Jindal Saw Limited (JINDALSAW) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Jindal Saw Limited, hosted by Emkay Global Financial Services Ltd. We have with us today, Mr. Neeraj Kumar, Group CEO and Whole Time Director; Mr. Vinay Kumar, President and Head Treasury; and Mr. Narendra Mantri, President and Head Commercial. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Karan Shah from Emkay Global. Thank you. And over to you, sir.

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

Good afternoon, stakeholders. I'm addressing the stakeholders because I'm told that we have participants from all walks in terms of, sometimes, rating agencies, banks, investors, obviously, research analysts, and all of them address. We are very happy that we have such wide participation in this. That gives us a lot of encouragement. So good afternoon to all of you. Friday, we had our Board meeting. This time, we had to have our Board meeting in the evening because it was attended by some of the directors joining virtually from U.S., so we had to adjust to the American time as well. Now before I start my today's presentation, I have to request all the stakeholders and participants, I've got a feedback from some of them that we don't get enough time for questions, or sometimes, the questions are repeated. And therefore, I'm going to take particular interest and I'm going to pay attention to details this time upfront in my presentation. I would cover it very systematically, use numbers through the minimum possibles and also would request stakeholders to make note of things that are being covered so that we don't have to repeat, and therefore, we leave time open for maximum participation and for questions on all aspects of the business that we have. So with that, now let me start. This quarter, we have declared a gross income of INR 2,240 crores, with that, EBITDA of INR 292 crores compared PBT of INR 105 crores. Now if you compare this with the Q2, turnover seems to be up 11%, but PBT is down, EBITDA is more or less there. So that gives you an indication that the cost-wise between the 2 quarters if there has been a difference or there has been a negative, where the costs have gone up, and therefore, the EBITDA, et cetera, are not commensurate to quarter 2. If you compare it with the quarters -- comparable quarter last year, then the gap is a little more. So that would give you an indication that, even though as a organization, at an operating level, the impact of COVID is more or less over in terms of none of our units are having any significant impact on the operations. None of our units, there are issues of patients. So on an operating level, whether it is head office or all the operating units, we are post-COVID era, and we're confident that we would remain that way. But if you analyze the results, then for this 9 months as compared to the 9 months of last year, there is still a gap. Last year, the sales was -- now I'm talking about 9-month to 9-month comparison. 919,000 tonnes of pipes, and pellets was 1,070,000 tonnes as compared to that 9 months, we are at 717,000. So there is still a gap of 919,000 coming down to 717,000. Pellet has done us comparatively better as compared to 1,070,000, we are at 910,000, which results into EBITDA first 9 months being INR 1,180 crores. Now we stand at about INR 800 crores. So there is a close to INR 400 crores, just a little below INR 400 crores of EBITDA, that we are yet to catch up when we compare the 9 months of the last year versus the 9 months of this year. And therefore, at an operating level, on a point-to-point level, we may be in a post-COVID era. But the legacy of the first 6 months, 9 months, there is still some gap that we need to catch on. If you look at now the EBITDA margin, marginal reduction, from around 15, we are now around 14. So in percentage terms, there is a marginal reduction. But in absolute terms, there is still a catch-up that we need to do because of the first 6 months getting impacted by COVID. However, I would like to draw your attention to the silver lining, one of the other very important boxes that is getting ticked and has been consistently ticked, and that is now our subsidiaries have begun to do very well. So this year, if you see, there has been a significant contribution. Last year, in the first 9 months, the subsidiaries contributed to around INR 14 crores to INR 15 crores in -- at the EBITDA level. This year, in spite of the COVID, et cetera, which is there, the subsidiaries have contributed to INR 130 crores when it comes to addition to the EBITDA. Now this is a significant aspect. This is a significant change which I would request all my shareholders to note. So not only that we had maintained the discipline of not providing any funding support from Jindal Saw to any of our subsidiaries for the last couple of years that we have been now maintaining the strict corporate government. Now all these subsidiaries have started doing very well on their own and has started contributing significantly into the EBITDA as well as the overall balance sheet restructuring plan that we are now working on. This trend is going to continue. I need to spend a little time on the Abu Dhabi operations. In the first 9 months, the Abu Dhabi operations have actually exceeded the best 12-month period ever. And this year, we are likely to cross the Abu Dhabi operations at a significantly higher level. And I must confirm we are delighted to let all of you know, this trend is likely to continue. So we have broken the paradigm for Abu Dhabi operations, taking it to the next level, and that is likely to continue. In just last quarter, the contribution of EBITDA from our Abu Dhabi operations are in the vicinity of INR 60 crores or so. That is likely to continue, and that's important for all of you to note. Second important aspect that I would like to talk about is, in spite of the operations that we have already discussed that we still have to do some catch-up, we have done well on debt. Even during this period where liquidity issues, all of these were there, I need to highlight 2 important aspects: A, we have not availed by choice the RBI moratorium discussed through the financial institutions were offered to the corporates by way of a COVID relief. We did not do it by choice because we had the financial strength to do without it. Second, the overall debt position has gone down. In terms of the total indicators of the company, which was in the vicinity of INR 3,500 crores to [ INR 3,700 crores] last year has come down to INR 3,300 crores as of end of December. And as we speak, now it has come down to INR 3,100 crores. That, as we have always been saying, means working capital as well as term loan. So the term loan is very much now coming under control. The working capital, obviously, is linked to our level of operations. And therefore, on indebtedness, we are coming down to INR 3,100 crores. On a consolidated basis also, we are in the vicinity of less than INR 5,000 crores, around INR 4,800 crores or so. So overall, if you really look at now, how is the scenario emerging? The scenario emerging is on the -- as on a date situation in terms of operations, we are in a post-COVID or a pre-COVID era. So the COVID legacy or the hangover of COVID is behind us when it comes to operation. Financially, for the 9 months, we still have to do some catch-up. Indebtedness is under control. EBITDA margin is under control. The subsidiaries have started performing significantly well. I must also highlight the receivables position, if you see -- because during this difficult period, the receivable position tends to become worse or it tends to become -- you start adding to the bad debts or provisioning of debts. I'm happy to tell you that our receivable position vis-à-vis March 2020 to December 2020, has actually improved significantly. In fact, there is more than 10% to 15% improvement in our receivables. It has not shown any significant lensing or the aging, and therefore, on receivables also we have done well. So now where do we stand? One thing which has been bothering us a little bit has been the iron ore prices and the steel prices. Steel prices, in fact, contributed to a slower-than-expected growth in Q3, because what happened? A lot of EPC guys, a lot of our clients, because of the buoyancy in the steel prices, delayed their project temporarily. And therefore, we expected our turnover in Q3, which has just gone by, to be a lot more. So if we look at the order book position, if we look at the situation that we were in, in terms of -- but we saw a deferment of projects in many of the cases. Second, we also saw that, because of the spike in the raw material prices as in iron ore, the margins temporarily under DI business also has come under some pressure, which is a factor that has contributed in bringing down the EBITDA margin for Q3. So the raw material prices, especially the steel prices, spike was something that we were watching very closely. It has resulted in delayed demand for us and has also resulted in our DI segment a little squeeze in margin. But I must confirm that the prices have begun to ease. The prices which were in the INR 35,000 range, went up to INR 50,000 range, has come down to now INR 48,000, INR 49,000. And that trend, we are seeing everywhere. Plus, we are getting a good pulse of this because, as you all know, Jindal Saw has a robust business model. We have a pellet also as a part of our portfolio, which really tracks the steel lump or steel ore prices. So there is a compensatory effect that happens in Jindal Saw. When the iron ore lump prices goes up, my realization on pellets improve whereas the margins on DI gets squeezed, but that is only a lag effect and it gets caught up. So we are seeing, even with our pellet prices, that now, indeed, the steel -- overall steel market prices have started softening, and we believe that it is going to settle to some realistic levels. Going forward, the macroeconomic indicators, the budget, the union budget for this year, all of those give us very, very good visibility for the next 2 to 3 years. Jal Jeevan Mission is getting a lot of now importance. Everything is getting translated down to a level of contracts. Everything is getting translated now down to purchase of pipes. That's good news for our helical pipes. That's good news for our DI pipes. The oil and gas, also, we are seeing some traction, some movement. Some new pipelines are being announced, West Bengal and all of those cases. So we do -- are now hopeful for the next 2 to 3 years. The spend of the government of India on infrastructure in order to kickstart the economy in order to have a spend infrastructure/CapEx, which is a spend/infrastructure/CapEx-led revival of the economy. If you just look at the government of India, policies, budget, economic survey, all of those put together, it clearly indicates that the government of India is looking for increasing their spend side to foster demand and focusing on infrastructure so that it gives them all-round robust growth in the economy. That's very good news for us. And we expect that we will benefit out of it. I must also let my investors know that in the steel segment, where we are a late entrant or we have just entered, we are beginning to do well. Our extrusion has stabilized. Our -- all the other processes have stabilized. And now we are beginning to serve the market in a very significant way. Our relationship with Hunting is doing very well. We have become now a very important supplier of premium products, premium connections to organizations like Oil India, ONGC. Many of the development orders that they have given us have all fructified now into regular orders. So those are all working well. All noncore businesses have already been de-subsidized. So -- but for NTPC or the JITF, which is not, which is at this point of time, cash-neutral, we are not having any other noncore business within the Jindal Saw or its subsidiaries business. So all that is done. Now let me address 2 very important issues that I wish to before I would request or I would entertain questions. One issue is this NTPC overhang, NTPC arbitration overhang. The first thing I would request the investors that: A, we have said and we continue to say, even the bankers have checked, and they are saying, that the order is robust, and eventually, we should get all the money that has been awarded to us. Important thing I wish to mention, a part of the award is interest as well. So there is an interest component which is embedded in the award. And therefore, while the money is not being paid, it is accruing interest. So that's the large picture. That's a large aspect that I would request all my investors, stakeholders to focus on. We all agree that it is getting delayed, a, because of the initial strategy that was being used by the PSU in terms of delaying -- the legal tactics that they have to delay the process. Then there was pandemic. In between, as a strategy, well thought-out strategy, we were able to persuade the courts for some interim measures, and we got some interim award. My dear shareholders and investors, please take that as a comfort to give you an indication that the courts are also looking at these favorably. But please appreciate, these monies which are coming in the interim measure are against litigation bank guarantee. The moment it comes that way, none of the guarantees have been given by Jindal Saw. There are conditions those banks are putting, and it has to be complied with. These days, all of you know, the banking system has become such that for most of the bank guarantees, you need to put cash collateral, et cetera. So my request to all the investors are, we are committed. We confirm that the NTPC award is a strong award in our favor. And we have a very high degree of confidence that the money would come. B, we also confirm that once the adjudication happens, once the final money comes, Jindal Saw would be made whole in terms of whatever money that Jindal Saw has given to this JITF under this, every penny, along with interest, would be repaid. Now these are the 2 broad things that I want to put on the table, and I would request all the investors to focus on. In between, interim strategies are being done. That is, again, part of legal tactics, part of positioning with the banks, et cetera. So that we will -- have been happening. But now we hope that, that would also come into -- come to an end very soon. Because now the high court has given us 4 dates in April, and they have clearly indicated to both NTPC as well as us that now they want to start hearing the case on its merits. So this legal tactics combined with the pandemic delays seem to be coming to an end. In April, we have 4 days -- 4 half sessions reserved, 2 given to us, 2 given to NTPC, to start discussing the merits of the case. And therefore, I would request all my stakeholders to -- we will keep on updating you on there, and we would continue to push hard on the final adjudication of the case, end of which, we assure our shareholders and stakeholders, Jindal Saw's money will come back once the final adjudication and we are free of all these bank guarantee and all of those things which are there as an interim measure. We'll come back. We are hopeful that once the final hearing starts or the hearing on meeting merits start in April, we should be able to conclude at least the high court process or the first round of the high court process soon. Depending on the outcome of the high court process, then the rest of it should become relatively easy because, in arbitration, the high court has a very limited role to play, which is under Section 34, which are only 4 or 5 specific issues on which an award can get challenged. So once we have passed the first round of high court process, the rest of it, we think or we believe we expect should be pretty simple as long as the court continues with its real hearings. So I just wanted to discuss this aspect elaborately because I know it is important for us and has been the overhang for many of the stakeholders now for a lot of time. Plus, we all have had to be patient on this because of the pandemic and before that, some of the delays that has happened. So I thought I must address that upfront. The last issue that I got to address to all my investors in particular, that we share your concern about our share price. And I have been saying this in the last 1 or 2 calls, that we equally are concerned, that the share price or the share market is not giving the value of Jindal Saw the way we think we have improved on our fundamentals. And again, let me recount, in the last 5 or 6 years, whatever we have said, we have done. We said we will get all the noncore businesses out of Jindal Saw, we did. We said we will put the CapEx on hold, we did. The steel plant that we were -- which was on the annual has been put on hold. We said we will conserve cash, we did. We said we will bring the debt down, we did. We said we will improve our market penetration and positioning, we did, in terms of stainless steel capacity expansion, all of those. Now we also said that the subsidiaries should start performing. Now that has also started performing. So everything that we said in the last 5 to 6 years, we have done all of those. And we definitely are concerned that the market is not valuing Jindal Saw where at current, our market cap is even below our net worth in terms of the book value of the shares are higher than the market price. After a lot of analysis, what we have thought or what we are thinking from within is maybe it's because at this point of time, among the shareholders of Jindal Saw, we do not have a large institutional or anchor shareholder. That could be one of the reasons, and we believe that we should get one soon. The second thing that we are thinking is -- or that we have analyzed is probably it is a hangover of this NTPC award because, a, it's a fairly large award, has been there for some time. And therefore, I think it's a combination of these 2 that, not having an NTPC award come in and not having an institutional shareholder into the portfolio is probably contributing to the share prices the way they are reacting or the way they are. Another thing that based on certain feedback that we have been constantly getting, I must clarify, if you look at the -- our promoter holding, we are at 63%. Now the biggest concern for the wealth of Jindal Saw is for our promoters and for all of us in terms of 63% is there with the promoters, and they value that very much. They are also constrained that we do not wish to increase this any further, at least at this point of time, because we wish to attract an institutional investor sometime soon. Maybe the moment we make some good progress on the NTPC, we can see some attention coming from one of the large -- or some of the large institutional investors. So we need to leave enough for the flow. And therefore, we would continue to do best that we can. We will continue to follow the path that we have stated that we will follow. And we would hope that the market would give us value sooner than later for what is the good work that we have done for us. So that is something which is a matter of concern. But let me just reiterate that, standing from where we are, operations are absolutely in top order. Order book, we have a very healthy order book. In fact, the order book that we have started from Q3 gives us confidence that the time coming ahead should be very good for us. There is a little lag that we are seeing in terms of the recovery of economy and the orders getting executed at the level of pipes because there has been some delay, as I told you because of the spike of the iron and steel prices, hopefully, that would settle down. So in the next 2 to 3 years, we expect a very good performance from us and also the NTPC orders or the NTPC arbitration award, and the money coming out of it should be behind us. So with that, let me end here. And now I'm ready to take some questions.

[Operator Instructions] The first question is from the line of Jatin Damania from Kotak Securities.

Sir, I just wanted to know a little bit more about the ductile business, and as you indicated that due to the rise in the steel prices, the margin in DI business has come under pressure and there was a delay in execution of the order because the various states government had delayed the projects. So how is the situation right now after the [ decline ] in the month of January, February? And how do you look the situation is going ahead? Because there are a couple of more players who are venturing into ductile iron business? So is there any room for new player to enter into the same market?

Okay. A good question, but let me clarify 1 or 2 things for you. The iron and steel prices going up -- has gone up in all segments. So it is the iron ore lump prices that impact the ductile iron business because iron ore lump is the basic raw material. We have our own blast for this. And from there ductile iron prices are moved. So don't -- I would just request you, distinguish between iron and steel final product as well as the lump. So it's the lump prices that has impacted or squeezed the ductile iron business a little bit. Now, going forward, as I mentioned to you, already the prices have begun to ease up. Second, all these infrastructure projects in terms of pipeline, et cetera, there is a limited amount that is available where you can delay. So things have begun to change. And I'm happy to tell you that in the month of January itself, just to give you a sense, if we combine our Abu Dhabi, which is just a DI plant, and our DI plant in India, just in the month of January, we have exceeded 70,000 tonnes of dispatch. So that gives us a lot of comfort that this delay of EPC, et cetera, is again all getting behind. So looking forward, what you should expect on DI, lump prices have started leasing. So that pressure should be gone. Whatever was the pressure has already been factored in some of the projects that we have won. So we will catch up and make up for the loss of the margin. The demand has come back in terms of the dispatch month-on-month. It has been seen in January. February, March. Again, we have some visibility. We have done some internal production planning, consensus planning and all of those. And they are all indicating a very positive trend, both in India as well as in Abu Dhabi for the supply of DI pipes.

Okay. And sir, the second question, in terms of the new player entering in the market, is there enough room?

We also have read some players wanting to enter, but that news has been going on in various forms and shapes for some time. So let's see. And even if a new player tries to enter the market, probably they would be 2 years away before it happens. And if the just-given mission goes the way it is being planned, the way it is look at, I'm sure there would be enough demand for the ductile iron pipes in India. So at this point of time, at least for the next 2 years, you -- we are completely okay. You should not worry about the capacity being added. Still, again, the ground being broken. We just have heard news of intent, just like whatever, but we have not seen any projects being put up anywhere as yet.

Okay. Sir, last question from my side. Can you highlight, what were the key drivers in Abu Dhabi during this quarter which has improved the performance substantially?

It's overall improvement in all aspects in terms of let's start with the capacity utilization and the production quality in terms of rejection. So there was a overall improvement on the operations, including debottlenecking up capacity and all of those, to start with. The demands have become robust because, again, the oil prices have gone back to above $50, because that region is petro economy. So the demand went up. The operations responded. And we did carry out a very thorough and methodical analysis where the performance as I told you, even in the first 9 months, is better than the best 12 months ever before.

[Operator Instructions] The next question is from the line of Tushar Pendharkar from Ventura Securities.

Sir, we are reading that government is expanding significantly on gas transmission and national gas grid. And in the last 2 budgets, FM announced a significant rollout of around 16,000 kilometers of transmission pipeline for gas to fulfill the city gas distribution requirement. But when we see the Jindal Saw saw pipe numbers, they are still not picking up. Like in last year, it was -- the run rate was 175,000 to 180,000 tonnes. This year, in Q3 also, it is [ 117 ] only. So how much time it will take to regain that pace?

Okay. National grid of gas pipeline, et cetera, have been announced to the government -- by the government is definitely a good news. But I must clarify that it takes some time before that gets translated into actual tenders and orders. Also, I would like to confirm to you that any major tender that is announced, whether it is in oil and gas sector or water sector, Jindal Saw is definitely one of the major participants. So in terms of the hit-to-win ratio, Jindal Saw is very much there. So if you are seeing a lower number because only there are that many projects which are at present. So the announcements at the level of Government of India for such grid, et cetera, is taking time, and we are expecting that, and we are hearing that now those policy decisions would percolate into contract for pipelines, et cetera. So we are hopeful that during this year, we should see some good gas pipeline project which should come our way.

Okay. And sir, in this seamless pipe division, how much is our capacity? And what would be the maximum volume we can achieve with our current capacity?

Okay. Seamless pipe division now -- our seamless pipe division, just so that we clarify, as carbon, steel, alloy, steel as well as stainless steel. That is different from the other market players that you have. Some have predominantly carbon steel, some are in alloy and some are in stainless. So if you put all these capacities that we have generated together, we would be close to 300,000 per annum. We are ramping up our capacity. More significant, it is not just the value, it is the value because once you are in a stainless steel market and you are thinking of doing high value-added products, you have premium connections. In seamless, for example, carbon, we are capable of doing 16 inches in diameter, which not many are able to do. So there are certain significant USPs that we have in our seamless business, which should show good result as we progress. One of the important aspects, again, here, I must mention is the Atmanirbhar Bharat initiative has actually shifted a lot from what was being imported to us because we are capable of now responding to those. We have our own premium connections. We have our own drill pipes. We have our own large di. We have our own alloys. We have, in fact, been the first one to supply 13 chrome pipes to [ OMBC ]. So we have -- we are moving into these value-added segments that should keep us in good stead in the near future.

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

Sir -- firstly, Neeraj sir, if you could clarify the net debt level on the consol level because the presentation showing as on December, I think, is of INR 4,200 crore something. And you spoke, INR 4,800 crore, if I'm not wrong, please correct me on that data.

Okay. I just got a -- when I was talking about the total consol -- because we are never selling you that we have walked the path that we said. The institutional debt is INR 4,200 crore and the balance INR 600 crore has come from the promoters. So overall, indebtedness for the peers in the group, even if you include the promoter debt, is INR 4,800 crore. Institutional debt is INR 4,200 crore. So that, again, at that point of time was said, Saket, in the spirit that sees the walk, the talk that we have been doing. These debts we're -- if I recall correctly, if my memory serves me right, we're upward of INR 8,000 crores. And in spite of improving our operations, we have been able to bring this down and without liquidating any shares or whatever. So the point that I was trying to make is that in terms of the operating level efficiency, in terms of the discipline, in terms of the governance, we have been doing exactly what we have said that we will do.

Correct. And sir, what is our blended cost of fund for the term loan as well as the working capital requirement? And on the...

It is well below 7% because it's a combination of betting credit, et cetera. But our weighted average cost of capital is well below 7%.

Any precise numbers that you can give? I didn't get your point, sir.

I'll have to -- because see, the reason why I don't want to get held on to a particular number because that keeps on changing on a day basis. Today, I do an export order and it gets executed, so any of those export financing, which is at maybe 2%, 3% gets paid off. So if you take 7 and below, we should be okay, because giving you a precise number, then there would be so many caveats that I'll have to put to make sure that I can get held on to that number.

[Operator Instructions] The next question is from the line of [ Ravi ], an individual investor.

My name is [ Ravi Sial ]. I'm just a single investor. You had mentioned that EBITDA last year was INR 1,180 crores for 9 months. And this year, it is roughly around INR 800 crores...

INR 798 crores, to be precise.

Okay, okay. So -- and with a contribution of INR 130 crores from subsidiaries. So that leaves INR 670 crores EBITDA from the mother company. Isn't it a little difficult...

No, no, no. Let me stop you there. It is INR 798 crore for J Saw and INR 130 crores from the subsidiaries. So the consolidated EBITDA of the company, along with the subsidiaries, is INR 928 crores as it stands.

Okay. I was deducting...

No, no. That went up. So okay, I should have clarified that, I'm sorry for that. INR 798 crore is the stand-alone, plus INR 130 crore makes, it INR 928 crore.

Okay. So you were saying that we have a lot of catching up to do. So is the catching up to be done in the last quarter or is it going beyond the year?

See, okay, there are 2 things. Let me address it 2 ways. One, when it comes to a run rate, we are very hopeful the way January has gone by that Q4 on a stand-alone quarter basis should be as good as pre-COVID. So there, the confidence level of achieving the level of operations in Q4, which is pre-COVID, is very much on the card and should happen. But would that be enough to wipe off all the gaps that have been created in the first 9 months? Maybe close, but not definitely. Because what we are looking at is, at the year-end consol EBITDA, because of the contribution from the subsidiaries as well as the catch-up that we will do in Q4, should come a little closer. But on a Jindal Saw stand-alone, even though the Q4 number should be significant better, are we going to hit the EBITDA level of pre-COVID or March 2019, '20? The answer is unlikely.