Jindal Saw Limited (JINDALSAW) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to the results con call of Jindal Saw Limited, organized by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is recorded. I would now like to turn the conference over to Mr. Sailesh Raja. Thank you, and over to you, sir.

Yes. Thanks, Mayuri. Good evening to all. So on behalf of B&K Securities, I would like to welcome you to the Jindal Saw 3Q FY '22 Earnings Call. From the management side, we'll be hearing from Mr. Neeraj Kumar, Group CEO and Whole Time Director; Mr. Vinay Gupta, President and Head Treasury; and Mr. Narendra Mantri, President, Head Commercial and CFO. So without taking much time, I hand over the call to Mr. Neeraj Kumar for the initial remarks, and post which, we'll open up for the Q&A. Over to you, sir.

Good afternoon, friends. On Friday, we had a Board meeting. I'm sure you would have seen the results and also the brief analysis that is -- that we attached with the results, which will explain the results. However, let me just walk you through some of the important numbers, and then probably we should go behind the numbers to see what are the highlights and how in this difficult situation, Jindal Saw stands strong. And why it's a difficult situation? Because the second wave of pandemic, the whole economy, we are recovering. The second, at this point of time, if you see, the raw material prices for Jindal Saw is very volatile. We all know what has happened to iron ore. We all know what has happened to iron and steel. And now we all know what is happening to coal. And all this in a global perspective where China has its own problems and the spillover of the China effect is still uncertain. So one side, you have a completely volatile, unpredictable market with respect to iron ore, with respect to coal, with respect to iron and steel and still, we have a situation where we find ourselves in the middle of here, where there are green shoots, there are glimpses of hope. And most important, there is a strong confidence within our organization that we have sailed through many. This one would be no different. We have actually come to terms with many of these situations. Unless there is a third wave, unless the coal prices continue to remain what they are or even more volatile, I think Jindal Saw is past the cusp. We should close the year well. You already have the first half results in front of you. This quarter, we had a top line of INR 2,571 crores, EBITDA of INR 380 crores and PBT of INR 196 crores as compared to a comparable quarter of INR 2,000 crores last year, INR 295 crores last year and INR 112 crores last year, respectively. If you see -- so this was the comparable quarter last year. If you look at the trailing quarter, we are marginally behind various factors, Q2 traditionally, for Jindal Saw because of the monsoon, et cetera, has always been a little subdued than Q1. And this got coupled with the raw material prices, which also has shown that EBITDA as a percentage from a trailing quarter where it was 16% plus has come down to less than 15% marginally, but the same trend continues, if you look at Q2 last year. So that's how broadly you should look at the result. In the given circumstances, I would request all of you to see the positivity, the trend and the ability of Jindal Saw to go through such a troubled times in terms of pandemic and volatility on the raw material side. Let me turn my attention to some of the other aspects, which I think are very important for us to understand the result in the perspective. At this point of time, the sector or the division of our entire business portfolio, which has been hit the hardest in the HSAW, primarily because: A, increase in steel prices; B, the EPC contractors putting their projects on hold; the government trying to defer the contracts because an HSAW market is typically a wafer-thin margin market. It's like you take a raw material price conversion and that's how the pipes are sold. And therefore, the HSAW market is the one which has been hit the hardest at this point of time. But what we must be happy is, going forward, we seem to have a good time ahead because the Jal Jeevan Mission, the sectoral demand for water, for transmission is going to go very strong. So the moment the steel prices stabilizes, the moment there is a coming -- all this pent-up demand is going to come back, and therefore, HSAW market, which at this point of time does appear a little depressed is a very, very small cyclical factor, which is there. Oil and gas, there is a good news. In terms of now GAIL, ONGC, IOCL, they all have some major plans, which should be in the market by way of a tender within this year. So oil and gas, especially the oil prices which are stabilizing, also gives you good news for the LSAW business in the export market. Export market within our sales funnel, we are looking at over 3 lakh tonnes in the next 2 years. Let me repeat, LSAW, oil and gas export market, we are looking at over 3 lakh tonnes in the next 2 years. Likewise LSAW in the domestic water sector, which is a slurry pipeline, also we see some demand, which is a new one, which is going to come. We are happy about it. Exports also is showing a promisable sign in terms of those slurry pipelines, et cetera. HSAW already I have said, water domestic, huge pent-up demand. The moment the price stabilizes, you could see all coming back. And you all know, Jindal Saw is the best positioned among all its peers, multiple locations, strategic locations and capacity available, talent available. We have -- we are absolutely ready. We are production ready, multiple locations and everything is there. So the moment these demand come, we should be there to take care of it. Looking at order book, in terms of we are a little low. Typically, our comfort zone is over $1 billion. Currently, we are at around $700 million, $800 million, but it is not worrisome at all because, as I told you, LSAW, HSAW, a lot of pent-up demand, a lot of things in the pipeline. And therefore, even though the order book is a little lower, relatively low at this point of time, it is not a matter of concern. We have enough to close the year well. Now let me address the working capital cycle and debt because they are all interlinked. The working capital cycle, if you see, is showing improvement. Consequently, there is an increase in the short-term debt. It is just that on the balance sheet date, there were some LCs, which were paid. And therefore, the creditors moved to the debt. So it's only a balance sheet kind of a reworking or regrouping item without any significant impact on the business and, therefore, none of you investors should get concerned about it. Now broadly, we see good business ahead, healthy business ahead and assuming no pandemic third wave or severe third wave and some stabilization on the raw material prices, we expect the next 2 years to be very good for us in our existing business. Let me hand back -- suffice us to say that DI business continues to have a very, very strong momentum and continues to have a very strong demand. Let me address now some of the very important aspects, which are more forward-looking. First, you must have seen the announcement that Sathavahana has made and we have made. Through a public notice, a selection by experts, approved by the NCLT, based on the recommendation of RP, Jindal Saw has been selected as an agency which will carry out the repair and maintenance of the Sathavahana facility to put them back to work. This is a INR 260-odd crores contract, which, A, gives us a put an insight, ability to put this capacity, save this capacity from distinction. It's a very strategic location in South India. So it gives us an ability to do all of those for the industry, which is the DI industry. Second, as a whole process goes through the NCLT, I'm sure there would be a beauty parade because there is an expression of interest, which was already out. I'm told we are few of them. And when I say a few of them, we include ourselves. So it also gives us a chance to participate in the beauty parade conducted by NCLT through their RP very seriously. So things have moved in a direction where upon becoming a successful bidder in the NCLT process, Jindal Saw would add close to 2 lakh to 2.5 lakh tonnes of DI capacity in South India, inorganically, which will be a significant jump in our capacity and ability to address the South Indian market, which thus far has been addressed only by 1 supplier. This also would give us some power, which is, at this point of time, captive plus some surplus power that we can do various things, including using it for group captive. So there would be a certain amount of power also which would be available. Likewise, there would be a certain amount of coke, which will be available, which can be a good synergy with Jindal Saw as a whole. So we have won the contract for repair and maintenance. We have -- we are among the few who have expressed the interest to participate in the bidding process. And definitely, we would be taking this opportunity very seriously. Upon successful completion, if that is an assumption, our DI business will take a significant step forward, including additional power that we can use or we can benefit from, additional coke, which we can use or we can benefit from as an overall company. The second important thing that I wish to address is Section 34 argument of NTPC versus AITX. We had a meeting on 25th of November hearing -- 25th of October, yes. We had on 25th -- as is expected, NTPC did not comply with the requirements of the court. And therefore, the court has had a few words for the learned council of the NTPC. And now they have given a series of dates. They said, okay, now we will begin to hear this on a day-to-day basis. NTPC has been asked to file everything, summarize everything into a 5 figure in terms of their objections. We had to do the same. We have submitted ours, NTPC is yet to. So we hope that now things are coming to foray where the judge is very keen that we should listen to now this case on merit. And as I said, judge has also asked both sides to submit something on -- as a 5-page basis, we have submitted ours. NTPC has not even submitted as yet. We hope that this time, they would comply with the court suggestions, the court requirements, and we will progress this case as quickly as possible. The third aspect that I would like to confirm ours is the stainless business of ours has stabilized. In terms of production market, the whole market now knows that Jindal has a very strong probably among the few extrusion facility in stainless steel, which puts us in a different league. So now there is a market awareness. We have done some very good deals. There is a stability in production. We are adding a few balancing equipments in that area, and we would very soon be adding to the strength of carbon steel, alloy steel business along with the stainless steel business. Also, all of you are aware, we have a license from Hunting for premium connections. I'm happy to let all of you know that at this point of time, we are in active discussion for a possible joint venture with Hunting, which again will put us into a very different league, when it comes to this business, when it comes to addressing the OCTG, when it comes to addressing the high value-add premium, et cetera business. So we stay focused on our business, move towards value-add, stays strong in a difficult scenario and the overhang of NTPC likely to end soon. We are hopeful that in these difficult situations, Jindal Saw's performance would be very strong over the next 12 to 18 to 24 months. One thing which remains or concerned is our market cap. It has seen some movement. But still, it's far from what our expectation is. Even if you take any parameter, it's very far. This remains our concern, but we are hopeful, we are confident that the investors would see the value. Now one thing that we still do not have is a deep profited strong institutional investor, and I'm sure it would be -- would catch the attention of the relevant people and it would reflect on our market cap, the value that we are creating. But as a management, we are committed to creating very strong, fundamentally strong company, which does good business, maintains a very high degree of governance and creates value for shareholders. And we hope that the market would realize this soon. With that, let me end and take up questions.

[Operator Instructions] We have first question from the line of Mr. Saket Kapoor from Kapoor Company.

Sir firstly, if we look on a Q-on-Q numbers on a consolidated basis, the numbers are on the lower side. And also, sir, the standalone number, our profit is INR 196 crores, whereas on the consol, it is INR 179 crores. So what led to the reduction in the profitability on a consolidated level, sir?

Let me just -- okay, to answer your question, standalone to consolidated, the difference is on account of -- as I told you, the U.S. has not done well. It is now picking up. And B, Abu Dhabi, there was a slight glitch because the pig iron prices were up. See, Abu Dhabi, we don't have blast furnace. It operates on induction furnaces. And the pig iron prices, as you know, is also crazy. And that's the one which has caused this dip. But again, it's temporary, we will be able to get over it.

Okay. Right sir. And sir, as you are telling that things are going to improve, so how should H2 be shaping up in terms of the deliverables of pipe? And sir, in the order booking also, we have observed that INR 2,100 crores worth of order booking has come from the water segment. So that is mainly towards the Large Dia pipes that is attributable to, sir? That 2,100...

So it is both. It is DI as well as Large Dia. But how do we look forward? As I told you, H1 plus a good prognosis, less the volatility in the raw material market. That's the equation that you should look at. I'm restrained by these -- my CFO and others to give you our guidance on the EBITDA or the numbers. But essentially, there is optimism, there's positivity because of our strong order book, ability to get orders. We only had -- it is till how long this coal prices remain very volatile. And therefore, I am confident of getting a very, very good result next year, for sure. And this year also, the trend should be improving.

[Operator Instructions] We have next question from the line of Ms. Pratiksha Daftari from Aequitas Investment.

So my first question is for the subsidiary, the Abu Dhabi subsidiary. What is the volume outlook? Last H2, we had a very good period. So do we expect to do similar this year?

Yes. Last year, we crossed 2 lakh tonnes. And this year, we will beat that, for sure.

Okay. And profitability, like you said that the pig iron prices have gone up. But do we feel that the worst is over or we might have some issues for some more period, like say, 1 more quarter?

See, we have tried to secure ourselves by procuring pig iron looking forward. So to that extent, we have secured ourselves in Abu Dhabi on pig iron; in India on coal. But these are all based on assumptions that the prices continue to now remain stable or start really coming to a realistic level. But as I said, China factor is really now causing a lot of uncertainty, a lot of concern. So assume that the China continues to behave in a different fashion and if the prices continue to be very volatile, then whatever hedging that we have put in the system for pig iron in Abu Dhabi and coal in India, may have -- the impact of that -- the positive fact of that may get limited. And the spin-up factor is really creating a lot of uncertainty, where we are drawing hope from that fundamentally and in reality, Chinese economy is really in trouble or how much they can sustain and how much they can window dress is now anybody's guess. So otherwise, China economy is becoming unsustainable for themselves and that's why -- but we all know what China -- it's completely opaque. So that gives us hope that this may not continue for very long. And soon, we should be back on doing good business globally.

Understanding. Sir, my next question on seamless front. So what would be the execution period of our current order book? And secondly, do we expect the realization to sustain the realization that we had so far?

What we are doing is wherever there is an EPC or the contractors are -- or the -- we have private participants, we are going back to them for repricing. So therefore, the NSR, we are able to maintain. And at this point of time, at least in the seamless segment, there is not much worry of the execution. We are maintaining a very healthy now balance between the order book as well as our execution capabilities.

Okay. So what would be the execution period for the order book right now?

Per month, we are doing in the seamless, in the vicinity of, say, about 15,000 to 18,000 depending on the sizes and the changeovers.

This would include stainless as well?

No, I'm talking about seamless.

Seamless. And for stainless steel?

Stainless steel, on an annual basis, now we should be able to do 20 more, if you take the welded as well as tubes nonwelded. That we...

Right. And when we say we have been able to reprice, we are -- basically able to pass on the stainless steel prices and actual business, not with a lag.

Yes, yes, yes. Exactly. Whenever we go for repricing -- see government contracts are more or less fixed price contracts. So we have to absorb whatever is the up and down. But in the private sector, whenever the clients are private sector, right, EPC guys and the others, there is a possibility to revisit them because then it works both ways. When there is a -- we request them for a pass it on, when there's a decrease, then they require us for -- so it's like it works both ways.

Understood. And sir, what would be the execution period for our SAW price right now?

SAW price this year, we -- if we go to [Foreign Language] around 45,000, 35,000, 80,000, 70,000 should maybe go to 120,000. And HSAW is about over 1 lakh or close to 1 lakh. We should go beyond 2 lakhs to 2.25 lakhs. So this order book, how long it will take to consume is actually not the way to look at it because this is like a -- it's like a tub. So there is a continuous filling and there is a continuous drain, and everything is fungible. So we are expecting to close the year-end on an HSAW of 225,000 total and LSAW of 120,000 total. So that would make you 3.5 lakhs to 4 lakhs of Large Dia business, which typically we are happy when we do more than 5 lakhs, 5.5 lakhs. So that is, as I told you, one area of concern in terms of tonnage. But it's more than compensated by what we are doing on the Pellet side. So here, there is a concern or there is a matter of -- that you will see a dip. But as Jindal Saw, we continue to stay stable because that would be more than compensated by what we have done in Pellets.

Okay. Okay. So sir, on Pellet front, I think we are seeing that the realization has moderated a bit. And for H1 at least, Pellets have substantially supported our margin. So how do I look at 1 Pellet segment performance for the H2? And do we see a material impact on margins going ahead, thanks to pellet prices?

Pellet prices have stabilized, has come down a little bit and we hope that it will stabilize. Even if it comes down, it will come down marginally. But what you need to understand that what we lost in Large Dia, we gained in Pellet. Now if we lose anything on the Pellet side, we will gain in the diameter -- Large Diameter pipes because there is enough pent-up demand and there is enough capacity. So therefore, as an organization, we would -- there is an automatic balancing, which is available and that is where we will take advantage. See Jindal Saw has got a few things. A, the business model is such that there is automatic balancing. B, our market presence, market positioning is such that we are on the -- we are actually the first among the peers and the equals to get a contract if we want to. So that gives us the flexibility of adjusting very quickly to and making the best of the opportunity.

Correct. So sir, do we still stick with the guidance of our EBITDA per tonne profitability to be similar to FY '20 levels for the year? Or it might go down a little bit?

No. See, last quarter -- normally, we keep around H1 EBITDA as 15%, 16%. Last quarter was 16.6%, which was Pellet. So EBITDA should continue between 14.75% to 15.25%.

Okay. All right. And sir, any plans of debt reduction?

Debt reduction, debt will reduce as per schedule, and we have a very healthy profile. We don't want to disturb it because now the banks -- as it is, our cost of borrowing is very good. But now the banks, I'm told, are becoming a little revenue minded. And therefore, any prepayment, they always insist on the prepayment premium or penalty whichever way you look at it. And therefore, on the term loan basis, as it is, we are somewhere around INR 1,600 crores, INR 1,700 crores. It will run it towards -- working capital is the one which is keep on going up or down as per the requirement of the business.

Next, we have in queue, Mr. Vikash Singh from PhillipCapital.

Sir, just wanted to understand a little bit more on Sathavahana. Who will pay for this contract, which we have got? Or is this a continuum of the fact that somebody has to win these assets and then they will pay for back on some money they will be for NCLT? I just wanted to understand that side of thing.

The contract is structured such that once we put this whole 2 facilities to work in terms of once it is up and running, commissioning, then we would be allowed to produce, spend and recover our money. This is one process. This is how the construct of the contract is for repair and maintenance. Second is NTPC process, which is the process of -- sorry, second, the NCLT process. So that process is where the RP, along with NCLT, would be wanting to select a possible owner. Depending on the results, who the possible owner is, they may want to deal with the repair and maintenance agent, which has been duly appointed in a manner, which is like business set. So therefore, both will run parallel. The result would depend on who the successful bidder comes out to be after the NCLT process and how that discussion happens between the successful bidder, who is the owner and the repair and maintenance agent, which currently is Jindal Saw.

7 Understood, sir. So sir, is that a way to -- just a follow-up on this. So any IRR which we would be getting? And is it safe to assume that until and unless we would cover our full money, these assets can't be transferred to somebody else?

No. No. See, as per the NCLT, this is -- this becomes -- it makes -- it keeps the -- it makes Jindal Saw the work that they do, the contract that they have. They become a secured creditor in a manner of speaking. So they have to be dealt with by the successful bidder for the ownership.

Understood. Any IRR we are getting on this initial investment, which we would be putting up in Sathavahana? In case, if you don't win it, then there should be some IRR, right? So it's not about the -- just absolute money returning?

At present, the beauty parade is yet to happen. There are several players in the EOI. And therefore, I would like to pass this -- answer to this question for a later date.

Understood. Understood. Sir, my second question pertains to -- in our press release, we have written that we would be very cautious in taking new orders because of the high prices. So just wanted to understand, have we came to the understanding that the price increase in steel has basically came to a halt and now we would be aggressively participating in orders? Or we are still trending a little bit sideways for some more time? Just wanted to understand our bidding strategy going forward.

Bidding strategy for what?

So basically, like you say, given in the press release that you were very cautious in taking new orders. So have we -- now would the bidding aggressively going forward thinking strategy?

All the strategy is very simple. The bidding strategy is simple. We will participate in all opportunities that come our way. But we will not bend over backwards to do what in our view is not a good business. Thereby, what I mean is, since we have a healthy order book, since we have multiple businesses, we don't think there is any reason for us to get desperate. And whenever we have seen in a monopolistic or in oligopolistic situation, people who have got desperate anyway, they have steamed out very quickly. So we are building the strength and staying power to stay until we are able to do good business, and we don't see any reason or anything to worry about it. We will definitely not act desperately in the market.

Understood, sir. Sir, pertains to a previous question asked by 1 participant accounts regarding repricing of orders, sir, could you share with us what percentage of our order has been repriced and the margins have been now protected there?

In DI, we have covered more than 50% because whatever is the government, as I told you, as -- once it's a fixed price contract, it's very difficult to renegotiate because government would not renegotiate with you. But most of the EPC, in DI, in Large Dia, we have been able to renegotiate and get some compensation additional.

Understood, sir. Sir, just 1 last question regarding our HSAW pipe outlook. You said that these things are you're expecting to improve, but at the same time, the steel prices remains on a higher level. So just wanted your thought process. Is that what are the -- is that the EPC contractor has came to you that they have taken this new steel prices as a new normal and they want to go ahead with the project? Or what is the change which is basically would drag that demand in this account for the stainless steel?

See, there is always a pent-up demand. As I told you, GAIL, IOCL, oil and gas factors -- oil and gas sector is likely to move ahead irrespective, which is essentially GAIL, ONGC, IOCL and all of those because there the stakes are too high. And therefore, those tenders, which are in the pipeline will move irrespective is what are their strength is. For the water sector, there is a huge pent-up demand, but that is where both the EPC contractors as well as the irrigation and PHED and other departments of all the states have held back certain tenders and certain contracts, which the moment the raw material prices gets to stabilize, we believe will come in the market very soon. So the water sector would be dependent on the raw material prices. Oil sector will come irrespective, and we expect some very large orders to come in the coming 4 to 5 months.