Jindal Saw Limited (JINDALSAW) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 results call of Jindal Saw Limited hosted by Emkay Global Financial Services. We have with us today, Mr. Neeraj Kumar, Group CEO and Whole Time Director; Mr. Vinay Gupta, Global Head Treasury; and Mr. Narendra Mantri, Head Commercial and CFO. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Anas Dadarkar of Emkay Global. Thank you, and over to you.

Good morning, everyone. I would like to welcome the management and thank them for giving us the opportunity. I would now hand over the call to the management for opening remarks. Over to you, sir.

Good morning, friends, analysts, stakeholders. As you know, yesterday, we had our Board meeting where we declared the third quarter results for this year. As you would have seen, there has been an improvement on expected lines. See, as you know, has got -- is typically always better than our Q2 results. So we had our top line of INR 2,748 crores with an EBITDA of [ 414 ], PBT [ 211 ], NPAT [ 120 ]. This should give you an indication of -- that we are on target for our annual performance. We expect that we will be closing the year based on expected lines. And we also have a good visibility for the next 3 quarters, at least. Based on our order book, based on our business in the pipeline, we see that we should be able to do well. And next year, we are hopeful of a little better performance because now we are seeing that the government of India emphasis on the infrastructure development, particularly in the water sector, that is -- that has always been there, but now it is beginning to trickle down to the level of tenders and some business coming on ground. So based on that, we are hopeful of a good outlook and a good business over the next 3 quarters, for sure. Now just looking at the results. One thing that -- or a few things that all of you would have noticed. There is an exceptional item where we have made a provision for approximately INR 34 crores to INR 35 crores. This is largely on account of our scaling down of the Italy business. As you know, Jindal Saw, we had a subsidiary in Italy, where we were doing finishing. Now we wish to completely shut down all the manufacturing or the finishing activity. And just have a presence in Italy through stock and trade. So in the curtailed business scenario, we expect that, that business should make profit because we would be supplying all the pipes now, either from India or from Abu Dhabi because it did not make sense to continue with that business in Italy, especially looking at the regulatory environment that the entire European Union has come up with. So the exceptional item is largely on account of scaling down of the Italy business. This is our best estimate. Currently, we are engaged with the Trade Union, the authority and everybody to shut it down. We expect that we would be able to contain the losses, or we would be able to cut down on the expenses, but some of the loose ends have to be tied yet and there could be some more that we may have to provide, but it would not be very significant. And especially looking at the performance of the company, we feel confident that we would be able to easily absorb that. So that would then make going forward, Italy, the business would be only for stocking and trading. If you compare our finance cost for this quarter compared to Q3 of last year, INR 128 crores for this year, INR 82 crores last year. Appears a big gap, but that is largely on account of -- last year, we had the benefit of foreign exchange fluctuation going the positive way. So otherwise, the interest cost on a trailing quarter is more or less consistent. The debt is beginning to slow down. In fact, now, there has been further reduction of debt in January, as we speak. So what debt figure of INR 4,100 crores of total debt that you are seeing. Today, it stands at less than INR 4,000 crores. Actually, it's around INR 3,900 crores. And we expect further reduction as we close the year on the debt portion. EBITDA margin for us has been stable 15 -- above 15%. And we have maintained that now for a few quarters. That's the nature of our business. As we have always maintained that -- Jindal Saw business model is very robust. We have a mix of LSAW, HSAW, DI, now stainless, seamless, HDPE also has been added and pellets. So that gives us a very stable and a robust business model. But it also then sobers down the spikes that you may get, if there is a certain boost in any one sector. So there is a balancing effect where both the downside as well as the upside gets sober down when you look at the business plan for -- or the business model of Jindal Saw. That's one of our strengths. One more thing that I wish to address up front is you might have seen in our notes as well as some people may have read the reports. We have received a further INR 500 crores released through the high court in the NTPC arbitration, which is going. Based on this now, probably the high court would speed up the hearing, and we expect that in the next quarter or so, at least, we should be able to cross the high court stage. Now this money that we have received INR 500 crores, out of which approximately INR 200 crores have come up to Jindal Saw, which has largely gone to address the loans and advances that we -- Jindal Saw had given to JITF. And that money has been used, again, to reduce Jindal Saw debt. That's how I mentioned that today, the debt of Jindal Saw stands less than INR 4,000 crores, it's INR 3,900 crores. The balance INR 300 crores that has been received has gone to satisfy the liabilities and the holding group companies for where the bank guarantee was given. Because, as you know, these money, while the case is on, while the judicial process is on, all these monies are getting released by -- against a bank guarantee. So we had to provide a bank guarantee to the high court. The bank, which was -- which provided the bank guarantee under the structure, this INR 300 crores had to go towards their security, their satisfaction of certain outstanding's, et cetera. Turning our attention to Abu Dhabi. Abu Dhabi, as you know, has seen or that region has seen a lot of political instability, but the good news is that, at present, now things are all beginning to settle down. Our exports to Iraq has resumed. As we speak, we have letter of credits, confirmed letter of credits of approximately $100 million, and therefore, now Abu Dhabi business is also giving us a good visibility of next few quarters. And also, it may be important for me to emphasize that the letter of credit that we have received from Iraq has been confirmed by a European bank, and therefore, we have taken effective steps to mitigate that political or sovereign risk that may be there, whatever little that may be there. Because while this LC was being negotiated or the MC was being issued, at that point of time, the conflict in that region was at high, and therefore, we thought it prudent to get it confirmed through a European bank, which already is in place. The MC is operative, the dispatches have started. And this $100 million MC should see us in good stead for the next few quarters in Abu Dhabi business as well. [Audio Gap]

Ladies and gentlemen, the line for the management is disconnected. Please stay connected while we reconnect them back. Ladies and gentlemen, the line for the management is reconnected. Thank you, and over to you, sir.

Yes. Sorry for this interruption. So probably, I'll just repeat the last part, where we were discussing about the Jindal Saw USA LLC business. As I mentioned, it is just as coating facility, which is not very capital-intensive. We do job work. That business has got impacted because of the new trade barriers that U.S. has created for itself, where the import of their pipes have significantly reduced. So that broadly covers all the aspects of Jindal Saw stand-alone and consolidated. We continue to maintain a healthy order book. Now this is where if you see in the last few quarters, the order book has been hovering around $1 billion-plus. Now again, should give comfort, and that should give a very positive strength to the company and for all of you that whatever we are filling by way of order book, at the same time, our execution rate has been good, and we are executing it. Especially looking at the delivery expectations that the customer has and the capacities that we have in our different businesses, with pellet business being sold on cash, $1 billion-plus or $1.1 billion to $1.2 billion is a good order book that we would like to have because that order book of more than this would either indicate that our execution rate has slowed down or then we get into a space where we may not be able to deliver everything on time to our customers. So this around $1 billion order book is a healthy order book for the business consideration. We have enough visibility but I must also give you comfort that there are a lot of good projects in the pipeline, both in the domestic sector as well as in the export market. In fact, the exports has inched up a little bit and we expect that a few big orders may come under execution very soon in the export market. So with these opening remarks, let me stop, and I would welcome any questions that you may have. Thank you.

[Operator Instructions] The first question is from the line of Jay Balaji, an individual investor.

Sir, first question is, one observation on -- after going through our company's data, its financial reports and press release. It is on a consolidated basis, our turnover is INR 2,987.97 crores, whereas on a stand-alone basis, our turnover is INR 2702.05 crores for December quarter 2019. Sir, the turnover on consolidated basis is greater by INR 285.92 crores. On the contrary, profit before tax, exceptional items that is bottom line, depletes during releases from INR 210.87 crores to INR 146.92 crores. That is -- there is negative difference loss of INR 64 crores approximately. Sir, kindly state what is the key reason attributable to such a deflation in bottom and corporate? What is attributable? Please, throw some light on it.

Yes, as I already explained that the dip doesn't -- is not only just at the PBT level. If you see, even at the EBITDA, there is a slight dip. Those are all primarily on account of the coating business in U.S.A. In JITF, where we now do not have much of operations, there are certain interest costs, et cetera, which still get booked without corresponding revenue. Because now most of the revenue that we will get in JITF, on account of these arbitration, et cetera, coming in. There are additional expenses that is being incurred to fight these cases in JITF, which account for the -- which get consolidated as an expense in a consolidated result. So primarily, the dip in the profit is on account of U.S., JITF and a bit on account of Abu Dhabi. Because Abu Dhabi, again this quarter, now the LCs, et cetera, have been received now. So the business is picking up in the last quarter. Third quarter, the Abu Dhabi business was a little lower-than-expected on account of delay in the [indiscernible].

Okay. Second question is regarding our press release. Page #3 or #5 that is under financing and liquidity, it doesn't mention that under the head financing and liquidity long-term debt of our company is INR 1,788.5 crores approximately. Can you please throw some light that what is the assets which have been backed by and what is the purpose of such a big long-term -- fixed asset -- long-term debt? So if you can throw some light on it.

Today, if you see our asset base. See, these are all kind of term loans, which have been there on the balance sheet for long. They are not new term loans and the term loans have been on the reducing size. In fact, it has consistently been coming down as per the repayment schedule. To date, the company has an asset base of more than INR 6,000 crores. So our fixed asset base is more than INR 6,000 crores against which now the loan that is left is about INR 1,700 crores, INR 1,800 crores.

What is our debt reduction policy, if any, our honorable Board has any debt reduction policy? If you can shed some light on it?

Yes, the debt reduction policy, there are 2 aspects to this. At this point of time, Jindal Saw does not have any major expansion plan. So any new large debt is not planned to be taken. And the treasury department has been working hard and has received a good result in terms of getting the debt elongated. So whatever is the repayment schedule at this point of time, it is roughly INR 300 crores of repayment per annum is broadly the repayment schedule. So the intention is we would maintain those repayment schedule, the debt would continue to come down. If there is additional liquidity, which gets created either by way of an improved collection, which happened in January or by way of inflows like NTPC, et cetera, would be used to augment long-term working capital. So the term loan will run its life production of approximately INR 300 crores per annum. And working capital would get reduced by collections as well as these inflows that we are getting from other sources. And the working capital would largely depend on the level of operations that we have. Because as you know, in Jindal Saw, we always hedge our positions with respect to raw material and we have receivables, which are all either government receivables or are all backed up by a proper security of a letter of credit or a bank guarantee.

One question regarding cash flow analysis. Sir, what has been the cash accrual during the 9 months? That is the 9 months with a 1 [ brand ] and its utilization. If you can throw light on the cash flow aspect of our company during this tenure of 9 months, please?

See the cash flows have largely gone towards the normal CapEx that the company has, which is in the region of about INR 200 crores per annum. And reduction of debt plus augmentation of working capital. There has, in the cash, there is no extraordinary use, either by way of investment or by way of any new CapEx, et cetera. So it has all gone into the normal course of business in terms of normal repayment schedule for term loan, augmenting long-term capital and funding all the operations and normal CapEx.

Okay. Sir finally, one suggestion, after going through -- Just one minute, if I can finish this in 1 -- 30 seconds will be enough. Sir, like I have gone through your presentation. Just one suggestion I want to make, in your investor presentation. Sir, please refer other companies also like [ National Corp ], if you can go through it that in details, they have explained that the presentation should be self-explanatory. I missed the conference call of [indiscernible] [indiscernible] also but my summation is that they are beautifully articulated who are there clients, what are their prospects and all. So I would request you to include in your further press conference, press releases, the full -- the manner in which [ National Corp ] had given presentation yesterday, kindly follow that, maintain that high level of standard that they have maintained. Although our press release is very good, but if you can raise our standards it will be better for investors to understand more accurately. That's a suggestion to our honorable board, sir.

We will look into it, and we would definitely adopt some more explanations, et cetera, to help you understand better.

[Operator Instructions] The next question is from the line of Nalin Cha from NVS brokerage.

At the outset, I think, I would like to say that a good set of numbers. A few observations I would like to hope -- make it. One is that there is a continuous, I would say, the pressure on the profitability on the cash flow from the, I would say that the host of the subsidiary companies, which are there in the fold of our company. And there is a very difficult situation to apprehend, what will be on a consolidated basis, our position as far as the performance is concerned. So can you not -- I mean, this thing windup or multi subsidiaries and present one picture. So it becomes much easier for us as a shareholder to appreciate that what is the correct position of the company. Like the impairment you have done, now so many subsidiaries are there, when some other experiments will come up and what will happen to the profitability in which quarter, we are unable to estimate anything correctly.

We really appreciate your concern, and that has been the concern for us as well. And therefore, if you see over the last 3, 4, 5 years, there has been a constant endeavor to make Jindal Saw a company which is focused on its core product, which is pipes and tubes currently. Therefore, we have gone through 2 rounds of demergers, where all the noncore businesses have been separated. Now within our core business, which is pipes and tubes, also, there has been an effort to constantly look at all businesses and take an objective, appropriate action. And that is how we have shut down Algeria, as you would know. We have shut down Spain. Again, as you would look at our past results. And now the last subsidiary, which we plan to shut down or we plan to cut down is Italy. So Italy, we are not shutting down it completely. We are removing the entire manufacturing and finishing activity in Italy, and we are bringing it down to only now stocking and trading. So with this gone, as Jindal Saw in terms of material subsidiary, you are left with Abu Dhabi, which is essentially a core business of Jindal Saw DI Pipes and you are left with the coating facility in U.S... So these are the 2 material subsidiaries, which are continuing and we plan to continue because it belongs to the core business of Jindal Saw. One more subsidiary, which is JITF, where this NTPC entire legal process is going on. We have to maintain that for the reason of continuity of the legal process to get finished. Once the legal process gets finished, behind JITF would also -- we will take it out of the Jindal Saw fold. So then what -- going forward, on one side, I do appreciate your concern. I wish to give you that comfort that as management, we have been working in that direction over a period of time because, yes, at one point of time, Jindal Saw had a structure, a very large conglomerate with core, non-core and all kinds of businesses. But now very soon, you would see a pretty clean set of numbers, where there would be consistency and visibility because now even for the consolidated basis, we are giving results as required by law on a quarter-to-quarter basis. So going forward, you have to only look at Jindal Saw's stand-alone, Abu Dhabi and the U.S. coating facility. Those were -- these are the only ones that you have to look at. All other businesses have been either removed or have shut down.

Okay. Can we have some idea as to what more in terms of the impairments, we could expect in -- I mean, the last quarter as well, as you know, I mean the year going forward from any of the subsidiaries or associate companies?

Impairment on account of cutting down the business, which will be more like settlement of the trade unions, employees, expenses, et cetera, whatever would come now only from Italy. We wish to continue with our Abu Dhabi business, and we wish to continue with our U.S. coating business. You don't expect any impairment on account of any disruption in business, they would continue. And hopefully, both businesses should give you a positive EBITDA going forward is what we expect. So in terms of curtailment in EBITDA, we do not expect anything to come going forward unless there is a major disruption in business because, as you know, at least Abu Dhabi, sometimes the political scenario -- that way, if you see the Gulf has been embroiled in one kind of, the other of, some kind of a instability. So for that, you should see a stable performance for Jindal Saw even at a consolidated basis going forward.

Okay, okay. Just I think a few minutes back, you mentioned that our asset base is roughly about INR 6,000 crores plus.

Yes.

Right? Now what is the maximum you feel that the top line could emerge from this INR 6,000 crores asset base? Is it that currently, we are more or less at the top level? I mean, at something like 80%, 100% capacity? Or there is a potential that this -- I just want to understand, input/output ratio kind of a thing, that what is the asset turnover could be in terms of? Whether this asset base can generate INR 10,000 crores or kind of a top line at a maximum or INR 7,000 crores? Or what is the present level?

Okay. Our present level run rate for top line is in the vicinity of INR 12,000 crores on a stand-alone basis. And we definitely have head room to go because there are -- if you see in the last few years, there has been some CapEx on the stainless steel, alloy steel and carbon steel, seamless pipes and tubes business. That business is now yet to fructify or yet to mature. So there is a definite headroom available in the seamless carbon and alloy steel pipes and tubes business. So there, there is enough scope for us to go beyond this current run rate of about INR 11,000 crores to 12,000 crore of top line, without any incremental CapEx. Likewise, we do have capacities left in the LSAW and HSAW business. But LSAW is a business, again, as you would realize, largely project-driven business. Sometimes, the sequencing of projects can be such where there is a scope for the turnover going up. On DI business, we would say we are close to 80%, 85% at this point of time, which should again give us some scope for headroom. And on the pellet business, we are more or less producing at capacity. That is 1.5. We are producing and selling 1.4 plus. So we are producing at capacity, but on the pellet business, we expect upward movement of both turnover as well as EBITDA on account of the re-auction of all the iron ore mines. If you see the way iron ore mines, which have all come for re-auction. The way they are being built, we expect a definite upward movement in the raw material prices. So if that happens, then the pellet prices rises or it actually rise the lump ore costs. So we expect some headroom there. So to answer your question, are we completely kept out on the turnover without any incremental CapEx? The answer is no. We do have headroom, and we expect our turnover as well as EBITDA to improve in the coming years based on the aspect that I have already mentioned.

Correct. And my last, I have a suggestion, is that we have a small capital base, so which is very attractive from the -- I mean, equity investors point of view. But you are able to declare only about 100% dividend, which is INR 63 crores. When our profitability is in the range of INR 500 crores plus, which means that we are hardly -- I mean, giving out, only 12%, 13% of our profitability. I think management should consider that our -- I would say that market cap has remained very static for a very long, long period of time. And this could be also one of the factor in terms of, I think, the sort of the word to the investors. And that could probably enable the company also to have a better market cap and the better wealth creation.

Yes, your point is very well taken. As you know, last few years, we have been engaged in trying to conserve cash for various reasons. Going forward, as the company throws more cash, we do take your point, and we would definitely consider towards the year-end when we hold an export meeting.

The next question is from the line of Vikram Sharma from Meraki Wealth Management.

[indiscernible]

Mr. Sharma, can you speak closer to the handset please? Your voice is not audible.

Yes, one minute. What is status of our operation and maintenance agreement with SAP HANA's part and our recent ties with Hunting Energy Services?

So with SAP HANA's part, as you know, the [ OMA ] has been signed, but it is at this point of time, just getting through the banking system because the banks also have to come on board. We have had a few rounds of meetings with the banks. And we expect that we should be able to resolve that soon.

And at times with Hunting Energy Services?

Oh, hunting is all done. Hunting, in fact, now we should actually start seeing the results on ground because the hunting strategic arrangement was signed, all the necessary equipment's, which were required to start doing premium connections in India have been brought there, more or less commissioned and tested. We have -- the hunting people have come and qualified us. The license has been issued for the interim. So the hunting business should now carry momentum and you would start seeing those results very soon.

And then my next question, what is total opportunity size in volumes from recent announcement of government by gas grid expansions?

See, government policies gives us hope. And therefore, we are a lot very, very hopeful on this [ Junk shanti mission ] and the oil and gas grid, plus the enhanced activity of companies like ONGC, et cetera. So those are all very good positive signs pointing in the right direction. But as you know, we are all tender driven, project driven. These are all tender driven and project-driven opportunities. So between the announcement by the government and the tender coming out, there is a lag of a few months. But on the water sector, we are seeing some traction. So that has happened. Oil and gas, we did execute 1 or 2 very good orders, and we are hopeful of getting some more in the pipeline.

Like any total opportunity size in volumes like government India's [ fund ] from 16,000 kilometers to 27,000 kilometers.

Yes, those have not come at the tender stage as yet. So those are, as I told you, we also are hopeful that all of those will come to the tender stage and will be bid out sooner than what we all expect to happen. We are all ready to just grab those opportunities.

Sir, any estimate what tonnes required for 1-kilometer pipeline in there?

A kilometer pipeline, it all depends on the size of the pipe. The size and the thickness. So to do our tonne conversion from a kilometer conversion, I would not request. I would, in fact, request you that as an analyst, you should not [ have that ] unless you are willing to go to the level of detail where you decide -- you go to the thickness as well as the diameter of the pipe. Otherwise, you can go wrong because each pipe can be as low as less than a tonne, and we have also manufactured pipes, which are upward of 10 tonnes, depending on the size and the thickness. So there, I would just request you to exercise caution. Unless, as I said, you want to go to that level of granular detail of size and the thickness of the pipe.

Okay. And sir, last question, what was the sale of stainless?

Sorry?

What was sales revenue from stainless steel pipes during the quarter?

Stainless steel, we have just begun to see the market. So in the last -- so far, probably this year, we would have done a few INR 100 crores which is likely to now pick up significantly.

The next question is from the line of Sunil Jain from Nirmal Bang.

Congratulations on good numbers. Sir, my question relates to, first of all, the consolidated debt on your -- on the book.

Okay. Consolidated debt on the books is INR 5,600 crores, yes.

So during last 9 months, it has come down by how much around INR 500 crores, INR 600 crores?

Last 9 months, it would have come down by at least INR 400 crores to INR 500 crores.

INR 400 crores, INR 500 crores. And sir, second thing, you said that NTPC, you got some interim INR 500 crores. In that, INR 300 crores has been used for arranging bank guarantee and all. So the...

[indiscernible] Liability is in JITF as well.

Yes.

[Foreign Language]

So that money, which is now been -- is whether we will be getting at least interest on that money, INR 300 crores?

Yes, yes, yes. Because you see whenever you give a litigation guarantee, the banks always want to have some security, but we would be earning interest on that for sure. And all this money would get released once we have gone through this court process. And all the bank guarantees also have been released.

So any more money will get affected in that?

We are going to push for some more because the way you need to look at, if you read the notes to the accounts that has been, the total award is about INR 1891 crore plus interest plus GST. And we are progressively pushing the courts and everyone to release as much as possible. So the way I would request all of you to look at is whenever a court insists on releasing some more funds, it should just give you an indication of how the case appears to the judiciary. And what is the trend or where we are heading towards. And our effort is always to get as much liquidity as possible. And so we would be in the next hearing, we would be pushing for release of some more funds because there is some headroom available. And there is a possibility that we can get some more.

Okay. And sir, how much is the export sales in, say, if this quarter or maybe 9 months?