Jindal Saw Limited (JINDALSAW) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Jindal Saw Limited Post Result Conference Call hosted by PhillipCapital India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vikash Singh from PhillipCapital India Private Limited. Thank you, and over to you, Mr. Vikash.

I welcome you all on Jindal Saw 4Q FY '22 Earnings Conference Call. Today, we have with us the senior management of Jindal Saw, Mr. Neeraj Kumar, Group CEO and Whole Time Director; Mr. Vinay Gupta, President and Head Treasury; and Mr. Narendra Mantri, President and Head Commercial and also CFO. So without taking much time, I'd just like to tell Mr. Neeraj Kumar to start with the opening remarks. Over to you, sir.

Good afternoon to all our friends, stakeholders, listeners. Thank you very much for taking some time to join us. I know this is a midweek. This is a busy day for all of you, but we just finished our Board meeting on 31st, and this was the earliest window that we got, and we thought it's important that we talk to all of you, and we make sure that all of you understand our perspective on the results and how do we see some pointers and guideline on how do we see the times coming ahead of us. So let's look at now first the results. Top line INR 11,243 crores as compared to INR 8,900 crores last year. EBITDA INR 1385 crores as compared to INR 1257 crores. Financial expenses, INR 369 crores versus INR 404 crores. Depreciation INR 372 crores, INR 346 crores. PBT of INR 637 crores and PAT of INR 405 crores. Now if we look at these results and compare it with the last year's results, a, it gives comfort that we are indeed now coming out of the value and on top line, on business, we are approaching pre-COVID levels. And in fact, on many parameters, we have pierced through that. So that's the first top line comfort that we all need to take that, as an organization, multiple factors contributing, we are approaching in many factors we have pierced the pre-COVID level. Look at EBITDA, still gives us something to think about and we all know how the basic commodity prices have behaved in the last -- particularly 6 months, whether it is coal, whether it is iron ore, how their behavior has been. And if we normalize our EBITDA margin, you would all be able to see, it will give you a very definite confirmation that, as Jindal Saw, we are ahead of the curve. So the only concern that we have in these results is the raw material prices, which have been moving in the commodity market. Now what are we doing about it, what we have done about it so far? The first thing that I would like to point to our stakeholders, people who take interest and follow us. For the last few quarters, consistently, we have kept our order book low. We have the sweet spot on the comfort zone used to be around $1 billion. And we have been in and around $600 million to $700 million for the last few quarters, and we have always emphasized that this is by choice. And I would draw your attention that now when there is a volatility in the market so much, we have absolutely adjusted ourselves, and we are performing very well with this new normal of an order book in the range of $600 million. This gives us an opportunity to adjust our contract values. This gives us a protection against how much entry we would have and how much we are exposed to the spot price movement in our raw materials. And since it's a deliberate attempt to keep it at that level, please note we are not letting the top line get impacted. So the execution, there is -- we have been able to now create an operating efficiency, where the execution of the contract and the filling of the order book is getting so well calibrated that our turnover has gone from INR 8,900 crores to INR 11,200 crores without disturbing the order book. And therefore, this is something that, as an organization, we have consciously taken that as a strategy to hedge or to partially give comfort from the very volatile commodity market. Second, you would also see that particularly in the DI segment, the order book is low. Again, that is by choice because we are working with the government. We are trying to impress upon them that a PVC, as we call, a price variation clause, is an essential part for supply of pipes. So where they are item rate contract, where the government buys the pipes directly from us, we have been able to succeed in many states to get the price variation clause included in the tender document, where they go through the EPC model, where, again, we are impressing upon the government that please include this and make it such that the movement -- because it's not -- at this point of time, it is a benefit. But when the price moves the other way, we will have to adjust. The price variation is passed on to the suppliers even in an EPC model. Since we are working with the various agencies, various government, it is best that we have kept our order book low. So our fixed price order book is deliberately kept low. And since it is by choice, we look at our execution for the month or the quarter. Accordingly, we just keep on filling the order book. And therefore, even with a lower level of around [ 600,000 to 700,000 ] order book, the execution is not getting impacted and we are able to create in terms of a better correlation between the pricing as well as the raw material, the pricing of the product as well as the raw material side. And we are working actively with government to have the price variation clause included in their contract, either through the EPC model or through the direct price model. So this, we believe, would give us in the coming year a lot of comfort, a lot of practical business kind of a hedge. We will not be able to obtain a perfect hedge, but we would definitely have a significant amount of hedge which is available. And why I say not a profit hedge because even if the price variation clauses are there, there is always a formula where there is an indexation. Also, if you see the coal prices, there are some monthly averages, which keep in. So penny to penny hedging practically is not possible. So that is something which I thought it's important to spell it out. It's important to let our friends know on how we are seeing this and how we are dealing with this in the coming forward. This gives us the comfort that the EBITDA margin will not only get preserved, but now I would focus my attention on a few other things, which will take the EBITDA margin above those percentages of 14% and 15% in the coming year. We hope that it will move. The second important thing that Jindal Saw has benefited, and it's important to again point it out, is our robust business model. Whatever we have kind of get impacted by the raw material movement in terms of iron ore, coal, it has had a compensatory effect because of the pellets because they all are correlated. Now with the new export policy on these products in place, and the softening, even though it is a little bumpy, but still there is a softening in the coal and iron ore prices, we expect that there would be some easing out on the NSR of pellets, but simultaneously, it would have a compensatory effect on our other product lines, namely the Large Dia, which is the LSAW, HSAW and DI. So this robust business model in Jindal Saw gives us a very effective and a solid protection, especially in a volatile situation. We do understand that we don't have the spikes that some people may have when you're on the right side of the curve. But as an organization, we have chosen to have built a robust safety, and therefore, the performance of Jindal Saw has been consistent over the years. And I'm sure you -- all of you would be analyzing it. So the robust business model is important. Now, working capital, if you see the interest cost, even though the inventory has gone up because of the depreciation of rupee, the inventory value has gone up because of the commodity prices going up. Still, if you see the weighted average cost of capital has come down largely because of a more efficient treasury management. Continuously, the treasury team is working at getting the most optimum resources in terms of cost, in terms of tenure, in terms of -- and that's why if you see the Large Dia -- the long-term funding has also come down. Working capital has gone up primarily because of the depreciating rupee, primarily because of the commodity prices going up, but nothing to be worried, nothing to be concerned because as I told you, the working capital cycle in terms of order book, execution, inventory, everything is being very closely monitored and we are seeing the impact of that. Therefore, these financial charges have also come down. Consequently, now the PBT, PAT, they are all a direct consequence of all these efforts, and that has gone up. So this is where, I would say, a high-level analysis of how we see the results. I'm absolutely sure a lot of you are analysts would be doing your modeling. My request would be, use this opportunity to discuss much larger issues. If you have specific questions, Mr. Rajeev Goel is sitting here. He is listening to my entire conversation. Number level questions, please forward it to him by mail, so that he can answer you by mail. And therefore, that would avoid any confusion, that would avoid any -- details that to everything that you need for your financial modeling in terms of numbers. My sincere request, please send a mail, we will definitely respond. Turning my attention to the consolidated results. If we see the top line INR 13,451 crores as opposed to INR 10,870 crores. INR 1,555 crores. The rest follows. This indicates that now the other subsidiaries are beginning to do well. Particularly, we need to talk about Abu Dhabi, Abu Dhabi DI facility. This has again broken the last year's record, which by itself was a record. So we have broken 2-year record in a row. We are performing well. EBITDA margins are good. It did get impacted because of the figure and prices a little bit. But the business plan is now very robust and it is continuing to do well. The prognosis we see is very good for DI business. One more significant development on the Abu Dhabi facility, I must mention that UAE, Abu Dhabi, has recently allowed 100% foreign ownership. Jindal Saw is among the few, the first large investments, large organizations, large establishment in Abu Dhabi to get a 100% foreign ownership. And therefore, now this year onwards, Abu Dhabi would be 100% consolidated subsidiary of Jindal Saw. So just to give you a sense, last year means the year which has just gone by, 31st March, 2022, the order of magnitude of [ ductile ] in our Abu Dhabi facility was $200 million, which is INR 1750 crores (sic) [ INR 1550 crores ]. So the top line was upward of $200 million. EBITDA was in the vicinity of $17 million, $18 million. So now being a consolidated subsidiary of Jindal Saw, going forward, Jindal Saw would have the benefit of 100% consolidation of these numbers. So they are definitely going to contribute to the results in starting April 1. So that is one significant change that you would notice. The second thing that you would have also seen that there have been some movements in the noncurrent asset or the loans advances, the category of where it is other than the normal working capital of Jindal Saw. I'm sure all of you would have noticed that. As you all know, it has been our constant endeavor to clean up Jindal Saw from all perspective and make it a flagship operating company of the PR Jindal Group. These are all a result of that some of the loans, which we have shown there or which was there, have now started showing movement. A lot of loans have been repaid, a lot of loans we have tried to convert so that we can move it out. So there is a very active now movement on the loans and advances or the other noncurrent assets, which are other than the working capital. And I'm sure during the year, we have a definitive plan to bring this under control, except for the loans that have been given to JITF, which is linked to the litigation in the High Court. So if you leave that aside, all the others is under attention, is we have a definitive plan. And during this year, we see a definite movement towards a reduction in all of them. Significant to point out, we have been talking about it, but now we are on a firm path. Jindal Quality Tubular, which is the stainless business, Jindal Fittings, and our LSAW Indore plant, which is Jindal Tubular. All three are getting merged with Jindal Saw. This is going to give Jindal Saw a significant advantage because Fittings and DI, they go together hand-in-hand, absolutely correlated. Stainless steel, alloy steel, carbon steel, now put together makes us a very formidable players because we have done an analysis. Almost 60% of the A-Class customers, the A Class, which I mean, is using the 80-20 principle. So 60% of the A-Class customers have CS, AS, SS requirement, all put together. So it gives us a very significant advantage in terms of our product range. Our stainless steel business has begun to do very well. I'm very happy to report that even esteemed organizations in the sectors of space, nuclear, now are beginning to look at us. We have started supplying to them, somewhere under trial, somewhere under approval. Another very significant development in that area is the joint venture of Hunting. As you all know, we have announced, I'm happy to let you know that the joint venture company has been incorporated. The work has started. The company, as we speak, is fully capitalized. Both shareholder funds have come in. We did that in anticipation of the Ukraine-Russia war, that if India gets sanctioned, our money should not get stuck. And Hunting also saw the reason, and therefore, we have capitalized the joint venture fully from both partners. And this was done to just rule out that unlikely event of the American sanctions trying to block any investment from an American company into India. So -- but that has given the joint venture a very solid balance sheet to start with. I'm happy to tell you that the treasury team has been able to organize the term loan. They are -- now organized the working capital. And therefore, the joint venture is fully now, from a finance perspective, ready to carry out its operations by all the equipment, pay everything and it's on full force. All the equipments have been ordered. We have gone for the best of class, best in the world. All the equipments are from the best suppliers around the world, mostly Japanese. The intent between the partners is very clear. This joint venture would be a center of excellence. Now when we talk about the technology feed, a center of excellence has a certain connotation, has a certain meaning. So the joint venture would be a center of excellence, the only of its kind in this region even from a Hunting perspective. And it would place the Nashik, which is the CS, AS and other businesses, into a very different league because as we all know, Hunting has a lot of patented products and which are second to none. So Jindal Saw will now with this joint venture be able to gain a lot from the Indian Atmanirbhar scheme because all these products so far has been imported. Now we expect that we would be able to supply it in India, from India, from our Nashik plant, which is good news even for the Nashik plant because then that will be the raw material, that would be the input that would go into the Hunting facility, which is co-located in Nashik. And there, again, on the ground, the sheds and everything is absolutely on track. We are expecting that we will soft launch second half of this year. So by September, October, we are expecting a soft launch. We are working with potential -- and we are also attracting a lot of other technologies. Because Hunting being what they are, all their technology partners across the globe, which also adds to the whole product portfolio accessories. They are also getting attracted because they all have a foothold in India, in a joint venture where one of the partners is America. So that ticks a lot of boxes for a lot of technology partners because having an American partner, all the joint venture, then when it comes to governance, things like those, those boxes are automatically ticked. So we are attracting a lot. So Hunting joint venture will be a very, very important step for us to propel this business, which is the carbon steel, alloy steel, stainless steel, tubes, and pipes into high value-added segments. We also have a definitive plan. As you know, we are among the few who have a very heavy extrusion press. We intend to, again, move back into value-added segment. So duplex, super duplex. These are segments that we are all aiming. Quality systems are being put in place and we hope to move in that segment. So that would be one of the key drivers which should help us propel the organization into a different league, and it would be a value-added product. Therefore, EBITDA margin is likely to improve. DI, as you all know, we have participated in Sathavahana transactions. The results are awaited in terms of all the valuation, et cetera, it hasn't happened. There is a small legal hitch, a Dubai-based company has made a representation, and we hope that the courts will take a view on it very quickly. And once that happens -- then let's see if that happens, then Sathavahana would be in our portfolio, a straight 25% increase in the capacity and a foothold in South India. So all told, with all these movements this year, we see some significant movement on the Jal Jeevan Mission because '24 is coming close, which is the time when Mr. Prime Minister would like to go for the next general election. We expect a lot of movement in the Jal Jeevan Mission, which translates into LSAW, HSAW DI pipes for us, HDPE pipes for us. We are completely ready to take on that whatever opportunity comes our way. I think I have covered all of those. As I said, okay, duty -- export duty, as we all know, government, there are indications that the senior government officials, even the PMO has been involved in it. Essentially it is going to have a softening impact on the commodities, which is largely good for us because then our LSAW, HSAW, DI, et cetera, will improve. It would have a compensatory effect on pellets as we see. So with all of these high-level remarks, let me stop, take a few questions. My team, Mr. Vinay, who is the Treasurer, Narendra Mantri, CFO; and Mr. Rajiv Goel, who's a part of Vinay's team, we are all here. I repeat, specific questions towards numbers, which you would require for your financial modeling, please send a mail, we would be happy to respond to you on mail because that's within accurate, it's transparent, it is more firm. But otherwise, any questions, I would welcome to take a few questions, we have some time. Thank you very much.

[Operator Instructions] The first question is from the line of Pratiksha Daftari from Aequitas.

My first question was on the pellet side, if you could elaborate on what would be the near-term impact of this export duty, especially for the orders that were already booked or in pipeline. And how does the duty play out for those orders?

Okay. Export stuck in pipeline are very small in nature. I'm told that the industry is representing that all of these, which are already either in high seas or orders should get an exemption. And we are hopeful that we will -- we also be able to get that general exemption. Even if it doesn't come, the amount is not significant. There are not many. Because anyway, as you see, our pellet, the catchment area for us, the natural advantageous area for us is Gujarat, our capacity and supply in Gujarat kind of balances very well with each other. So going forward, yes, we do see a general softening of prices a little bit. But to answer your specific question that are we stuck because of the policy coming in between, the answer is insignificant.

And if you could comment on DI outlook given the capacity addition that we happen to see in somewhere Q1, Q2, how does that affect that outlook? And basically pricing in our market?

Okay. DI outlook, we see a very good outlook. A, '24 general election is coming close, Jal Jeevan Mission are top line initiative of Government of India. States following the path, various schemes, Jal se Nal (sic) [ Nal se Jal ] scheme and all that. So all of those macroeconomic and other factors are supporting healthy tender flow DI business for us. Our Gujarat plant is operating now to capacity. We have added a new finishing line for exports, which is basically focused on exports. As you all know, we have got up to [ 1,200 ]. Also, it's important for all of you to note there has been a good development in Europe. We have been able to achieve a patent for our double-chamber pipes. So now our effort would be to try and get the double-chamber DI pipes into India as well, especially in difficult terrains. If we do that, since we have a patent now in Europe, we'll try and take the advantage of that, get a similar quality or benchmark for only quality products or producers in the [ DCP ] market. So DI, we are very hopeful. On Sathavahana, as I said, which will add up to 2.5 lakh tonnes of capacity, on Sathavahana, except for the indication that we are very keen, we are very interested. We are in the queue. I wouldn't like to say much because the matter is at this point of time with NCLT. And we hope that it would get sorted out very soon. If we are successful, it would change the landscape of our DI market because we would be a dominant player in South as well.

Just -- so basically, we are not seeing any pricing pressure. I mean, we're not envisaging any pricing pressure because of increased capacity? Demand will be able to -- demand will be strong. Is that what you're saying?

Yes. At this point of time, the demand is strong. To the extent that some -- a few places we have even seen just to take care of the pipe demand. Some governments are even looking at permitting HDPE pipes, which was earlier DI pipes. So they are converting because -- as I told you, 2024 is coming close. So there is enough demand to accommodate everybody. And so there is no -- there's not any pricing pressure.

One question on the SAW side -- SAW pipe side. So LSAW order book seems very strong. So is it that we are seeing that demand has started picking up strongly in this segment? And secondly...

No, no. All around, as I told you in my opening remarks, now we are seeing the economic activities similar to pre-COVID levels.

Okay. And what would be the impact of raw material volatility specifically to this segment to this order book that we have?

I have already elaborated in detail how we are trying to hedge. And wherever we are able to get a price variation clause, then we are largely productive.

The next question is from the line of Arijit Dutta from Kotak MF.

Sir, my question is mainly on the DI pipe as a segment. Now what I understand that in the last 2 years -- while I -- before that, while I agree that demand is strong, especially we are heading for an election, Jal Jeevan Yojana. But here, there are many players, especially in the East who have minted money, I'm talking about the steel players, who has minted take money in the last 2 years, especially the smaller ones. And they are contemplating for growth drivers post this export tax and the infrastructure overhang that we are seeing and the housing overhang. What are the roadblocks they will face or what are the moats we are having in the DI pipes as a segment?

Yes, I got your question. I've already partially hinted at that. We are constantly moving the quality and the product bar up. And therefore, it would be an uphill task for people who are not used to this segment to catch up. double-chamber pipes, all have been developed, and it's a very, very definitive entry barrier for people who do not understand quality. [ Thinner ] pipe...

But for the basic pipes, only a capacity of, say, INR 100 crores will be -- only a CapEx of INR 100 crores will suffice them to enter this segment, you think?

No. The answer is, no. Why no? Because DI pipe, the manufacturing of DI pipe is, a, capital intensive; b, technologically you need advanced things. For example, your basic route is hot metal. So you need to have either a blast furnace or an electric arc furnace or an induction furnace. In India, blast furnace, because you have abundant of iron ore, is the most efficient route. And therefore, the shorter route of induction furnace and electric arc furnace is available, but economically, it is not viable. So by itself, if you have to have a blast furnace, then the INR 100 crore investment that we are talking about, is not enough. Then you have to have a centrifugal casting machine, which is also now becoming very, very sophisticated. And because of that sophistication, the quality in terms of the weight, in terms of the dimensions, we are raising it to a different level. Annealing is a must. Annealing furnace is again a huge heavy investment, plus it is energy incentive -- sorry, energy intensive. You need a source of energy, either you use natural gas. We use the blast furnace gas. So it makes it cost-effective. And then you need a finishing line. So to set up a DI plant is among the more difficult as compared to, for example, if I give you a comparison, setting up an LSAW, HSAW plant is far simpler than setting up a DI plant. In DI plant, you start from hot metal where your raw material is either plates or coils. Plus, it doesn't go through the same process of finishing. In DI, the finishing is very, very significant, tedious. You need zinc aluminum, you need the internal cement lining. Then on top of it, you have to have a or a PU or [indiscernible]. So setting up a DI plant is not easy, plus as an organization, if you are not used to very high quality standards, you will have to go up the learning curve.

Very, very well explained. Sir, if a plant is having a -- if a steel plant is having a blast furnace, say 1 million tonne capacity or somewhat 1 million capacity, what would be the approx cost per tonne for setting up a DI plant from there, if they already have a blast furnace?

If they already have a blast furnace, then it all depends what kind of a continuous casting with CCM, what size they want to go. But let me put it this way, to set up a DI facility of that capacity and nature, we have 0.5 million tonne in Gujarat. Today, the replacement cost of that would be upward of INR 1,000 crores.

No, no, INR 1,000 crores is for 200,000 tonnes. Since 0.5 million, it will be more than INR 2,000 crores.

More than INR 2,000 crores. No, but he's saying if you have a blast furnace.

No, I'm saying replacement of 0.5 million tonne.

So replacement of 0.5 million tonne would be close to INR 2,000 crores. But if you remove the blast furnace, then as I said, it will be upward of INR 1,000 crores.

The next question is from the line of [ Ashav Patel from Molecule Ventures BMS ].

Sir, for FY '22, DI pipe segment, what proportion of sales is coming from older, lower-price contracts?

Sorry, your voice is not clear. Can you please repeat your question once again?

Sir, for FY '22, DI pipe segment, what proportion of sales is coming from older, lower-priced contracts?

In the current year, you say?