Ladies and gentlemen, good day, and welcome to the Q1 FY2018 Conference call of JSW Steel, hosted by Emkay Global Financial Services. As a reminder, all participants' names 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 touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Goutam Chakraborty from Emkay Global. Thank you, and over to you, sir.
Yeah, thanks, Lisan, and good evening, everybody. On behalf of Emkay Global, I welcome you all to today's discussion. We thank the JSW Steel management for giving us the opportunity to host this call. We have with us the senior management of JSW Steel, and now I would like to hand over the floor to Mr. Pritesh Vinay, VP Capital Markets and Group Investor Relations, to take you further. Over to you, Pritesh.
Thank you, Goutam. A very good evening to all the participants. I welcome all of you on JSW Steel's first-quarter fiscal 2018 earnings call. We have with us today the senior management team represented by Mr. Seshagiri Rao, the Joint Managing Director and Group CFO; Dr. Vinod Nowal, the Deputy MD; Mr. Jayant Acharya, Director Commercial and Marketing; and Mr. Rajeev Pai, the CFO. You are all familiar with the format. We will start with a few minutes of opening remarks by Mr. Rao, and then we will open the floor for Q&A. I would request all the participants to restrict your questions to two per participant in order to give everybody a fair opportunity. With that, I will hand the floor over to Mr. Rao for his opening comments.
Good evening to all of you. I'm happy to share with you the performance of JSW Steel for the first quarter of the fiscal year 2018. As you're all aware, global steel production has been going up. In the first half of the year, we have seen a 4.5% growth. Even China, everybody anticipated there will be production will be flat, including the demand, whereas even China produced the highest ever in the month of June, 73.8 million tons. Overall, in the first half, they produced 4.6% growth again. More production capacity utilization gradually increased from as low as 67.6% in the month of December to 73% in the month of June. With this more production, in spite of moderate exports from these four countries: Russia, China, Japan, and Korea, we have seen the price correction of steel in the international market, particularly HR coil.
We have seen in this quarter a 13% reduction. In line with the correction in the global steel prices, particularly hot rolled coils, the iron ore and coal prices also corrected. As regards to India, steel production went up by 3.5%. Consumption grew by 4.6%, which is better than last financial year. Imports more or less stable at around 550,000-600,000 tons, whereas Indian steel prices also got corrected in the last quarter in line with the international prices. In addition to these factors, global and Indian, one more important development in India is water shortage. Water shortage in the south, particularly in Tamil Nadu, so that had impacted the production to some extent to us.
In addition to that, when we wanted to sell our products, the introduction of GST from 1st of July, even though there were some uncertainties in the month of May, once it was becoming clearer that it would be implemented from 1st of July, there was a destocking started in June that also impacted the sales. In view of these factors, we could achieve a production of 3.9 million tons year on year, a 1% growth, which is slightly lower than the guidance which we have given around 5%. The sales are at 3.5 million tons, which is a growth of 5% year on year. As regards to sales realizations in this quarter, in line with international prices drop, we also adjusted the hot roll coil prices. If I look at the blended sales realizations, more or less they're at the same level sequentially.
How we were able to maintain this by increasing our coated product sales to a large extent because those prices have not fallen. They were more stable, or it has an upward bias in the last quarter. Our coated sales have gone up from 28% to 32%. That made us maintain blended sales realizations almost at the same level sequentially. The cost of production, there were pressures. Iron ore prices in India have not got adjusted, unfortunately, in the last quarter, when international prices have fallen by 25% in the last quarter. Whereas NMDC adjusted the price only from July 1 by INR 200 per ton. Cost of production pressure due to iron ore prices being higher was there in the last quarter. Coking coal opening inventory, which was expensive, that also we had to consume.
Coking coal prices started coming, so some benefit has come to us sequentially over the last quarter, but it is not full. Benefit of lower coking coal prices, which has happened in the quarter, has not come in fully in this quarter. Overall, cost of production was at a higher level. This has put the pressure on the EBITDA per ton for a standalone company at INR 6,266 per ton. EBITDA margin is at 14.7%. The total sales we have recorded at INR 15,096. EBITDA for a standalone company is INR 2,197 crore, and the profit after tax is INR 418 crore. As regards to our subsidiaries, US Plate and Pipe Mill has done well. The plate capacity utilization went up to 28%, and the EBITDA for the quarter was $5 million, as against $5 million loss in the corresponding quarter of last year.
There is a swing of almost $10 million in our US operations in this quarter. Coated products have done extremely well. It has shown EBITDA of INR 2,050,000,000, a 30% growth in EBITDA in the coated products, as I explained, because of the strategy which we have changed. Amba River, Salem Unit, Steel Processing Centers, Industrial Gases, Vallabh Tinplate , Marubeni-Itochu Joint Venture, everywhere there is a positive improvement in the EBITDA. Value-added steel products have gone up to 38% in the quarter. CRCA, galvanized products, color-coated, electrical steel all have shown significant growth. The strategy of the company is to mitigate the problems associated with the challenges which I just explained. These strategies, to a large extent, mitigated that problem. Consolidated EBITDA was INR 26,170,000,000, and the net profit after tax was INR 6,240,000,000 for the consolidated company. The net debt was INR 433,230,000,000.
There is an increase of INR 1,774 crore during the quarter, majorly used for incremental working capital that was required during the quarter. What we are seeing is steel demand definitely improving, not only globally but also in India. What is comforting is that Chinese apparent steel consumption on a derivative basis, if you see, in the first six months of the year, there was an increase almost close to 9-10%, which nobody was anticipating, and their exports have come down by 28%. Taking that into account, the global steel demand outlook is looking better. As far as India is concerned, the public sector spending, either from roads or power and transmission lines, solar energy, earthquake equipment, pre-engineering buildings, water pipeline, gas pipeline, these are the sectors where we are seeing a traction in the demand. Steel demand going forward, we feel it will accelerate.
Whatever loss of sales we have seen in quarter one, we are confident that we'll be able to make it up in the following three quarters and achieve our guidance of 16.5 million tons of production and 15.5 million tons of sales for the year. As regards to GST, we have calculated our benefit of GST, and we have passed it on as of 1st of July 2017 while announcing the prices. We are seeing again the GST getting stabilized. We feel that the normalcy will come back in this quarter. The project's expenditure, which we announced, they are on track. We are implementing the downstream in our Kalmeshwar, Vasind, and Tarapur, and also expanding our CRM unit at Vasind at Vijayanagar, plus expansion at Dolvi from 5 to 10. They're on track. With that, any questions are there, I will 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 wish to remain yourself in 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. Participants, in order to ensure that the management is able to address questions from all participants in this conference, please limit your questions to per participant only. We'll take the first question from the line of Rakesh Mehta from HDFC Mutual Fund. Please go ahead.
Yeah, hi. I was wondering if you could comment a little bit about the coking coal pricing environment. If I'm not mistaken, we haven't yet heard anything that's happening on the quarter two contract settlements as well. If you could give us some color on that, and where do you think coal prices could settle for the balance of the year?
Yeah, so the coal prices, coking coal prices specifically, have been volatile. In the month of April, we had seen a spike in coking coal prices from Australia, primarily because of the floods, and it had gone up to $300 FOB and dropped down to about $146 in June. We have seen the coking coal prices move up again somewhat in this month, but we feel that as of the way we look at it now, it's going to be range-bound, probably in this range between what we have seen in June and July. As we had discussed earlier, most of our prices are index-linked, so it's not on the quarterly settlement basis. It will move with the index on a monthly basis.
Okay. And.
In the Q2, just I wanted to add, in the Q2, there will be a reduction in the coking coal prices on consumption basis in JSW Steel. We expect it would be in the range of around $15 per ton.
Okay. Just in terms of your expectations for iron ore per se, because I mean, as you alluded to your comments that NMDC was late in cutting prices, but now you have a global price rally that's happened again. Do you expect your prices for the subsequent months to go up again, or do you think that they could be stable?
Iron ore overall supply in India is increasing, particularly in Odisha. Odisha iron ore prices are significantly at lower prices compared to Chhattisgarh and also Karnataka. Where our Vijayanagar plant is concerned, this INR 200 benefit from 1st of July starts flowing in. Whether these iron ore prices in Karnataka will be stable or will go down or will go up, for that supply increase is essential. Today, the total iron ore production that can be made in Karnataka is 30 million tons as per Supreme Court directive, whereas they're producing close to 27-27.5 million tons, even though the approvals that have been given for mining is 33 million tons. Balance is not coming from the mining companies in spite of the approval. Therefore, that is not available, let us say, for a minute.
If it has to improve, new mines permission have to be given that is beyond 30. The mining companies plus Karnataka Iron Steel Association approached the Supreme Court to increase the ceiling from 30 million. That case is getting heard in the Supreme Court. We expect some relief as regards to remove the ceiling or increase the ceiling. Once that happens, we expect the supplies to go up. That should bring the normalcy in the iron ore prices, which are there in the Karnataka state. We do not expect the prices to go up from the current levels.
Okay. Okay. Thank you.
Thank you. The next question is from the line of Bhavin Chheda from Enam Holdings. Please go ahead.
Yeah, good evening. Good set of numbers. What would be the update on the VAT credit in Maharashtra, if any clarifications post GST?
VAT credit on non-GST items?
No, sorry. The Maharashtra plant for the sales in Maharashtra used to get the VAT exemption or VAT credit. How is the scenario post GST?
As far as the approval which we have got, it says that in the post-GST scenario, they will protect the state taxes, state taxes in the sense to the extent of state taxes. Now SGST is at 9%. They have to take a decision how much they will do. Is it 5% or is it 9%? A lot of representations have gone from the industry. The GST council is not taking a call on that. They have left it to the states to do it. Industry has been pursuing the government to take a call on this, including even Karnataka. Same situation.
Karnataka, we don't have any earlier VAT credit. So Karnataka is not an issue, right?
Karnataka expansion which we have done from 10 million ton to 12 million ton, there is a benefit.
From 10-12, there was a benefit.
Yes.
Okay. As of now, you are collecting SGST and submitting the same to the state government, right?
Yes.
The claim would come at the latest date when the state government clarifies.
We will submit our referred claim as per the approvals that have been given to us. SGST, we are entitled as per that if we get fine. Otherwise, we continue to pursue the government. At least 5%, whatever we used to get, I don't think that will be questioned.
Okay. One last question on the difference, this huge incremental number from the other subsidiaries, how much of it will be sustainable in the coming quarter? Because the difference, if I exclude JSW Coated Products and if I exclude the US number, there was an incremental INR 160-170 crore EBITDA, which I think you said from Amba River, Salav Processing Units, Vallabh Steel, and all that. How much should we build in on a sustainable basis for the coming quarters?
For the coming quarters, whatever numbers are there, I think we can look at the same numbers to continue in future.
Okay. So there was no one-off in any of the numbers?
No, I don't think so.
Yeah. Okay. Thank you, sir. Yeah.
Thank you. The next question is from the line of Nitesh Jain from Axis Capital. Please go ahead.
Sir, can you provide some commentary on the steel price movement in India? We gather that in July last week, the steel prices have gone up, and then in August, local mills are again planning for some hikes. If you can quantify the post-June, what is the pricing action in July, and what is how the August look like?
Yeah. In the month of July, after our correction, we have passed on some of the GST benefits on a net basis. We had increased prices marginally in the beginning of, or rather around the 7th of July. The main increase is going to be from 1st of August. As you are aware, the international prices specifically have moved up, if you look from June end to now, by almost $50. There is a case for increasing the prices. We are going to increase, let's say, between August and September the prices. Exact amount, I will not be able to share with you right now. We are still working that out.
No problem. For July, at least you can share from the June average, is it like INR 500 or INR 1,000 higher? At least for July. I know that August looks difficult to comment at this moment, but for July, you can mention the quantum, please.
Yeah, but month to month, if I give it to you, it will be a little misleading. I think it will be better to take a concerted quarter view. Directionally, as we said, it's going up. Between, let's say, July, August, and September, you will see a price increase reflecting what is there internationally.
Okay. Yeah, that's all from my side. Thank you very much.
Thank you. The next question is from the line of Pinakin Parekh from JP Morgan. Please go ahead.
Awesome. Thank you very much. Two questions. First, we have maintained our sales volume guidance, and if we look at the Q1, it was impacted by GST and the water shortage. It implies a material pickup over the next three quarters. Broadly, from a mix perspective, should we see an increase in exports over a year, or you believe that, as you highlighted, the demand is improving, the higher volumes can be absorbed within the domestic markets? Because I am just trying to understand that should the margins expand materially depending on where do we sell? Do we sell locally, or do we sell more in the export market?
No, I think, as you know, we have been quite flexible in terms of our shift between the domestic and the export market. Our quarter one export percentage has been about 23%. The domestic markets are picking up. Therefore, we would try to focus on the domestic market and maintain exports around this percentage level of sales.
Sure. The second question is that the annual report mentions that of the five mines, one in the category C auction, two mines would be operational by first half of 2018, and the remaining three over the remainder of 2018. Does the ramp-up of the mine have anything to do with the Supreme Court guidelines of 30 million ton production or the 30 million ton gap, or would JSW's mine ramp-up be independent out of that gap? The C category mines, as per Supreme Court, the CEC has given recommendations to over and above the 30. Once Supreme Court accepts the recommendations of the CEC, then it will come extra.
Okay. Okay. To that extent, we'll have to wait for that Supreme Court recommendation in order to basically ramp these mines up.
Yes, definitely.
Secondly, the annual report mentioned a certain number of 4.7 million tons of these five mines. Is this the limit imposed by the mining plan, or, I mean, other than the Supreme Court limit, is there any restraint on this number, or if the company is able to, it can ramp up the production more than this number, assuming the courts were to allow it?
4.7 is as per the formula set by the Supreme Court earlier. So this is the maximum unless until it's relaxed in future.
Okay. Okay. It will be reset, and then we have to look at what we can do.
Yeah.
Okay. Understood. Thank you very much, sir.
Thank you. We'll take the next question from the line of Ashish Kejriwal from IDFC Securities. Please go ahead.
Yeah. Thanks a lot. Sir, if I'm looking at your JSW Steel Coated numbers and your top line and volumes which you have given, it seems that your net realization has increased quarter on quarter. First of all, is that right? If it is right, then why is everything not coming down to EBITDA? Because your HRC prices were lower quarter on quarter, and this seems to be a net realization for JSW Steel Coated seems to be on a higher side. Am I missing something in this?
No, on a quarter on quarter basis, the JSW Coated, when you talk about JSW Coated, the subsidiary JSW Coated, the sales realizations have gone up between quarter four to quarter one, as well as YOY.
Yeah. I'm seeing that the prices have increased by around INR 1,600 something, but our EBITDA has just increased by INR 600 per ton, despite the fact that HRC prices should be lower quarter on quarter again.
Yeah. It's a point-to-point. It may be a little difficult because it's a question of mix of what orders you are carrying at that point of time between export and contracted orders and retail orders. That mix could change it a bit. Generally, it has gone up on quarter on quarter basis.
Okay. Is it possible to give broad numbers for major subsidiaries' EBITDA? Like we have given for JSW Coated and US operations, is it possible to give for your Amba River and JSW Steel Salem? Any sharp jump up in any of the subsidiaries? Because the change which we are looking at from consol to standalone and JSW Steel Coated and US operation, that's not explaining the entire momentum.
Coated, we gave the number already, which is the material in this incremental INR 450 crore of incremental EBITDA that is coming in the consolidated numbers.
How is INR 44 crore?
205 crore. INR 205 crore is from Coated.
I'm looking at the difference from first to fourth quarter.
Yeah. Those numbers, we'll be able to give annually, not every quarter.
Is it safe to say that we have seen some jump up in any of the subsidiaries besides US and JSW Coated?
There's some improvement, definitely. Like the S ever field, JV, there is an improvement. Similarly, Vallabh Tinplate . Similarly, steel processing centers. Industrial gases. The new acquisition we have made from Praxair, that is the JSW Industrial Gases.
We think that we are going to maintain that in next quarter also.
Right.
Sir, lastly, when we are looking at the volumes, we are seeing that domestic sales volume has, in fact, increased quarter on quarter, while export sales volume has declined sharply. Is it mainly because the export realization or the export was less profitable in last quarter as compared to fourth quarter?
Yeah, you're correct. The prices from February, March to April, May had corrected, as you would have seen internationally as well. Therefore, we tactically shifted into the domestic market these volumes and reduced our export to that extent. Our exports, we have focused more on the value-added part, which would be cold rolled, galvanized, color-coated, galvalume, etc.
Thanks a lot on all of that.
Thank you. We'll take the next question from the line of Dhawal Doshi from PhillipCapital . Please go ahead.
Hello, sir. Good set of numbers. Congratulations for that. Sir, two questions. First, sir, is there any element of a Forex gain or something, or a translation gain for this quarter, as in which would have boosted the consolidated performance, which is?
There's no Forex gain, which has come exceptionally in this quarter.
Okay. There is no Forex gain. Secondly, sir, if I were to look at the standalone company realizations on a gross basis from Q4 to Q1, realizations have moved up by almost INR 460. You did mention in your opening remarks saying that the coated product realizations were quite strong, but that will get reflected in the subsidiary performance. Even the standalone company, we have seen a sequential increase. As in, how did that happen? As in, is the product mix also coming into play out over there? Because what we understand was prices were quite soft in Q1.
Quoted products also there at JSW Steel standalone from Vijayanagar unit, we have galvanizing, and we have cold rolling. Cold rolling, a big presence we have as a part of the standalone company. So those prices acted as a buffer for the fall in HR coil and long products.
Okay. Sir, lastly, what was the benefit of the coal price decline in Q1?
Q1, $18 per ton.
Okay. Thanks. Thanks a lot, sir.
Thank you. The next question is from the line of Rajesh Lachhani from HSBC. Please go ahead.
Yeah. Thanks for the opportunity. My question is on the weakness in the HRC prices while long products have remained largely stable. Are we looking at some better demand scenario for the long products than flat products? That is my first question.
Now, the hot roll prices basically reflect faster the international scenario. Therefore, the international correction in prices between Q4 to Q1 translated itself faster in the domestic market as well. As far as longs is concerned, it is more domestic-driven. I think primarily, as you know, April, May, June is a season just before monsoons where constructions are completed. So long product tends to be more stable and positive during that period of time. During the monsoon period, the long products stabilize a little downward. This time, because of international movements on steel, and primarily it started with long products in China because of a structural correction in production of induction furnaces in China, the long products also started moving up, and it was followed by flat products.
I think in this quarter, we are seeing a positive upside both on the longs and flats, more so in flats than in longs because it had fallen earlier, as I explained.
Okay. My second question, sir, is on the sound bites we are getting on the acquisition of the distressed assets from JSW Steel. Sir, you are already on track of your expansion projects. I am just trying to understand what happens if we are front-runner in one of those acquisitions. What happens to that expansion projects?
Expansion project we have already announced, and we have committed, and we started implementing. That will continue. At the same time, if any acquisition opportunities that would come in, which will attract you and value equity, we'll take a call on that. As regards to the mode of acquisition and method of financing without straining the cash flow of JSW Steel, and also within the parameters of debt to EBITDA, debt to equity, we will work out the acquisition strategy.
Okay. Sir, I understand that the expansion project is the priority compared to acquisitions?
Priority, it is not changeable. We have already decided to go ahead. We have already committed, and we have started implementing the project. Therefore, it's not a question of priority. We will continue that. We will complete it.
Okay, sir.
Thank you. The next question is from the line of Pavitra from Nomura Securities. Please go ahead.
Hi. Thanks for taking my question.
Sorry to interrupt, Pavitra. We're not able to hear you. Can you speak a bit louder?
Yeah. Is it better now?
No. I requested to use the handset mode while speaking.
Yeah. Okay. My first question is on the capex that you've spent this quarter. If you can tell us how much was spent this quarter, and also what's the guidance for the full year?
Our guidance for the full year is INR 8,000. Out of INR 8,000, the capex on expenditure incurred basis is INR 1,325. On cash flow basis, it is close to INR 1,000.
Okay. Got it. With regard to this, you mentioned that the increase in net debt was on account of working capital. If you can mention how much was the working capital outflow, and do you expect to see any wind down of that over the next few quarters?
We built up some inventory on account of the, let's say, finished products, and some on account of GST. We had drawn down some inventory in the March quarter, which we needed to build up for our working purposes. In addition to that, due to GST postponement of purchase, especially in the month of June, there is some inventory which has been built up. We expect that part of this inventory will be liquidated in this quarter.
Okay. Sure. Finally, just one more question on the net debt to EBITDA and the net debt to equity. It just seems to be trending slightly above the threshold levels that you had previously mentioned of 3.75 times and 1.75 times. I just wanted to understand what steps will it take to bring these metrics back down to threshold levels?
Whatever guidance of production and sales we have given, we are confident that we'll be able to achieve that in this year. Accordingly, the ratios which we have guided. By end of this financial year, we will be within that range.
Okay. Sure. Thank you.
Thank you. The next question is from the line of Saumil Mehta from BNP Paribas Mutual Fund. Please go ahead. Saumil, your line is unmuted. The line for the current participant seems to have dropped off. We'll move on to the next participant. That is from the line of Ritesh Shah from Investec. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Sir, my first question is if you could provide some color on the Moitra coking coal block and the economics of the leases that we have won in Karnataka.
As for the Moitra coal mine is concerned, we have to make it operational by June 2019, whereas it has a million ton per annum mining we can do. If we look at a strip ratio of three, three and a half times, actually available coking coal, usable coking coal will be in the range of 200,000-300,000 tons. This is not a big quantity from Moitra. As regards to the other five iron ore concessions we have got, it is secured in the auction where the weighted average of the premium which we have to pay to the market price is around 90%. Therefore, what is left out is 10%, which is equal to the cost of mining. Therefore, compared to the market price, there won't be any reduction in the overall price.
At the same time, there will be a huge advantage in transportation. We will be able to do better arrangements for transportation, either you call pipe conveyor or we do a dedicated rail system. We'll be able to reduce the transportation cost. That is where I think the savings would come. Third is the premium which we are paying to the market price today, that would disappear. It is almost close to INR 600 per ton. It is the premium over Chhattisgarh. That premium won't be there in this price in the captive mines. There will be financially a benefit which would come on account of these three counts.
Right. Sir, when you said 90%, is it the IBM premium to the IBM notified price? How should one look at it?
Generally, IBM takes an average of the prices declared by various mining companies for their sales in that state for various grades. Based on that, they declare the price. This is the average of the sale price of the mining companies for different grades.
Okay. I'm assuming it would also include NMDC's.
It includes NMDC's. Yes.
Okay. Great. Sir, my second question is on slide nine. The volume that we have given over there are 3.39 on the bar chart. I just wanted to understand how to reconcile it.
3.9 million.
3.39.
Okay. Okay. So you're talking about the quarter one consolidated numbers?
Yes. Yes, sir.
Yeah. Here you are reconciling this 3.51 to this number because we have started a conversion arrangement with Uttam where we are supplying hot rolled coils from Dolvi, and we are converting metal into coated and selling that in the market. There is some stock buildup in the work in progress as far as that unit is concerned. There is some stock built up on account of GST, as we said, in the coated space.
Okay. That helps. Sir, my last question is, what are the cost-saving parameters that we should look at at company level for next 18 to 24 months, either from change in product mix or anything specific that we are doing?
The change in product mix, I think our focus now is to see that all our value equitative assets, we run to the full. So our cold rolling lines, our electrical steel lines, our galvanizing lines in Vijayanagar are all now running at more or less 100% capacity. In the galvanizing space, it's actually the galvanneal line which is there in Vijayanagar. The production of automotive steels have gone up, both in galvanneal and galvanized, and that is slowly likely to increase as we go along. In the cold roll and CRC, also various value-added steels are now getting produced at Vijayanagar. Similarly, in the coated facilities at Vasind, Tarapur, and Kalmeshwar, all the lines are being run full.
Our efforts is to see that we increase our production of galvalume and the color coated with galvalume substrate since this is more cost-efficient and as well as higher yield in terms of price.
Sir, my question was from the cost side. Are there any different moves that we are taking besides the brownfield and greenfield expansion that we are doing? Anything like change in mix, more or less of blast furnace, more of electric arc? Anything from that angle like Mr. Rao indicated about a conveyor belt? I am more asking from a bottom-up angle.
Yeah. Definitely. One is the digital side last time I touched upon. We have identified along with BCG total 40 projects which has the potential to give INR 430 crore cost reduction that could happen. Out of that, INR 30 crore projects are under implementation right now. This will be implemented in the next 18 months. More and more projects will be identified in this. This is digital side. We are moving automating operations, building algorithms, and also digitalizing processes. That is where we wanted to reduce the cost. Similarly, the area where we would like to focus is the logistics. That is, again, giving us a lot of advantage in terms of reducing cost. Idle freight is one area, and also turnaround time is the two areas where we are focusing on the logistics side.
The pipe conveyor, which is already under implementation, where we told last time INR 650 crore is the project cost, is under implementation in the next 18 months. Definitely, it will get completed. There we are expecting a significant reduction in our transportation cost of iron ore to Vijayanagar plant. We also announced this very pipeline feasibility study which we are doing for setting up from the coastal Karnataka to Vijayanagar plant. That will open up opportunity for us in case iron ore situation continues to be in the similar manner as we have today. If not, immediately in the next 12-18 months' time, we will be able to have more alternatives to increase the supply to our Vijayanagar plant from outside Karnataka at a very competitive cost. There are various steps which we are looking at on the cost reduction side.
Okay. That helps. If I may squeeze in one more question on the wealth plan.
Mr. Shah, may we request that you return to the question queue? There are a bunch of people waiting for their turn.
Thank you.
Thank you. The next question is from the line of Saumil Mehta from BNP Paribas Mutual Fund. Please go ahead.
Yeah. Thanks for the opportunity. Sir, my question is with respect to any inorganic acquisition. Now, does it fit into our long-term strategy or other in terms of financial covenants? Should we believe that that will also be the 3.75 net debt to EBITDA after any sort of financial arrangements which we have? Or we have the flexibility to increase that with banks, and probably that will taper down over a period of time?
No. Our effort or our objective or target is not to breach these covenants, including acquisitions. If any acquisition opportunity that comes in, we have to structure the financing in a manner that the reliance on JSW Steel cash flow or any other manner putting pressure on the covenants will not be there. That is how we are looking at it. Yes, your question is correct. Including acquisitions, we wanted to maintain these ratios.
Okay. Okay. Is it fair to assume that any form of inorganic acquisition will only be in the domestic market because there were certain news items of me looking at some assets out of India? Is that the back burner and first priority would be to look any lucrative inorganic only in India and then probably venture out of India?
No. We do not rule out overseas inorganic growth opportunities if they come up, particularly in the downstream side. After having seen the trade restrictions that have been imposed by various countries, there is an imminent need for the company to look for manufacturing facilities in the overseas markets. Therefore, we continue to look overseas also as a part of inorganic growth, notwithstanding the opportunities in India.
Sure. My last question is with respect to any form of, in terms of a long-term strategy of being integrated in the iron ore part. Now, a number of iron ore options are going to come up in the state of Odisha. Do we believe that based on the transportation cost and all that, it will be feasible to have any acquisitions outside the state of Karnataka?
Iron ore side, we feel that we have more opportunities in India. There are a lot of mines that are coming up for auction, and more and more will come in 2020, March 2020, when the existing mining leases expire. We look more for iron ore mine acquisitions in the auctions in India.
I was just referring to between state of Karnataka and any form of acquisition outside Karnataka.
Outside Karnataka for Vijayanagar plant, yes. Now, we will definitely look at because we talked about slurry pipeline from coastal Karnataka to Vijayanagar plant. It does not make a difference whether you own it in Karnataka, iron ore mine, or you have in Odisha.
Sure. Thank you so much.
Thank you. The next question is from the line of Pratik Singh from Credit Suisse. Please go ahead.
Yeah. Good evening, sir. Good set of numbers. I want to know the level of revenue and capital acceptances this quarter.
Revenue capital acceptances are INR 1,265 million. Capex acceptances INR 219 million.
219 million. Thank you, sir. My second question, where exactly are we on the Dolvi expansion, the Vijayanagar BF3, or the CRM? I believe we should be in very early stages here. Could it also lead to some production disruption later this year?
Expansion at Dolvi from 5 to 10, I don't expect any disruption to the existing production because it is separate units altogether, of course, adjacent to the existing facilities. Dolvi expansion to 10 million is not going to disrupt the existing production. At Vijayanagar, the CRM is concerned, the expansion from 0.9 to 1.8 million. There will be some shutdowns, but not in this year. We are preparing all the equipment and whatever work that has to be done, civil works that we will be completing. Next year, we will take the call. Some shutdown is required for that. Regarding BF3 also?
Yes, sir. Go ahead.
No. In blast furnace, some modifications if we have to do there. Also, some may be required that we will take a call in the next year, not in this year.
Sure, sir. Thanks.
Thank you. The next question is from the line of Saveer Dedhia from Mirae Asset. Please go ahead.
Good evening, sir. My question is more related with GST. Are we seeing any benefits due to GST in terms of operational and in terms of taxes as well?
There are some positives and negatives financially if we look at. In addition to GST being a very transformational tax reform, the positives are concerned on the interstate purchases that CST will be saving. Similarly, on the interstate sales where customer is bearing the CST of this 2% that won't be there. There is one major benefit which will accrue to the company. Similarly, the branch sales which we used to do earlier, branch transfers. Then we have to reverse the input credit that is not required in the GST scenario. That was a lot of positives. Negative side, if I really look at it, the non-GST items like natural gas.
There is some confusion going on on the natural gas side. Earlier, it was procured both outside the state and within the state. Outside the state, we used to pay CST and entry tax. Within the state, we used to pay the VAT. VAT used to be 13%, and we used to get 9.5% as the set-off. Now, post-GST, natural gas is not covered under the GST. They continue to charge the VAT, but there is no provision to give the set-off. We have represented that to the government. We are yet to hear from them.
Same thing.[crosstalk]
If you can quantify both the elements in terms of benefit and this natural gas issue?
Yeah. It depends upon how much gas we procure from each of the states. Quantification, we have to work out. The point remains it is one negative overall. Even after netting out whatever benefit, whatever negatives that are there, overall, GST will give the net reduction. That is what is passed on to the customer.
Okay. When you say that is passed on to the customer, to the extent where there is an operational efficiency and to the extent of CST saving, that can be retained by the company, right?
Retained by the company is.
Because the pricing mechanism on the sales side is very transparent and internationally linked, right?
No. The spirit of GST is whatever benefit the company gets, we have to pass it on. Accordingly, this benefit has been worked out separately, both positives and negatives. We worked out it is in the range of INR 500-INR 700 per ton that we passed it on.
Okay. Okay. Sir, one has to understand in terms of operational efficiencies, right? This, what we have spoken, is more on the financial side. In terms of operational, let's say in terms of freight, there are various newspaper articles which say that there is a huge saving on the freight side in terms of time reduction. Do we get benefit out of that?
We will definitely get that benefit. This benefit, if we have to get, we have to talk to the transporters and start negotiating all the contracts. We have started doing that. It will take time. Quantifying how much benefit will come is difficult to do. As a part of digitization, we are also pursuing one thing, which is GPS and all the outward freight trucks. We know how much turnaround time they take. We will be able to track it. With that, it is possible for us to negotiate better with the transporters. That is what we are trying to do. At this stage, it is difficult to quantify that. Definitely, the benefit would come.
If we have to get some rough guess in terms of what can be the range of this benefit on a per ton basis, is it possible at this point of time or no?
No. Not possible.
Right. Okay. Thank you.
Thank you. The next question is from the line of Sumangal Nevatia from Macquarie. Please go ahead.
Yeah. Good evening. Thanks. Just one question remain. I know it's a small contributor, but if you could just elaborate on a turnaround in the US business. The $5 million EBITDA, I think last was witnessed in 2012 when I see volumes also increasing. How sustainable is this turnaround and what levels of utilization can we achieve? What further improvements in earnings could we see here? Thanks.
Capacity utilization of the plate mill in the last quarter was 28%. The pipe mill remained at around 8%. With that capacity utilization, we were at $5 million EBITDA last quarter. There is a huge scope for improving the capacity utilization further. After having seen the kind of trade remedial actions taken by the U.S. for a longer period of five years, and they are also talking about Section 232-related investigations and its outcome. The outlook for the steel industry in the U.S. is looking bright. There is potential to increase the capacity utilization and not only sustain and improve upon this EBITDA.
Understood. Any specific measure which has led to this or just operational leverage benefit this quarter?
One is order book is improving. That is one. Number two is in order to improve the operations, we are also contemplating to improve the capability of the plate mill. Thereby, the yields can improve substantially there. That will reduce the cost in future. With that, I think there will be a large potential in the US to turnaround.
Understood. Thanks and all the best.
Thank you. The next question is from the line of Abhijit Mitra from ICICI Securities. Please go ahead.
Yes. Thanks for taking my question. This question is to Mr. Rao. Regarding this domestic inorganic opportunities, I think last quarter, you made a statement that there is quite a divergence of valuation opinions amongst related parties regarding these assets. Over the last two months, do you see any change to that opinion of the last call, or do you feel that similar things exist? Secondly, has the due diligence process started? As in, are the books of accounts being opened to the interested suiters, or that process yet to start? When do you feel the process will start according to you, if you can just throw some light on the same? Thanks.
No. In the NCLT, as you know, the 180 days' time starts ticking from the time it is admitted. Some of the companies already got admitted. Some are yet to be done. Therefore, 180 days is the outer limit plus 90 days. That is the limit by which it would be done. Whatever information we are getting from various sources is that the IRPs, wherever they are appointed, will take 60 days' time to prepare information memorandum and also complete valuation, liquidation value for these companies, incorporate in the information memorandum, and then call for expression of interest. That may be from 0-60. After that, only data room or information will be available to prospective investors.
Okay. Okay. Between the choice, I know it's a hypothetical question, but between the choice of assets, I mean, since the majority of the expansion which you announced is on the flat product side, I mean, will the product profile dominate your optionality, or will it purely be the cost or a combination of these two? I mean, is it fair to assume that you would be more interested towards the long product assets if you choose to look at it? I mean, is that the right way to look at it, or?
Maybe as a company, as a strategy, we would like to focus more on the flat products going forward. When we are looking at acquisitions or organic growth, we will focus a significant portion in the flat and the limited presence in the long.
The same applies to the inorganic side also, I would presume.
Yes.
Okay. Thanks. That's all from me. Thanks.
Thank you. The next question is from the line of Pallav Agarwal from Antique. Please go ahead.
Yeah. Good evening, sir. I just have a question on the hedging. In the annual report, I could see some contracts on the iron ore and coking coal. What exactly is our strategy on the hedging part? Do we hedge in the international markets? Is there a policy of how much we want to hedge our iron ore requirements?
Iron ore, as you know, we can only hedge only to the extent of imports of iron ore, so estimated imports. We import only for Dolvi Unit, not for Vijayanagar, unless exceptional circumstances arise. We anticipate what could be the imports for our Dolvi Unit. To that extent, we try to hedge as regards to iron ore. Therefore, when our requirement is total 30 million tons, maybe 4-5 million tons is the extent of hedging which we always look to. As regards to coking coal, against our total requirement, we have a policy to hedge up to 25%. We are not able to do it because liquidity is not there in the market. Whatever we have done is very, very small.
Okay. Do we hedge the forex exposure also on this?
Forex exposure is a separate policy, as we have been communicating, that imports and exports, exports to the extent of imports, both sides will be hedged fully, balance these by way of options or by way of forwards, which will impact the revenue.
Okay, sir. Yeah. Thank you.
Thank you. Ladies and gentlemen, we'll be taking the last two questions. That is from the line of the next question is from the line of Kamlesh Bagmar from Prabhudas Lilladher. Please go ahead.
Yeah. Thanks for the opportunity, sir. Sir, one question on the realization part that you have mentioned that you have been able to offset the impact of fall in prices because of the higher or better mix. Like I say, even in the past, we have seen that as and when HRC prices move up, the gap between the CR or GP/GI, that also compresses. Would it be the case going forward we would be seeing the improvement in HR realizations, but that won't be followed by the equivalent improvement in the CR and other value-added product realizations?
Usually, in the flat side, you will see if the hot roll prices, let's say, go up now, it will reflect on the downstream side maybe with a lag. It does reflect on the downstream side. In this case, also, we expect the downstream prices like coated or cold rolled to react upwards with a lag once we increase the HR prices.
Okay. Sir, lastly, in the cost part, we have not seen any fall in the cost. If you see cost, they have moved up significantly quarter on quarter. Though scale was lower, we have seen the cut in the other expenses as well as significant cut in other expenses. Like I say, we have mentioned that $18 was the fall in coking coal prices and only around INR 100 or INR 150 increase in the iron ore prices. Despite that, the cost has gone up, sir.
Cost has gone up majorly in the iron ore side and also in the power cost side. We have seen per ton there is an increase in the cost. There are the three items where cost increases are there. Sequentially, coking coal prices have come down. You are correct. That is more than offset whatever reduction that has happened sequentially by the increase in the other costs. You are correct on that. Yes.
Yeah. Okay. Okay. Sir, going forward, would we see significant fall in cost in Q2?
Coking coal, we already guided for a $15 reduction in Q2. Similarly, iron ore, INR 200 per ton, which is reduced on 1 July. Yes, that will flow through in this quarter.
Okay. Okay. Great, sir. Thanks a lot, sir.
Thank you. The next question is from the line of Nitin Agarwal from JM Financial. Please go ahead.
Thanks for the opportunity. Sir, can you throw some light on the Chile iron ore operations in terms of the profitability? Second, are there any plans to restart our coking coal mines in the US?
In the case of Chile, still it is under maintenance. At these prices where volatility is from $46-$75, it is very difficult to take a call to start the mine. Therefore, we continue to maintain that mine. We have no plans in the immediate future to start the mine. As regards to coking coal, yes, we will be starting the mine.
Right now, is the Chile mine giving any negative EBITDA contribution in terms of the cost? Can you?
Yeah. Yeah. It is in the range of maybe $1,000,000-$100,000 per month.
Okay. Thanks.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments.
I just wanted to reiterate that the guidance which we have given of 16.5 million ton of production and 15.5 million ton of sales, we will be able to achieve. In Q2, there are certain upsides which will bring down our costs like iron ore prices and coking coal prices. In this quarter, because of the monsoon, the water levels have improved, including Salem. Therefore, production, whatever we have lost in quarter one, hopefully, we should be able to make it up in this quarter. The last point is the overall demand situation is improving both globally and also in India. The domestic prices as on date, if I calculate the landed cost of imports from China based on the current FOB prices and the domestic prices, domestic prices are at a discount, giving a scope for improvement in domestic prices.
Thank you very much.
Thank you. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that completes today's conference. Thank you for joining us. You may now disconnect now. Thank you.