Jindal Stainless Limited (JSL) Earnings Call Transcript & Summary

Ladies and gentlemen. Good day and welcome to the Jindal Stainless Q2 FY '22 Results Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijit Mitra of ICICI Securities. Thank you, and over to you, sir.

Yes. Thanks, operator, and good afternoon to all the participants and thanks for joining in. We are here to discuss Q2 and H1 FY '22 Results Conference Call of Jindal Stainless Limited and Jindal Stainless (Hisar) Limited. From the management we have Mr. Abhyuday Jindal, Managing Director; Mr. Anurag Mantri, Group CFO; Mr. Jagmohan Sood, Whole-time Director JSHL; Mr. Ramnik Gupta, CFO, JSHL and the Investor Relations team. Without further ado, I hand it over to Mr. Goutam Chakraborty for his remarks, so over to you Goutam.

Yes. Thanks, Abhijit, and good afternoon everyone. We'll begin this call with the brief opening remarks from our MD and the Group CFO. Following which we will have the forum open for an interactive question-and-answer session. Before we start, I would like to point out that some of the statements made in today's call may be forward-looking in nature, and the disclaimer to this effect has been included in our results presentation that was shared earlier. Now I'd like to invite our MD, Mr. Abhyuday Jindal, to make his opening remarks, over to you, sir.

Thank you, Goutam. Good afternoon to everyone. On behalf of the management team of Jindal Stainless Limited and Jindal Stainless (Hisar) Limited, I welcome you all to this forum. First, I would like to share the key highlights of Q1 (sic) [ Q2 ] FY '22, following which Anurag will take you through the operational and financial highlights. Let me start by giving an overall scenario of the stainless steel market. Global stainless steel production grew by 25% year-on-year to 14.5 million tonnes during quarter 2 of the calendar year 2021. Stainless steel demand in most of the regions across the world has been robust. The upward rally in prices of input materials continued unabated throughout the second quarter. The average international prices of nickel and ferrochrome in Q2 of this year climbed by 35% and 75% over last year, respectively. This, coupled with strong market sentiment resulted into higher stainless steel prices as well. As far as our performance is concerned, I am glad to share that we continue to improve our operationing and financial performance on the back of our agile product and geographical mix. Continued focus on cost optimization and prudent financial management has also carried. An overall healthy demand environment post the second wave of COVID in Q1 of this year and normalization of demand from all consumer-facing segments pulled up sales volume in Q2 FY '22. As general manufacturing picked up pace during the quarter, demand for special high-margin grades like duplex, super austenitic also gained momentum. All major end-use segments like process industry, pipe and tube, railway, wagons, metro rail grew during the quarter as stainless steel demand remained firm. Despite prevailing logistical challenges due to container scarcity, we maintained strong operational performance through advanced planning, strategic sourcing of raw materials. Specialty Products division sales grew by 31% in Q2 FY '22 over the corresponding period last year, led by higher sales in blade steel and precision strip segments. On the project side, I'm happy to share that we have commissioned 26,000 tonnes per annum capacity precision strip mill as part of the first phase of the brownfield expansion under the -- under SPD. This takes the total precision strip production capacity to 48,000 tonnes per annum. With regards to other brownfield expansion projects, all are on track and moving on as per our expectation. Now let me highlight some of the issues that are being faced by the domestic stainless steel industry. Imports have been rising substantially during the past few months and surged by 115% during April '21 to September '21, a period over the same period last year. The share of imports in the domestic market in Q2 FY '22 was at 40% as compared to 35% in Q1. Despite the situation, the government extended the suspension period of CVD on flat stainless steel imports from China by another 5 months. As the rising import trend hurts medium- and long-term prospects of the Indian stainless steel industry, especially the MSME manufacturers, the domestic industry is in constant dialogue with the government on these issues. On the merger front, the company's petition for merger is pending before honorable NCLT Chandigarh branch for approval, and we expect it to be completed in this financial year -- in this fiscal year, sorry. During the quarter, CRISIL rating has upgraded the rating of JSL short-term bank facilities as CRISIL A1+, which is the higher short-term rating and reaffirmed CRISIL A+ rating on its long-term bank facilities. For JSHL, CRISIL has, for the first time, rated its long-term bank facilities as CRISIL A+. The reason for these ratings include company's healthy liquidity profile and cash accrual as a result of strong operating performance along with deleveraged balance sheet and a minimal long-term debt obligation over the medium term. With the gradual reopening of the economic activities post-COVID, related restrictions and government push for infrastructure development, we expect India's stainless demand to continue to remain robust. As ethical corporate citizen, we have been also taking various initiatives to encourage sustainable operations. I am pleased to share that JSHL has received CII National Award for Excellence in Energy Management 2020 and Global Environment Award by Energy and Environment Foundation. With this, I would like to hand over to Anurag to discuss the operating and financial performances. Thank you.

Thank you, Abhyuday. Good afternoon, and warm welcome to everyone joining us on the call today. We have shared our investor presentation with the stock exchanges. In today's call, and we'll be -- we'll have a discussion on the same line. The strong momentum continued in Q2 FY '22 as well as far as our operating performance is concerned on the back of a strong demand recovery and positive sentiment both in domestic as well as export markets, primarily driven by major segments such as process industries, metro, railways, wagon, et cetera. Let me take you to -- all of you to other operational and financial highlights of Q2 and H1 FY '22. While maintaining major focus on domestic market, our agile business strategy, as mentioned by Abhyuday, has been focusing on capturing the high-quality product segment in domestic as well as in the export market. Export for the quarter increased from 23% from 20% in Q1 FY '22. Post-COVID recovery started -- after the post second quarter of the previous year, however, challenges they're in the last year. And therefore, it won't be prudent to compare Q2 FY '22 performance with that on a year-on-year basis. On a quarter-on-quarter basis, the pro forma combined revenue and EBITDA both grew by 26% to INR 7,810 crore and INR 1,216 crore, respectively on a TTM basis. The pro forma stand-alone combined revenue grew by 37% over FY '21 to INR 26,259 crore. EBITDA rose by 60% to INR 3,863 crore, while PBT grew by 137% to INR 2,834 crore. On the half yearly basis, the pro forma combined revenue, EBITDA and PBT stand at INR 14,015 crores INR 2,182 crores and INR 1,752 crores, respectively, for H1 FY '22. I'm also pleased to share with you that all the operating subsidiaries have also shown positive trends with 2x improvement in EBITDA at INR 103 crore in the quarter over the previous quarter. Upward trend in the raw material prices resulted into positive inventory valuation due to time lag between our sales and sourcing. The average LME prices of nickel and ferrochrome in Q2 FY '22 climbed up by 10% and 21%, respectively, over Q1 FY '22. Our focus on consolidating balance sheet strength continues as on 30th September 2021, our pro forma combined entity net debt stands at INR 2,930 crore down by 38% as against March 21 level. As we said, we continue to focus on our leverage ratios. Our pro forma debt equity and debt EBITDA ratio stands at around 0.4 and 0.8x, respectively. With the strategic debt reduction and fall in our borrowing rate -- borrowing interest costs in borrowing rate, the combined interest costs also fell by more than 50% in Q2 and -- [ H1 ] FY '22 to INR 73 crore and INR 159 crore respectively. In fact, interest cost has stand now 1.25% of our revenue as against our 5% earlier. Focus on prudent capital allocation will continue going ahead. As Abhyuday mentioned about our rating upgrade from CRISIL, I'm happy that our consistent focus on prudent financial management complementing robust operational performance has been paying off. The recent commissioning of Phase 1 of the precision strip will further strengthen our presence in the segment like auto, process industry, and oil and petrochemical, and we'll be augmenting supplies to aerospace and electric vehicles in the future also. Thus, the ongoing expansion will not only bring about the volume growth, but also it will improve the product mix for the combined entity. This, coupled with our cost and supply chain optimization and efficiencies from scale of operation will help us to cater the strong stainless steel demand across various segments and even explore new opportunities. On this note, I would like the moderator to open the floor for the Q&A session.

[Operator Instructions] First question is from the line of Amit Dixit from Edelweiss.

Congratulations for a good set of numbers. I had just a couple of questions. The first one is my usual question on margins. So we have seen EBITDA per tonne sustaining at 20,000 plus for last 3 quarters. And the outlook on stainless steel, as far as the global prices are concerned, look quite optimistic with ferrochrome and nickel both supporting it. So would you like to revise your guidance upwards again from 18,000 to 20,000?

Yes. So guidance side, Amit, you're right. I think now since half year results are out and earlier on most of 7 month of the fiscal year, given the past trend and given the visibility of next 2 to 3 months, at least clear visibility of next 2 months, we are revising our guidance for FY '22 from earlier guidance to 24,000 to 25,000 on a full year basis.

Okay. So it's 24,000 to 25,000 on a full year basis?

Right.

Okay. Great. The second question is on essentially the CapEx program, so these expansion CapEx essentially. So while you have outlined the various CapEx spend all, can you just give us an idea where we are, I mean, on CapEx and generative on schedule or not, particularly in light of COVID-related disruption that we have been seeing in supply chain and equipment supply?

Yes. Mr. Sood, I think, would be best placed to answer this question a little bit. I think SPD, we already mentioned that, that has been commissioned, our previous project. For our Jajpur expansion, I think Mr. Sood would be best place to answer.

Yes. Just to answer the question, there is an update, all brownfield expansion projects announced in Q1 FY '22 are on track, and expected spend is also on the track. Say SPD projects, we have already given this update that we have already commissioned, and we expect to ramp up the complete facility by another 3 quarters. That has already been given. And augmenting and doubling the stainless steel mill capacity from 1.1 million tonne to 2.1 million tonnes at Jajpur, that is well on time. Augmentation of downstream facilities and backward integration is well within the expected time lines and progressing well. So in a nutshell, if I have to answer your question, yes, we are actually adhering to the time lines. There is no impact of the COVID. So far, we are not expecting any further delay, any other -- any delay any of any sort.

Next question is from the line of Vishal Chandak from DAM Capital.

Yes. Congratulations on a very good set of numbers, sir. Sir, my first question is with respect to your debt levels. You mentioned the combined pro forma net debt is now INR 2,930 crores. Given that your CapEx has now started and that would largely be funded through internal accruals maybe funded through debt, how should we look at this debt number going forward in FY '23 and FY '24, we look at going down from here onwards or maybe stabilizing at current levels?

So the CapEx now, the cash outflow will more increase in H2 of this year because, as we said, H1 was a low, our CapEx outflow was largely on LCs, and most of these LCs are now getting started due on H2 primarily. So considering those, I think we'll be balancing between our repayment and CapEx outflow and some of the cash, which will be a more -- reduction in the some of the initial reduction in the short-term debt, especially our -- so that we have some liquidity in hand with us.

Sir, for FY '22, can we assume that we would probably be looking at a similar number for when we exit FY '22?

Our current debt level as a combined entity is also INR 2,930 crores. And maybe we may have some, depending on how we progress this on EBITDA, I think number would be slightly less or maybe around this number.

Sir, my second question was with respect to the CapEx. If you could just reiterate, how do we plan to spend over the next 3 years on the capital expenditure front?

Sorry, I...

CapEx spend over the next 3 years?

The next 3 years CapEx, if you could highlight, especially with respect to the brownfield expansion from 1.1 to 2.1, how much of it has been already spent and how much of it would happen in H2 and the next 3 years?

Okay. So Vishal, as we mentioned, is that this year out of this INR 2,100 crores of Jajpur, Hisar INR 451 crores separate, out of this INR 2,100 crore overall whatever CapEx we said, we said this year's outflow would be close to INR 1,100 crore, and similar outflow will be there in FY '23. So I think those, I mean some plus or minus, some of a few percentage here and there, I think more or less, this would be the outflow. As Mr. Sood mentioned because all our CapEx outflows are on track, and we have mobilized the sites and everything even equipment ordering, so it's completely on track. So INR 1,100 crores will be the outflow this year and next year also similar outlook.

Next question is from the line of Rajesh Majumdar from Batlivala & Karani Securities.

Once again, congratulations. I just had a couple of questions. One is on the overall stainless steel demand. What is the growth rate, if you have the figures, for the industry over the last 5 years of annual growth rate? And what has it been in the recent past?

So I think it's been quite consistent, actually. If you see the growth rate for India per se, it has always been close to 7%, 7.5%, and stainless steel is actually the fastest-growing commodity in the metal space, domestically as well internationally. So we say carbon steel grows around maybe 4% -- 3.5%, 4%. Stainless steel is closer to 6.5%, 7%.

So roughly 1.5x of the carbon steel, is that a correct assumption to make or this [ granular ]?

Yes, correct.

Okay. I think the recent part, especially in the 400 series cities, what is the kind of growth rates you see over the last 4 years or so, or 3 years maybe since the COVID also in between?

Sorry, 400 series, you had a question on 400 series?

Yes. Yes. I'm saying for the last 3 years, since we are emphasizing on the 400 series, what is the kind of growth rate we have seen in the market in the 400 series over the last 3 years?

So specifically, how much 400 series has grown, we can get back on that. But yes, our sales, if I talk about personally, JSL side, 400 series over the last 3 years have been growing by almost 5% every year. So we were close to out of our total portfolio was maybe 12% 3 years back. Now we're close to 23% to 24%. And as a strategic area, every year, we do want to increase our sales in 400 series.

See most of the applications, especially in railways and autos are actually 400 series oriented. So as more and more users are increasing in these segments, so we are seeing a traction. So now the idea is basically, we are now close to 25%, 30% in our mix. But having said it, obviously, some of the quarter we may see a more of 300 series where we find a better opportunity. So it's more segment-oriented rather than I think the way market is becoming a more high-end product and segment-oriented. Accordingly, the customization and kind of material, we also, so it's a more -- it's getting into a solution providing mode. So we also then work now closely with the client that what suits them best in terms of the various use applications.

Right. And in terms of pricing, is the 400 series more rigid in terms of the number of changes you do per month or per week compared to your other series? Is it more stable, the pricing?

So over, -- if I talk about over a 5-year period, yes, definitely, it is more stable. But last 2 years, because there has been so much volatility in all raw materials, a lot of volatility in ferroalloys, ferrochrome, silicon manganese, ferro manganese. So now I can't say that is the case. But if we look at like a 5-year period, then yes, 400 series generally has been a little more stable grade.

Right. So the prices are fixed one, very month or less than that now on 400 series?

No, no. There is no price that is fixed. It totally depends on the segment. It totally depends on the customer. So like, for example, railway is on quarterly or 6 monthly pricing, same with auto. But then we have a lot of customers on spot pricing as well.

Okay. Got it. And what about the export business and import business and those things, those are also quarterly basis?

We're also adding -- we're also adding already added export surcharge as well. So all our export orders have variable freight clause and alloy surcharge clause as well now.

So this is one big difference from our international pricing. So typically, we are now started testing this mechanism of these types surcharge-based price based on the underlying commodity in international market, which help us in, obviously, which benefits, which is a win-win situation for us as well as customers. Because if the prices goes down, they will benefit, if the price goes up, we will be protected with our margin. So -- and typically -- so this is the starting of the journey and this helps us also to book a long-term export order, because there is a long serving time in export order. So this overall builds a more healthy order book for us.

And my last question is could you give us some color on the exports on JSL because we're aware of the exports from JSHL, what are the exact products and which are the countries we're exporting to from JSL Jajpur?

So JSL is actually we export more from JSL Jajpur, than we do from Hisar. And our exports are mainly to the same countries only and the higher end markets. So Germany, Italy. In Europe, U.S., we are catering to from Jajpur. Russian markets we're catering too. And now we've also entered the South American market as well.

And the product?

Product, it's a mix. Again, there is not a specific product. It totally depends on the customers ask and we have a very wide range. So there is no particular product. Overall, it ends up being 300 and 400 series is maximum and a little bit of 200 series.

Next question is from the line of Chetan Shah from Abakkus AMC.

Sir, just one quick question. Can you give us your view on how the underlying alloy prices, you see short term and long term? I know it's very difficult to take a call on, but based on your interaction and experience, how do you see those prices are moving. That will be very helpful.

I think they still -- it looks to be remaining quite robust, and it will continue to increase the way the world situation is looking with China power supply issues, shipping issues around the world, demand is picking up everywhere. So I think for the next few months, it will definitely remain robust, and it will remain at these levels or higher.

Okay. Sir, can you give us some flavor on how our subsidiaries perform, especially the lifestyle and other 2? And how you see that faring for the next foreseeable future?

Our subsidiaries have all done very well this quarter. They have doubled, in fact, over last quarter. Q1, all have doubled. Lifestyle performance has also picked up. We're getting good orders again from railway division, from our OEM business. We've added 3 new OEMs. We've added Tata. We've added Havells. We've added Kent already into our portfolio. So lifestyle has picked up. Railway had picked up again this year, which was a complete washout last year because of COVID, railway orders have picked up. So lifestyle order book is very healthy. Margins are also better. Steelway has done very well. Steelway also has particularly I think, almost doubled from Q1 also for Steelway as well. So we're getting a good order book from pipe and tubes, and Steelway. The only thing that is lagging behind is the auto industry right now. So for JSL as well and for our service center business, auto industry is the only laggard. But then we have an opportunity in other segments. So we've also started supplying from JSHL to the pharma segment, medical equipment, which is also doing very well. .

Sir, when you talk about new customers in our lifestyle business. So normally, these customers when we take in, are they for like 2, 3, 4-year time horizon, how is the contract work, if you can give us some flavor on that piece?

See, again, it is depending on the segment. It is definitely depending on the customer as well. So there is no clear cut answer. Like I'm saying in railways because the nature of the business is that we need to sign long-term contracts. So we do that. Auto also, they like to have long-term contracts because they want their material or quantity assurance, supply assurance to be there. So certain departments, certain segments we do. Otherwise, it's purely more on spot basis.

Next question is from the line of Ritesh Shah from Investec.

Congratulations for a good set of numbers. Sir, I have a couple of questions. Sir, I'll just continue with the prior question. You indicated like for rail and auto, you have long-term contracts. And you also use a word, "We have started with export surcharge and alloy surcharge loss." Sir, is it possible to put some numbers and specifically explain the alloy surcharge clause that you spoke about? What I'm trying to understand over here is what percentage of our volumes have a inbuilt pass-through business? And if there is a lag element, how should one understand that?

See, Ritesh, I think if I understand your question, you are saying what percentage of export orders we are booking in the alloy surcharge or about the pricing mechanism, which we are doing in alloy surcharge?

I'm looking at both, sir. Surcharge clause, you indicated that we have started recently, right? So alloy surcharge clause.

So I think -- okay, got it. Let me just now answer. I think on export side, we are now trying to maximize our orders, and on the export side, because obviously not all the markets we can do, some of the segment, but I think idea is that to actually do more than 60% of export and the orders under of this roof. Now pricing mechanism, I think it's quite sensitive at this stage and it's a bit early stage that the copper steel sensitive in it. It's a new thing which we -- I mean outside Europe, any players have actually started because typically with that. So we -- it's still more at this stage, we would not like to share much of the detail. But the idea is that basically, as I said, we have a win-win situation of both of us customers as well as us and we can book the long-term orders and long-term visibility on the order book. So underlying -- depending on the underlying commodity prices, it will get adjusted in the future. That's a broad concept, but obviously, specific formulas as to it's a more matter of too detailing. And as I said, it's quite commercial sensitive with our customers and also at this stage.

So Mantri, basically, so what percentage of our revenues will have a pass-through, wherein we do not have to worry about if something moves up on the raw material side, it is actually taken care of?

Okay. So if you see typically, obviously, this is a more mechanism, but otherwise, more or less, we follow the similar situation in domestic market where we keep revising prices. And when we revise our pricing being the leading player, when we revise prices, we consider everything, which is under like raw material prices, international prices, foreign exchange and [indiscernible] price everything. So it may be not look like a completely formula based to the customer, but more or less, this is how the prices in the domestic market are evolved. And more than, I think 70% of our...

Pass-through.

Is actually through on spot through basis.

That's useful. Sir, secondly, I wanted to touch upon, I think we have several products in the basket. I think magnesium is also one of the variables that will be a raw mat for us. Are we good on the inventories over here? Or is there any sort of disruption that one could look at? How are we placed on this particular aspect?

I think Mr. Sood, if you can take this question up.

I could not get the question right. If you could repeat?

On raw material, like certain ferroalloys, what is our position right now? Are we secured or are we still facing any shortages?

Sir specifically referring to magnesium over here because a lot of global players have been facing problems.

Specifically to magnesium?

Okay. Mr. Ritesh, just to clarify that magnesium is used as an alloying element in nonferrous metals, not in stainless steel. Magnesium is produced generally in China, and it's becoming a major, major bottleneck for auto industry and other industries, not for us stainless steel, okay? For us, the -- I mean ferroalloys, which we use or the elements or metal, which we use are manganese, chromium, nickel and all those things. And we are well secured in these elements and metals.

And the sourcing for this is locally, including manganese?

Yes, manganese is abundantly found in India, and it is sourced locally. 100%, it is local sourced.

That's perfect, okay.

Part of our strategy is to go maximum domestic sourcing.

That's useful. And sir, last question for Abhyuday. Sir what are we doing as a industry? It looks like it's falling to deaf ears to the government when it comes to imports. How should one break them up? Or what is the industry doing to actually make sure that there are certain trade measures in place to protect the local industry?

So -- no, there are continuous efforts are being made. We are in constant dialogue with Commerce Ministry. Steel Ministry is continuously supporting us. They do feel apply it, and we're in constant dialogue with Commerce and Finance Ministry. We have been engaging with NITI Aayog also now. Because they are the face for the government to promote business, to support businesses. So we have engaged with NITI Aayog who is also supporting us. So it is definitely a unique situation because of all the news that came in the steel industry and all the prices that have gone up. So stainless steel, along with that, also got mixed. So there is continuous effort by Stainless Steel Development Association, we've engaged. All other associations are also feeling the pinch now. So it's a continuous joint effort that we are approaching the government. They are realizing. They are gathering data up. So we are very hopeful that the suspension that it did till January 31 does not get further extended. Otherwise, if they did not feel then they could have clearly cut it and thrown it out, but they have suspended it, which means that there is definitely merit in the case. And even though the situation is kind of unique right now, as things start stabilizing, I'm sure this duty will come back.

And sir, any update on the other DGTR cases which are going on against the trades of China, Indonesia?

No, not as of now. I think there is a constant dialogue but no update that has come from the ministry till now to us.

Next question is from Vikash Singh from PhillipCapital.

Congratulations on very good set of numbers. Sir, I just want to understand regarding our new CapEx of 1 million tonnes. So once it comes in, how quickly we think which we would be able to ramp since we would have a little bit of learning curve from the past expansion?

Good. I think Mr. Sood. Yes, please ask your second question.

And the second part is whether like some of the foreign players, is it possible that by the time we commission this capacity, certain portion of this capacity can be tied up in long-term contracts?

Yes. Okay. Mr. Sood, you can take up the first part, then I can answer the second one.

Yes. Mr. Singh, the ramp-up time, as you pointed out rightly that since we are already in this business, the ramp-up time should be lesser, yes. In a normal circumstances for a new plant, the ramp-up time is almost 6 to 8 quarters. In our case, we are pretty much sure that this would be cut down by at least half, and we would be at 100% within 3 to 4 quarters.

Understood, sir.

And in terms of your question for long term. See, it's, again, a very dynamic situation. We definitely have certain segments where we have long-term contracts, which will continue. Those industries are also increasing. So our volumes in those long-term contracts will also increase. Auto industry, definitely, once the semiconductor issue is over, there will be huge growth coming in there. Similarly in railway segment as well. Then we have MOUs signed with major customers. Our trade segment, we have MOU signed with pipe and tube players. We have MOU signed. And with the stainless steel industry growing at 6% to 7%, all these volumes will be revised with them. So definitely a portion of the expansion will be catering to long-term contracts.

So basically -- so where I'm coming from, so basically, because even if we're able to ramp it up within an year to the full potential, this demand might not be doing in the similar fashion and...

No, demand already we're already behind. I needed the capacity ready this year. We're already behind. That is why if you see imports are coming into the tune of 40% to 45%. So if you're talking about demand, domestic and global, there is enough demand in the market. We are a little behind actually because whatever reasons there are. So there is enough demand, and we are actually behind our expansion.

Understood. And sir, in JSHL, so we are increasing our value addition by INR 450 crores. So basically by 150. So what kind of incremental margins this project is been given?

So typically -- so if we talk about the current situation that without incremental because it's in the total volume of JSHL, it contribute 6% in the quantity-wise and around 11% in the value-wise. So if I say the capacity which we are ramping up and we are having with the CapEx of INR 450 crores in the SPD value-added product, if I consider that on the same basis as the COVID scenario, so there will be incremental around 4% to 5% in the volume as well as in the -- similar pricing will be in terms of the value-wise contribution to the EBITDA line.

Understood. And just one last question. Your EBITDA per tonne guidances are still a little bit less than what we have done in the first half. So second half is just, since the prices are still on an increasing trend, so what kind of cost inflation we are expecting upon which we are giving a lower guidance than first half?

So basically, if you see the first half, if I remove the -- we removed almost INR 77 crores of ForEx gain, which was now part of, which is now part of -average EBITDA per tonne was close to 25,500 per tonne. Now the guidance which we are giving for a full year basis, 24,000 to 25,000 because we still don't have full visibility on quarter 4 specifically and the last quarter of this -- last month of this quarter. So I think that's -- we are not very way off from our guidance of, I think, 24,000 to 25,000 which and guidance in which we should surely be achieving in as per our philosophy.

Next question is from Nishith from Aequitas.

Congratulations on good set of numbers. Sir, I wanted to understand, are we facing any raw material availability issues?

No. Not as of now because I must appreciate our purchase department. They have done a very good job. Like for thermal coal, for example, we've already got a stock for the next 2, 3 months lined up. So from any raw material, major raw material side, we're not finding any disruption. Mr. Sood can add on if something.

Yes. Just to add on and giving comfort, see the kind of sourcing strategy we have made, it is more agile. And knowing the supply chain and logistics disruptions and other steps have been taken to ensure availability of key raw materials, consumables and refractory items. Effective inventory management and negotiation strategy has also been put in place to secure the essential raw materials.

Okay. Sir, what kind of -- what percentage do we stainless steel scrap do we get from the domestic market?

I did not get your question. Are you asking what kind of raw materials, what percentage of raw material we are getting from India?

Yes. Yes. What percentage?

Yes, percentage.

Okay. So Nishithji, we are getting almost 65% of our raw materials from India from domestic sources and almost 30% to 35% from import sources. And trust is continuously localize the raw materials.

Just to add, I think this is a big change and as Abhyuday was mentioning and what Mr. Sood narrated is that our focus is shifting on the domestic supplier end. Even for the foreign supplier, we are asking them to open yards here so that our volatility on the underlying commodity and ForEx prices reduced. So earlier, if you see almost 70% raw material was actually imported for us. Now today, as Mr. Sood mentioned, it's actually 65% is domestic. So it's a big shift of what we were -- we have been talking in the last calls about focusing on our sourcing strategy. So this is one major change, which I think giving us good results on our P&L.

Okay. That's great. And sir, in terms of coal availability, we are not facing any issue, right?

No. We are quite secured as of now.

Okay. Sir, now coming to our working capital, it has been higher this quarter. So going forward, do you see this trend continuing?

See working capital are because of 2 reasons. One is that the underlying raw material prices have increased substantially. So there's a big increase in the value of working capital. And funds therefore the oil requirement on the working capital side. The volumes also, as you can see, has increased. So both of them are actually resulting in higher working capital for us.

Okay. Sir, and coming to my last question, sir, do we see our tax rate going to 25% this year?

So if I talk about like in 2 separate companies on JSL and JSHL. So JSHL is right on the lower tax rate, so because JSHL don't have any losses carryforward. And that's what we have reported on the lower tax rate. And if I talked about the JSL, since they have carryforward losses, so that's the reason they have that tax rate under the PAT for the individual company perspective. Once we will merge it, so we will evaluate the position from the total group perspective and both it will be on the lower side as a total.

Next question is from the line of Nimit Baya, an individual investor.

Congrats for a great set of numbers. My questions were: one, you mentioned imports were at 40%. I'm presuming you would be maintaining your market share at 50%, 55% of the domestic market. So then...

And that is what our pitch to the government and as industry is that the people who are getting squeezed are the smaller manufacturers, so the government is has to take care of the smaller guys as well, which is what we are trying to pitch to them that duties are required.

So as of now, apart from the general 2 plants and imports, remaining manufacturing in India would be low single-digit contribution. Is that -- is my understanding right?

Absolutely.

Yes, currently, which are operating, obviously, as Abhyuday was mentioning, actually, there is a because of the government policy, a lot of facilities, MSMEs are actually not getting encouraged for their operating facilities.

Understood. Okay. Second question was, is your export realization similar to your domestic realization? Or is it higher? Is it lower?

So again, on average, domestic has always been the best performing market for us. But the kind of unique situation is there in the world. Right now, export market is at the same level or sometimes even higher depending on which market we are looking at. So it's you can say comparable or a little higher at the moment.

Okay. So then...

Basically, as we mentioned that now, Abhyuday mentioned in his opening speech that in terms of the product and geographical mix, we are now more agile. So idea is to maximize our order...

Maximize the...

So eventually, it will get a equilibrium. In some quarters, we will see. But as a investor, I think you should see our idea is that if we get a better margin orders in the European market will not be shying away from diverting domestic. So that's one ability which we have built in our product mix, production planning and supply chain.

Perfectly understood. So imports which are coming in would not hurt you as a company, of course, it will hurt the industry because there might be more inefficient plants or smaller scale plants. But because export realizations are also good enough, global prices are not lower than Indian prices. So is my understanding correct?

Absolutely. I'm saying it's absolutely correct.

Okay. Perfect. And my last question was auto industry would contribute what proportion of your overall sales in a normal environment?

In a normal environment, it is close to 9% to 10%.

No, it's 12%, close to 12%.

12%.

And it's increasing, I think.

I mean, it should have increased without this semiconductor shortage, but it's about 11% to 12%.

And which right now would be maybe somewhere in the mid-single digits.

8% -- 7%, 8% are lower.

So that delta of 3% or 4% would kick in once this semiconductor thing gets sorted out.

I think even higher, it should go. But yes, the break, it will definitely go back to 11%, 12%, and we expect it to go higher also.

The next question is from the line of Rishab, an investor.

Just want to ask you, post the completion of expansion and post merger what are the kind of EBITDA per tonne you're looking at?

See, our guidance for this year EBITDA per tonne, we just mentioned 24,000 to 25,000 per tonne. So expansion anywhere -- sorry, merger will not have -- it's same. For merger will not have differentiate considering the same thing over here.

Because you said like there will be some synergies which will happen, so I'm understanding there are no operating synergies in this?

Which we already started building because the merger is already approved by SEBI and stock exchange. It's a NCLT process, which is there. So those we are already started building up in our operations.

Okay. And one more thing. There is a perception normally in this industry, steel or metals except for maybe one group that minority shareholders interest are not fully protected. How do you address this, if you can say something here?

If you can be specific in what way shareholders' interest are not protected, then we can answer it better, please?

Within -- the cash flows is normally, there is things like that's not fully to, say accounted or you can say, there are some related party transactions which happened at in market parameters or these kind of issues. Normally, which are so apparent, but these kind of things normally happen in this industry. So I'm just trying to understand if you can say something here.

Governance wise, I can't comment on generalizing and the industries rather specific because also I'm not privy to the knowledge of -- my knowledge of these type of things. I can say that as a governance, we maintain a very high standard and even on our auditors as well as even our internal auditors are also among the big 4. So technically, it's not the management audit we get it done from our internal audit, they are actually internal auditors which presented to a statutory auditor. So -- and all our -- both the companies and all companies internal auditors are among the big 4s. And the auditors are also in Grant Thornton. Yes maybe I think Abhyuday...

And I think just to add a little perspective . As you see in the history of our company or any other general company as well, we've never had any of these corporate governance issues. So as a company, as a family integrity is at the highest level for us. And if you have attended our calls in the previous past few years, we have been very open, we have been very honest, and everything is on the cards for us. So shareholders -- we are working for our shareholders. We definitely want to take care of them. And yes, if there is anything specific you can ask us, but in terms of corporate governance, we have the highest, highest sort of care that.

Is there any dividend policy that you're looking at or anything?

We are working on it. I don't want to jump and commit anything right now. We're definitely working on it, and we would definitely like to take care of our shareholders.

Next question is from Tejas Mehta from Omkara Capital.

Just on the capital management side, I wanted some more clarity. I'm sorry, I missed the first 15, 20 minutes of the call, so if you have already answered it, it'll be repetition. So on the working capital side, we see that there is a huge amount of inventory, which has been built into the balance sheet for both the companies. When is the situation likely to be reversed?

Okay. So the working capital increase, I just answered actually, let me repeat that, I think, because of 2 reasons, because the underlying raw material prices have increased by 40% to 50%. So there is a big value increase even in the same tonnages. So that's one reason of the value increase. The second is that our volumes have also increased. So the working capital increase is corresponding to our volumes and the underlying raw material prices. So and suppose the prices goes down, it will come down accordingly.

Yes. No, so I was just trying to understand, usually, you'll be using your free operating cash flows, to hide the repay debt or to fund your brownfield expansion that you're doing at this point of time. But with this kind of capital being locked in the working capital, you will have to kind of rely on external capital to compute your CapEx.

Hardly it will be done, but working capital is the -- is actually is correspondence to our operations. So it's not that we have suddenly large of inventory or something stuck up over there. It's not a aged inventory. Unlocking -- if the price goes up, we'll have to obviously source the raw material at higher prices, keep the production lines and inventories our raw material and WIP inventory according to that source valuation. So it's completely corresponding to that. Now unlocking will only happen depending on the market if the prices goes down. Volume side, obviously, it will continue to increase. So corresponding to that, there would be a higher working capital requirement.

Got it. And do you expect the inventory levels to probably remain at the same levels now in the second half given that maybe pricing.

Difficult to answer because it's -- if the prices remains and continue to go high, certainly it may go up actually rather. And if the prices comes down, it will then get immediately unlocked. So it's completely a combination. Otherwise, we are monitoring very closely out and we don't see any challenge in our debtors days and it's not increase in number of days as well.

Yes, yes, yes. So then how are you funding your expansion at this point of time? You'll have to pick up...

What we said is largely from internal approvals, obviously, but there was an immediate requirement to put up large part of capital into the working capital because of high increased activity and high raw material prices, which we have done. Depending on that, we'll continue. Now our leverage ratio and all these are in a very good situation, we are in a comfortable zone. We'll continue to monitor and see that how we do the going forward the working capital debt and long-term debt balances.

Next question is from Divyanshu Sachdeva from White Oak Capital Management.

So I just had 2 questions. Number one, given the fact that now the chrome ore would come from your ore mines, so how much saving per tonne are you factoring into?

So that is still a little early to comment on right now because we're still in the process of getting environmental clearance and operation is still to start. So maybe next quarter, I would like to take this question up.

Okay. Okay. And this savings since it's uncertain for you, I have not factored the same savings but not in your guidance as well right?

Yes.

Next question is from the line of Vishal Chandak from DAM Capital.

Sir, the first question that I had was, what is the kind of inventory gains that are sitting in our EBITDA at this point in time because of increase in raw material and finished good prices? Sir, if you could just quantify that part because it seems to be abnormally high pricing environment in this...

Vishal, this is inventory, I would say not, some of a positive or negative side inventory valuations is the better term to use for this. And this is purely due to the pricing and sourcing mechanism on the SS industry. So -- and it just becomes an internal part of our profitability. So typically, there is a 40 to 50 days time lag between the -- as we mentioned that most of our orders, 70% are domestic, and now we are moving to export alloys as joint business, export pricing mechanism. It's immediately get adjusted with the current spot price, underlying raw material prices. While the sourcing, obviously, for that, so whenever the price is on line, there would always be a continuous momentum in terms of those type of 40 to 55 days lag, time price difference on that period, and it's a vice-versa also. But now that at least those risk -- as a risk management, we have narrowed down this time to for just 40 to 50 days, which used to be earlier say 75, 80 days earlier.

Sure. So my next question was with respect to -- in the past, we had raised some, issued some preferential allotment was done, so whereby part of the payment was made. When should we expect the balance payout coming for the preferential allotment?

So one more tranche have already been put up in the last quarter, and the balance are now -- there is a time line till March. So it will come within those time lines.

Next question is from the line of Saket Kapoor from Kapoor and Company.

Sir, firstly, as you told that the sourcing pattern has changed for the scrap part and now we are sourcing a major portion, 60%, 65% from the -- from domestic only. So there also, sir, is it a deemed import type that your importers are their themselves setting up their stockyards here? And then it is being understood as an import from the country? Or it is the end user also is domestic only. That was my question.

It's a mix of both. There is end user scrap generation also. And correct, you are right, importer. I mean there are suppliers who are setting up yard and importing materials from abroad. It's a mix of both.

Right sir, looking into the your volume for the -- for H2, taking into account the utilization levels, which have been for the first half, it's going to be in the similar lines for H2 as there is no further rooms for higher numbers?

Volume will definitely be higher because there was a little disruption of COVID in this Q1 of this year, so H2 volume will be higher than H1 of this year.

Because sir [ 452 ] was the volume number, if I'm not wrong. So taking into the nameplate capacity, it would be in that vicinity only or correct me there.

No, a little bit higher, similar number. I would say Mr. Sood maybe have better numbers, but I would say around that level, maybe 10,000 to 15,000 higher.

And sir, this acquisition or this company named JSL Ferrous, what should be the rational for this sir, we have mentioned that for the Jajpur expansion this is being done, if you could dwell more into it, JSL Ferrous?

Actually, a little too early to talk about, this is something that we are internally discussing and working out. So just as a early step, we created this company, what our plan for it, give it in next quarter because we should have worked it out by then. In the next call, if you ask me, I'll be able to answer this question.

It is not related to the greenfield expansion then?

It's not related to that. It is some other ideas we do have, but it is too early to discuss or nothing has been taken forward. So I would like to first internally complete the discussion, clear our strategy, then openly talk about it.

Okay. Last 2 points, sir, on the ferrochrome price trend, what are the current spot prices, sir? As we have seen in your presentation, the prices for the quarter were in average of above INR 105,000. So I think there are some...

Currently, average price, I will not be able to comment on. But currently, it's around INR 121,000, INR 122,000.

INR 121,000 and INR 122,000, okay. And for the tax part, we found in the cash flow that the advanced tax payment for JSL on a consolidated basis is to the tune of INR 87 crores. So if we take tax MAT, this is say 45% of what the total tax to be paid. So are we calculating this on the MAT basis itself, the MAT tax of INR 87 crores?

So for the 2 companies, so when I explained about that, for the JSHL since we have adopted the lower tax rate, so the tax liability has been discharged as per the statutory requirement accordingly. And as far as the JSL is concerned, since we have losses carryforward as a independent company, so we have worked out accordingly. And if you see the current tax expenses, the amount has been calculated accordingly under the MAT and the liability has been discharged accordingly.

So the point I was trying to make is, if we take this 45% of advance tax at INR 87 crores then the overall we are projecting or working with a MAT of INR 950 crores for the full year because then only this 45% proportionate works out.

Right now since both are the 2 separate listed companies, so when you ...

I'm talking about JSL only, sir.

Yes, I'm coming to JSL only. I'm coming to the JSL only. So if you talked about the JSL, is the PBT level for the 6 months is INR 974 crore, correct? And if you look at tax expense line item, which has been calculating accordingly. So whatever the losses there it has been adjusted and the liability has been created accordingly. And when you are looking at the cash flow, so as per the statutory requirement, there are installments, but this estimation is done on the full year basis, not on a quarter basis. So all these factors have been considered while discharging the advance tax liability.

So that was my understanding sir, the INR 950 crore is what we have been taking into account then it is on the lower side for the full year?

That's what I'm saying. See, when you estimate the liability for the not on the quarter basis, that is what the standard requirement is there. But when you look at from the estimation, you consider the whole year as I put together. So while our EBITDA discharging the advance tax liability. And depending upon the cash flow situation and the priority, accordingly, we discharge the liability.

As there are no further questions, I now hand the conference over to the management for closing comments. Over to you.

Thank you. I would like to thank everyone for attending this call and showing interest in JSL and JSHL. Completion of merger along with slated capacity expansion and better product mix will help us maximize the value for our stakeholders. I hope we have been able to answer all your questions. Should you need any further clarification or like to know more about the companies, please feel free to contact our Investor Relations team. Thank you once again for taking the time to join us on this call. Wishing you all a very happy and safe Diwali.

Thank you, very much sir. Ladies and gentlemen, on behalf of ICICI Securities, that concludes today's conference call. Thank you all for joining us, and you may now disconnect your lines.