clearly indicates that the steel user industries are doing extremely well, particularly the automobiles, railroads, infrastructure, water pipeline, gas pipeline, metro station. These are all contributed for this elasticity of steel demand to GDP, picking up quite substantially in the last quarter.
What we have seen is that the momentum started picking up from December onwards, and the steel demand is quite robust both globally and in India. In this context, if you look at JSW Steel performance, it is one of the extraordinary performances in the last quarter. We have given the guidance of the beginning of the quarter. We could achieve 98.6% of our production guidance, and we've achieved 101% of our sales guidance for the year. If I look at the Q4 performance, we produced 4.31 million tonnes of production. We have reduced our inventories by 164,000 tonnes.
If our sales growth was 7%, we sold 4.22 million tonnes. In the sales side, we have done a lot of things. We have moderated our export sales to 15% in the last quarter. We increased our domestic sales to 41%. Our consolidated market share last quarter was 14.6%. Our south and west share of sales have gone up to 86%. Our outdoor sales went up. Our value-added steel products went up.
All these have contributed for improvement in the margins, notwithstanding the cost pressures coming from higher iron ore prices, higher coking coal prices, higher natural gas prices, higher electrode cost, higher graphite cost. In spite of all that, we could improve our margins. Our margin per tonne was INR 11,953 per tonne, which is 25.7%. Our net sales went up. Our EBITDA and standalone company was INR 5,043 crore, showing a growth of 68%.
Our net profit for standalone company was INR 2,235 crore. As far as the consolidated results are concerned, we have done again well our US Plate and Pipe Mill. it contributed $3.25 million for the quarter EBITDA. Our US coal mines started contributing. It contributed 0.6 million tonne EBITDA in the last quarter.
Domestic subsidiaries have done well. All this together, the consolidated EBITDA for the quarter was INR 5,291 crore, showing a growth of 67%. Our profit after tax is INR 2,880 crore, showing a growth of 186%. For the financial year, we achieved 16.27 million tonne of production, 15.62 million tonne of sales. Our EBITDA for consolidated basis was INR 14,794 crore. Our profit after tax was INR 6,113 crore. Now, in this result, there are two items which I need to explain. One is incentives, VAT incentives, which we used to get pre-GST.
In the post-GST, we were waiting for the government to announce how these incentives will be extended. They have issued notifications to almost all the states where we are present. The VAT rate, which used to be 5%, that SGST rate right now is 9%. Effectively, the state taxes went up from 5% to 9%. Earlier, the incentive used to be calculated based on 5%. Now the government has said that the incentives will be given based on 9%. The differential 4% is accounted in this quarter.
The total incentives accounted is INR 524 crore. Out of these INR 524 crore, INR 367 crore pertaining to the previous quarter or previous years. One more thing which I would like to give information here. Out of INR 524 crore, only INR 108 crore belong to previous years. INR 524 crore minus INR 108 crore belongs entirely to this year.
The quarter is concerned only INR 157 crore belonging to this quarter. When I say that my EBITDA for the quarter is INR 11,953 crore, out of that, INR 367 crore pertaining to previous quarter or previous year is accounted in this quarter. You have to adjust to see my EBITDA per tonne if you take out this for the quarter. This is one point. The second point relating to the US plated pipeline.
Last quarter, we have accounted INR 572 crore is on account of tax liability coming down because the tax rates have come down to 21% in the US. In this quarter, we have accounted the accumulated losses before tax asset because US plated pipeline started doing well, and there is no Emphasis of Matter by auditors, and the outlook is very buoyant. Considering these factors, the deferred tax asset has been recognized to the extent of INR 726 crore.
This amount you will find in the consolidated balance sheet as a deferred tax asset. To that extent, the consolidated net profit is up. These are two items which you have to look at for seeing what is actually the operational EBITDA and the operational net profit.
The other important area is that our debt has come down to INR 38,019 crore. The effective interest rate has come down to 7.04%. We could use the surplus cash to pay the debt. We have reduced debt by INR 3,500 crore over March 2017. The acceptance of outstanding on revenue account is INR 1.293 million, and in the case of CapEx, it is INR 188 million long. Our board has recommended a dividend on the equity share, INR 3.20 per share. That is 320%, and it will be put up to the shareholders' approval, which will happen in July.
We come to our capital expenditure program. We have announced last year INR 26,815 crore of CapEx. Out of that, we incurred INR 4,690 crore during the year. After having seen the kind of rebound in the steel demand and the demand outlook going forward, and also the installed capacity of 130 million tonne versus the actual production that happened in FY 2018, 104 million tonne of finished steel, we expect there is a clear shortage of steel which could happen if no new capacities quickly come into India.
Therefore, we have to accelerate our CapEx program and create more capacities to meet the domestic demand. The board has cleared an additional CapEx of INR 17,600 crore. INR 26,800 crore, which we have given last year and INR 17,600 crore, total together is INR 44,400 crore is the capital expenditure program, including last year.
This capital expenditure is spread over a period of four years, including last year. Once we complete this CapEx, what is going to happen in regards to JSW Steel overall capacity circumstance? Today, we are 18 million tonne. We are increasing capacity of crude steel by 6.7 million tonne.
Last time, we gave 5 million tonne of expansion at Dolvi. We are doing further capacity expansion by another 0.7 million tonne. Instead of 5, we are doing 5.7 million tonne by increasing the DRI capacity of the Salem. Majorly, that is what is happening. This is happening at a very good cost. This is one expansion we would like to take up. The second is at Vijayanagar. We have explained to you last time that BF3, once we modernize, there is a 1 million tonne of incremental hot metal that would come in.
BF2, cost of hot metal is expensive relative to BF3. Instead of spending money on the downstream for creating more capacity to handle the hot metal, we would take the shutdown of BF2. Now, after having seen the kind of rebound in the demand and the realizations and the margins which are there, we feel it is in the interest of the stakeholders to commit capital expenditure to create more handling capacity in the melt shop and also in the rolling capacity to handle the incremental 1 million tonne.
Instead of taking shutdown of the gas turbines too once BF3 revamping is complete, we would like to create more capacity in the melt shop and also in the rolling capacity. We wanted to increase the million tonne more capacity in Vijayanagar, 12 to 13 million tonne.
One million tonne extra at Vijayanagar, another 0.7 million tonne at Dolvi. One point seven plus five, so total 6.7 million tonne of crude steel capacity will get commissioned by 31st March 2020. This is one thing. Second is, in the case of downstream, we are effectively increasing more capacity. Three point three million tonne, 3.34 million tonne of capacity we are creating in the downstream. We are today 5.00 million. That is going up by 3.34 million tonne downstream capacity.
As a part of this, we are increasing color-coated capacity by 0.9 million tonne incrementally. We are also creating a tinplate capacity of 0.5 million tonne. We have committed additional CapEx in the downstream. We also identified additional CapEx programs as a backward integration, like additional coke oven plant, additional beneficiation plant, additional power plant, and some more cost-saving projects.
Those projects are being taken up and normal CapEx. All this together, the total CapEx is working up to INR 44,400 crore. This amount will be financed INR 25,000 crore by debt, balance out of cash equivalent. The phasing of this capital expenditure in the 2018 and 2019, we'll be spending INR 10,000 crore, 2019, 2020, INR 15,000 crore, balanced in the year 2021.
This is about the CapEx. As regards to our overseas acquisitions, whatever we have announced in the U.S., Acero Junction acquisition, a 3 million tonne facility. We have almost completed our due diligence, so we will be closing that transaction. There will be $80 million of equity value, which we will be paying for 100% of equity. There is approximately $100 million debt in the company. Another $40-$50 million we need to spend for starting the operations.
We will be completing the transaction very, very shortly. This has high potential in our view, particularly being in the US, and those markets are looking far better. Margins are quite healthy. It is a 3 million tonne facility with a backward integration of 1.5 million tonne. In Europe, we are looking at Lucchini, and the due diligence is going on. We'll be able to share more information by the end of the quarter. In India, the IBC side, there is not much progress we are seeing. Most of the cases are going into litigation, which in our view is likely to take more time. Even Monnet resolution plan has been approved by the COC. It was submitted to NCLT. Fields are going on. It may take some time. In spite of receiving the CCI approval, pending NCLT approval, we will not be able to complete the transaction.
We expect some more time it will take. That is why we pressed a button more on the organic growth. We will be able to really create these capacities in the next two years' time. 6.6 million tonne of incremental crude steel capacity and 3.34 million tonne of downstream cost billing. There will be incremental EBITDA that will accrue not only from volume but also out of the cost-saving initiatives the company has taken. As regards to overall debt to EBITDA, debt to equity is concerned, I think we have deleveraged to a large extent. There is enough headroom we have created relative to the guiding financial ratios. Our debt to EBITDA was 2.57 as of 31 March 2018. Our debt to equity is 1.38 times.
We have brought it down quite significantly, and there is enough headroom for us not only to complete this CapEx program but also to look at any inorganic opportunities that may come in future. Guidance for next financial year. Our overall capacity is not going up in FY 2019, so we are mostly focusing on screening the existing capacity and also changing the mix, increase our market share, particularly in the south and west, increase our value-added products, and complete some of the coke oven plant, pipe conveyor, and some of the other cost-saving projects where we have spent some money in the last year.
They will get commissioned, and some cost savings will accrue to the company. Taking that into account, our guidance for production is 16.75 million tonne, which is 3% over last year. Our sales will be 16 million tonne, 2.5% over last year.
This is the guidance for production and sales numbers for FY19. The steel demand for FY19, we expect it would be in the range of 7-7.5%. It is based on two assumptions. One assumption is last year we have seen the elasticity of steel demand is 1.2 times of GDP growth. If we take that into account, there should be 8.5%, 9% should be the steel demand growth for FY19.
At the same time, if you look at the industry like infrastructure, automobile, packaging industry, construction industry, real estate, and apply the kind of expected growth in those segments based on their proportion of steel consumption, we are arriving at a demand of around 6, 6.5%. Taking that into account, both these factors, minimum steel demand growth for FY19 will be in the range of 7-7.5%. With this, I stop here, and any clarifications we need, we are open to clarify. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Anyone wishing to ask a question may please press star and one on your touchstone telephone. If you want to remove yourself from the question queue, you may press star and two. Participants, I request that you use handsets while asking a question. Ladies and gentlemen, if you will wait for a moment while the question queue assembles. The first question is from the line of Anshuman Atri from Premji Invest. Please go ahead.
Yes, thank you for the opportunity and congratulations on performance. My question is regarding the incremental CapEx on value addition and cost savings. What is the potential improvement in total EBITDA possible because of this realization improvement and cost savings can be expected?
For instance, overall, we can say that 6.6 million tonne of incremental capacity which will get commissioned by 31 March 2020, if we say that adjusted EBITDA after taking into account the incentive for the previous quarter for previous years, it is around INR 11,100 per tonne. Multiply by this 85-90% capacity utilization. That is the kind of incremental EBITDA which could come in from volume growth itself. Second is product mix change. Product mix change is the 3.3 million tonne of incremental capacity which we are creating in the downstream. If I look at the average EBITDA incrementally in the downstream, it is around INR 3,000 per tonne.
That is the kind of incremental EBITDA which can come in on account of this 3.3 million tonne. Over and above 3.3 million tonne, some more changes are happening in the product mix. One change is tinplate. tinplate is 0.5 million tonne is coming in. In the tinplate, the EBITDA margin is more than INR 3,000. Incrementally, that would come in on the 0.5. Plus, color-coated, we are increasing capacity from 0.7 to 1.6. That is 0.9 million tonne of incremental color-coated. Color-coated, the EBITDA margin is more than INR 3,000. So 0.9 million tonne incrementally it will come in. This is what is going to accrue on the downstream capacity. If I look at cost saving, there we are commissioning 1.5 million tonne of coke plant at Dolvi. Today, we are buying the coke.
Captive coke will be available fully for the second half of this financial year, partly in the first half, maybe in the second quarter, and fully for the second half of this financial year. So 1.5 million tonne bought out coke and the captive coke difference in the cost, that would accrue to the company in this year itself and fully in the year FY20. Pipe conveyor, again, which we explained last time, that will get commissioned in the July to August of this year. Transportation cost will come down on account of pipe conveyor. I will not be able to give you one number on account of this, but there will be a substantial attrition to these EBITDA margins on account of cost-saving initiatives the company has taken. As mining side, we are spending INR 700 crore.
This is on the mines in Vijayanagar and also the Jharkhand coking coal mine. Both will get commissioned fully by 31 March 2020. This will also contribute to the EBITDA margin from the mining capital expenditure. Therefore, there is an upside to the current EBITDA, ensuring that the raw material prices and the steel prices will remain at the same level. This incremental margins which will come in will improve our margins further.
Okay. Secondly, on the imports, we are seeing high increase of color-coated products. Is government taking any action regarding this?
Government has already put in the BIS quality standards on the color, but that is not, in our view, effectively implemented. We have taken up with the government to implement these measures at the ground level. Hopefully, they will implement and it will moderate this color. If you want to add names, you may.
Okay. Thank you, sir.
Thank you. The next question is from the line of Amit Dixit from Edelweiss Securities. Please go ahead.
Thanks, sir. Thanks for taking my question and congrats for an impressive set of numbers. I have a couple of questions. One is regarding the iron ore mines. Can you give a timeline that when these mines will be kind of operational? I know a couple of them are operational now, but regarding the material that you will get. Secondly, what material will it substitute? Will it substitute NMDC material or material that you get from Odisha? That is on mining side, iron ore mining. The second question is on the CapEx plan. Of course, we are planning for a big bang capacity expansion. What kind of comfort are we getting on the demand side in India and at the grassroots level?
Okay. Good evening. Regarding the mines in Karnataka, we bought five mines in auction of the C category mines. Out of that, one mine is in operation last two months, and one mine is about to be in operation within the next one month's time. Another three mines, we are getting first stage clearances from MOEF, and we are hopefully by second half, we will be in position to start balance three mines also. Altogether, five mines will give us 4.3 million, and that will help us to actually stop buying from Odisha or imported material.
Okay. That's it. Thank you.
On the demand side, I think on the ground, we are seeing a lot of activity. That's why the demand, if you see JPC numbers, there was 7.9% growth in this last year. We are seeing that driven by good improvement in manufacturing, especially to talk about automobiles, appliances, which are seeing robust growth. We are seeing pipeline projects coming up in water pipelines and oil and gas both. Incrementally, substantial quantities are likely to kick in this year.
We are seeing demand drivers from the construction infrastructure space with respect to bridges, lift irrigation, metros, highways, and commercial buildings and stores. That itself is going to be a lot of TMT consumption, which has been actually a very key driver of the change in volume and prices in the last quarter. You are seeing good demand on the coated and color-coated side based on the appliances, the solar capacity increases which are being planned.
In addition to that, we are seeing a little bit of improvement as we see from the loan side, also from banks, rural housing pickup, the agri allocation of funds towards the budget is seeing initial stages of pickup. I think the general fundamental demand in the country looks good.
Ok ay. Thanks, sir, and all the best.
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 the CapEx plan that has been announced, roughly INR 45,000 crore of spending over the next three years. Does this mean that we would stay out of M&A for the time being given we have a large slew of projects that we will execute, or is acquisition something which can proceed parallelly if the opportunity comes through?
If you see the Debt to EBITDA as of 31 March 2018 was 2.57. Debt to Equity is 1.38. We have been guiding you for the last few years. We want it to be at 3.75, Debt to EBITDA, and Debt to Equity at 1.75. There is enough headroom that is available to maintain these ratios at these levels and continue to grow, not only to complete this CapEx, but also look at any opportunities that may come either in IBC or any such opportunity. Second point is last year when we incurred INR 4,690 crore of fees, total CapEx. Out of that, the debt which funded is only INR 1,600 crore in that. Balance we met out of cash equivalence. Not only meeting over INR 3,000 crore of CapEx in the last year, we reduced our debt by INR 3,500 crore.
That means at INR 14,800 crore EBITDA level, we were able to earmark either for repayment of the debt or meeting CapEx over INR 6,000-6,500 crore. If that is the kind of ability which at INR 14,800 crore I have, in this year where we are guiding you for 2.5% increase in sales and there is a change in the volume mix, there are certain INR 3,000 crore of CapEx programs for cost savings which are getting commissioned this year, and the steel demand is very robust. If that is the guidance which we are giving, therefore with the cash generation that would come in, we will be able to meet a significant portion of the CapEx even in the current financial year out of our internal cash generation. Out of the INR 45,000 crore which we talked about, INR 4,690 crore is already spent.
To balance CapEx, INR 10,000 crore will be earmarked for FY 2019. What we are planning to do for this INR 10,000 crore is raise INR 7,000 crore of debt and INR 3,000 crore of cash equivalence. That is how we have phased out this expenditure. We have enough headroom by way of meeting this out of internal cash equivalence or by meeting within the parameters which I just explained to you. There is no issue with regard to meeting the CapEx or getting any further opportunities.
Understood. Sir, just to carry forward this question further, recently there were some announcements for capital spending in the US. Now, sir, over the next three years, what kind of capital expenditure are we planning to incur in the US operations of JSW, which could be over and above the announced projects in this three-year CapEx plan?
In the US, we have already informed that there will be a $500 million total capital program in the plate and pipe line. Out of that $500 million, $150 million is by MSC equity and $350 million without recourse to JSW Steel India will be raised in the US. This $150 million is spread over again over a period of two years' time.
Understood. Sir, lastly, on the Monnet thing, whenever the NCLT approves, we do not know when it would. In your view, sir, how much time would it take for the company to essentially get those operations fully ramped up and online? Is it a multi-quarter process, or do you think it is a multi-month process?
We have got already CCI clearance, and implementation of the plan, I do not think it will take a very long time from the date of NCLT clearance. Understood, sir. At least operationalizing the plant at its capacity will take time. Starting the operation to the extent of TMT mill, which is around 500,000 tons, that will not take time. It will be maybe three to four months' time. The capacity to 1 million tons, it will take some time.
Okay. Okay. Okay. Understood, sir. Thank you very much for this.
Thank you. The next question is from the line of Prateek Singh from Credit Suisse. Please go ahead.
Yeah. Hi, sir. Congrats for a good set of numbers. Just wanted to get an idea of the pricing environment of coking coal. If you can give me the purchase and consumption cost for 3Q and 4Q both, how it has moved.
Yeah. The coking coal price in quarter three was blended was $187. It has moved to $205 in quarter four.
Understood. Is this the consumption cost or purchase cost?
This is based on CFR consumption.
Understood, sir. Regarding this GST incentives going ahead, how should we look at it? Is this the number that we got for this quarter specifically, is that something which we can build in going ahead also every quarter?
I'll tell you what it is. For instance, whatever incentive belongs to the previous year, it's only INR 108 crore. Balance 12 belongs to financial year. This quarter is concerned, INR 108 crore plus another INR 259 crore. What is the INR 108 crore you have excluded from this quarter? Balance 12, INR 108 crore.
That answers my question.
Thank you. The next question is from the line of Bhavin Chheda from Enam Holdings. Please go ahead.
Yeah. Good evening, sir. Good set of numbers. Sir, just to clarify on this SGST refund, on a run rate basis, this would be now around INR 110 crore plus minus depending on the volumes, right, per quarter?
No. Here, I think the way it has to be looked at, the net present value, whatever amount that would come in, it has to be paid back to the government at the end of 14 years. So whatever amount is there, you have to calculate the net present value, and the difference between amount collected and the net present value will come as a benefit to the payer. Balance will come as a loan refundable to the government, and every year at the NPV discounting rate, interest will be charged.
Okay. I'll understand that separately. I think it was confusing a bit. Next question. On the US CapEx, I missed on $500 million. You said would be spent over what period and exactly what we are doing at the US plate and pipe mill, and if you can get some guidance there for FY 2019 and 2020?
Yeah. Sure. Total $500 million is divided into three phases. In the phase one is $70 million, another $80 million in phase two, $350 million in phase three. This is how we are doing. Phase one, once we complete, is already ongoing $70 million CapEx. Then yields will improve. We expect an improvement of $50 per ton in the margins.
Right.
Another $80 million will be spending to modernize the existing plate and pipe mill. First 70 and second 80, phase one and phase two for modernization of existing plate and pipe mill.
Right.
$250 million for backward integration because Section 232 has already come in.
We wanted to do backward integration, thereby the Melted and Manufactured policy to submit bids in the government tenders. It is essential to do backward integration. We wanted to spend $350 million and create an electric arc furnace and caster facility. This is the phase three. Phase three is subject to environmental clearance. We already applied for environmental clearance to do the backward integration.
The last point here, one important benefit which can include to JSW Steel India is that we approached the Ministry of Commerce, U.S.A., that the slab may be allowed to be supplied without subjecting to Section 232 because we are doing backward integration for two years' time until backward integration is complete. We have received a favorable consideration subject to we are able to show a firm tie-up of $350 million. We are in the process of tying up. Once we do that, we will be able to even supply slab from India without subjecting it to Section 232 additional duty credit.
Sure, sir. Sir, other question is on the pipe conveyor. What exactly is the capacity of pipe conveyor when we are starting and how much time it would take to ramp up?
This pipe conveyor is going to be ready by, say, September, and we will start operations from conveyor from the first October, you can say. Downhill conveyor work is also there, which is going to fit to this conveyor. That will also take another six months' time. This will be operation from first October 2018.
Capacity of that to handle iron ore?
Capacity of this is 20 million, 22 million.
Okay. This would handle inward iron ore movement in Karnataka or whatever you import as well as get it from Odisha.
This is in mines area. We have a yard there. We will source into yard, and from there it will come to our plant. Afterward, this will connect into proposed mines, which is for us as well as others. It will get connected as full integrated conveyor belt.
Thank you, sir.
Thank you. The next question is from the line of Sumangal Nevatia from Macquarie Group. Please go ahead.
Thanks for the chance. Sir, first question is with respect to volumes, FY19 you have guided. Just to look from a two to three-year perspective, is it right to assume that FY20 would be closer to flat volumes and then a big jump in FY21, 22?
That's correct.
All right. Sir, in terms of steel prices, if you could just share what are the current trends in April and May versus Q4 average steel prices, both for long and flat?
Just to take you back, in quarter three to quarter four, we have seen the prices going up. The long product prices have moved up more than the flat product prices. Internationally, I would say the flat product steel prices have moved somewhere on an average about $50 in hot roll coils. In long products, the domestic, because that is of more relevance, let's say, for example, in bars, have moved by almost INR 7,000-8,000 per ton in terms of December to March on point-to-point basis.
If you look at Q1, that is in April and May, we have seen marginal movement up in April and May each month between 1-2%, maybe depending on the product, primarily on account of, I would say, depreciation of the rupee, which is impacting the inflow as well as the cost of raw material coming in. Going forward, I feel that the prices will remain range-bound in this quarter based on a fundamental improvement in demand which we see.
Okay. So 1-2% from exit. So maybe from Q4 average level, it will be closer to 3-4% higher. Is that a correct understanding?
You can calculate that. I will not be able to give it to you offhand, but it is one. You assume, let's say, 1-2% in we're talking about each month. That is April 1 to 2 and May 1 to 2. Based on that, you can just calculate the exit price.
All right. Thanks and all the best.
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'm just trying to understand the timing of the announcement as well as the new CapEx announcement serves. If I see almost 70% is on account of backward integration project and 30% is effectively what is adding to the new capacity both upstream and downstream. How to look at it as it is? I mean, are the optionalities on organic as well as inorganic really low? How should one read into this almost INR 12,000 crore being spent on pellet plants and coke ovens right now? Somewhere the cycle is between middle to the peak. If you can help me understand what the decisions that have gone behind the CapEx announcement, it would be great.
As I explained in the beginning itself, there is a good rebound of steel demand which is expected to continue in the future in India and also globally. If that is the outlook, first, as far as Vijayanagar is concerned, we were talking about shutdown of BF2 once BF3 ramping up happens. Does it make sense in the current environment where the EBITDA per ton is INR 11,000 flat to shut down a million-ton capacity or commit the CapEx and then use that leverage, that opportunity, to improve the EBITDA further? We find it compelling to commit this CapEx right now and finish it before 31 March 2020 to expand capacity by a million ton. That is why we have taken that call.
The second, backward integration again at Vijayanagar, we have a coke oven 1 and 2, very old plant. It is non-recovery coke oven plant. It has a capacity of 0.8 million ton, very expensive relative to the coke oven 3 and 4. That is coming for relining. When it comes for relining, instead of improving that coke oven 1 and 2, if we can set up a recovery coke, we will be able to use the gases. We will be able to reduce the cost of coke. Number three is whatever shortfall is there in the coke for Vijayanagar, we will be able to get from this coke oven plant. It is compelling for us to go ahead and commit CapEx for coke oven. Similarly, pellet plant. Today, when we say we are expanding to 13 million ton at Vijayanagar, then we need more lumps.
Our lump proportion in the total iron oxide mix is going above 20%. If it's above 20%, sourcing lumps is becoming a challenge in Karnataka. If we have pellet, it not only improves productivity, we will be able to reduce our dependency on the lumps. Therefore, it is making normally immediate sense to commit for pellet plant. That is why we committed this CapEx at Vijayanagar, increased to 13 million, set up pellet plant, set up coke oven battery, and complete the Vijayanagar up to 13 million ton. Coming back to Dolvi, now we have a capacity extra in the SMS facility there. Whereas in Salem, can we expand the capacity from existing 0.9 to 1.6 million ton? If additional DRI is available, then it is possible for us to use that and then increase the capacity by 0.7 million ton at Dolvi.
It's a very less investment. We are committing to that particular project. Every project has a big rationale. That is why if you see JSW Steel, our return on capital employed was number six in the world. Our return on capital employed for 31 March 2018 is 16.164%. It will further improve going forward. We are very, very cautious in allocating the capital. Whatever projects we are taking up here, all these projects will improve our return on capital employed, will improve our EBITDA margin, will improve our product mix. It will make us much, much stronger. Second is, if you compare with inorganic growth opportunities in India and IBC, it is definitely more expensive relative to what we are doing. If that is happening next day, tomorrow it is happening, then you can pay for the time.
Whereas the way we are understanding today, almost all the cases are going into litigation. Eventually, every case will land in Supreme Court. It will take some time. Before that, we will be able to complete this and show you the result and create value in the company.
Right. That is helpful. What I was also trying to understand is that as far as the split of the CapEx is concerned between capacity increase and backward integration, can or could it be more skewed towards capacity increase? I mean, or have we exhausted all the options out there? That was perhaps what I kind of implied when I asked the question. If you can also help me understand, what are the levers of volume that you see as far as further increase in your existing plants are concerned?
Yeah. This question is very important to answer. For instance, Vijayanagar, we have environmental clearance up to 16. So we are doing only up to 13. So there is further possibility of increase by 3 million ton quite quickly at Vijayanagar.
Subject to iron ore availability, I would presume. That was your initial.
So that is further possibilities there in terms of lever for volume growth, brownfield, in the most inexpensive way.
Got it. Thanks. That's all from my side.
Thank you. The next question is from the line Indrajit Agarwal from Goldman Sachs. Please go ahead.
Hello. Good evening. Two questions from my side. First, on the other expenses side, why is there a sudden jump in other expenses this quarter vis-à-vis last quarter? Secondly, on US plate and pipe mill, given the kind of recovery that we are seeing in that region, how has the order book moved over the last couple of quarters, and what is your expectation in the medium term for that?
As far as the US is concerned, the capacity utilization has improved in the case of plate mill. We expect it will pick up further. That is looking far better than what it was. The other expenditure is concerned, there is rupee hedging cost, which has rupee dollar heating cost, which has come in in the other expenditure. This is one. The second is we have stores and spares. There is some increase in the expenditure in the last quarter. The third area is there are certain preferred shares which have been subscribed by the company.
In one of the companies which have set up the townships, these preferred shares are payable after some time. It has to be accounted at net present value. That amount has been accounted in other expenditure, the loss of face value and the net present value difference. These are the three items which increase in the other expenditure. One of the item is only the preferred share accounting, balance all normal.
All right, sir. Thank you.
Thank you. The next question is from the line of Ritesh Shah from Investec Capital Services. Please go ahead.
Hi, sir. Thanks for the opportunity. My first question is, what is the rationale of adding DRI capacity, specifically looking at it from the perspective of blast versus DRI? How do we address the gas over here, or is it like coke oven will feed into it?
Today, even assuming we buy the gas in the market and increase the DRI capacity in Salem, we have a proportion in the overall availability of hot metal. In the converter, we will be mixing blast furnace and the DRI and the hot metal. That proportion will still remain ideal, number one. Number two is when we are expanding capacity at Salem, we are also incorporating hot charging of DRI at Dolvi directly into converter furnace. These two together will increase the productivity overall. Therefore, gas, even though not available for additional capacity in Salem, it is still making sense when we do the overall costing. That is one. Number two idea is that instead of expanding the. Hello? Yes. Based on that, I think we have taken a call to increase the capacity by 0.7 million ton.
Overall profitability and the return on capital employed is still quite attractive.
Okay. Sir, my second question is on the product mix. We seem to be quite positive on the demand side, but a lot of it is coming from the infra segment. The incremental CapEx, what we are doing on the downstream, it's more towards the flat side. How should we look at the mix and how do we address the incremental demand?
If you see, when we are driving the capacity up now, we are doing about 6.7 million tons. That, as you correctly said, is primarily flat products. The demand which is getting driven in these flats is automotive, which we said is growing at a very healthy rate, appliances, appliance industry, solar. We are seeing even in the earth-moving equipment, the yellow goods.
We are seeing, as I said, water pipelines and oil and gas, which is again a big incremental demand which is coming in. We are talking about growth in the capital goods sector. Therefore, there are a lot of areas, I think, in the flat side which is seeing growth. On coated, as we said, in addition to the appliances and solar, we are seeing the roofing, because the agri and rural is picking up, the roofing side and the cladding side is improving. The color-coated demand and the coated roofing demand is also improving. The air conditioning, HVAC demand is also improving.
Sir, where I was coming from is, how do we look at the product mix? Basically, should not we tilt more towards the long side to keep it balanced to cater to the country's needs? Is it more from an ROCE perspective that you are looking at it, that we need to be more on the flat side versus long? I was trying to understand it from that angle.
If you look at the long, we have seen the long past pattern of movement. We have seen the last few years has had very little growth on the infra side due to which the longs was suffering. We had actually put bar mill probably ahead of the growth curve. That is why for some time it was underutilized. We are currently having long capacity in excess of 5 million, about 5.1 million tons. Now that the growth in the longs infrastructure is likely to pick up, we are trying to see that these capacities are 100% utilized.
Once the capacity utilization is fully seen, which we are seeing around the corner, we will take measures in our new expansion to put that in place. Also in our 1 million ton expansion, which we are putting in Vijayanagar, for your information, that 1 million ton is long product, which is wire rods, which is being added. That entire capacity is going into long product. So 1.2 million approximately or 1 million ton mill we will be putting up there.
That helps. Mr. Rao, sir, one question for you. At the start of the year, you had indicated cost savings from the digital side, logistics, and also it was pipe conveyor was also there. Any update over here? I think from the digital side, we had indicated INR 430 crore, 40 projects identified. Sir, any commentary over here?b Is it already there in the numbers or one should expect this going forward?
We have already taken up for implementation INR 350 crore worth of projects in FY 2018. Out of that, INR 172 crore accrued last year. In this current financial year, we are targeting INR 450 crore from the savings from the digital initiative.
Okay. Okay. Hello? Yes. Hello.
Are you done with your question?
Yes. That's fine. Thanks.
Thank you. The next question is from the line of Rajesh Lachhani from HSBC. Please go ahead.
Yeah. Thanks for the opportunity. Sir, my question is generally regarding you have spoken on the India demand, which you think has moved the corner and is looking quite bright. But the significant CapEx, does it also mean that you are quite positive on the global supply demand scenario as well?
Yes. We are very positive about the global supply demand as well If you see the general economic climate in the world, the growth is quite broad-based. The economic growth has been good, and the 2019 numbers projected, 2018 numbers projected by IMF looks good. We are seeing a good growth coming up from U.S., Europe. We are seeing the Chinese demand in the domestic market growing much better than what was predicted earlier in the World Steel forecast. Japan is growing well on the back of Olympics and budgetary support. The discipline of China, especially by cutting capacities and lesser exports, is further stabilizing the market. Yes, we are positive. We are seeing signs of investment cycle coming back in some of the countries after a long lull. CapEx is getting revived. As the capacity utilization nears 80%, I think people start looking at capacity increases.
We are seeing signs of that in some of the countries as well.
Understood, sir.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Ritesh Shah for his closing comments.
Thanks, Ritesh. Pritesh, any closing comments from your side?
We will work on achieving our guidance for this year and also bring savings from the backward integration budget and also ensure that whatever CapEx program we have given, we will be able to implement within the cost and within the timeline. Thank you. Thank you very much.
Thank you. Ladies and gentlemen, on behalf of Investec Capital Services, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines. Thank you.