Ladies and gentlemen, good day and welcome to the Q2 FY2018 earnings conference call of JSW Steel, hosted by Axis Capital 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 touch-tone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nitesh Jain from Axis Capital. Thank you, and over to you, Mr. Jain.
Thank you, Karuna. Good evening, everyone, and welcome to JSW Steel's second quarter fiscal 2018 earnings call. I sincerely thank the management team of JSW Steel for giving us this opportunity to host the call. Without further delay, I think I guess I hand over the floor to Mr. Pritesh Vinay from JSW Steel. Over to you, Pritesh.
Thank you, Nitesh. A very good evening to all the participants. We have with us today the senior management team of JSW Steel, represented by Mr. Seshagiri Rao, the Joint Managing Director and Group CFO, Mr. Jayant Acharya, Director of Commercial and Marketing, and Mr. Rajeev Pai, the CFO. We will start with a few minutes of opening remarks by Mr. Rao in the context of the results, and then we will open for Q&A. With that, over to Mr. Rao.
Good evening to everybody, and I welcome you all for the briefing of the second quarter performance of JSW Steel. Just to put it in the context, the global growth outlook has dramatically changed when we spoke last time and now. It is quite positive. Because of very positive investment sentiment across the globe, we are seeing a cyclical uptick as far as the global steel demand outlook is concerned. What is surprising or puzzling is that the Chinese overall steel supply and demand situation, when everybody was anticipating that demand for steel within China will be flat, on the nominal basis, as per World Steel Association, the steel demand in China grew by 12.4%. Also, if you adjust even unreported numbers, the Chinese steel demand in the first nine months of the calendar year went up by 3%.
This has made the change, in my view, in the overall global steel demand outlook. Exports, even though they have fallen from China overall, but Japan, Korea, China, and Russia, which are export-dependent countries, their exports more or less remained the same. One important information which I would like to give is as regards to ASEAN. ASEAN countries, the production went up by 7 million tons. Whereas when production went up, their imports have fallen by 7 million tons. At the same time, the imports from China, Japan, and Korea came down to ASEAN countries by 10 million tons. If Japan, Korea, and China have to maintain their exports into these ASEAN countries, then there is a 10 million ton which they have to look for new markets.
These 10 million tons they are looking for India, because of various trade remedial actions that have been taken by the Indian government, is at a significantly lower level relative to what is happening across the globe in the steel pricing. They have put more steel into the Indian market. In the Q2, the overall imports are at a level of 3 million ton, which is an annualized basis, touching 12 million ton, which is a matter of concern in the Q2. Particularly, if I look at China, the imports into India went up in the Q2 by 102% on quarter-on-quarter basis. What is the impact of these increasing imports into India in the Q2 when the global steel prices went up? Domestic steel prices have not kept pace with the increase in the global steel prices.
That is why either competition or JSW Steel, the overall prices more or less remain stable or flat in the Q2. In spite of the numbers, the NSR being flat in the Q2, JSW Steel has done remarkably well in the Q2. We have reported a production number of 3.94 million tons. Sequentially, it is plus 1%, and year on year it is minus 1%. Sales is one important item which we have done very, very well. The consolidated sales at 3.96 million tons, which is the highest ever in the history of JSW Steel, showing a growth of 4%. When production is flat, then we have achieved a very good number in terms of sales, is due to reduction in the inventory by almost close to 211,000 tons. Just I want to add why production was low in the Q2. There are two reasons.
One reason is the introduction of GST, which has come from the first of July onwards. As you are all aware, the iron ore is sold within Karnataka through auction. When the auction was to be done, the monitoring committee used to invoice the buyer prior to GST. Once GST is introduced, if somebody has to get the set-off, that set-off has to be claimed electronically in the system online. Who has to invoice is the question which the monitoring committee has asked the Supreme Court of India. Until that is clarified, they did not do the auctions. That impacted the supply of iron ore to our Vijayanagar plant, where we have lost some production in quarter two. At the same time, the water shortage, which we explained in Q1, continued in Salem. That also impacted Salem production.
Because of these two constraints and monsoon putting some constraints in the Dolvi unit, all together, the production in Q2 is more or less flat. I would like to clarify as regards to our guidance of 15.5 million tons sales and 16.5 million tons of production. We are at a level of close to 47.5%-48%. Whatever shortfall is there to the extent of 300,000 tons, we are reasonably confident that in the second half, we will be able to make it up. These constraints which I just explained are not existing in the second half. As regards to the financial performance, our EBITDA for the standalone company is INR 2,927 crore, which is 19.57%, INR 7,460 per ton, which is a significant increase compared to Q1 of INR 6,266 per ton. The profit after tax is INR 845 crore on standalone. The US subsidiary was impacted.
The performance was impacted due to the hurricane which hit the state of Texas. That's why the EBITDA contribution fell quarter on quarter from $5 million Q1 to $1 million in the Q2. We expect it comes back in the Q3 and Q4. Coated steel performance also was impacted, but still it had made an EBITDA of INR 142 crore in the Q2. Relative to the Q1, it fell. Two reasons. One reason is zinc prices. In the Q2, it went up over $500 per ton. That had an impact on the cost of production. Plus, HR coil prices went up, but the coated product realizations have not gone up in the same pace as that of the HR. That impacted the EBITDA for the coated. Also, there was a little impact in the RCL because of the GST.
When GST was introduced, the GST that is payable on the sale of pellets and coke was 2.5%. Prior to that, the VAT was 5%. There was a benefit of 5% as a part of the incentive scheme prior to GST. That has become half in the RCL. That is why the EBITDA was lower in the RCL relative to Q1. Salem unit has done well. On a consolidated basis, these units, subsidiaries have contributed INR 1,080,000,000. Consolidated EBITDA is INR 30,360,000,000. The profit after tax is INR 8,360,000,000, which is a 29% growth. The consolidated debt is INR 42,764,000,000, which is lower compared to Q1. We brought it down. Debt to equity improved to 1.87 times. Debt to EBITDA is 3.67 times. Acceptance is INR 1,305,000,000 on revenue account. Capital account is INR 209,000,000.
One or two more developments is relating to Supreme Court hearing on removing the cap or increasing the cap in the state of Karnataka. We have represented to the Supreme Court that the category C mines have been auctioned. The cap of 30 million ton is not allowing to start the mining in category C. That request has been heard by Supreme Court. All the hearings have been completed. The order is reserved. We are expecting a favorable order from the Supreme Court. Once that order comes, within two months, we will be able to start the two mines. Within five months, we will be able to start the balance three mines. That is the status on the starting of our own mines in the state of Karnataka. The second development, which is also positive, is FDF, forest development fees.
In this forest development fees, as you know, FDT was introduced by Karnataka state at 12% on the base price of iron ore, which was contested under Industry One in the Karnataka High Court. The Karnataka High Court ordered the state government to refund and not to charge in future, which was a substantial cash flow benefit and P&L benefit, which would come to JSW Steel. It was contested again by the state government in the Supreme Court. The Supreme Court has given a stay on the refund, but they have not reversed the order. The hearings are to happen in the Supreme Court on this. Pending that, the Karnataka government retrospectively amended the act and issued a notification of FDF. They called FDT as the forest development fees and again imposed 12% and started charging. We again contested this levy of forest development fee through notification.
We have got a favorable order from the Honorable High Court of Karnataka. This is again a positive. It was asked to refund whatever amount that has been paid. We paid INR 254 crore so far in the form of forest development fee. We have debited INR 77 crore to P&L account. This amount also will come back to the company in future if state government of Karnataka again do not go for an appeal to the Supreme Court and Supreme Court does not reverse the order. These are the two important developments. Our CAPEX program is going as per the schedule. The CAPEX incurred in the first six months of the year is around INR 2,196 crore. Cash outflow is around INR 2,000 crore. It will ramp up in the second half. We are placing orders and making down payments, and the work has started on the ground.
It will get ramped up in the next few months. This is the status. If any questions are there, we are open to answer.
Thank you very much, sir. Ladies and gentlemen, we will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on your touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. First question is from the line of Simangal Navethia from Macquarie. Please go ahead.
Yeah, good evening. Thanks, sir. First question is with respect to realization.
If you can comment how what was the change in realization during the quarter, because what is reported appears a bit lower than what we were estimating.
So in quarter two, if you see our EBITDA per ton vis-à-vis quarter one, it has moved by about INR 1,200 per ton. Now, the realizations which we have been able to get on the domestic front, we have been able to realize some improvement in the domestic sales other than the contractual, which were locked until September. Those will be basically renegotiated in the second half. Other than that, there were some exports which had a prior booking, which has basically pulled down some NSR. These are basically the two reasons.
Okay. Okay. Given the pattern of these changes, do we expect a decent recovery in Q3 then?
Yes. So t he contractual business will get renegotiated for October-December, wherever quarterly contracts are there and half-yearly contracts wherever they are there for six months. In case of exports, similarly, some of the bookings which were pertaining to earlier period which have got executed, those will be replaced by fresh booking. Therefore, there would be some improvement which we are expecting on both discounts. On the spot side, I think we have captured some price increase, as I said. At the same time, I would like to highlight that the increased imports which have come into the country, especially in quarter one, quarter two, were about 56% more than quarter one and 48% more than quarter two last year. At a rate of about 1 million tons a month, the imports have come into the country.
Certain products have really impacted us in terms of realization because they have been very low. Particularly in the flats, we have seen coated products like color coated products coming in from countries like China, Vietnam at substantially lower rates than the domestic prices, due to which the prices in the spot market or monthly pricing has remained under pressure. Similarly, some of the flat products and hot rolled and cold rolled have come into the country at a cheaper level, primarily because the exports from these countries like China, Japan, and Korea into the ASEAN has reduced, and some of that steel has found its way into India. That is a matter of concern which we are examining and will take it up appropriately with the authorities.
Understood. Next question. We see a very high focus on value-added sales and specialty products.
Now, this forms close to 60% of volume versus 52-53% last year. If you can just share, how do you see this increasing over the next two years? What could be just a ballpark incremental contribution from these value-added products in the EBITDA, say?
We have tried to give you a flavor of the value-added and specials in two buckets. The value-added, as we have been guiding earlier, stands at 37% in quarter two this year vis-à-vis 34% in quarter two last year. However, there are certain special products in the hot rolled category, wire rod categories, and in the rebar category, which earlier we were not capturing. We are now capturing for the sense of the presentation. We have now started highlighting these. These include special products like oil and gas application line pipes. They include automotive applications in hot rolled.
They include electrode qualities. They include fastener qualities and wire rod. They would include corrosion resistance rebars, etc., which are getting captured in this 23% special products which has been highlighted in this quarter. You will note this, a note which defines these products. This 23% consists of which products have been highlighted in our analyst presentation. We will be tracking this henceforth. This is to give you a feel that our business is more driven by the specialty and value-added. Therefore, the volatility in the segments in which we operate are likely to be lesser. We are trying, and more and more efforts are being made to reduce the commodity component and increase these components as we go along. If you see quarter one and if you see quarter two, you see a trend of 58% to 60%.
I think our efforts will be to maintain these kind of ranges as we go forward.
Understood. Can I just ask one bookkeeping question? Just last one. If you see the contribution of other subsidiaries, that is when I subtract standalone quoted and US EBITDA from the console, this quarter, there is a loss of INR 380 million versus INR 1.8 billion profit last quarter. Is it possible to share some breakup and what is driving this?
It is because of elimination of profit on the stocks lying with Uttam and also with quoted. That is the reason why there is an elimination in the consolidation which would come in, but that would get booked as and when the sales happen in future.
What is the sustainable level of this number?
As we have been mentioning about sustainability in the case of JSW Steel, Salem, and other units, I do not think there is any problem. Only coated side zinc prices, which has impacted us in the Q2. Otherwise, we could have maintained. Number two is NSR has not kept pace in the coated products for the reasons which Jayant outlined. Imports coming in at substantially lower prices. There are the two reasons why there was an issue in the coated. In future, whether it is possible to maintain the downside to this EBITDA, we see very less possibility.
All right. Thanks and all the best. Thanks.
Thank you. Next question is from the line of Pinakin Parekh from JP Morgan. Please go ahead.
Awesome. Thank you very much. Two questions.
You mentioned the Supreme Court has reserved its judgment regarding the iron ore cap that is there in Karnataka. If it were to allow the cap to be increased, the company can bring its mines into production. I just wanted to understand, would that also, if the cap is increased, would it also allow JSW Vijayanagar to implement a crude steel capacity expansion plan because that and approvals are also constrained by the overall mining cap?
You're absolutely right because, as I mentioned last time, we have an approval to expand capacity from 12 million ton to 16 million ton. That is one. Number two is when we talked about BF3 modernization where we have given the CAPEX program, we said BF2 we will take the shutdown.
BF2, if we continue to run, then if we can make investment in the downstream like SMS Shore and the rolling facilities, it is possible to increase capacity quickly. That we are not doing because of lack of iron ore. If Supreme Court increases the cap and auctions also will happen, further auctions will happen, then there is a possibility of expanding at Vijayanagar, yes.
Sir, just to take this point forward, if the courts were to approve an increase of the mining capacity, theoretically, sir, how much time would JSW take to implement that capacity expansion? Because it's a brownfield, it's existing facilities. Can it come quicker than the ISPAT expansion by March 2020?
Expansion, we have to work out what would be the cost of expansion and how long it will take. It would be quicker. That much I can tell you.
Okay. Secondly, sir, given that there has all this been newsful about distressed steel assets coming into auction now, obviously, you cannot tell us what assets JSW is bidding for. Just trying to understand, would JSW look at these assets with partnership with somebody, or would it be looking at these assets on its own if it were to look at these stressed assets?
Yeah, we are looking at various structures. If at all we decide to go ahead, for instance, Ilva, if we see we were looking at a partnership, at a consortium. That is a kind of model is preferable, in my view, at the current context where it will take some time to turn around the targeted asset. Those models are actively pursued, keeping into account the kind of financial policies which we have listed out, that is debt to EBITDA and debt to equity.
Therefore, that may be the strategy which we would like to pursue. Sure, sir. Just to push this point forward, in India, given that you are closest to the process, do you see any of these stressed assets moving forward in the resolution process over the next six months, or do you think, in your view, this is more an 18- to 24-month process? My view is slowly gradually changing after having met these stakeholders. There is a huge amount of commitment we are seeing from the government, RBI, and the banks to complete this process within the framework laid down by NCLT. Earlier, we were expecting there could be some litigations that could come in, but that possibility gradually is reducing because they are making amendments like Ministry of Corporate Affairs clarifying that any capital restructuring as a part of the NCLT process does not require shareholders' clearance.
That type of things will remove the bottlenecks that could come in. Similarly, whatever problems that are being pointed out by various stakeholders, either to the government or to Reserve Bank of India in terms of bidding criteria, evaluation criteria, and also amendments that are required in the Income Tax Companies Act and also GST, they are being very actively pursued by them. In that, it gives reasonable confidence that this process will be credible.
Understood. Understood. Thank you very much, sir.
Thank you. In order to ensure that the management is able to address questions from all the participants in the queue, we request the participants to please limit their questions up to two. Should you have a follow-up question, we request you to please rejoin the queue. We take the next question from the line of Bhavin Chheda from ENAM Holdings. Please go ahead.
Yeah, good evening, sir. Sir, question on the iron ore pricing, the NMDC and other Karnataka price, difference between the Karnataka and Chhattisgarh price on the auction, can you give us some guidance? Has this reduced over the last six months because NMDC has been charging premium on the Karnataka auction? Has it reduced, remained stable, or has it gone up? What the current difference is for the similar grade ore?
As regards to the premium which they are charging in Karnataka over Chhattisgarh price, that has not changed. That continued even now in the auctions, which we talked about around INR 600 per ton. In addition to the INR 600 premium over Chhattisgarh, the premium of NMDC over Orissa, again, another INR 1,000 per ton, that also is continuing. Sorry, sir, you can repeat that? There are two premiums which we are talking.
One premium is the price charged in Karnataka over Chhattisgarh NMDC price. That is INR 600. Chhattisgarh price of NMDC over Orissa price.
For the similar grade?
Similar grade, INR 1,000.
So NMDC Chhattisgarh is higher by INR 1,000 versus Orissa ore?
Correct. Okay. Overall, we are losing INR 1,600 per ton, base price, plus taxes on that.
Right.
That is a kind of difference because of constraint in the supply of iron ore in Karnataka.
My second question is on the VAT credit note which you have given in the notes, the INR 990 million number. That is accounted in revenues, or it is accounted in other operating income?
It is other operating income that is consistently we have been following because as per the incentive scheme, they have committed at that time that they would protect the VAT in the post GST.
That's where we have taken that into account. There could be an upside here, which I would like to point out. SGST is 9%, whereas earlier VAT was 5%. There is a possibility that this 5% can be increased to higher amounts.
This accounting is for 5% only?
Right.
Okay. There remains an upside unless the state government issues the order. What I understand is that you had a similar VAT credit in Karnataka for a couple of million tons. How have you accounted in that in the quarterly result?
It is same. Exactly the same.
Okay. So this INR 99 crore includes that state number also? Because there is no note on the Karnataka number. I was trying to figure if there is any provision made there and clarification there.
Karnataka is under loan scheme. That's why it is not coming in P&L.
CST is not there because CST earlier, there used to be a refund scheme in Karnataka. Now CST has gone. Now CST will not be protected in the post GST scenario. That is not taken into account.
There also you have accounted at the rate of 5%?
No, no, no. There P&L, there is nothing is accounted because it is under a loan scheme. It is a different scheme.
Okay. That is accounted by a balance sheet.
Correct.
Okay. Thank you, sir.
Yeah.
Thank you. Next question is from the line of Amit Dixit from Edelweiss. Please go ahead.
Thanks for taking my question, sir. My question pertains to the realization in. What was the realization? I mean, how did the realization move in flats and longs separately? What is the trend that you are seeing in Q3?
So in flat steel, if you have seen internationally, the numbers have improved over, let's say, May, June to September. It did correct a bit in October internationally coming from China, but now is stable, but upward within this April, June quarter. As far as longs is concerned, if you were to look at the domestic space because it gets mostly defined in domestic, the prices are range-bound, and they have not really gone up much. They have been in a particular range only. We do expect that there may be some improvement as we go into the quarter four, but long products may be range-bound. Flat products, there could be some improvement, but the pressures which are there from imports, especially in the coated, is a cause of concern, which we are trying to monitor as we go along.
Especially if you look at certain color coated products which are coming in from China and Vietnam, the discount is in excess of 15%-16% vis-à-vis our price.
Okay. So, sir, just to push this point forward a little bit, in case of color coated and galvanized, since the negotiations are due, I mean, from the auto and other contracted guys, what kind of price hikes can you expect going ahead in Q3?
It would be difficult to quantify a number. As far as color coated is concerned, color coated would be going mostly to the appliances or to the construction industry that does not find its way into automotive. Yes, appliances also get contracted. There would be some kind of a review mechanism on that.
As I said, color coated is getting weighed down by imports, and specifically from China, Vietnam, and some other countries which are pricing it at a very, very low level. That is a concern there. Similarly, in GI, also imports into the country have gone up, and that is putting pressure in both these products. As far as cold rolled is concerned, I think we have seen some rise in imports there as well, but it is range-bound. We are looking at these, discussing with the customers. In automotive, there is a negotiation process which takes place because it is there on a quarterly and half-yearly basis. We are in the process of negotiation. There is a case which we feel for some improvement in this period, quarter three or half, with this last at least to automobile and ancillary like appliances.
Okay. Second question is with respect to the distressed assets. I mean, regarding their relative attractiveness, is there some metrics like, I mean, per ton or something, some threshold that you might have set?
No, we have, of course, metrics like return on capital employed and the synergies which we can bring in and the future potential. These are the metrics which we apply and also specific investment cost per ton. This we will definitely look into that while deciding any inorganic growth opportunity.
Is there a number to it, or I mean, you just decide it on case-to-case basis?
Yeah, it is a combination of these factors. One number I can't give for one item.
Okay. Sure. Thank you, so much sir.
Thank you so much. Thank you. Next question is from the line of Rajesh Lachhani from HSBC. Please go ahead.
Yeah. Thanks for the opportunity, sir.
My question is regarding the iron ore mines. Once you get the favorable judgment from Supreme Court, you will be starting this iron ore mining. I just wanted to understand how would it impact the profitability in terms of would it be lower cost than what you're already sourcing? What would be that number?
At least this premium of INR 600 which I am paying, that will not be there.
After grade adjusted?
Once the captive iron ore is done, we have to pay a premium to the market price. Premium to the market price in the sense premium that would be IBM average price. Supply goes up in the market, automatically there will be a pressure on the prices. The INR 600 will disappear once the supply starts coming in from the category C mines.
If they remove the 30 million ton for A and B, where a lot of mining companies went and requested that they have found new results or additional results by exploration, therefore they should be permitted to produce more than what they were initially permitted. Therefore, there are two things which would be hopefully decided by the Supreme Court. One is cap for category C and category A and B enhancement from 30 million. There are two things which will be decided. Based on that, supply goes up, the benefit which would come not from the point of view of market price, but the premium between Chhattisgarh and Vijayanagar at least would disappear.
Understood. Sir, my second question is while your production was impacted due to water shortage and GST-related impact, the sales were modestly up.
Just trying to understand if the production were not impacted, would the sales number have been still further up?
Of course, it would be. Whatever we have produced, we have sold, plus we have reduced the inventory by INR 2,11,000. If we have the opportunity to produce more in both the locations or three locations, then the sales could have been higher. That is why we have guided for 5% growth. It would have achieved definitely.
Okay. Sir,
the sub-trades are not there.
So Sir, what can we expect for FY2019?
FY2019 is a little far away from now to guide. What we can reassure you is that we are working to achieve what our guidance we have given for this year of 16 and a half and 15 and a half.
Sure, sir. That answers my question.
Thank you.
Next question is from the line of Sanjay Jain from Motilal Oswal Securities. Please go ahead.
Yeah. Could you give us some sense on these cost movements, like cooking coal cost movements and iron ore cost movements for the next two, three months?
On the cooking coal side, I think last time we had guided that the prices would come down by about $15. We have been able to reduce quarter on quarter the prices in that range. Going forward, while the cooking coal prices have come off their peak now, I think the benefit of that would play out more in quarter four. In the next quarter, we would be seeing some higher-priced cargoes coming in. There would be an impact in terms of cost increase for the blended cooking coal by $5 to $10.
Right.
In case of iron ore, NMDC has cut some prices. How is the average going to play out?
Yeah. Iron ore side, the prices would be a little lower than Q2.
Okay. Yeah. Thanks so much.
Thank you. Next question is from the line of Ashish Kejriwal from IDFC Securities. Please go ahead.
Yeah. Thank you. The first question is on blended realization. When we have seen an increase of around INR 200 per ton on EBITDA, is it possible to explain how much it is because of higher steel prices? Or on a blended basis, have steel prices fallen?
I think as I explained in one of the questions, in the flat product side on the monthly prices, we did get some increases. It was a little depressed in certain products in flat, especially, as I said, on coated because of the imports.
As far as long products were concerned, they have been range-bound. Exports, as I explained in the last question, there have been a fast booking of exports which we have executed in this last quarter. There has been some impact because of that.
So on a blended basis, on average basis, have we seen blended steel price to be lower than first quarter?
So it's b een about flattish if you were to look at the combined impact between domestic and export.
Okay. Sir, secondly, if I am looking at, again, I think Mr. Rao has explained a bit that part of the loss and other subsidies was because of elimination of profit from stock line with Uttam Galva and JSW. If I am looking at last quarter, last quarter, it was much above. Before that, also, we were in the similar loss-making range.
Is it safe to assume that last quarter was one-off and we will see continuous phenomena in console minus standalone as well as JSW and US operation in entities?
It will be very difficult to say it won't be there in future because the consolidation adjustment depends upon the cost of production and the HR coil prices at which the transfer price is there. Transfer price is market price. When you are transferring that at the end of the quarter when you have to make adjustment, what is the profit that would remain in HR coil price? It depends upon the pricing that is being done in the quarter. Therefore, it will be very difficult to say there won't be zero. But it is one-off for this quarter? Yes, it is extraordinary relative to what it generally be there.
No, I'm talking about last quarter. Last quarter, that number was INR 180 crore.
Yes, it was higher. Last quarter was higher. It is one-off.
Okay. Sir, lastly, in the last three quarters, we have been booking some trading benefits as we were buying iron ore and standalone for subsidiaries and booking profits. That was absent this quarter. Any specific reason for the same?
No, it is that profit majorly is coming on account of hedging. That is why the benefit continued to flow. Those hedging positions are not there today. Therefore, in future, it may not be there. Your purchase of traded goods is coming out at INR 47 crore versus in the range of INR 320-360 crore in the last three quarters. Yeah. That is the reason why the profit would accrue on account of hedging that has been done by one subsidiary.
Because hedging positions today are no more giving that type of benefit compared to the spot price versus hedging position. So it will not be there in future.
Thank you, sir.
Thank you. Next question is from the line of Abhishek Poddar from Kotak Securities. Please go ahead.
Hi sir, thanks for taking my question. Just one question on the long product side of business. Post GST, are you seeing any benefit flowing to yourselves from secondary producers losing market share because of better tax compliance? Secondly, also on the demand side of long products, any color on the pockets of demand showing any signs of improvement? Thanks.
No, we have not seen any benefit coming out of the GST, especially in the long product side yet.
I think the long product side continues to be oversupplied, and the secondary sector continues to rule at a price differential to the primary producers. That thing may continue for some time till the coal cost for primary producers keep the prices high. I do not think that we will get much benefit in the near term. The second impact is because of the seasonal construction activity going down. We do expect that there would be some improvement as we go into some more infrastructure build in the second half. The demand side should pick up. We are hopeful that at least from a demand perspective, things will improve on the long side as we go into the second half.
Yeah. Any comment on the demand for longs from real estate versus infrastructure? How do you see both of these sectors doing?
For real estate, especially in the residentials, we do not see too much of activity. In the commercial space, selectively, activities are there. Seasonal impact had slowed it down in the last quarter. If you were to look at long products, if you were to look at other than rebars, things like wire rods, there the demand has been reasonably stable. Going forward into this particular quarter, we expect the demand to be slightly better than what it was in Q2 as far as wire rods is concerned. Similarly, in alloy steel bars and rods, we have seen some improvement in demand coming in the last one or two months, especially from the auto sector. That should play out in this quarter as well.
Yeah. Sir, Just last bit on the infrastructure space. Are you seeing any uptick, especially in the north? We are hearing a lot about the projects coming in.
We are hoping. We are seeing news in terms of infrastructure investment coming into the ground. We are expecting that there would be some uptick. We need to see that. As far as rebars is concerned, I would like to say that domestic prices have been range-bound, have been under pressure. Therefore, the rebar, we need to see. I think my sense is that the positive impact would play out in January,- March, month before.
Okay. Thank you, sir.
Thank you. Next question is from the line of Dhawal Doshi from PhillipCapital. Please go ahead.
Hello, sir. Sir, just a couple of clarifications. You said the contractual obligations, which were the quarterly contracts as well as the half-yearly contracts and the exports, impacted the overall realizations this quarter.
Would the entire 26% of exports be hit, or as in what portion of the total sales this quarter was more of a drag, and that could see a bounce back in the next quarter?
It's very difficult to go into that granularity. I think the sense which I was trying to give is that in the international markets, since the prices had dipped in the month of May, June, and then it went up after that, certain bookings which are there would naturally be executed in the quarter two. There has been some impact because of that. As we go into the quarter three, we see that the prices have stabilized. We see, therefore, a possibility of improvement. Having said that, I would always qualify to say that the Chinese uncertainties or uncertainty of dumping by any other region could influence the prices.
Also, sir, what percentage would be those contractual obligations? I do not think that that will be difficult to give, sir.
Contractual obligations is in the range of one quarter, about 25%.
Okay. 25% of the overall. Okay. Sir, lastly, with regards to the absolute steel price jump that has happened, can you quantify what has been the hike that we have taken from July to September, or how much would be the prices up, current spot prices up from the Q2 average?
Product-wise, I think it is a little difficult to specify that. I think when you speak to our investment guys, maybe they will try to, our investment team will try to give you some flavor on that if it is possible. It would be difficult to quantify.
Okay. Fine. Thank you. Thanks a lot.
Thank you. Next question is from the line of Ratesha from Investec. Please go ahead.
Hi sir. Thanks for the opportunity. Sir, my first question is we were looking to acquire a steel mill or a processing line in Italy. Sir, any particular update over here?
Can you just repeat the question once, please?
Sir, we were looking for some inorganic growth in Italy. Sir, any update over here?
No, not particularly Italy. I think we have been looking for inorganic opportunities globally since there are opportunities in the steel space in various parts. We have been looking at opportunities, including Europe and Italy as well. You are aware about our efforts on Ilva, and that has finally gone to ArcelorMittal. That is over. In particular, with respect to anything in Italy asset, there is nothing concrete right now which we can discuss.
Okay. Sir, my second question is you highlighted on the Chinese dumping which is going on, and specifically on color coated. Are there any talks with the government when we are looking for incremental MIPs? That is the first question. Secondly, on pure HRC basis, what is the input on import priority basis? Domestic prices are trading at a premium or discount if you could provide some color over there, sir?
So on the HRC side, the domestic prices currently, if you look at the Chinese prices, they are at a discount to the Chinese landed prices as you see the prices today. That is one. Secondly, on the imports of color coated, especially where prices are coming in from, sorry, material is coming in from China and Vietnam, color coated was earlier not under the BIS.
This time, we had taken up with the government over the past few months to put more and more products under BIS. This time, a list of products have been announced, including color coated, which where the BIS would become effective from January third week. That should contain to some extent, and the customs should be able to control substandard kind of dumpings which are taking place in those products.
Sir, is there an MIP over here on color coated?
So MIP is non-existent. It is a question of a reference price under anti-dumping. There is a reference price mechanism which is there, but anti-dumping is country limited, as you know. There is an anti-dumping from China which is there. There is no anti-dumping prevalent from Vietnam. Vietnam also is under a free trade agreement. Therefore, the impact of that is multiple.
That's why I'm saying that especially from countries like Vietnam, the discount to the domestic prices for color coated is as much as 15-16%.
That helps. Sir, you said that Chinese prices have been trading at discount to domestic prices. Sir, would you like to quantify on absolute basis?
The Chinese prices are currently higher at the present. If you were to check the current imports from China, they are higher than the domestic prices by about 8%.
Now, 8%. Okay. That helps a lot. Thank you so much, sir.
Thank you. Next question is from the line of Pallav Agarwal from Antique. Please go ahead.
Yeah. Good evening, sir. You're referring to the anti-dumping duty reference price for color coated.
Is $822 at these levels, does it deter imports, or is it at a fairly low level, which really does not make a difference to the import quantities of color coated?
No, it does not deter import. At these levels, our prices are higher by almost, as I said, 15%-16% over the imported numbers, and it is not deterring imports. Primarily, the imports are coming in from China and Vietnam, which is impacting us. They are above the reference price level of $822, but it is still 15%-16% below our prices.
Okay. Basically, the pressure on color coated spreads could continue in Q2 as well. Would that?
So one positive here is the BIS, which would come in because some of these countries and some of these suppliers have been supplying substandard coating, substandard paint coat on top of this, and basically, to some extent, cheating the customers. That would get contained, I think, over a period of time once the BIS is enforced from January.
Yeah. Okay, sir. Thank you. Yeah.
Thank you. Next question is from the line of Bhaskar Basu from Jefferies. Please go ahead.
Yeah. Just one question on the color coated imports which you talked about. I just want to understand how much of your volumes is basically color coated. If I remember correctly, it's only about 0.2, 0.3 million tons annualized. Is that right, or?
No, our total capacity of color coated is 0.6 million.
Out of this, just to give you a broad flavor, one-third is exports and the balance is domestic.
Okay. And besides color coated, is there any other product which is also getting affected by?
Yeah, some part of galvanized is also getting impacted.
Okay. My second question is on the Karnataka mine issue. Is there any sense on what kind of relaxation on the cap could be possible from the 30 million ton, whether that can go up to 40 or 35 or any number there?
The entire arguments which have gone from the industry is that 10 million tons separate limit for the category C mines. As regards to the A and B is concerned, the recommendation of CEC is to increase the cap from 30 to 35. Okay.
Okay. So effectively, both put together can go up to 45.
If it is accepted by the Supreme Court. The MIKAS Quri, he has a different view that 30 million should not be increased. The category C, he is okay.
Okay. Okay. Got it. Any timelines for this, or?
Anytime we are expecting because arguments are complete by all the parties, and the order is reserved. It is more than now two weeks. We are expecting anytime.
Okay. Okay. Thanks. Thanks from my side.
Operator, can we take the last question, please?
Sure, sir. That is from the line of Prateek Singh from Credit Suisse. Please go ahead.
Hey, hi. Thanks for taking my question. Just wanted to know how do we see the year-ending debt level and the gearing ratios? Also, can we see more working capital release going ahead? Gearing ratios, so now we are already below 3.75 debt to EBITDA. Debt to equity, we are at 1.87.
We will bring it down definitely below these levels by end of the financial year. More working capital is released. I do not think so. More working capital will be released because the Uttam is being operated by us, so more and more working capital is going into that. We are also looking at another one or two downstream stressed companies to operate on a similar model. Therefore, more working capital may be required here.
Understood, sir. Thanks. Also, sir, I think you mentioned it earlier also. Can you just repeat the level of acceptances, both capital and revenue?
Acceptances, so capital is INR 209, and the revenue is INR 1,305.
Okay. Thanks. Thanks a lot, sir.
Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand over the floor to the management for their closing comments. Over to you, sir.
Thank you very much. Only at the end, I would like to say or reassure you that we will try our best to achieve the guidance. This 300,000 tons of shortfall in the first half, we will make it up in the second half. Second half appears to be far better compared to the H1 because there are no constraints we are seeing relating to water and also the iron ore availability. Taking that into account and also the demand point of view, we are more optimistic for the second half. Second half, we expect better performance for H1. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Axis Capital Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your line.