Release Date: October 20, 2023
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Jindal Stainless Ltd (BOM:532508, Financial) delivered satisfactory volumes in Q2 FY24 amid muted global demand, with a significant increase in domestic volume due to robust domestic demand.
- The company successfully commissioned the incremental capacity of its hot strip mill in Odisha, reaching a 3.2 million tonne capacity.
- CARE upgraded Jindal Stainless Ltd (BOM:532508)'s credit ratings to AA from AA-, reflecting consistent improvement in sales volume and better-than-expected EBITDA per tonne.
- The company has become a member of Responsible Steel, a global nonprofit multistakeholder standard and certification initiative, highlighting its commitment to sustainability.
- Jindal Stainless Ltd (BOM:532508) announced an interim dividend of 50%, or INR1 per equity share for FY24, marking the third dividend in the last six months.
Negative Points
- The company faces challenging macroeconomic conditions on the export front, with weakened global demand and pricing pressure affecting export volume on a quarter-on-quarter basis.
- Unchecked inflow of subsidized and substandard foreign imports, particularly from China, continues to distort the level playing field against Indian manufacturers.
- The Indonesian subsidiary, PTJSI, is facing unfavorable market conditions due to Chinese imports, leading to the decision to explore options for selling, liquidating, or divesting the equity stake.
- Despite efforts, the company has not seen immediate green shoots in the European export market, with expectations of improvement only from January onwards.
- The company’s EBITDA per tonne guidance remains impacted by subdued export markets and the pressure from Chinese imports, maintaining around INR20,000 per tonne.
Q & A Highlights
Q: I wanted to understand in terms of your sales mix, which we are currently running at around 2.2 million ton level, how much it is supported by the old existing plant and how much the new plant has now contributing to the volumes?
A: It's an integrated unit. We are in the ramp-up phase with the expansion that we have just completed in March, and we expect in the next two years to be completed. This year, we will have at least a 20% volume growth compared to last year. The mix of volumes is coming from both the old and new capacities.
Q: How do you see the marketing environment doing over the next three to six months, considering the easing of nickel and raw material prices?
A: Raw material prices eventually get passed through. However, there is a significant anomaly between chrome ore and ferrochrome prices. Chrome ore prices have jumped more than 30%, while ferrochrome prices have only increased by 4-5%. This has delayed the pass-through to consumers. Additionally, Chinese imports continue to distort the pricing ecosystem. Despite these challenges, we are maintaining our guidance of around INR20,000 per ton for the year.
Q: What is the progress and timeline for the Tsingshan JV and Rathi Steels investment?
A: The Tsingshan JV is on track, and we expect operations to start by Q1 of FY25. For Rathi Steels, operations are expected to start by December. We have invested an additional INR100 crores to stabilize and improve plant efficiency. There are no immediate plans to further enhance capacity at Rathi until we see how the unit performs.
Q: Can you detail the cash flow bridge for JUSL, given the strong cash flow at the EBITDA level but minimal debt reduction?
A: JUSL earned close to INR400 crore EBITDA in H1. There was a receivable built up from JSL, which was not paid. Consequently, there was a dividend of INR200 crore paid by JUSL to JSL post-quarter, which has now been received by JSL. This cash was upstreamed efficiently, and we have also seen working capital optimization, freeing up almost INR500-600 crores in the system.
Q: What is the capital allocation framework for future expansions?
A: We are working on our plans and will announce further capital allocation next quarter. We are evaluating our new investments, including Rathi and Indonesia, and will consider how the export market performs before making further announcements.
Q: What is the strategy behind slab procurement and its impact on capacity utilization?
A: Slab procurement is viewed as a raw material option. We can either import slabs or bring in scrap and other raw materials, depending on price and efficiency. The market is already there, growing at 7-8%, and slab procurement is more about margin and raw material benefits rather than market development.
Q: How do you plan to maintain EBITDA margins despite the increase in Chinese imports?
A: Chinese imports impact us more in low-margin segments like hollowware, utensils, and pipe and tube, rather than high-end sectors like auto and white goods. Our margins are more affected by subdued exports. We expect margins to remain around 19.5% to 20% until exports pick up.
Q: What is the expected payback period and IRR for the NPI project?
A: The NPI project is expected to have a payback period of three to four years, with an IRR of up to 25%. Our capital allocation policy targets projects with at least a 15% IRR.
Q: What are the expected cash flows from the Rathi Steels and Tsingshan JV projects?
A: For Rathi Steels, we expect initial low margins of around INR8,000 to INR12,000 per ton as we stabilize and then move to higher-margin products. For the Tsingshan JV, with a $157 million investment, we expect an annual contribution of around $39-40 million, translating to INR250-300 crores.
Q: What is the impact of the reduced export levels on the product mix and capacity utilization?
A: The product mix for Q2 FY24 was 36% for the 200 series, 44% for the 300 series, and 20% for the 400 series. Reduced exports have slightly lowered the 400 series and increased the 200 series. We aim to utilize our capacity fully, exploring both stainless steel and carbon steel options.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
