Six years back Sajjan Jindal was in a bind. Although JSW Steel had edged past Tata Steel to become the country’s second biggest steel producer, his joy was short-lived. With the Supreme Court ordering the suspension of mining in Karnataka in July 2011, supplies of iron ore were badly hit.
Without captive ore, Jindal’s steel plants, which needed 16 million tonnes of ore were starving; the Vijayanagar plant was running at less than a third of its 10 mtpa capacity. In September, the court asked NMDC, the state-owned miner, to annul all long-term contracts with steelmakers in Karnataka and start selling only through auctions.
By end-2012, mining had resumed in Karnataka. But by then the chairman and managing director of the JSW Group was up against a downtrend in steel prices.
Prices of HRC (hot rolled coil) dropped from $880 per tonne in March 2011 all the way to $364 per tonne in December 2015, according to data on Bloomberg.
The Indian market was innundated with cheap imports from Japan, China and Korea. Together with other steelmakers, Jindal, who is known to be close to the NDA government, lobbied hard for higher import duties. The government stepped in to impose an MIP (minimum import price) which put cost including freight (CIF) prices higher by anywhere between $90-200 per tonne.
More relief came in once the steel cycle turned and prices started moving up; in 2016-17, average realisations for HRC were in the region of $435 per tonne. Analysts now forecast a price of $450 per tonne in 2017-18.
For JSW Steel, a stand-alone loss of close to Rs 3,500 crore in 2015-16 swung to a profit of Rs 3,577 crore in 2016-17.
As analysts at Kotak institutional equities (KIE) point out, the net debt to Ebitda, which stood at 6.4X in March 2016, dropped to 3.4X in March 2017, and should further fall to 3.1X in March 2018.
Better realisations should take the stand-alone Ebitda per tonne to Rs 8,244 in 2017-18 from `7,815 in 2016-17. And free cash flows, which turned positive in 2016-17 at around `2,850 crore, after being negative both in 2014-15 and in 2015-16, should stay that way.
Today, 57-year old Jindal is so confident of his balance sheet, he has made an offer for the near-bankrupt Monnet Ispat.
That might seem audacious since the group’s capex requirements are not small; JSW Steel alone is looking at close to Rs 8,000 crore of capex in each of the next three years.
But Jindal is clearly not about to pass up an opportunity where he can buy up distressed assets cheap. Ore or no ore, he’s not stressed.