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Edited Transcript of JSWSTEEL.NSE earnings conference call or presentation 23-Oct-19 12:30pm GMT

Half Year 2020 JSW Steel Ltd Earnings Call

Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of JSW Steel Ltd earnings conference call or presentation Wednesday, October 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jayant Acharya

JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director

* M. V. S. Seshagiri Rao

JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director

* Pritesh Vinay

JSW Steel Limited - VP of Finance & Investors Relations

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Conference Call Participants

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* Amit A. Dixit

Edelweiss Securities Ltd., Research Division - Financial Analyst

* Anuj Singla

BofA Merrill Lynch, Research Division - VP in Equity Research

* Ashish Kejriwal

IDFC Securities Limited, Research Division - Research Analyst

* Indrajit Agarwal

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Pinakin M. Parekh

JP Morgan Chase & Co, Research Division - Associate

* Ritesh Shah

Investec Bank plc, Research Division - Analyst

* Saumil Mehta

BNPP Asset Management India Private Ltd - Research Analyst of Equities

* Sumangal Nevatia

Kotak Securities (Institutional Equities) - Analyst

* Urvil Bhatt

IIFL Research - Assistant VP

* Vishal Chandak

Emkay Global Financial Services Ltd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and a very warm welcome to the Q2 FY 2020 Earnings Conference Call of JSW Steel hosted by IIFL Institutional Equities. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Urvil Bhatt from IIFL Institutional Equities. Thank you, and over to you, sir.

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Urvil Bhatt, IIFL Research - Assistant VP [2]

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Thanks, Ali. Good evening, everyone. On behalf of IIFL Institutional Equities, I welcome you all to the 2Q FY '20 Earnings Call of JSW Steel Limited.

I will now hand over the call to Pritesh Vinay, VP Corporate Finance and Group Investor Relations at JSW Steel. Over to you, Pritesh.

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Pritesh Vinay, JSW Steel Limited - VP of Finance & Investors Relations [3]

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Thank you very much, Urvil. A very good evening to all the participants, and we welcome you to the Second Quarter Fiscal 2020 Results Earnings Conference Call of JSW Steel. We have with us today the management team of JSW Steel, represented by the Seshagiri Rao, the Joint Managing Director and Group CFO; Dr. Vinod Nowal, Deputy Managing Director; Mr. Jayant Acharya, Director, Commercial, Marketing and Strategy; and Mr. Rajeev Pai, CFO.

I am sure you have had the chance and opportunity to go through the results, the press release and the presentation, which is already uploaded, and the links of that would be in your inbox. We will start with a few minutes of opening remarks by Mr. Rao on the broader sector, market and performance of the company. And post that, we can open up for Q&A.

With that, over to Mr. Rao.

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [4]

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Good evening. Happy Diwali to all of you and your families. This quarter is one of the toughest and challenging quarters we have seen. This moment of the escalating trade tensions got reflected by USA across the global economy and disruption and supply chain...

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Operator [5]

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Sir, I am sorry to interrupt. We cannot hear you.

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [6]

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Disruptions, which also we have seen or experienced in the last quarter.

The reaction by various governments and also (inaudible) in response to the escalating trade tensions, we have seen mainstream monetary and fiscal policies. Because of the massive stimulus that has been announced in China, that created a huge disruption in the steel market. And then the entire world, in line with the falling demand, adjusted the production, whereas China continued to produce more. That is why more of raw material demand from China. So the import of iron ore has gone up by 10%, almost 65 million tonnes. So more demand for iron ore, and at the same time, more demand for coal. So this all led to distortions in the market where raw material prices were not corrected, whereas steel prices got corrected because of the slower demand other than China (inaudible).

Adding to that in the domestic market, there was a credit sweep from the banking system, the weak government spending, falling for newer demand and also prolonged monsoon. They are 4 major reasons where the demand in India also started showing decline. As for JPC numbers, even though April, the consumption number was over 6%, which came down less than 1% by September. So steadily, constantly, it has been falling, the steel demand in India.

In this challenging customer census, exports from the FTA countries is once again a concern, went up to 65% in this quarter. In spite of these challenges, if I look at JSW Steel numbers, we have produced 3,84,000 -- sorry, 3.84 million tonnes, which is lower by 8% year-on-year and lower by 3% quarter-on-quarter.

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Pritesh Vinay, JSW Steel Limited - VP of Finance & Investors Relations [7]

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Operator, I think there seems to be some problem in the line. We are getting feedback that the audio is very weak. Can you please dial us back into the [mainframe].

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Operator [8]

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Sure, I'll do that. One moment. Yes.

Participants, you are requested to stay connected while we reconnect the management?

We have the line for the management reconnected. Sir, you may please go ahead now.

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [9]

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So I'll just continue where I left as regards to the numbers of JSW Steel in the backdrop of what is happening globally and also in the Indian markets. The production number were 3.84 million tonnes. Sequentially, you'd find a drop of 3% and a year-on-year drop of 8%. The drop admittedly attributable to monsoon impact at Dolvi and also automotive slowdown which impacted the Salem unit and also some planned shutdown at Vijayanagar unit because actually, we moderated the production in the last quarter, in line with the market conditions. The sales stand-alone number was 3.6 million tonnes, which is sequentially lower by 6%. And in the year-on-year, it is down by 9%.

So when the domestic demand was weak, what we've done is we have pushed more quantities in the export market. That's why exports went up by 68% year-on-year basis. And it was 31% of the total sales for exports to 1.09 million tonnes. When the global steel prices fell, in line with that, domestic business also corrected. Domestic steel prices fell by 16%.

And costs, we tried our best to manage our costs. Cost came down by 9% on a year-on-year basis. The EBITDA margin per tonne of INR 7,768 per tonne. In these results, there are 3 important points, which I would like to highlight. One is, there are 4 wholly-owned subsidiaries, which got the approval from NCLT for merger into main parent company, that is JSW Steel. So this approval has come, and we have given the effect of the merger in the books of accounts. But they are all wholly-owned subsidiaries. So consolidation -- consolidated numbers, there is no change. But the stand-alone numbers, you'll see the impact of merger of these 4 subsidiaries into JSW Steel. These 4 companies are Dolvi Minerals & Metals Private Limited, Dolvi Coke Projects Limited, JSW Steel Processing Center Limited, JSW Steel Salav Limited. These are 4 companies which got merged.

The second important point was the earlier 3.3 million tonnes steel planned at Dolvi was enjoying the sales tax incentive, the GST incentive after GST was introduced. That incentive scheme expired on 5th of August 2019. In the meantime, as you're all aware, we expanded our capacity from 3.3 million tonnes to 5 million tonnes. So the incentive relating to that expansion project, we received the in principle approval. In fact, this project expansion was completed in May 2016, but we have not booked in the books of accounts the benefit of this incentive due to nonreceipt of this approval from the Ministry of Industry, Government of Maharashtra. So that approval has been -- is in place in this quarter. So the amount accruing from May 2016 up to 30 September, 2019 amounting to INR 512 crores is accounted in this quarter. To give a breakup, out of this INR 512 crores, INR 466 crores was pertaining to the period before March 31, 2019, balance INR 46 crores belonged to this half year.

So these incentive relating to this 3.3 million tonnes to 5 million tonnes will continue in the future also. The next piece, the corporate tax reduction, which was announced through tax ordinance in September 2019, the company evaluated the availing the MAT credit, which is available in the books of accounts and also the outstanding deferred tax liabilities. So the company has the option to move to the new tax regime. We have evaluated this new tax provisions for the subsidiaries and also to the main company. In the case of 2 subsidiaries, that is JSW Coated and also JSW Industrial Gases Limited, we have opted to go for new tax regime, that is 22% plus surcharges. In the case of other companies, considering the MAT tax credit that is available, we decided to continue in the existing tax regime but with clear intention that we will move to the new tax regime after availing the MAT tax credit that is available today.

The intention is move to the new tax regime, then the deferred tax liabilities earlier provided, the differential temporary differences on account of change in tax from 35% to 25% effective tax rate, that can be reversed. So we have taken the reversal of extra deferred tax credit that is available in the books of accounts as on 30 September, 2019 was reversed. That amount was INR 2,150 crores on stand-alone basis; on a consolidated basis, INR 2,207 crores.

With that, if you look at the overall EBITDA for stand-alone company is INR 2,796 crores, which is 18.01% EBITDA margin. And the subsidiaries of Coated, ARCL, JSW Industrial Gases have done well. They contributed INR 271 crores in aggregate. The overseas companies continued to drag. The U.S. Plate and Pipe mill showed an EBITDA loss of $11.2 million, which includes $3.5 million of inventory losses. U.S. Plate and Pipe mill was doing well at the EBITDA level in the past. Again, this quarter, they came into red because the steel prices in the U.S. have come down so the capacity utilization was lower. Number two is inventory losses, which we had to take in the -- in this quarter. Now the capacity expansion, which we were doing -- the modernization of the Plate and Pipe mill which we were doing, the first part was completed. So the benefits we expect will start coming in from third quarter onwards in the Plate and Pipe mill. The coal mines, which we have it as a positive EBITDA of $1.8 million. The Ohio junction facility had an EBITDA loss of $31.6 million, including 13.17 inventory losses. Italy had EUR 6.9 million quarterly loss in the last quarter. So all in aggregate, INR 332 crores was negative from the overseas companies.

After netting out this, the EBITDA for -- on a consolidated basis was INR 2,731 crores. The profit after tax on a consolidated basis was INR 2,536 crores, considering the benefit of the deferred tax write-back. In the light of what we have done so far in the first half, so we also reviewed our guidance, considering the outlook for the second half. So we thought it is not possible to recover the quantities of volumes which we have lost in the quarter 1 -- in the first half. So accordingly, we felt that we should adjust the guidance approximately to the extent of around 3%. So we will be achieving 97% of our guidance, assuming that the second half, we will repeat whatever we have done in the second half of previous year, that is '19. With that, we will be achieving 97% of the guidance, both in terms of production and in terms of sales volume.

The next point is CapEx. Capital expenditure, we have given the guidance of INR 15,700 crores cash outflow in the current financial year. So we have also reviewed. We are focusing to complete the project at Dolvi, that is 5 million tonnes to 10 million tonnes. There's other special projects and also certain downstream projects like cold rolling mill unit at Vasind. Second, tin plate at Tarapur, and also second coke oven plant at Vijayanagar. There are some projects which we identified. Those projects, we can slow down the implementation and push it for next year. That's why the CapEx, overall cash outflow, we are restricting it in this year to INR 11,000 crores and I guess INR 15,700 crores guided earlier.

The overall debt of the company as on -- net debt of the company as on 31st -- 30 September, 2019 was INR 49,640 crores. The effective interest rate was 6.82%. The revenue acceptances were $1,252 million. The capital expenditure acceptances are $447 million. Debt-to-EBITDA is 3.23x. Debt-to-equity is 1.36x.

As regards to acquisition, Bhushan Power & Steel and also Vallabh Industries Limited, both are in NCLAT, the litigations are going on, whatever modifications we suggested, the hearings are continuing. The case in BPSL is posted for 25th of this month. So hearings will continue. In the case of Vallabh Industries Limited, all the arguments are completed. The judgment is reserved. Asian Color Coated Limited have been declared as a successful bidder and resolution plan has been submitted to NCLT.

As regards to outlook, I'll spend just a few minutes. Government has announced a lot of initiatives in the last 1.5 months. They said they will be investing total INR 100 lakh crores, INR 20 lakh crores per annum in the next 5 years, which is very positive for steel industry if these investments happen. Similarly, they also announced a lot of financial sector stimulus, the NBFCs or capitalization of banks or INR 50,000 crores for improving exports, INR 1,45,000 crores for tax concessions. There are lot of things which government has done. But if I have to talk about specific to steel industry, they have done anti-dumping duty on the Galvalume on China and South Korea and Vietnam. They have also introduced the steel import monitoring system, which will really help the industry to monitor the imports which are coming in either in the form of defectives or in the form of circumvention of the BIS standards and also to improve as far the industry is concerned, if some of the products which we are not able to produce, to work on that, to improve on that. So this is also a great initiative from the government.

Draft scrapping policy is put on the website by the Ministry of Steel for consultation with the -- all the stakeholders. So this will really improve the usage of steel if scrapping policy is finalized. Whatever we are hearing from the government is government is very committed to finalize this policy as early as possible. On exports, the remission of duties and taxes on export of products in U.S. MEIS from 1st of January 2020 is also a welcome step. The last one is the iron ore mining options. Whatever mines that would be expiring on March 31, 2020, Karnataka has taken the first initiative. They have done the auctions. JSW Steel could secure 3 mines. And now Orissa government has moved in the same direction. They have put 20 mines in the auction. Out of that, 5 mines are for captive purposes. So we have a chance to participate in these auctions. So the fear really that we all used to have that there will be a disruption. I think government is working to ensure that there's no disruption from a play of high, low.

Considering these factors, we expect the second half demand will pick up. We are seeing already some green shoots in the market. By this revival particularly in the TMT demand, volumes are moving in that particular segment. And also solar appliances, the piping sector, we are seeing some green shoot. Then there is credit flow started coming into the industry. So all these together, we expect the demand will not be lower than 5%. So it will be at least 5%. If you see the JPC numbers, this is giving 6 months. Overall demand is around 5%. So it will -- if not improve, at least, it will not fall below this 5%. And as regards to our performance in the second half, one is achieving this 97% of our guidance. The second is, the cost savings further, particularly the coking coal prices, which are corrected. So that benefit will come in the second half of this financial year. In addition to that, our captive iron ore mines, where we produced 1.25 million tonnes in the Q2 and the overall first half, we produced around 2 million tonnes. In the second half, we expect 2.5 million tonnes to 3 million tonnes to produce, so with that, more and more captive iron ore will be available to us. So with that, cost reduction benefit will come to the company. The second half will be better than the first half. Existing our performance of the first half, we have calibrated the CapEx. We will live within that CapEx expenditure.

With that, I'll close my comments and any clarifications that we have to give. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Amit Dixit from Edelweiss.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [2]

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I have a couple of questions. The first one is with respect to realization, if you can break up realization in domestic and export. I mean how much it went down by in this quarter, sequentially? And how much do you expect it to go down in Q3?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [3]

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So the overall MSR, I think, drop Y-o-Y is about 16%, and on a sequential basis is 9.5%. This is the blended MSR which we are talking about. So in terms of a price indication going forward, as we indicated, there is no further -- the price has bottomed out. We do not expect any further drops in the pricing. At the same time, the advantage of lower coking coal will flow in into the next quarter as well as cost advantages from our own iron ore. So therefore, the spreads, to that extent, will be improved. So bottoming out of price and maintenance of price going forward.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [4]

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Sir, is it possible to break it in export -- the decline in export and domestic?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [5]

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It is difficult to give you that at this point.

So that's a different area. So it's not exactly the like-to-like products, which we would be exporting or selling in the domestic.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [6]

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Okay. Sir, second question is on the CapEx deferment. While we have deferred the CapEx for downstream projects, these are -- as I understand, these are typically low payback period kind of projects, and that would have given you a higher premium. So I just wanted to know, understand or rationale for different peaks. I mean -- because -- do you suspect demand to be tepid for these kind of products or there is something else.

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [7]

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No. If you look at CAL project at Vasind, where we are spending almost close to INR 600 crores on fees, this particular project is anyhow to be commissioned in the next year. It is not in this year at all. So therefore, this particular project, we'll stop spending money in this year. We just said we will do it in the next year. So commissioning will happen in the following year, that is 2021 and '22. It is not the question of demand is -- potential demand is going to come down, but temporarily, yes, demand is weak. In the meantime, the PLTCM plus galvanizing lines, Galvalume lines, color coating lines at Vasind, Tarapur, are all getting commissioned. So those will get stabilized. Then by the time, this mill will be ready. Similarly, Tinplate. Tinplate 1 is already commissioned. So we are stabilizing the quality and pushing the volumes in the market. So the Tinplate 2, even if it is delayed for some time, by the time Tin 1 gets fully established in the marketplace, Tin 2 will be ready in the following year. The same story, even at Vijayanagar or at Vallabh Tinplate where we are seeing color coating lines will postpone for some time. So whatever we are already commissioning, by the time they get established, they get stabilized, the other projects will come in. It is only a postponement from this year. It's not that we have stopped these projects.

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Operator [8]

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The next question is from the line of Anuj Singla from Bank of America.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [9]

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The first question is for Mr. Acharya. So Mr. Acharya, you mentioned that the domestic prices have kind of bottomed out. So is it fair to assume that we are already lower than the antidumping duty level, $489, maybe effectively $500 level. Are we below that level already in the spot market, INR 35,000?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [10]

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So Anuj, $489, which is the antidumping rate, you're right. So from that perspective, we are lower today, yes.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [11]

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And sir, will it be also fair to assume that the price decline which has happened over the last quarter, not all of that has got reflected in 2Q? Some impact will come in 3Q as well? Will it be possible to quantify that?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [12]

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So yes, the exit rate will be different rather than the Q2 average. But I think rather than talking about an MSR because we don't know how the quarter would flow November, December, still could hold some potential. But I think on a spread basis, as I was explaining, that because of the cost benefits coming in on the coking coal, iron ore side as well as our own iron ore mines, additional volumes kicking in, we expect the spreads to improve.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [13]

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Okay. Sir, on that count only, coking coal prices, the spot levels have come down somewhere around $40 to $45 from the peak levels over the last quarter. So will it be possible for you to guide how much of that benefit we have captured in 2Q, and what can flow in 3Q?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [14]

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So we have captured about $10 of the coking coal benefit in quarter 2 and about $25 to $30 will flow into quarter 3.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [15]

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Okay. Okay. Wonderful. And lastly, one question for Mr. Rao. Mr. Rao, is there CapEx guidance you can give for FY '21 as well? What kind of CapEx number we should be expecting?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [16]

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We'll be able to really give exact numbers in the month of May 2020. But until that time, whatever numbers we have given earlier, that number will stand for FY '21. Then we will calibrate that number when we finalize our yearly numbers.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [17]

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Okay. And any comments on RCEP, sir, upcoming agreement? Is there -- has there been any progress with the government on -- excluding steel out of that agreement?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [18]

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What are we hearing from the government I think as and when we interact with them, that they are more keen to sign RCEP. But as it has been reported in certain press, that they wanted to take care this time that enough precautions are there while signing the RCEP that in case the imports into India of any product goes up substantially, automatic triggers will come in, and there will be duties -- duties will come into force. That type of mechanisms, so they would like to build in. I think they are moving in that direction. But how far they will be successful, we are not sure about it. But they are negotiating very hard. So my view is they will sign the RCEP with certain precautions.

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Operator [19]

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(Operator Instructions) The next question is from the line of Mangal Nevatia from Kotak Securities.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [20]

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So just a clarification on the CapEx. So our total CapEx of around INR 49,000 crores, that stays. And this year, we pushed 4,700 to next year. So are we talking about almost INR 20,000 crores to be spent in FY '21?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [21]

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No, it is not in that number. Out of the total INR 48,000-and-odd crores of capital expenditure program, when we really look back to what were the commitments that have been made, where commitments are not made, there are INR 7,000 crores commitments yet to be made. So therefore, we are focusing on those projects where commitments are not made. So the -- in INR 7,000 crores, still we have a chance that we can push some of these projects to '22, '23 -- no, sorry, '21, '22. So therefore -- that's why we are giving -- we are commenting that we will come back with the numbers for FY 2021 in the month of May. It is not that we are increasing the number of 2021.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [22]

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Okay. So I mean, after this INR 11,000 crores in '20, out of 49 we'll be left with around INR 24,000 crores? Is that the right number? INR 24,000 crores?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [23]

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Yes.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [24]

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Okay. All right. And sir, the CRM that we were expecting to commission October onwards. So that is witnessing around 6 to 9 months delay. Is that the right understanding?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [25]

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We said we will do in fringes. So the CPL line is already commissioned.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [26]

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Okay.

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [27]

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So that is also in advanced stage. So it will get commissions -- galvanizing lines are there. They are getting commissioned. If not in this quarter, early next quarter. So very good progress in regards to CRM.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [28]

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Okay, understood. Okay. Sir, one question with respect to prices. Is it possible to share what would be the exit price versus last quarter average price?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [29]

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No, it's a bit difficult to give you that. But as we said that the exit price is something which we feel has bottomed out because of various reasons, which we discussed in the call. So going forward, since the supply chain has de-stocked inventory to a reasonable extent and the international antidumping duties are prevalent in some of the products, we do feel that there is a possibility of prices stabilizing with a positive bias in quarter 4.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [30]

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Understood. And just one last small clarification with respect to incentives. So first quarter was around INR 36 crores, and only INR 10 crores is for the second quarter. That's the right calculation?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [31]

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Yes, yes, this is correct.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [32]

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So quarter average should be closer to INR 10 crores, INR 15 crores? Or it would be lumpy towards few quarters?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [33]

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No, no, it will not be lumpy. Because when Dolvi Coke Projects Limited which got merged into main parent companies, there were certain input credits outstanding, which are not set off. That is why that got set off in the quarter 2. That's why the overall incentive came down in the Q2 relative to Q1.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [34]

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Okay. So run rate is 36 for the -- I mean, around INR 140 crores, INR 150 crores annually, right?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [35]

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No, we have to take on an average around INR 25 crores per quarter.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [36]

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Understood, INR 100 crores.

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [37]

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INR 25 crores per month.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [38]

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INR 25 crores per month. Okay.

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [39]

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Yes.

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Operator [40]

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The next question is from the line of Ritesh Shah from Investec Capital.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [41]

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Sir, my first question is, in the press release, we do say that we have sought certain reliefs on Bhushan Power. Sir, can you please explain what reliefs have been sought and what it would mean to us going forward?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [42]

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Well, there are certain modifications which were done by the NCLT while approving the scheme. Those modifications, we took it up with the NCLT that they're not acceptable. Number one, relating to prevention of money laundering act, we said the specific relief is required, particularly in the context of where the banks have reported there was a fraud. So we said we wanted specific relief. That is one, which is not granted by the NCLT, so we took it up with the NCLAT.

The second one is the resolution plan does not talk about any closing adjustments. Closing adjustments, what I mean to say regarding working capital. By working capital is where you increase in current effect -- net current assets. That kind of provision is not there in the case of Bhushan Power & Steel, so we offered the annual base basis, including other things. Whereas the NCLT has asked and modified the resolution plan and said that the profit that accrues during CIRP period, they use the word profit, that belongs to the lenders. So we didn't have any idea what we -- what it meant. Is it closing adjustment? Is it EBITDA? Is it a profit? Whatever it is, it cannot be pertaining to the lenders. It has to be wanting to relief an applicant. So we took it up with the second issue.

Then the third issue is relating to the resolution plan. There is certain clarifications which we needed, relating to the litigations, that would come in from any other authorities. That one is not very clear in the resolution plan approval. So we wanted a clarification on that. There are three areas, where basically we went back to the NCLAT.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [43]

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Sir, is it possible for you to quantify, first, on the second point that you said, that is a working capital than net current assets? That's one. And secondly, you indicated under PMLA act. So is it something that JSW Steel and the promoters are entirely seeking basically ringfencing of all the liabilities or anything of that sort?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [44]

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No, we are not looking at promoters of -- Jasmine, promoters of Bhushan Power & Steel. What we are basically looking at JSW Steel and the corporate debtor that is Bhushan Power & Steel. We want immunity to these two. Whereas it was clear as regard to JSW Steel, but it is not clear as regards to corporate debtor, that is Bhushan Power & Steel in the future. And that is what we wanted.

As regards to the second question, which you wanted -- we also don't have information like how much EBITDA accrued during the CIRP period, how much current assets that are there right now in the company. We have no idea on that. So whatever amount that could be, we have a claim on that as for the resolution plan. It doesn't belong to the lenders.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [45]

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Sir, would it be fair to assume, until we have clarity on these 3 aspects, basically we won't take a hard stance to go ahead on Bhushan Power? I'll just -- related with the lower CapEx guidance, so I just wanted clarity on this first.

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [46]

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Yes. It is clear from our side that we are committed to this acquisition, subject to the resolution plan as we submitted gets approved.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [47]

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Okay. That helps. Sir, second question is for Jayant. Sir, you indicated that we don't expect prices to drop. Now prevailing steel prices are already below ABB. We are trying hard for exports, but export have proven difficult. I'm not sure of the system inventory numbers. But even if I look at our inventory data at stand-alone, it has actually bumped up by nearly 15 days. So how should we look at -- one is our inventory days? And secondly, inventory at the system level and consequently impact on local pricing.

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [48]

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So inventory as a channel, Ritesh, I think, has moved down because the -- over the last few months, people have been destocking. And we exposed in the last quarter, in general, if you look at the industry data, if you look at JPC numbers, it shows sequential increase in exports from India by 75%. So the inventory from the channel, I think, in this last quarter, has substantially corrected. That is one. Secondly, the imports in some of these products, I think, have gone down. The stock levels have gone down and the risk appetite for -- seeing fresh imports is limited given the (inaudible) in some products and the current weak economic scenario on the other side.

So international prices have also, by and large, bottomed with iron ore internationally remaining elevated. Coking coal has come down to some extent, but it still is not supportive of the steel prices today. So therefore you will see a supply side correction possibility in international markets from steel volume side, and that should be helpful for maintaining price stability in the international market. Similarly, in the domestic side, I think it will -- the current inventory status and a slight uptick in H2 in terms of demand and sentiment would help us to stabilize the prices from hereon.

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Operator [49]

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(Operator Instructions) The next question is from the line of Pinakin Parekh from JPMorgan.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division - Associate [50]

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Yes. I have two questions. My first is, if I look at the -- I mean, the export growth and volumes, the implied domestic sales volume decline is nearly 24%, 25% on a year-on-year basis, while the actual domestic consumption did not decline by as much. So to that extent, sir, did JSW on its own did not sell volumes in the market? Or were there specific issues? And should this trend continue in the next 2 quarters? Or should this domestic sales volume normalize for the company?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [51]

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It will normalize. The -- one is that over the last 2 years or so, we have been consistently focusing on improving our value-added mix and a large focus had gone into automotive and the [height and size treat] for various construction segment, et cetera. Unfortunately, both got impacted in terms of domestic demand. Automotive, directly and indirectly, especially the commercial vehicle had a big impact on us. So therefore, that area went down sharply. The other reason is that in the retail segment also, we saw liquidity squeeze, restricting purchase and consequent month inventory losses leading to deferring of purchases. We didn't want to push consciously the markets with lower pricing and thereby accentuate the fall further in terms of inventory losses. So it was -- we thought it more prudent that we take the [meter] out and take out the quantity through the export group. So the other thing is that we had domestic [government] orders for which, unfortunately some of these orders were put on hold or adequate funding was not available, which we expect that the funding should start and the hold should be removed in H2. So that would pick up. Domestic expenditures on the infrastructure side, oil and gas pipelines and water pipelines, we are already seeing some movement happening. So we should regain our market share. That's not a problem.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division - Associate [52]

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Sir, so just wanted to understand what you highlighted in terms of the domestic market, has that somewhat changed into October? And are you seeing signs of that in November? Or you think this is more 3, 4 months down the line?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [53]

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So we are seeing improvement in the construction side. So let's say, typically, TMT bars, we have seen the pickup has already started in the last few weeks. The movement is better. [Bylaws], it is better. The appliances sector, even in the last quarter, we did quite well as much as appliances last quarter went up Y-o-Y with 41% for us, solar went up by 18%. They continue to do better. We have seen some entry of government-funded projects coming in later part of this Q3, which would basically translate into volume gains from the infrastructure space in the second half. So it's picking up. Automotive, I will be cautious to say that, yes, the improvement in passenger cars and two-wheelers is happening, led by discounts on BS4 vehicles. So the retail side inventory is going down. However, commercial vehicle space will take some more time. And I think that maybe towards the end of the second half, we may see some improvement there.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division - Associate [54]

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Understood. My second question is, just if we take a step back, the net debt increase on a Q-on-Q basis, you mentioned -- the company mentioned in the call that it remains committed to the acquisition of Bhushan Power. Now sir, assuming that the NCLAT accepts JSW's appeals and make the required changes, and while steel profitability will improve, the outlook is not for it to go back to INR 12,000, INR 13,000 EBITDA per tonne anytime soon. In that context, will JSW remain committed to both the large organic CapEx plan, which it had announced 6 months prior and Bhushan Power acquisition? Or can we see some changes in terms of how the capital will be allocated between organic, inorganic growth in the face of the weaker margin environment?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [55]

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We already factored the acquisition of Bhushan Power & Steel while giving the numbers. I don't think that will undergo a change. Only the organic growth which we already committed, that expenditure, we will continue to incur with certain modifications if Bhushan Power & Steel happens. As I mentioned to you, out of INR 48,000 crores of organic CapEx program, INR 7,000 crores is yet to be committed. So that amount, we'll continue to review. There were INR 41,000 crores commitment is there. Certain projects, special projects and the projects which we have listed out to possibly push it to the following year based on the market conditions and also the kind of EBITDA which company would earn and also Bhushan Power & Steel acquisition.

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Operator [56]

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The next question is from the line of Ashish Kejriwal from IDFC Securities.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [57]

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Yes. Sir, two questions. One is on Dolvi expansion. I think -- because of the heavy monsoon also, is there a possibility of any delay in Dolvi commissioning? And if possible -- is it possible to give what kind of volumes we can expect from Dolvi in FY '21? That's the first question. And second question is, what kind of export mix still we are seeing that is in October? Because in second quarter, we have seen around 31% of the products. But in October, have you seen any change in that lot?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [58]

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If you heard about our calibration of CapEx, we talked about other projects other than Dolvi. So the focus to complete this 5 million tonne project -- 5 million tonne expansion project at Dolvi is a priority. Then if there are any slippages, so if you ask me, then the monsoon really affected the overall progress of the work. We were just renewing and trying to expedite. So this, I think, we'll be able to give the correct picture maybe a quarter out -- in the next quarter. But still, when we review, the project can be commissioned by March 2020 as planned, but the monsoon should stop. Still we are seeing -- it is raining. Even yesterday, there was a heavy rain in Dolvi. So we are expecting that now monsoon is not there. No rains will happen. But we'll be able to mobilize the contractors and the workers. When rain happens, everybody leave the site. That is a problem. So as per the current progress, we're still online to complete by 31 March '20. That is what we're working for.

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [59]

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Export, your question regarding 31% in this quarter, I think the average for the first half is 24%. Our exports, if you see the last few years, we have been hovering in the range of 20% to 25% most of the time. So we will be in this range going forward as well, and we will look at H2 in that light.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [60]

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Fair enough. And sir, one more thing. In fact, when we are talking about the asset, you said that there is a possibility that government will go for it and there will be automatic trigger which can come with some import increases. But when we are looking at the total import rate, there are more than 80%, 85% of the imports are coming from these countries, where we will not have any duty. So is it safe to assume that whatever import duty, 2.5%, which we are enjoying right now for some of the -- for many of the products of any other country except FTA, that will no longer be valid going forward if we find ourself in that range?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [61]

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China is included. What you are saying is right, but we have to see what type of auto-trigger mechanisms that would be agreed upon and to accept is everybody's guess, whether it will be a 3-year average, it will be a 2-year average or a 5-year average or last year. These are all negotiations finally what will come in. So what is -- what is comforting to us is government is negotiating on this particular point after having seen the fall out in the FTAs, which has happened. That is one positive step which we are seeing in this direction.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [62]

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And when is the last date, sir, for that? It's 30th November?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [63]

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What we understood is post November. If it is not stated, then we will do a high-level meeting at very senior levels. Well, in that meeting, they will conclude, whether it will be done or it will not be done.

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Operator [64]

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The next question is from the line of Saumil Mehta from the BNPP Mutual Funds.

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [65]

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Sir, first question is, it's going to be auto-contracts for 6 months and have we time lines on our auto-contracts for the second half? And what would be a very qualitative across reduction what we are looking at?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [66]

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The auto-contracts are under discussion and negotiation, so they should be finalized in this quarter.

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [67]

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But from the initial thoughts, it suggests that there can be a decent 5%, 10% reduction or probably it's difficult to comment at this point in time?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [68]

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There would be some correction because the first half prices have been stable for the automotive customers. So there would be some drop in the H2 for the automotive. But that discussion is on. It would be preemptive to comment that final number now.

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [69]

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Sure. And my second, with respect to your exit prices now from our channel checks and the other checks suggest that the exit prices were closer to INR 2,000 to INR 3,000 lower versus the quarter average. How different would we be looking at probably our exit prices versus the quarter 2 average?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [70]

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So I think rather than handling the price side as we would like to put in, that it is from a cost perspective, we are reducing our cost in the next 2, 3 months on account of coal and iron ore coming in from our own mines. Also, some cost initiative efficiencies, which have been worked out. So the spread in the next quarter would improve. But we don't expect prices to drop further so therefore the spread will improve. So if that satisfies (inaudible).

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [71]

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Okay. And so my last question is, have you seen some reduction in prices for October as well and start of November?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [72]

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No. Actually, in the long product side, the prices have stabilized quite well. As a matter of fact, on the retail side, there is an uptick on the (inaudible). As far as the flats are concerned, currently we see a stable price environment. But we will -- as I said, that, that's what I am expecting that it is bottomed out.

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [73]

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But there was no price cuts over the last month or so. Is that a fair assumption?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [74]

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Yes. So our last price correction happened in the month of September.

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Operator [75]

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The next question is from the line of Indrajit Agarwal from Goldman Sachs.

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Indrajit Agarwal, Goldman Sachs Group Inc., Research Division - Equity Analyst [76]

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I just have one question more on the industrial side. Of the 8 million tonne annualized export and import that India generally has, can you help us understand how much -- for how much MIP or ABB has already been triggered? And how much of it is special steel, which in spite of ABB being held down compulsory have to import? I want to understand that how much of that export and import can actually go off because of ABB?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [77]

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So the hot-rolled imports usually are in the range of 2 million-odd in a year. So hot-rolled and cold-rolled are items which are under ABB right now. So to that extent, they will get shielded.

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Operator [78]

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The next question is from the line of Vishal Chandak from Emkay Global.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [79]

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Sir, so if you could just turn over to Slide 17, where you have a slide on the picture of EBITDA for the second quarter of last year and quarter of this year. We see 3 elements. One is volume decline, NSR decline and there's the cost improvement. If you could just help us -- I understand the efficiency part would be within somewhere between the cost side. So if you could just help us on what elements of costs are included over here in terms of breakup coal, iron ore, electrodes, et cetera? And how much is the efficiency parameter here?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [80]

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No, it is difficult to give a breakup of the INR 1,165 crores, how much is attributable to price, how much attributable to usage, how much it is attributable to other factors. So this is a composite information, where cost reductions are happening due to various factors attributable to the events.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [81]

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Sure. Okay. And then lastly, you mentioned that there are 2 one-off items in this result. One is the grants, which we have taken for the past period as well as the reversal of the DTL. So if I were to normalize this on a like-for-like basis, then what would be the operating profit after tax for this current quarter?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [82]

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The total profit before tax incentive, that is PBT, if you look at it, is INR 688 crores, if I recall correctly. So the INR 688 crores includes the tax incentive. Then one point which we have to understand here is that it is not just one-off item. 1st of August 2019, INR 70 crores to INR 80 crores per month incentive was used to come up to 3.3 million tonnes. It is not there for the month of September. It is not there for most part of August. So INR [70 crores to INR 140 crores], which was there in the earlier quarter, is not there on the 3.3 million tonnes. That has gone. In lieu of that, this INR 512 crores has come in, out of that INR 46 crores pertains to this year, balance INR 466 crores pertains to previous year. I don't call it as a one-off item. Because if you see every month now we are giving the guidance of INR 20 crores, INR 25 crores will come in. So this amount itself is INR 300 crores. So from that point of view, this will more or less, I should consider as operating profit, operating PBT going forward in the future because one compensates the other.

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Operator [83]

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We will take the last question from the line of Sumangal Nevatia from Kotak Securities.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [84]

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Just one follow-up. On the cost savings, you shared about the coking coal cost savings. If it's possible to quantify what cost savings will have in iron ore and other -- some cost savings projects which will contribute from Q3?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [85]

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There are series of items which contributed to the cost savings. One is iron ore captive and also not using the imports from (inaudible). Coal side, which we already told about that. Similarly, natural gas prices have come down. So that has contributed. Thermal coal prices have come down. That's why cost of power -- producing power has come down. Stores and spreads, there is a lower consumption. So there are several areas, where cost reduction has happened.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [86]

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No, I'm talking about 3Q in terms of expectation of cost reduction, what will be, if any quantification is possible for iron ore and other cost efficiency projects?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [87]

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In the Q3, (inaudible) is the (inaudible) captive iron ore that is one area where we can get lumps and [find] from our own mines. It is 1.25 million tonnes of what we have got in the Q2. In the Q1, we have got only 0.75, so total 2 million tonnes. That will go up to 2.5 million tonnes. That is one advantage of (inaudible) million tonnes which will come in. Then the iron ore prices have come down in the Q2. So that impact will come fully in the Q3 and Q4, plus the line cost, electrode cost, wherever reductions have happened, refractory costs, wherever it has happened. The impact of that will be coming. In the monsoon period, particularly in the Q2, whatever efficiencies in the fuel side, that we could not achieve in the Q2. There is a monsoon, there will be high moisture. So fuel cost will be high. [PCA] injection will be lower. All will get corrected in the Q3 and Q4. So again, fuel efficiency, very, very good in the Q3 and Q4.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [88]

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Understood. So when we're talking about spread improvement, is it from spot or exit spreads? Or is it from the 2Q spread levels?

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Jayant Acharya, JSW Steel Limited - Director of Commercial & Marketing and Non-Independent Executive Director [89]

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The Q2 spread levels.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) - Analyst [90]

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Okay. Okay. And one just last question on the auction, you said, I mean, you are encouraged with the government initiatives and maybe disruptions won't be there. But just as is there any restocking happening by us or by industry, if you can share any thoughts on that, sir?

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [91]

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Interruptions, no to say, it is divided into Karnataka and (inaudible). With regards to Karnataka, we don't expect any disruptions in the state of Karnataka. So we expect something positive will happen on the (inaudible) mines. Therefore, there could be more coming into the market in Karnataka. Then in the case of [Orissa] there is one more change which is expected to come in. That the automatic transfer of existing approvals to the new (inaudible) at least for 2 years, we can operate under the old approvals. We will (inaudible) under an advanced stage. If that comes in, we don't expect disruption. If auctions happen, these approvals are transferred for 2 years, then there's no issue. Assuming that it won't happen, there is some problem will come in, then there are 2 comforts which we have, where in permitted against saying, which is (inaudible) India. 25% of the dumps which they have, they can sell in the market, which is also quite a substantial quantity. Our understanding is we've 40 million tonnes -- 25 to 40. This is a number which we hear in the market. There have been these kind of stocks. So there will be auction of those materials from steel authority. Over and above that, the material which is lined with various mining companies, they are not able to because the logistics will not permit. So once the existing mine stop, then logistics will permit to move that material. These 2 will come into the market. So in either way, we feel that the disruption possibility is limited, but we are cautious. We are steady. And if there is a problem, then Q4, we will take appropriate steps.

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Operator [92]

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That was the last question. I now hand the conference over to Mr. Rao for closing comments.

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M. V. S. Seshagiri Rao, JSW Steel Limited - Joint MD, Group CFO & Non-Independent Executive Director [93]

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Thank you very much. And as regards to Q3 and Q4, we are quite optimistic. Demand will revive and come back. It will be far better than what we have seen in the H1. Second is we will be able to reduce the costs in the quarter -- in quarter 3 and quarter 4, and able to maintain, if not improve the margins much better than what we have seen in the Q2. Then we will be completing the project expansion at Dolvi. We'll be focusing mostly on that expansion project by calibrating the capital program. And we make all the efforts to meet our guidance of 97%, which we have given. The last one is we are working very hard to ensure that Q3 and Q4, we'll focus our efforts in bringing stability and improvement in the overseas operations. The last one is to participate in the iron ore auctions and secure more and more iron ore going forward, thereby we'll be able to get some capital sources to run our Dolvi and (inaudible) units. Thank You.

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Operator [94]

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Thank you very much. Ladies and gentlemen, on behalf of IIFL Institutional Equities, that concludes this conference call for today. Thank you for joining us. And you may now disconnect your lines.