As Hot As Iron

Updated: Aug 31 2003, 05:30am hrs
The Jindal Steel & Power (JSPL) stock surged by nearly 50 per cent to Rs 725 in a month after it announced the first quarter to June 2003 results. It posted a 59 per cent growth in net profit on the back of improved global sponge iron prices. JSPLs total income soared by 63 per cent to Rs 302.7 crore. It recorded 3.5 per cent growth on y-o-y basis in sponge iron production.

The company has been maintaining growth trend for over past four years thanks to its complete backward integration of sponge iron manufacturing. It has its own iron ore mine, coal mine, captive power plant to take care of raw material requirements at reasonable cost. JSPL derives a bulk of its revenue from sponge iron (around 75 per cent).

The demand for sponge iron has gone up owing to a rise in demand of steel and lower availability of scrap in the international market. This has resulted in firming up of prices of sponge iron in India.

The rising steel production has fired an increase in JSPLs captive consumption of sponge iron. The company does not want to lose its current 25 per cent share of the coal-based sponge iron market. Therefore, JSPL has embarked on an expansion plan to raise the sponge iron capacity to 13 lakh tonnes from 6.5 lakh tonnes.

The two-phase plan, which will increase the companys capacity of sponge iron to 13 lakh tonnes and power generation by 50 MW to 255 MW, is expected to be completed by September 2005.

The company will fund Rs 275 crore by way of internal accruals and balance of Rs 275 crore through debt. Payback period of all these projects combined is 3.5 years and internal rate of return is 30 per cent. JSPL, like other companies in the industry, is now in a position to raise finance at attractive, single-digit rates thanks to hardening of steel prices and soft interest rates.

Hot trial runs of the Rail & Universal Beam Mill, an ambitious project of the company commenced in the month of February 2003, one month ahead of the schedule. The mill will produce worlds longest rail of 120-meter length, first time in India. The mill will also produce large parallel flange beams and columns.

In a major effort to reduce financial cost, the company has redeemed Rs 60 crore high-cost preference shares out of the total preference share capital of Rs 71 crore. The company has successfully renegotiated lower rate of interest, converted existing rupee loans into foreign currency loans and also offered prepayment in some cases. These measures are expected to reduce financing cost by more than Rs 20 crore in FY 2003-04. This will help in reduction of project cost and improve the bottomline.

JSPL expects to perform better in the rest of the current fiscal as steel outlook is bright and sponge iron prices are expected to remain firm.