Jindal Saw Limited (JINDALSAW) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the Q2 FY '21 Results Call of Jindal Saw Limited hosted by Emkay Global Financial Services. We have with us today on the call 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 now hand the conference over to Mr. Anas Dadarkar. Thank you, and over to you, sir.

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

Good morning, investors. Good morning, friends. I hope all of you are doing well and keeping healthy. This pandemic still seems to continue. It's coming in waves. As you know, in Delhi now we are witnessing a new high, around 7,000. But luckily, all of us are safe. The -- all the plants of Jindal Saw is working. All our offices are functional, so the strict protocols that we have put in place has helped Jindal Saw as a multi-location, multi-division, multiproduct organization to work to the best at its ability in the given scenario. I'm happy to report that none of our plants have lost or have had any major interruptions due to this pandemic. So that's something which is good for us. We feel happy about it, and we would request all the investors to take note of it. Yesterday, we had our board meeting, and we have declared our quarterly results, which is the second quarter results. Looks like barring some unforeseen or very difficult scenario resulting out of the pandemic, it appears that the negative impact of pandemic is behind us. This quarter, we posted a stand-alone result. I'm just going to highlight a few things to you, and then also give you 1 or 2 very significant developments on the consolidated results, because it does show a trend. There has been a reversal, and we will talk about it. So this quarter, we had a gross income top line of INR 2,021 crores as opposed to INR 1,400 crores in the first quarter. So the businesses have started picking up. The EBITDA number for this quarter is INR 295 crores, PBT, INR 112 crores and PAT, INR 74 crores. Important to note, as we have said, we have cleaned up our balance sheet. So we don't expect any exceptional items to come during this year in our stand-alone balance sheet. Now important to note is if you look at the consolidated results, top line, INR 2,446 crores; EBITDA, INR 349 crores. Now that is something which I would like to draw the attention of all our investors. That's stand-alone EBITDA INR 295 crores and consolidated EBITDA of INR 349 crores. So there is over INR 50 crores of EBITDA, which has been added by the subsidiaries and Jindal Saw Group companies, largely on account of now Abu Dhabi unit, our Abu Dhabi DI unit beginning to do well. In fact, the prognosis -- the hope is this year, the Abu Dhabi unit should perform the best ever for Abu Dhabi. So it is beginning to do well. We have a healthy order book. The productions have stabilized. The dispatches are happening, and things are beginning to look good for Abu Dhabi unit. The U.S. unit, because of the elections, sluggish economy and oil and gas demand or the prices, is not as good as it used to be. But overall, the EBITDA figure has -- consolidated EBITDA has an addition of over INR 50 crores from -- largely from Abu Dhabi. Even at the PAT level, if you see, there is an increase from INR 74 crores to INR 80 crores. So this is something that is for our investors to note that now, at all levels, whether it is at the top line, EBITDA, PBT or PAT levels, the other businesses or other subsidiaries, associates of Jindal Saw who are included in the consolidated results have started contributing positively, and we hope and expect that this trend will continue. That's about the results. A few things that I wish to also highlight, you would see there has been a reduction in the overall debt scenario. There has been a reduction on the financial charges scenario, so the balance sheet continues to remain strong. Good thing that I wish to highlight again that even during this pandemic scenario, our receivables have stayed under control. We have been collecting our money on the old outstanding dues have also been collected, so the receivables continue to be under control. The inventory continue to remain under control. There is no major effect that we are incurring. There is no major projects that is on the ambit. So that should give you the sense that on the balance sheet side also, there is a status quo standstill or improvement in the working capital management for the company. Looking forward. If you see, we have, during the quarter, added a lot to our order book. In fact, the order book during this quarter has gone up in spite of we supplying goods worth INR 2,000 crores. So that again gives us an indication that the economy is beginning to open up. The demand is beginning to come. Among them, the significant ones for us are the stainless seamless business, because the stainless seamless business, as you know, is a new business. We are a new entrant. We have received a few important certifications upgradations. The first order that we and Hunting got together for 13 chrome -- supply of 13 chrome pipes is under execution, and we are happy to let you know we would execute it within time and meeting all quality specifications. So on the seamless business, we do see and we are hopeful that things should begin to improve as we go forward. Water segment is an important segment for us, because we have our large dia spiral pipes as well as DI. DI business continues to do strong. Most of the states are coming out with their own water grid system, which has given rise to demand both for our spiral pipes as well as for DI pipes. In oil and gas sector, in spite of the fluctuation of the international oil prices, at least in India, the demand for pipes for oil and gas continues to stay stable. In fact, now we are also working on the within city gas pipelines, this is one area where we have not focused our attention as yet. Now we are beginning to look at catering to this sector as well, because, as you know, from our Nashik plant, we can make seamless pipes up to 16 inches in diameter. So the ideal -- the gas pipelines within the city, they fall within that range. We will try and address that segment as well. Pellet, this year, because the way the iron and steel industry is behaving continues to do well. In fact, the average contribution from pellet business has shown improvement in this quarter, and we expect that, that strength or strong performance would continue. The average EBITDA on the pipe is marginally lower than what it used to be, because the oil and gas and water, the water segment supplies has been higher than the oil and gas, and therefore, there is a marginal lowering of the EBITDA. But overall, we are maintaining the EBITDA above 14.5% of the top line within this quarter as well. Hopeful for the next 2 quarters, and we are confident that our strong performance will continue, wherein we would be able to maintain a very healthy order book. We will be able to maintain all our banking relationships. You would be happy to note our credit rating of AA has been reaffirmed. So with these initial comments, let me stop here and invite you to ask some clarifications, questions or whatever that you may have. Thank you very much.

[Operator Instructions] The first question is from the line of Saket Kapoor from Kapoor & Company.

Hope all well, sir, as you have all ready elaborated. Sir, firstly, we did face the impact of monsoon for this quarter in the L saw and the DI pipe segment. So sir, how are the deliverables going to look for H2, sir? And can the December quarter can be, on a likewise comparable basis with last year, this December quarter numbers?

Yes. This quarter, as you know, we did have -- we are growing -- or we were just coming out of the first quarter, which was a near washout because of the lockdown, et cetera. The second quarter on one side, there was a positive thing on coming out of that, but did have a dampening effect because of the monsoon. Third quarter should be comparable to the third quarter of last year, with maybe marginally on the lower side, but we are confident that the fourth quarter for this year should be a typical fourth quarter for Jindal Saw. As you know, the fourth quarter businesses are always the best or the highest because of the budgets, because of the government push to complete whatever projects -- implement whatever projects. So we expect Q3 to definitely improve, come close to the Q3 last year. Q4, we expect it to be a normal quarter for this year for Jindal Saw.

And sir, what reason you mentioned, sir, why Q3 will be lower than the last year, Q3?

Because we are still on the ascending curve. If you see, the second quarter was better than first quarter significantly, and we continue to build up. We continue to grow. So there -- we expect it to come very close to the third quarter of last year. But maybe, it will be a little marginally lower, but it should be very close.

Sir, we have seen this raw material price, especially the H.R. Coil prices moving up, So sir how would these impact our businesses going forward?

Two things. A, most of the time, the moment we get our projects, we try and block our entire raw material essentially to hedge ourselves against these situations. But still, if there are some open positions, there would be a marginal squeeze in our EBITDA. But very soon, all this will get passed on to the customer. So there is a movement in steel prices, which, on one hand, is helping our pellet prices to go up and has already shown the contribution. And we are taking steps to minimize its impact on our large diameter business, which is the -- where we use coils and plates as a raw material. Most of them already has -- if you look at our working capital utilization, we have placed orders. We have opened letter of credits, so we should be able to hedge ourselves on the raw material prices.

Sir, now just putting forward to Page #7, sir. Jindal Saw growth strategy, wherein you have very well articulated that the company is making conscious effort to move towards value-added products and penetrate new markets and increase production and productivity. And also, sir, about this investment has been judiciously been increased in higher ROCE segment, while de-subsidiarizing loss making entities in its fold. Sir, if you could give some more understanding what is going to be followed ahead, sir? And a very -- just a continued point to it, sir. Sir, if I'm not wrong, sir, this is -- this exercise, sir you started sometime way back into the '16, '17, if I'm not wrong. At that time, you did push investors like us that these loss-making subsidiaries are going to get the subsidiarized in a phased manner. And you have walked the talk, sir. But sir, to the hardship of investors and shareholders, we have found that post this process of desubsidiarization of loss-making subsidiary, the investors which used to have the confidence and had made investment in Jindal Saw. I'm talking about the mutual funds namely life insurance corporation, Reliance and other people. Everybody have exited. And as on today, sir, if I'm not wrong, in the public domain, September quarter shareholding pattern is there, even after all the efforts being made by the management team. Where is this disconnect, sir? This is turning out to be a very frustrating point for investor communities, investors like us who have definitely put their trust and the confidence on you. So you are working for your 4, 5 people, your customers, your bankers, your employees and your shareholders. Sir, your bankers are happy, your rating agencies are happy. Your customers are happy. Your suppliers are happy. What about the shareholders sir? The shareholders are getting a dividend payout of INR 2 after a period of 18 months. Other than that, there is neither any share appreciation. There is no interest at all, neither any mutual funds nor foreign institutions, no ranker investor never participate in the growth story, even sir, after promoter of Jindal category holding 63% stake in the company. This is a very big dilemma and this is putting questions on the credibility of the professional team run by you itself. It is my observation, sir. This is nothing to point out or to be any sarcastic, but this is what the real picture in front of you, sir.

Very long question. Let me just take it one by one. And you have highlighted a few things. First, you talked about reorganization. Yes. We had laid out a plan, and we have moved on it where the desubsidiarization process is more or less complete, all the loss-making subsidiaries, all the nonrelated businesses, except for the JITF or Jones, which has been kept there only for the strategic reason where the contract requires Jindal Saw to remain as a majority. Otherwise -- and that's why in JITF, Jindal Saw owns 51%. Rest all the nonrelated businesses, all the loss-making subsidiaries have been moved out. The last one being the Italian operations. So that's one part, which is we had laid out a plan, and we have completed that. Second, if you see there has been an improvement in the EBITDA margins on the top line as well where we have steadily progressed towards an EBITDA in the range of INR 1,500 crores to INR 1,600 crores on a normal year basis. Third, there has been a steady, again, reduction and control on the debt of the company. So on all these parameters, where me, my professional team and the entire Jindal Saw have been working, we have shown consistent progress in towards positive. Now coming to your question about we having 4 or 5 stakeholders where the banks seem to be okay with us, the rating agencies seem to be okay with us. The clients seem to be okay with us. The suppliers seem to be okay with us. But as you rightly pointed out, the shareholders, at present, are not seeing the value in this organization. And that can be seen straight, if you see the network versus market cap difference. That does give an indication that the shareholders do not see the value that is being created. Now the question is, why? That is a question that we are also now beginning to focus on, and we are getting concerned, because everything that needs to be done as an organization is being done. Maybe, this is a maybe, there are still some legacy issues where probably now shareholders are waiting for the subsidiaries to start do well. Probably the shareholders are waiting for some consistent performance of the subsidiaries before they start seeing value. So I share your concern, and I have the same empathy, and we will be working on it. We will try and reach out to the customers as things begin to open up as our performance becomes more stable, especially from the subsidiaries. And we expect that there is a delay, but we expect the shareholders to begin to see the fundamental strength that has been created in the company, and we hope it should happen sooner than later. So I do share your -- and I empathize with you, because this is something that we are also now beginning to focus on and getting some feedback from the investor community on where is the gap between the real fundamental strength of the company, which has been created versus what is being perceived in the shareholder community.

And sir lastly, for LIC I think so we have come with an entity issue...

Sorry to interrupt Mr. Kapoor. [Operator Instructions] The next question is from the line of Parthiv from NVS Brokerage.

Sir actually I missed, sir, a couple of minutes in the starting. But I just wanted to ask, is your order book around INR 7,000 crores, I believe, when you convert to INR terms, right? Around, around.

Correct. Yes.

Yes.

So what is the time line in which this would be executed? Like what is the time frame what the company is looking out to execute this entire order book?

It is different for different products. As you know, large diameter pipes and DI pipes, the order book can stretch up to 9 months. And in the seamless business, typically, the order book stretches up to 2 months to 2, 2.5 months of delivery. And the order book is more or less against delivery against cash. So we don't have a very large order book on pellet at any point of time.

And has the company seen any kind of increase in order book receivables like receiving the orders in recent months or recent days, I would say?

Yes. If you see the trend, second quarter, the order book and if you compare it with what we have executed, there has been a net addition to the order book, and we expect that in the third quarter also that trend should continue.

Okay. And sir, just I was just -- when you told you have maintained 14.5% EBITDA margins and quarter 3, quarter 4 would be on the same lines as that of last year. I was just doing a quick back of the envelope calculation. It looks very -- the company looks very attractive when you just look at the valuation. But just a humble request as a shareholder and just to carry forward Mr. Kapoor's point ahead, please declare a certain amount of dividend, which is way above the thing -- what investors are getting as on date. That would actually build a lot of confidence into the company.

We know. We take note of your points. And definitely towards the end of the year when the question of dividend comes, we shall definitely deliberate upon it, and we will do whatever...

So either a dividend or a buyback, whatever is comfortable at that point of time, please do have a look for the investors at large.

Okay. Will do.

The next question is from the line of [ Chirag Patel ], an investor. [Operator Instructions] As there's no response from the current participant, we'll move on to the next. That is from the line of Vikash Singh from PhillipCapital.

Yes. Sir, my first question pertains to our volume execution this year. So basically, if I remember correctly, at this time, we wanted to do almost a similar or slightly higher volume what we have done in FY '20. So considering this first -- second half, how do you see that in terms of delivery schedule, how do you see the volumes moving up?

If you just make that adjustment in the first quarter and second quarter a little bit because of the lockdown and the impact of pandemic, we are on track. So Q3, Q4, there would be a catch-up and providing for the adjustment for Q1 and Q2, we should be on track.

So should we maintain that kind of guidance of almost flattish volumes year-on-year? Or this would be slightly higher as per current delivery schedule you have?

No, I would request you to look at more like a flattish performance because, as I said, there is a catch-up that we have to do. Q1 has more or less been a washout. So I would indicate more towards a flattish performance.

Understood. Sir, my second question pertains to our order book addition and the competitive intensity. Considering that now, steel pellet have been very volatile, I understand that we do back to that booking, but there's still a time lag of 15 days or a month before we do so. So how do you -- sir would that -- can we safely assume because of such a high volatility, there is a margin compression in terms of the new addition of order books, which is basically contributed by both higher steel prices as well as the higher competitive intensity or more or less we are good in that account also?

See, I have already addressed this to some extent, that we, within Jindal Saw, there is a compensatory effect. Whenever the steel prices or the basic raw material prices in steel go up, our pellet division continues to do well. So the net impact, we do not see much because: a, we have a hedging strategy; b, there is a natural compensation -- compensatory mechanism available within Jindal Saw. So we don't see much impact of the higher steel prices on our rising raw material prices. However, one thing that you also must note is the breakup between supply to pipes for oil and gas sector versus supply of pipes to the water sector. The water sector typically gives a little less EBITDA margin than the oil and gas. But to put all of these in perspective for Jindal Saw, we expect a stable EBITDA margin performance.

Understood. Sir, just lastly, your targeted debt reduction, if you could share with us?

The debt reduction will follow its path in terms of whenever there is a debt reduction that is happening -- will happen as per schedule, and we definitely expect the debt for the year-end to even go down further. It is important for me to highlight here that now the term debt on the company's balance sheet anyway is on a lower side in terms of -- it is less than INR 2,000 crores. It's somewhere around INR 1,700 crores -- INR 1,600 crores to INR 1,700 crores. The working capital, as I have always reiterated, our operations, trade finance is a important parcel and very important aspect of. So the working capital utilization as the operations go up, as the operations ramp up, will continue to stay there or will go marginally high. But term debt, we are absolutely confident that it is under control. We may have to do some profile correction in terms of trying to lengthen our repayment of the debt. So some profile correction is definitely looking at -- we are looking at in terms of lengthening our repayment schedule. We are also looking at further reduction in our cost of capital on account of the credit rating that we have received. So all of you can expect some improvement in our cost of capital and a lengthening of the profile, which would further ease the liquidity pressure on the company. But overall, as I said, you should see a stable and a reducing debt trend for the company during the year.

The next question is from the line of Sahil Sanghvi from Monarch Networth Capital.

My first question is, can you give me the current utilization level of the DI plants sir?

DI plants, we are operating upward of 80%, I would say. Because, again, see, in the pipe business, percentage capacity utilization is always with a lot of caveats, because it is how many times you are making changeovers, how many times you are making adjustments for the different sizes. DI plant is operating upward of 80% will continue to operate very good in terms of now we are even expecting some orders in the export segment. Because as you would have seen, the oil prices are beginning to harden. We hope that it continues, and it crosses $50, $60 if it makes within that, because then the Middle East becomes very attractive in terms of -- because those economies are all driven by the petroleum prices. So then we expect the DI to then start getting exported. So DI business, we are very, very confident that we'll continue to do well during the year.

Right sir. My second question then if Mr. Mantri could also answer this. We have been constantly seeing an increase in the order book for DI pipe. I think 2 quarters back, probably that number was around 5 lakh and we've seen that going to 580, 579 lakh. So can you throw some light on where are these orders coming from? Which states? And probably, are you getting any kind of demand from the Jal Jeevan Mission? Or are these state-specific orders?

See, Jal Jeevan Mission is being implemented through the water grids in the state. So the states where we have got some recent good orders are Maharashtra. We have got some very good win in Uttar Pradesh, because all these states are beginning to put a water grid, which is a part of the Jal Jeevan Mission. So definitely, the Jal Jeevan Mission has begun to translate into states coming out with orders for pipes for the water sector. And definitely, we are benefiting out of it.

Right. Sir, any pressure you're seeing on the receivable front from these water projects, be it at SAW or DI pipes?

I have already addressed that, but in Jindal Saw, in fact, our receivables in terms of overall aggregate receivables in terms of overdues, in terms of DSOs everywhere in the last 6 months, a lot of effort has been put, and there has been an improvement on all the 3 fronts. We don't see any significant write offs or significant receivables getting stuck, because it's also important for you to note that a lot of our business, we do it against letter of credit. So receivable has actually never been an issue with Jindal Saw. We continue to have a very strong credit control system into our company.

Right, sir. And one last question was regarding our market share in the DI Pipe segment. So a lot of our competitors are increasing their capacity, and even some of them in our region. So do we see any risk of losing market share in the DI segment?

See, in the DI segment, we are confident that the market is growing, and the market is growing such that it would be able to accommodate all these -- or be able to absorb all these capacity expansion, et cetera. What we are confident of is that year-on-year, we will continue to have our Samaghogha plant manufacture and supply close to or upward of 5 lakh tonnes per annum. That has been the trend and that would continue.

The next question from the line of Ritika Gupta from Aequitas Investments.

Sir, I wanted to know, considering that most of our orders are now from the water sector, how do we see our EBITDA per tonne trending?

See, as I have already mentioned that the EBITDA per tonne for the consolidated and for the entire pipe segment has already come down marginally, which has been compensated by the increase in EBITDA in our pellet segment. So overall EBITDA margin of 14%, 14.5% is something that we are confident that we should be able to maintain.

Okay. Sir, you mentioned that this is going to be the best year of the Abu Dhabi plant. Do we expect this run rate of INR 50 crores EBITDA per quarter to continue? Or do we expect it to increase?

When you say the INR 50 crore EBITDA, which has been added during this quarter, we expect this trend to continue. In terms of the year-end, again, it would not be appropriate for me to give you the guidance on the exact numbers, but we are hopeful that the improved performance should continue for our Abu Dhabi facility as well.

So sir you think that it's going to improve from this level as well?