On the back of an improving performance of its Dolvi unit (earlier JSW Ispat) and an aggressive hunt for iron ore assets, JSW Steel, the country?s third-biggest steel producer, is looking at servicing its debt from its incremental cash flows. The company currently has a total debt burden of R32,000 crore.

Analysts feel the debt burden of the company is too huge and could throw a spanner in the wheel of its growth plans but Sheshagiri Rao, joint managing director and group chief financial officer (CFO) of JSW Steel, disagrees. ?First of all, I don?t even agree that my debt burden is very high. If you look at the numbers, we have a comfortable debt gearing of 1.44, which is manageable. Besides this, our improving operations at Dolvi unit and a positive outlook on the long term iron ore availability will be enough to service the debt with incremental cash flows,? he said.

The company?s 3.3 million tonnes per annum (mtpa) Dolvi unit is expected to contribute substantially towards the company?s operating profit from the first quarter of the next fiscal.

?Once the pellet plant and the coke oven plant is ready, Dolvi will be in a position to surpass the Ebitda of Vijayanagar. This should happen by the first quarter,? Rao said.

Ebitda is a measure of the operating profit of a company.

When Ispat Industries was acquired by JSW in December 2010, the unit had a negative Ebitda of R77 crore. This was improved to R1,180 crore by the end of March 2013 by reducing its power cost, gas requirement and targeting nearby markets to sell its products under a slew of short and medium term measures.

?Under the long-term measure, we decided to source iron ore from Bellary instead of from far off states of Chhattisgarh and Orissa. This has still not worked out due to mining ban. But the coke oven and pellet plant will be ready by the current quarter and the benefit will reflect on the balance sheet by the first quarter of the next fiscal,? he said.

While he did not share the numbers, analysts said the Dolvi plant currently clocks an Ebitda per tonne of R3,500 while Vijayanagar is double of it. ?Therefore, to surpass the per tonne profitability of the Vijayanagar plant would mean an uphill task and it looks unlikely in the absence of iron ore from Karnataka,? said Goutam Chakraborty, analyst (institutional research) from Emkay Global.

Rao said that the company is keenly looking at bidding for iron ore mines in Karnataka and Goa, which can also reduce its iron ore procurement cost from R3,200 per tonne to R1,200-1,500 per tonne. These will also help the company in increasing its cash flows.

?The problem with all researchers is that they are looking at my lagging debt to Ebitda and say it is very huge at 4.4 times. This is a very wrong way to look at it,? he pointed out.

Explaining further, he said the current gross debt is R32,000 crore and people take into consideration the FY13 Ebitda of R7,200 crore which is at production volumes of 8.5 mtpa. But considering the company?s current year?s expected volumes of 12 mtpa, improvement in Dolvi?s Ebitda, better iron ore situation than last year and better product mix, the current year?s Ebitda will cross last year?s by a big margin and reduce the debt to Ebitda burden substantially, he said.

He added that in fact, the company will be in a much better position to go for a major buyout of Stemcor too if the deal goes through.

International brokerage Goldman Sachs, in a latest report on the steel sector said that JSW?s capex cycle is largely behind it, and they expect net debt/Ebitda to decline to 2.5 times by FY16 (estimated) from 3.3 times in FY14 (estimated). The increase in debt in FY14 is on account of the Ispat merger