Seshagiri Rao MVS Joint Managing Director and Group CFO
Dear Shareholders and friends of JSW Steel,
The last financial year has been one of the most challenging ones for countries, businesses and citizens and businesses alike. At a macro level, most major economies bounced back after a weak first half, but at a micro level, many families and communities are still struggling to cope with the aftermath of a worldwide pandemic, and its fierce second coming.
In such a challenging scenario, JSW Steel delivered a strong operational performance while ensuring that it stepped up efforts to strength the hands of government as it fought the pandemic, and relief, succour and support to communities. This is a reflection of the spirit of #BetterEveryday that pervades the JSW Steel Group, as well as the result of our strategies playing out.
The global economy witnessed a degrowth (-3.3%) after ten consecutive years of growth. India, too, went into a technical recession, but returned into the green in the last two quarters, with the full-year GDP decline being limited to 7.3%, significantly better than feared. The commodity industries also mirrored this story of two halves. Steel consumption plummeted in the first half, before bouncing back strongly, and eventual global production for CY 2020 being only marginally lower at 1,864 MnT, compared to 1,880 MnT in CY 2019. China’s moderating exports saw demand being fulfilled by countries such as India, as it became a net exporter during the year, with exports rising by 29.1% and imports falling by an almost equal number. Domestic finished steel production stood at 94 MnT, down by 6% on an annual basis. However, infrastructure spending, increased demand from automotive, construction and other sectors, and a return of private capex as well as consumer demand led to a strong revival in steel demand.
In Q1 of FY 2020-21, domestic steel demand fell by 57%, and hence we focused on exports. In Q2 and Q3, as the domestic consumption picked up and the industry witnessed a sharp recovery, we focused on domestic retail business. Our domestic sales in Q3 were at 3.48 MnT, 13% higher y-o-y, proving our ability to leverage geographic mix to our advantage.
While it can be argued that our performance was the result of better realisations (higher by 11%), on the back of strong steel prices, I would say that the most important factor was our strong execution ability in bringing the Odisha mines to production. Between Karnataka and Odisha, the total captive iron ore mined was ~18.2 MnT, and without this, we would have been struggling to operate our plants, especially Dolvi, given the volatile and uncertain conditions surrounding iron ore during the year. We are earmarking a substantial investment over the next couple of years to upgrade these mines, reduce reliance on outsourcing and create a more digitalised operating environment while taking care of sustainability imperatives.
We were also able to leverage our strong front-end presence and deepen our reach in rural India, which helped the retail sales (especially of long products). The brand’s association with sports, investments in better visibility and recall, and outreach for dealer and network partners ensured that we made strong inroads into several retail segments. We are redoubling our efforts by investing in modern, digital platforms such as JSW One, to bring a unified experience to our customers while offering them a wider bouquet to choose from.
JSW Steel also capitalised on its ability to turn around acquired assets and focused on acquisitions that would add downstream strengths to its portfolio and plug product gaps. Whether it is Asian Colour Coated, or Vallabh Tinplate, we are looking to grow our strength in value-added products. Similarly, the acquisition of PCMD of Welspun Corp gives us entry into the pipe segment, whereas the BPSL asset in Jharsuguda, allows us to strengthen our core presence in the East.
Our expansion at Dolvi from 5 to 10 MTPA is ready for commissioning in a couple of months. The 8 MTPA pellet plant, part of our cost saving project at Vijayanagar got commissioned in March 2021. We are constructing a new 1.5 MTPA Coke Oven plant as well, likely to be completed in a year. Multiple downstream projects are in process at Kamleshwar, Vasind and Tarapur, which will enhance modernisation and enrich our product mix. We have recently announced a 5 MTPA expansion at Vijayanagar, and this along with other modernisation projects in the pipeline will take our standalone capacity to 30.5 MTPA by FY 2024-25, and a combined capacity with JVs and associates to 37.5 MTPA.
We have created sufficient buffer in our balance sheet by focusing on prudent capital allocation, with the result that our gearing ratios and interest coverage look very comfortable, even beyond the norms we had guided earlier. Despite the spending on capex and acquisitions of nearly `15,000 crore, our debt reduced by ~`850 crore to `52,615 crore. With this cushion, we are investing in sweating our assets and ensuring that we create capacity in line with India’s ambition of being a 300 MTPA steel producing country. We see consolidation being a key trend in the industry and hope to leverage any inorganic or greenfield opportunities that come our way. To remain competitive and be a supplier not only to India but also the world, we are committed to investing time, resources and energy in becoming more sustainable and steadily improve our performance against ESG parameters. We are also focused on digitalisation and have taken up multiple projects to enhance competitiveness, efficiency and response time.
We are in a long-term structural upmove for the steel industry, and the developments surrounding the US President’s US$6 trillion social spending Bill and Europe’s energy transition projects will be events to watch. The story in India is less reliant on policy events and more on structural shifts. Given India’s relatively low per capita consumption, lag in new supply coming on stream and a strengthening demand scenario both at the institutional and retail level, our view is that steel prices will remain strong for the foreseeable future. It is no surprise then, that India is now seeing gradually improving utilisation levels, backed by a policy stance aimed at strengthening domestic manufacturing and self-reliance along with a massive budgetary outlay for infrastructure. Historically, all supercycles have been supported by large-scale urbanisation projects and extensive government spending on social infrastructure. It does not seem any different this time, except that we are more ready than ever before.
Sincerely,
