Don’t think auto sector demand will weaken in Q3, Q4: Seshagiri Rao

Seshagiri Rao, Joint Managing Director and CFO, JSW Steel, tells Shubhra Tandon that the growth momentum will continue in the second half of the year.

By:October 27, 2020 10:51 AM


JSW Steel reported strong numbers for the September quarter, with an all-round improvement in revenue and margins as business activity picked up. The auto sector did particularly well among the user industries, with steel sales to automobile industry surging 33% year-on-year. Seshagiri Rao, joint managing director and CFO, JSW Steel, tells Shubhra Tandon that the growth momentum will continue in the second half of the year.

The numbers were quite strong in Q2, volumes were up substantially both compared to last year as well as sequentially. Would you say the worst has passed or are there still some uncertainties?

Yes, I feel that the worst is behind us. We have seen strong recovery in business activity compared to Q1FY21, there is still some softness compared to last year, but there are seasonal factors too that impact demand in Q2. However, overall, the environment is upbeat and we think that the second half will see strong growth momentum.

How is the demand for the rest of the year looking like? Which user industries are showing promise?

Sales to the auto industry went up 33% y-o-y. Nobody expected this type of revival in the auto sector, even though commercial vehicle sector is still lagging behind, but we are seeing very good improvement as regards to offtake by auto sector. Additionally, there’s good traction in the coated steel products, appliances, packaging, solar and also government-aided projects. Rural demand has been resilient and good monsoon and government initiatives will improve demand further. Overall, demand for steel was down 10% year-on-year, but it is a significant improvement from the 50% decline seen in Q1. Flat products were down 6.5% y-o-y, while long products demand fell by 13% y-o-y. Long products demand was impacted by the monsoon, and remained low. However, construction activity has gained pace now and Q3 and Q4 should see good demand … Packaging and colour coated areas saw good offtake, this should also continue in the rest of the year.

Is the auto sector witnessing pent-up demand or is it sustainable?

In the auto sector, the commercial segment is still lagging behind, whereas tractors, two-wheelers and passenger vehicles are doing reasonably well. I don’t think this demand will weaken in Q3 and Q4 mainly because it is the festive season and also the government’s very focused attention to give either fiscal incentive, or fiscal stimulus or monetary transmission in the rural India. Therefore, that should stimulate the demand … On a year-on-year basis it will take some time, month-on-month there is definitely an improvement that I see. If you look at tractors also, there has been a huge improvement in October numbers, so it is not correct to say that there is no demand in rural India.

Did you face any Covid-led disruptions to operations this quarter?

There were no Covid-related disruptions, In fact, our operations are back to pre-Covid levels. We achieved an average capacity utilisation level of around 86% for the quarter. This is in line with that of pre-Covid levels of 85% achieved in the second quarter of the previous year. However, there were some disruptions due to unavailability of iron ore. Donamalai mines in Karnataka were not working. Also, due to increase in exports, evacuation of iron ore from other mines remained a challenge. However, we hope that the situation will normalise this quarter onwards.

How were the steel prices during the second quarter? What is the outlook on steel prices for the second half of the year?

In the second quarter, the prices have gone up by 11%. International prices went up by 16%. There has been an improvement in sales realisations even in India, though at a slower pace compared to that globally. We are seeing a good recovery in the steel prices and the situation is expected to continue in this quarter and the next.

The costs during the quarter were substantially lower. Is this reduction sustainable?

Majorly, it was due to natural gas price. Natural gas prices have come down. So that enabled us to reduce the prices, particularly in the Dolvi unit. Over and above that, the power cost is also lower because thermal coal prices have come down. So this has contributed to lower power cost and the lower gas prices, which is reflected by the lower power and fuel cost. Coking coal as a blend would remain similar in this quarter due to the volatility which coal has exhibited. Iron ore prices have gone up due to supply constraints, which is impacting costs. Around 5% to 7% there, plus mining cost which we are paying extra. In that regard, if we look at JSW Infrastructure, they have made their 18 million tonne iron ore terminal at Paradip Port operational. So, we did not go to Dhamra, and we can handle everything from Paradip. So that is how we will be able to reduce, to some extent, the cost of transportation and port charges in bringing the iron ore. We are also focussing on reducing cost of transporting iron ore from the mine to the railway siding. The third is mining cost itself. We will work on reducing the mining costs further down. In the long term, we wanted to set up a slurry pipeline to bring iron ore from the mine to the port. That will take time. But once we do that, logistics cost will come down drastically.

The share of value added and special products has now increased substantially to 51% of sales volumes. You will also have Asian Colour Coated soon with you. What can we expect from this segment in the next 2-3 years?

The demand for colour-coated products is on the rise from steel-using industries. There is a substantial increase in demand. We already have plans to expand Vasind, Tarapur and Kalmeshwar, from 1.7 million tonne capacity to 3.6 million tonne by the end of this financial year. Once Asian Colour Coated comes in, it will increase this capacity further by one million tonne. Since it is a high margin business, we expect our margins to get a further lift from this segment. There will be a `4,000-`5,000 per tonne benefit, which will be favourable for the margins.

Is everything clear for the acquisition of Asian Colour Coated? What are the plans there?

The NCLT has given the approval to our plans for acquiring the company. However, we are still awaiting the final order to see if there are any modifications. If everything is same, then we are good to go. It will not be appropriate to discuss any plans till we have the final order.

Although Supreme Court is yet to give final order, by when do you think Bhushan Power and Steel (BPSL) resolution happening?

I think it should get settled by December 2021.

Do you wish to renegotiate terms of the BPSL deal?

No, we are committed to the plan that we have submitted and will abide by it.

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