Jindal Stainless Limited (JSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Jindal Stainless (Hisar) Limited Investor and Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Devrishi Singh of CDR India. Thank you, and over to you, sir.

Thank you, Rio. Good afternoon, everyone, and thank you for joining us on Jindal Stainless (Hisar) Limited Investor and Analyst Conference Call to discuss the merger of the company into Jindal Stainless Limited. We have with us Mr. Abhyuday Jindal, Managing Director; Mr. Ramnik Gupta, Chief Financial Officer; and Mr. Goutam Chakraborty, Head, Investor Relations of the company. We will begin the call with brief opening remarks from the management, following which we will have the forum open for an interactive Q&A session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature and a disclaimer to this effect has been included in the presentation that was shared with you earlier. Now I would like to invite Mr. Abhyuday Jindal to make his opening remarks.

Thank you. Good afternoon, everyone. On behalf of the management team of Jindal Stainless (Hisar) Limited, I welcome you all to our investor and analyst conference call. This call follows a key decision we took in our Board meeting, which was scheduled yesterday on December 29, 2020. Our Board of Directors that earlier constituted a committee to explore and evaluate various options of consolidating of the business of Jindal Stainless Limited and Jindal Stainless (Hisar) Limited and/or other group entities. In this regard, we are extremely pleased to inform you that the committee has demanded the merger of JSHL into JSL, subject to shareholders and regulatory approvals effective from April 1, 2020. I will begin by sharing my perspective on the proposed merger, and then we'll hand it over to Ramnik, who will take you through to the details of the entire transaction. As a combined entity, we'll have a total production capacity of 1.9 million tonnes per annum, and it places us in the top 10 stainless steel manufacturers in the world. Among these countries, India is one of the fastest-growing stainless steel markets, and as a single entity, we will have a significant role to shape and grow this industry. The increased scale of the combined entity will result in significant economies of scale and a large number of operational financial synergies that would lead to consolidation of strengths. We believe one of the key synergies of the merger includes a strategic fit of the future growth potential of both companies. JSL's Jajpur plant is well equipped with surplus land, world-class infrastructure and a substantial potential to undergo cost-efficient brownfield expansions. Therefore, there exists a considerable reinvestment opportunity to unlock future growth. While JSHL is located in the vicinity of key consumption centers, JSL, which is located in close proximity to raw materials and port infrastructure for better logistics, is expected to enhance the overall operational efficiencies. Furthermore, while JSHL offerings are largely focused on specialized stainless steel products, like Precision Steel, Coin Blanks, Blade Steel, JSL is largely focused on wider, high-volume stainless steel offerings. Therefore, the consolidation of business will result in diversified product portfolio and company being able to cater to the ever-growing demand from ABC, Auto Railways and SPD segments. We are confident that this development would go a long way to realize greater synergies and maximize greater value for the group and in particular, for JSHL shareholders as well. This arrangement will result in the single entity -- listed entity, with a simplified capital structure. So overall, we look forward to this potential consolidation of JSL and JSHL businesses, which is expected to be value accretion -- accretive owning to multiple significant benefits. With this, I would now like to hand over to Ramnik, who will take us through to the details of the proposed merger transaction. Thank you.

Thank you, Mr. Jindal. Good afternoon, and warm welcome to everyone joining us on the call today. The presentation and the press release providing a detailed overview of this proposed merger had been released to the stock exchanges. I will briefly take you through the overall transaction highlights for the proposed merger. The entire valuation exercise has been conducted by independent valuers after analyzing various matters of valuation. SKU fairness opinion, all the valuation and the spread ratio has been issued by SBI Cap as a merchant banker. So for as a proposal, JSHL will merge into JSL, leading to a single legal entity going forward. Under the terms of agreement, which has been unanimously approved by both JSL and JSHL Board of Directors, the promoter will hold 57.1% stake while the remaining 42.9% will be held by the shareholders in the combined equity. The merger of the JSHL into JSL will be an equity merger with swap ratio of 1:1.95 shares of JSL being allotted for every share in JSHL. As for the proposed structure, mobility business for JSL Lifestyle businesses, domestic subsidiary of JSHL, would be merged into JSL. Non-mobility business would be carved out as a separate team entity named Jindal Lifestyle Limited. Jindal Stainless Steelways Limited and Jindal Lifestyle Limited will be operating as a subsidiaries of merged JSL. The transaction is subject to approval by JSL and JSHL shareholders, receipt of regulatory approvals and other customary closing conditions and is expected to close in the second half of FY '22. We expect to derive significant synergies from growth and operational efficiencies, which would go along the way in assessing our performance. The combination of JSL and JSHL is compelling and the shareholders will have an opportunity to participate in the new company's long-term value creation potential. This concludes my remarks on the transaction details of this acquisition. I would now request the moderator to open the lines for the question-and-answer session. Thank you.

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

Congratulation, again, moving with the reconsolidation. I just wanted to consider because, I guess, in the merger, I guess we have at the -- somewhat, we feel that the minority shareholder of JSHL might lose some value because if you look at the holding JSHL indirectly used -- I mean, directly used to hold around 30% stakes in JSL plus the loans given, intercorporate deposit by JSL to JSL. And the -- I mean the Lifestyle subsidiary, which seems on the verge of doing good is again getting merged with JSL, the benefit which used to be given to a JSL shareholders. So can you throw some light on all these issues, which will be faced by the minority shareholders of JSHL? And how are they going to benefit?

So Jatin, if you see my remarks, which I especially mentioned about that, this valuation has been done by independent valuers, and they have gone through the various matter of the valuation and then they arrived at looking at from all the stakeholder perspective. So what is best from the minority stakeholder, which you mentioned about considering all the factors there. And they arrived on that matter independently without -- we are not influencing in that part. It's a totally independent opinion they have given on the matter. Apart from that, it has been fairness opinion as well as...

Larger picture.

Yes. So they have considered a whole broader perspective from the organization perspective, the larger picture. And this opinion has been -- independently opinion -- fairness opinion has been given by SBI Cap, who are the merchant banker. So they have considered all the factors on the global perspective so...

And just to add that we are basically that this larger entity is going to create a much bigger shareholder value than if what you were suggesting a Lifestyle or this pack, this combined entity is going to create tremendous value for all our shareholders, minority, majority, everybody.

I agree, because if you look in the previous calls also, I mean, there was a mention that JSL is largely -- I mean, JSL is focused on stainless steel offering like JSHL is focused on the high-margin products. So after the merger, if I just want to understand if you can quantify from 1 or 2 years down the line, probably 3 years down the line, what is the synergy that one can get it? Because currently, if I'm seeing 13,000, 14,000 EBITDA per tonne, how much sustainable it is? And post this merger, what is the upward tick we can see in the -- improvement in the operating performance?

So if I tell you in terms of EBITDA, it will remain at the same level. There will be a lot of synergies at the entity level, but in terms of our EBITDA per tonne, that we don't expect to grow to the -- remain to the level of 13,000 to 15,000 per tonne. A lot of synergies will be created at the group entity level in terms of stronger balance sheet, one large entity competing with all the global majors in the world, top 10 in the world now, better negotiating power with all our vendors, logistic providers, suppliers, service providers with everybody, we expect to get a huge benefit from a larger entity scope. So that is what we're looking at directly, from operational side is what we're currently working on. How do we, whatever we have to split when the AMP happened and the company was split, all that, we are now rolling back and create a strong one large entity.

So that means -- I mean, if I'm not wrong, each other -- at the operational level, everything will remain same. But at the organizational level, there is a -- there will be quite a good of synergy that you can see? Right?

Yes, yes, yes.

Yes. And coming on to your JSL Lifestyle subsidiary, which you've merged -- now which will be merging with JSL on the mobility front, so if I'm looking at the construct of the numbers, the Lifestyle reported near about INR 120 crores to INR 130 crores of the revenue with INR 13 crores, INR 14 crores of EBITDA. So can you bifurcate the revenue and the EBITDA in terms of the mobility and the non-mobility front?

So Jatin, let me talk about this license business because this year, we started with this pandemic. So it was -- impacted us also in quarter one. So it has not only impacted us, this also impacted the consumer-facing segment also. So then we -- the [ V-shaped ] recovery. As the segment grows up, open up after this pandemic. So it has shown the recovery in the JSL Lifestyle also. What we're talking about that is the nature of business are very different in terms of what the consumer-facing segment as well as the Railway part, which we are talking about merging with the JSL. So our primary focus or the management focus is more of the consumer-facing arms from the new company which we have formed into the Jindal Lifestyle Limited, so which will be taking care in terms of home appliances, OEM business, and all this focus will be there in the [ peak-end ] business. So overall focus will be energy, more on towards that side. And whatever the benefit of the synergies, which we can look at some of the group as a perspective whole, when we serve to the Railway, so in terms of the different components, which we supply, so that we are working -- that part we are merging with the JSL business.

Okay. So I mean, probably the revenue, guys, so we can take it offline. Sir, as you said now in the previous call, in the JSL call, I mean you very well articulated that the company is madly focused on reducing the combined entity debt to near about INR 3,700 crores by end of FY '21. So -- and probably 2, 3 years down the line, we might see one more round of CapEx coming in the combined entity. So what is the maximum debt or the peak debt we can see in 3 to 4 years down the line in the -- as a whole?

So Jatin, if you look at that our -- when you talk about the combined entity perspective, so if you look at that, our focus is always on the deleveraging. So that is what we are focusing. And we have seen that in both the companies, so the debt reduction has been there on the net debt basis. So in terms of that in future also, so.

Looking down [indiscernible].

Yes. So our focus will be that our debt equity should be less than 1.25 that will be our endeavor, and we will be targeting to that part in the combined entity from the future perspective.

[Operator Instructions] The next question is from the line of Elesh Gopani from Gopani Securities and Investments.

Sir, what will be the equity of the merged entity because there are cross holdings in this company and Jindal Hisar is owning Jindal Stainless Steel? And what will be the merge debt -- net debt of the company?

So thanks, sir, for joining us the call. So in terms of that, what we talked about that so what -- we have prepared the pro forma. So in pro forma numbers as on the basis of April 1, 2020 on that basis. So because since this is both are listed company, so we are operating independently. So we have -- this is subject to the regulatory approval that's for the process. But if you look at the -- as on March 31, 2020 rather as on the April 1, 2020. So if I talk about the net debt for the group as a whole perspective, the combined entity, it will be around INR 4,700 crores at the group level.

And what will be the net equity of the company, combined entity because Jindal Hisar is holding 35% of Jindal Stainless Steel, no?

So in terms of that, the total number of share is 82.34 crores.

As a combined [indiscernible]?

82.34 crores.

82.34 crores shares, no?

Yes, if you [indiscernible].

[Operator Instructions] The next question is from Hitesh [ Shreda ] from Lucky Investment.

Sir, what will be the debt reduction that could happen between March '20, which you mentioned is INR 4,750 crore through March '22, which is the next 2 years?

So if you look at the net debt reduction, which we had -- our earliest focus on the deal value which we did in the past year also. And for the current year also, in spite of any pandemic also in the Q2 also. So we are expecting that the number, which will be on the net debt basis around -- will be INR 3,700 crore as a combined entity as on FY '21.

Okay. And how much it should be year after this?

So that we will -- as soon as we will progress and that we -- because our right now when we were talking to another investor, Mr. Jatin, so I was explaining to new, we were asked the same question. So our focus will be that our debt to equity should be 1.25. That what we will endeavor over the period of the next 2, 3 years.

Okay. And in terms of CapEx plan of the merged entity, what will be the CapEx plan and capacity expansion over the next 2 years?

So, to be honest with you, we are working on that part. So give us some time. So we will be coming out with the exact numbers. So in terms of our CapEx number, how we are doing the CapEx in the JSL Odisha that will come out in the next maybe 2 -- after 1 month, maybe in the next call when we are having our...

We're working on it right now and within 1 month or 2, we should be ready with our figures and numbers and plans.

You were supposed -- in your past conversation, you were supposed to debottleneck. So you have a debottlenecking scope only at Odisha, right?

Yes. We, basically, already did some debottlenecking last year this year. And now we have reached our 1.1 million capacity. So to further expand, we would need to go for brownfield expansion.

Okay. So it's already 1.1 million in Odisha?

In Odisha, it's at already 1.1 million. And we have already made all the provisions to increase it by another 1 million tonne.

And it is 0.8 million in Hisar, right?

Yes, behind it, yes.

Okay. And sir, lastly, one more question. The recent antidumping duty, which was put up on, I think, the Malaysian imports, which was a fairly large number.

CVD, interim CVD or Indonesia.

Yes. So I'm surprised that should bring in some extra EBITDA per kg, right? But you mentioned that the merged entity will still be 13,000 to 15,000 so...

So there are 2 ways, see because import, if you see that the overall level has not reduced. Indonesia, this is the challenge that as an industry, we say if one country reduces, there are enough other countries that pick up. [Foreign Language] [Technical Difficulty] Challenge in the industry, we say this is why we can't take direct, direct benefit of this CVD impact.

Okay. So basically, imports of Malaysia reduced, but imports from Indonesia actually increased where there is [indiscernible].

CVD came on Indonesia. So imports on Indonesia reduced, but from other countries increased.

Okay. So there is net -- no benefit for, say, to the EBITDA?

Earlier you were saying 11,000 to 12,000 [indiscernible].

Yes. I mean, there has been little logic, but that is not only on account of CVD. It is on account of a lot of other factors. CVD is one of them, plus our operational efficiency synergies, plus commodity prices increasing, demand being strong. There are a lot of factors, but there has been no direct impact of CVD in terms of to increase our EBITDA let's say, 2% to 3%.

Did you gain incrementally in volumes or you didn't gain incrementally in volumes also?

No. We did gain in -- incrementally on volumes because there are certain segments where we are the strongest then and where our demand picked up. So we did gain in certain areas but not overall, I can say.

[Operator Instructions] The next question is from Saket Kapoor from Kapoor & Company.

And in continuation to the call at JSL. Abhyuday sir, you have told that a lot of synergies are in the offering for the merged entities, and there is going to -- very likely going to be a very long-term growth story for investors in the merged entity. Sir, a very short point, sir, what are the current shortcomings, sir, on which you are working so that this could be a sustainable story altogether. Sir, because in commodity business, we have always found that with the commodity prices and the trend, things are [indiscernible], but as the trend reverses, people like all commodity companies are debt lament at the time when the cycle changes and the demand diminishes or falls. So [Foreign Language] with this merger taking place in a single entity what steps are you taking that [Foreign Language] 6 years ago, that story won't be repeated even God forbid, you fall in midst of a slum. That may happen...

Very good question. And so what -- one thing that we have done over the last 10 years has really strengthened our processes. Like, I will say, these 2 have very high lead times. These 2 get our raw material from all over the world, lead times of 60 to 75 days only from shipping point of view. Now we have completely moved to domestic. So instead of getting, I would say, 80% of import. Now we're getting 60% to 65% of all our raw materials in the domestic and nearby countries. So that has really helped us in reducing our lead time, delivery period. We are focusing on commodity, sort of, all our commodities. We're working on a prudent mechanism to buy and sell, as we buy, we sell. So there is less inventory gain and loss, less impact of this commodity fluctuation. And all this is helping by reducing the lead times. Another thing that we are doing as an organization, we are moving more into the ceretec series, which has no nickel and molly in it at all. It's a little more stable grade. It is closer to, I can say, carbon steel. So by increasing our portfolio there, the kind of fluctuation we should to see a nickel, which is the most volatile raw material, that again, will reduce. Another thing that any way the company always focused on and what we're continuing is to have a very diversified segment range. So if any impact we see in one segment, we are -- our capacities or our production is not hampered. We can always increase our sales in the other segment or push our sales in the export market as well. So that way, we are completely protected. We have improved our processes so that we don't make the similar mistakes again. We are focusing on our ratios like Ramnik and Anurag in the previous call mentioned, we have decided to look at our ratios, debt to EBITDA, debt to equity, FATR and focus all our expansion, all our sort of project going forward, looking at our ratios. Because definitely more than our investors, I think I am also concerned that we don't make the similar mistakes we did in the past. So we analyzed over the last 10 years, where all we made the mistake, where all there were certain gaps, and we have bridged them to a large extent over the last 10 years.

And I hope, sir, that with the vigilance and with your commands and god willing, we should have an upper hand. Sir, interest cost component has also been a big part of the P&L so what steps and with this merged entity, definitely, our ratings are going to improve and the cost of funding on a blended basis will definitely go down. So sir, on an absolute number, sir, I think you will be coming up with further details as you have told post-March numbers, but what should we be -- as a percentage of our EBITDA or as a percentage of our sales, what should be the interest cost that you are working for the merged entity, sir?

See, currently, we are at an average of 11%. And with all the benefits of, like you mentioned yourself merge, entity, stronger balance sheet, higher rating of the company, I think, Ramnik, please correct me, by another 1% to 1.5%, 1% or definitely, we are pushing the team for 1.5% reduction. So I'm expecting between the 2, some figures should come.

Correct, correct.

Right, sir. And sir, if you could take into account that this 13,000 EBITDA per tonne with the frameworks with which we are working, can it be on a sustainable basis, we can look forward, sir, or the [indiscernible] of the market can make the swings more volatile?

No. I mean, it's very tough to predict the future. But as of now, looking at our order book, looking at the way the market is performing, the segments are performing, I think 13,000 to 14,000 tonnes per -- 13,000 to 14,000 combined entity should be possible.

And what was the number for the September quarter, sir? For Hisar and JSL, I don't have the numbers in front of me.

So if you look at the Hisar number, it was around 15,000 plus. And if I talk about that JSL, it was around 16,470 EBITDA per tonne.

We may look at the consolidation of a lower EBITDA per tonne for the...

JSL was 15,000?

Yes, for the Q2.

So sir, with the improved demand and the scenario favorable, are we looking slightly -- we are taking a more conservative tone of 15,000, 16,000 is also sustainable or 13,000 is the benchmark, we should look. The H2 should look much stronger, sir.

Seeing at the way the steel -- stainless steel market works, we don't want to claim something that we are not very confident of achieving also. So 13,000 is something that we see definitely is achievable. And obviously, as the market improves, we can achieve 15,000 as well, or it can come down. But 14,000, you should take that as a good number.

Right, right. And sir, how should now we value the entity [Foreign Language] as a stainless steel enterprise on a global basis, how are these companies valued globally, sir? [Foreign Language] just to benchmark the Jindal Stainless entity versus the other players, and capacity wise also, so we rank 10 in the -- in your presentation, Slide 11, 10, I think, so you have given the details reason why, but the capacity...

Not capacity, we will be in the top 10 stainless steel manufacturers in the world.

I'm just looking to how do -- how are these companies valued globally, sir? And when we are benchmarking it now as a single entity, we have, I think, so things [indiscernible] in the picking order. So taking into account the EBITDA, they are making, how are these -- these being valued as per the EBITDA number. How many times per EBITDA are they valued?

Basically, if you look at -- in these companies that you are mentioning, they have other verticals also. But broadly, if you look at -- on EBITDA multiple basis, globally, these are -- the multiples that they get are a little higher than what the Indian companies are getting. So to that extent, you can compare.

So are there any comparison or apples to apple comparison or that's a different story altogether?

Not exactly apple to apple comparison because purely stainless steel business only -- there are different other verticals. But if you compare with the pure stainless steel division, then our EBITDA per tonne or the margins actually are a little higher than most of them.

Okay, sir. And there was one Chinese player entry also in the western part of the country, they were setting up smelting shop there. What is the update on that, sir? And I mean, we have factored our expansion on the business...

[indiscernible] to comment, and we would also not like to comment on our competitors on these type of calls.

But it is correct, sir, but you might have been working on the market dynamics also [Foreign Language] they are onstream or not, that was my only question.

No, we are not as much concerned. So I would prefer not to comment on it.

Okay. And sir, lastly, sir, as being a long shareholders in Hisar as well as JSL, sir, I think, now it is the parting up from Hisar to the new merged stronger entity JSL. Sir, have you not looked at any dividend component from Hisar as a parting due to the existing shareholder for JSL Hisar as they are already, sir -- the holding join capacity, [Foreign Language]. So are we not looking to at least revolve the shareholders from the cash flow, which they are accruing for the coming -- these 9 months in the form of any different...

The revolver of [indiscernible] from the merged entity, synergies and benefit. Like I said last call, also Saket, just stick with us, believe in us, there will be tremendous value more than what we would have got in the swap ratio, more value will be created in the next coming years.

Right, sir, with that comforting statement, sir, we hope and god willing that things should look much better from there. They are looking better, definitely. And the times ahead should be on a sustainable basis. We, investors are looking for sustainable and in commodity business, that is what our point is, see how can we remain invested in companies, which is directly exposed to the commodity sector. How different that point of investment rationale is what we are trying to reason out, sir.

Yes, great. Thank you, Saket.

Thank you very much. That was the last question in queue. I would now like to hand the conference back to the management team for closing comments.

Thank you so much. I would like to thank everyone for attending this call and for showing interest in Jindal Stainless (Hisar) Limited. Post merger, the company has a dominant market share in India and a worldwide position, creating a large Indian MNC representing government make in India and Atmanirbhar Bharat vision. We remain positive that its strong positioning in the stainless steel industry and improving macros would help to deliver steady and consistent growth going forward. I hope we have been able to answer all your questions. Should you need any further clarification or would like to know more about the company, please feel free to contact our Investor Relations team or Citigate. Thank you once again for taking the time to join us on this call. And I would like to wish everyone a very happy and healthy New Year. Thank you.

Thank you very much. On behalf of Jindal Stainless (Hisar) Limited, that concludes this conference call. Thank you for joining us ladies and gentlemen. You may now disconnect your lines.