Business Today - - CONTENTS - By Nevin John

Heavy debt fails to de­ter JSW Group from plans to take over sick as­sets, large ex­pan­sions.

On Septem­ber 29, Sa­j­jan Jin­dal cel­e­brated Dussehra with his fam­ily and col­leagues at JSW Cen­tre, the head­quar­ters of JSW Group in Mumbai’s Ban­dra Kurla Com­plex. Like in the past, he donned tra­di­tional head­gear and moved his feet to the tunes of garba. His wife San­gita, son Parth and daugh­terin-law Anushree, joined the cel­e­bra­tions. While the rest of Mumbai con­tin­ued the cel­e­bra­tions over the next few days, Jin­dal took a flight to Lon­don. He had no time to dally, what with the group on the verge of mas­sive ex­pan­sion, even ven­tur­ing out­side its com­fort zone of steel, power and ce­ment where it has been a dom­i­nant player for decades.

JSW is now for­ay­ing into paint man­u­fac­tur­ing, fi­nan­cial ser­vices and elec­tric ve­hi­cles. Along­side, the largest steel­maker in the coun­try – JSW Steel has a ca­pac­ity of 18 mil­lion tonnes (MT) per an­num, sur­pass­ing state-owned SAIL’s 17.5 MT and Tata Steel’s 12.7 MT – in­tends to grow even larger, build­ing new ca­pac­ity as well as ac­quir­ing sick as­sets and turn­ing them around. Ex­pan­sion of ce­ment and port busi­nesses is on the cards as well. “There have been no new in­vest­ments in th­ese sec­tors for the last few years, so we an­tic­i­pate sup­ply con­straints once the growth mo­men­tum picks up,” Jin­dal tells Busi­ness To­day. “This is an op­por­tune time to in­vest to take ad­van­tage of the up­com­ing growth cy­cle.”

What lies ahead for Jin­dal? The ` 66,000-crore JSW Group al­ready has an ag­gre­gate debt of ` 60,000 crore, and his am­bi­tious plans will only raise the fig­ure. The new steel ca­pac­ity he wants to add will re­quire in­vest­ment of more than ` 26,800 crore over the next three years, in­clud­ing ` 15,000 crore to double the ca­pac­ity of the plant in Dolvi, Ma­ha­rash­tra, from five mil­lion to 10 MT. The com­pany’s ports in Ma­ha­rash­tra and Goa and the new ter­mi­nal in Paradip (Odisha) will need ` 7,000 crore for ex­pan­sion as it plans to ex­pand ca­pac­ity from 70 MT to 200 MT by 2020 to be­come the only In­dian con­glom­er­ate that can pose a chal­lenge to the Adani Group’s steep rise in the sec­tor. The elec­tric ve­hi­cles (EVs) plant he wants to set up in Gu­jarat will re­quire ` 4,000 crore. Be­sides, there will be in­vest­ments in ce­ment, power and paints that are yet to be quan­ti­fied. Jin­dal will surely need low-cost cap­i­tal, so as not to over-lever­age his bal­ance sheet, as well as part­ner­ships, es­pe­cially in EVs.

Tough Times

Jin­dal’s steel busi­ness has been through tough times be­fore emerg­ing as the coun­try’s big­gest. In 1998, he at­tempted a gi­ant leap and fell short. He set up a sec­ond steel com­pany, Jin­dal Vi­jay­na­gar Steel (JVSL) – dis­tinct from the Jin­dal Iron and Steel Co (JISCO) he was run­ning then – to build a 1.2 MT in­te­grated steel plant at Vi­jay­na­gar, Karnataka, cost­ing ` 4,000 crore. (JISCO and JVSL were later merged to form JSW Steel in 2004.) But the night be­fore the plant was to go on-stream, un­sea­sonal rains lashed the area and halted the coal con­veyor belt.

Jin­dal launched a sal­vage ef­fort. He per­son­ally joined his work­ers in man­u­ally feed­ing coal to the fur­nace, but the coal, too, had got wet and the ma­chines, one by one, ground to a halt. The half-melted iron stuck to the pot and hard­ened as the heat­ing stopped. “We had to vir­tu­ally cut the pot to re­move the iron,” says an old timer.

Though Jin­dal showed un­wa­ver­ing will and restarted op­er­a­tions within six months, the cost was heavy, with JVSL run­ning up a debt of ` 5,000 crore and given the ad­verse mar­ket con­di­tions then, hav­ing to sell be­low the pro­duc­tion cost. In 2000, it had to go in for cor­po­rate debt re­struc­tur­ing (CDR). It took JVSL five years to come out of CDR.

Ac­quire to Con­quer

But that is now a dis­tant mem­ory. Con­di­tions were such that many in­dus­try peers suf­fered the same fate then, with some like Is­pat In­dus­tries never able to over­come their sit­u­a­tion. Is­pat was fi­nally taken over by Jin­dal in 2010 and merged with JSW Steel. (The Dolvi plant, now billed for ex­pan­sion, was part of Is­pat.) It is among the 10 ac­qui­si­tions Jin­dal has made, start­ing with South­ern Iron Ore Steel Co (SISCOL) in Salem, Tamil Nadu, in 2004, thereby in­creas­ing JSW Steel’s orig­i­nal ca­pac­ity 11 times to be­come the coun­try’s fore­most steel­maker.

The decade since the global fi­nan­cial down­turn of 2008 has not been an easy one for the steel in­dus­try, with a global slow­down in the com­modi­ties mar­ket last­ing sev­eral years. But JSW Steel has risen above it – its in­come has grown 340 per

cent to ` 55,757.97 crore and its profit 108 per cent to ` 3,454.05 crore. It has ex­panded its range of steel from flats, long, special and value-added cat­e­gories to in­clude high value-added, auto and elec­tri­cal grade steel as well. The en­try into auto and elec­tri­cal grade steel was fa­cil­i­tated by the tie-up with Ja­panese steel­maker JFE, which ac­quired a 15 per cent stake in JSW Steel in 2010. “Our com­pany can con­vert iron ore into steel at a cost of $115 per tonne, which is the world’s most eco­nom­i­cal,” says Seshagiri Rao, Joint Man­ag­ing Di­rec­tor. The av­er­age cost of the major play­ers (who are with­out mines) in In­dia are above $250 a tonne.

There have been other hur­dles, notably the Supreme Court de­ci­sion of Au­gust 2011 to ban min­ing in Karnataka’s Bel­laryHospet re­gion. JSW Steel was sourc­ing 50 per cent of the iron ore for its Vi­jay­na­gar plant from the re­gion. Steel pro­duc­tion also dropped by half, while profit in that quar­ter plunged 72 per cent. Cok­ing coal sup­ply was also hit – but it taught Jin­dal a valu­able les­son: he needed cap­tive iron ore mines, just like ri­val Tata Steel. Ac­cord­ingly, JSW Steel won five iron ore mines in Karnataka with an es­ti­mated re­serve of 111 MT in Oc­to­ber 2016. Th­ese are ex­pected to meet around 20 per cent of the Vi­jay­na­gar plant’s re­quire­ments. The com­pany also won a mine in Jharkhand, which has ex­tractable coal re­serves of 30 MT.

Man of Steel

“Sa­j­jan Jin­dal is a man of steel,” says Raamdeo Agrawal, Co-founder and Man­ag­ing Di­rec­tor, Moti­lal Oswal Fi­nan­cial Ser­vices. “He un­der­stands the steel busi­ness bet­ter than any­body in In­dia. He has proved his skill by turn­ing around loss­mak­ing steel com­pa­nies.” The case of Is­pat, the best known of JSW Steel’s ac­qui­si­tions, il­lus­trates this per­fectly.

When it was taken over, Is­pat had posted an op­er­at­ing EBITDA loss of ` 77 crore the pre­vi­ous year and had an out­stand­ing debt of ` 7,300 crore. Within three years, in 2012/13, it achieved an op­er­at­ing profit of ` 1,180 crore. “Just putting money into an ail­ing com­pany will not turn it around,” says Rao. “Be­fore mak­ing ac­qui­si­tions, we al­ways look at the syn­er­gies we can bring in.” De­spite its losses, Is­pat’s 3.3 MT Dolvi plant had the lat­est steel­mak­ing tech­nol­ogy. JSW Steel also re­duced in­put costs by sourc­ing cheaper coal and buy­ing power from Jin­dal En­ergy. Is­pat had been buy­ing power from the grid at ` 7.50 per unit, while JSW En­ergy was sell­ing it at ` 4.50 per unit – the same price it of­fered JSW Steel. “By sav­ing ` 3 per unit, we re­duced costs by ` 45 crore per month,” adds Rao.

The merger also en­abled JSW Steel to slash lo­gis­tics costs. It had steel-coat­ing plants in Vasind and Tara­pur – both in Ma­ha­rash­tra – which were sup­plied hot-rolled coil (HRC) steel from the dis­tant Vi­jay­na­gar plant, cost­ing the com­pany ` 1,500 per tonne of steel in trans­porta­tion. The steel coat­ing plants be­gan sourc­ing their re­quire­ments from the Dolvi plant in Ma­ha­rash­tra, re­duc­ing trans­porta­tion ex­pense. Si­mul­ta­ne­ously, Is­pat’s Ban­ga­lore buy­ers were sup­plied with steel from the Vi­jay­na­gar plant, once again slash­ing trans­porta­tion costs from ` 1,500 to ` 400 per tonne. “So it was a two-way syn­ergy. Over­all sav­ings in lo­gis­tics were over ` 2,000 per tonne,” says Rao.


No doubt the Dolvi plant needed ad­di­tional in­vest­ment, too – Jin­dal put in around ` 1,800 crore to in­crease its ca­pac­ity from 3.3 MT to 5 MT, which low­ered the over­all cap­i­tal cost. He built a pel­let-mak­ing unit so that the plant no longer had to buy iron ore lumps and out­source the task. He is also build­ing a coke oven. The blast fur­nace gas gen­er­ated by the plant is also be­ing used for a 55 MW cap­tive power plant. Bulk sourc­ing of raw ma­te­rial and debt re­fi­nanc­ing also brought down ex­pen­di­ture. The story of SISCOL, Jin­dal’s first ac­qui­si­tion – since re­named Salem Works – which, too, was loss-mak­ing when it was taken over, is sim­i­lar.

Con­tro­ver­sial Moves

Not that ev­ery ac­qui­si­tion of Jin­dal’s has paid off. Two in par­tic­u­lar – both from fam­ily mem­bers – have dis­ap­pointed. The first was the 2007 pur­chase of three US com­pa­nies mak­ing steel plates and pipes, in which his elder brother Prithvi­raj Jin­dal had a sub­stan­tial stake, for $810 mil­lion. They were all loss-mak­ing, with net losses of $42 mil­lion against rev­enues of $510 mil­lion in 2006/07.

Jin­dal had ex­pected to re­cover costs, in­clud­ing that of the ac­qui­si­tion, in four years. But the com­pany has had to write­off loans worth ` 6,208.74 crore to the US hold­ing com­pany. In the first quar­ter of this fi­nan­cial year, the US plate and pipe mill had an op­er­at­ing in­come of $5.1 mil­lion on rev­enues of $58.67 mil­lion, which sug­gest it is show­ing signs of re­cov­ery. How­ever, JSW Steel (US) is still con­sis­tently mak­ing losses. The other ‘fam­ily’ ac­qui­si­tion – still to be com­pleted – is the Ch­hat­tis­garh power plant, run by brother Naveen Jin­dal-led JSPL. The JSW Group’s power arm, JSW En­ergy, agreed in 2016 to take over it for ` 6,500 crore, much to the con­cern of its in­vestors, due to coal short­ages and lack of long-term power pur­chase agree­ments.

JSW En­ergy once set it­self the goal of 10,000 MW by 2020, but with cur­rent ca­pac­ity at 4,500 MW, is now re­think­ing the mat­ter. With the coun­try now power-sur­plus, and de­mand grow­ing at 6 per cent an­nu­ally, too much ca­pac­ity could lead to as­sets ly­ing idle. “We’re keen to ac­quire stressed power as­sets, but they have to be at mine pit heads or close to them, where PPAs are ei­ther al­ready in force or can be en­tered into at com­pet­i­tive rates,” says a JSW En­ergy of­fi­cial. The grow­ing debt of the com­pany, at ` 14,350 crore, also needs to be kept an eye on. “JSW En­ergy is al­ready slightly over­lever­aged and mer­chant power has few tak­ers,” says San­jay Sethi, CEO and Man­ag­ing Di­rec­tor, Nestor Con­sult­ing In­dia. Again, the fu­ture of ther­mal power is it­self in doubt. “Since the world is mov­ing to­wards re­new­able en­ergy, we are not quite sure about build­ing more ther­mal ca­pac­ity,” says Rao.

Set­backs and Chal­lenges

De­spite its slew of ac­qui­si­tions ear­lier, in the last two years, most of Jin­dal’s takeover ef­forts have failed to come off. JSW Ce­ment was keen on the 11 MT ce­ment plants of French gi­ant La­fargeHol­cim when they were put on the block, but in mid-2016, Nirma Ltd bagged the deal. JSW Steel had been con­sid­er­ing ac­quir­ing the UK as­sets of Tata Steel, but the com­pany reached a joint ven­ture agree­ment with Ger­many’s Thyssenkrupp in­stead. As part of a con­sor­tium, JSW Steel also sub­mit­ted a bid for the loss-mak­ing 10 MT steel plant Ilva in Italy, but it went to the ri­val ArcelorMittal-led con­sor­tium. It is now try­ing to buy long prod­ucts maker Aferpi (old name Luc­chini SpA), the sec­ond-largest steel pro­ducer in Italy, to ex­pand its pres­ence into Europe.

JSW En­ergy had a bind­ing agree­ment with the Jaypee Group to buy its 500 MW ther­mal power plant at Bina, Mad­hya Pradesh, but the deal was scrapped. It had a non-bind­ing pact to ac­quire the power busi­ness of the ail­ing Mon­net Is­pat and En­ergy as well – run by Sa­j­jan Jin­dal’s brother-in-law


San­deep Ja­jo­dia – but ef­forts to take over the com­pany stalled after the Re­serve Bank of In­dia asked lenders to ini­ti­ate in­sol­vency pro­ceed­ings against it. Its of­fer to buy a con­trol­ling stake in Mon­net through the strate­gic debt re­struc­tur­ing (SDR) route was turned down by the State Bank of In­dia-led con­sor­tium formed after the RBI di­rec­tive.

Jin­dal is still hope­ful of ac­quir­ing Mon­net Is­pat, and even has his eye on the cri­sis-hit Bhushan Steel and Bhushan Power & Steel. Ac­cord­ing to the bank­ing sources, JSW is among the buy­ers which have sub­mit­ted “ex­pres­sions of in­ter­est” (EoIs) in Mon­net’s as­sets to the In­sol­vency Res­o­lu­tion Pro­fes­sional ap­pointed for it un­der the new In­sol­vency Law. Mon­net’s to­tal debt is around ` 10,330 crore. Jin­dal is also in talks with in­vestors to make a bid for Bhushan Steel. The steel in­dus­try con­tin­ues to stag­nate de­spite the re­cent im­prove­ment of mar­ket con­di­tions, which is pre­cisely why the JSW Group sees an op­por­tu­nity, ex­pect­ing a short­age of steel by 2021. “Banks are not fund­ing steel com­pa­nies be­cause of their non-per­form­ing as­sets and steel com­pa­nies are un­able to take up projects be­cause their bal­ance sheets are stressed,” says Rao. “” We are well po­si­tioned to take a call on in­vest­ments in the sec­tor.” Jin­dal is also in the race to buy 30 per cent stake in Jaiprakash Power Ven­tures, which is up for sale.

Build­ing Brands

There is also a con­certed ef­fort to raise JSW’s brand im­age, with the new for­ays, which are all con­sumer-fac­ing, part of the ef­fort. The driv­ing force is Jin­dal’s son, Parth Jin­dal, Man­ag­ing Di­rec­tor, JSW Ce­ment. “I en­joy mar­ket­ing and brand build­ing, while dad en­joys man­u­fac­tur­ing,” he says. “Most of our busi­nesses, bar­ring ce­ment and steel re­tail, are B2B. So, we did not bother much about our brand ear­lier.”

“If you ask a lay­man, he will still say that the big­gest steel com­pany is Tata Steel,” he laments. A sober­ing ex­pe­ri­ence in Bhubanesh­war while he was with JSW Steel con­vinced him of the need to im­prove the group’s im­age. He met a num­ber of deal­ers dur­ing a visit to the city and with­out dis­clos­ing his iden­tity asked them which brand they would rec­om­mend for a house he was plan­ning to build. To his shock, bar­ring one, all rec­om­mended Tata Steel. “I asked them why. One dealer said Tata Steel prod­ucts were the best. The com­pany was also prompt in re­plac­ing de­fec­tive sam­ples. He even be­lieved Tata Steel was made from pure iron ore, while JSW Steel came from scrap iron.” On his re­turn to Mumbai, he promptly sat down with JSW Steel’s mar­ket­ing team and re­worked the in­cen­tive schemes for deal­ers and their in­flu­encers. Parth’s stew­ard­ship of JSW Ce­ment has so far been ef­fec­tive. The com­pany’s rev­enue has grown to ` 1,289.81 crore in 2015/16, against ` 165.96 crore five years ago, while net profit stood at ` 89.25 crore in the same year, after three years of con­sec­u­tive losses.

New Fron­tiers

The foray into paint man­u­fac­tur­ing, in par­tic­u­lar, is Parth’s brain­child. “JSW is keen on en­ter­ing sec­tors where brand plays a big role in in­flu­enc­ing con­sumer de­ci­sions,” says Jin­dal. The choice of paints was dic­tated by the group’s core strengths in steel and ce­ment. “You need steel and ce­ment to build a house and fi­nally you need to paint it,” says Parth. In a con­sumer busi­ness like paints, dis­tri­bu­tion will be cru­cial. “A major bar­rier for a new en­trant is sup­ply chain com­plex­ity,” adds Parth.

The en­try into EVs is an out­come of the gov­ern­ment’s stated in­ten­tion of en­cour­ag­ing them heav­ily in com­ing years. “The Jin­dals will be pur­su­ing it as a busi­ness op­por­tu­nity,” says Raghu Vish­wanath, MD of brand val­u­a­tion com­pany Ver­te­brand. The ad­van­tage is that it is a com­pletely new arena, with only one com­pany, Mahin­dra & Mahin­dra, hav­ing man­u­fac­tured EVs in all th­ese years. “We feel there is a level-play­ing field,” says Sa­j­jan Jin­dal. “In­dia has demon­strated strong ad­vo­cacy for elec­tric mo­bil­ity. JSW En­ergy is, there­fore, ven­tur­ing in this space given the ad­van­tage of its free cash flows.”

The EV plant will be built at Vanod vil­lage in Gu­jarat’s Suren­drana­gar district, with the com­pany hav­ing al­ready signed a MoU with the state gov­ern­ment, com­mit­ting to set up in­fra­struc­ture for recharg­ing and pro­duc­ing elec­tri­cal bat­ter­ies as well. It is also in talks with China’s auto gi­ant Zhe­jiang Geely Hold­ing Group for a part­ner­ship to pro­vide tech­ni­cal support. What are JSW En­ergy prospects in EVs, given that all the major auto com­pa­nies in the coun­try are also ven­tur­ing into this seg­ment? “It will have to con­nect di­rectly with the cus­tomer un­like in B2B,” says De­vang­shu Dutta, CEO of re­tail and con­sumer con­sul­tancy Third Eye­sight. “This will re­quire a shift in mind­set and a cul­tural change, in ad­di­tion to tech­ni­cal ca­pa­bil­i­ties.”

Loan Bag­gage

But the debt re­mains and is bound to get big­ger with the new ven­tures. How does the group plan to cope? JFE’s equity in­fu­sion of around ` 5,410 crore in JSW Steel in 2010 was sought pri­mar­ily to re­duce the com­pany’s debt. JFE may well put in more funds – its spokesman has said the group has held dis­cus­sions with JSW on pos­si­ble in­vest­ments in the new op­por­tu­ni­ties of­fered by In­dia. “We would pre­fer to ac­quire sick mills in East­ern In­dia and are open to part­ner­ing with JFE Hold­ings,” says Rao.

An­a­lysts say there is no need to worry too much about the bur­geon­ing debt. “At a time when In­dia is look­ing for growth, it is best to buy as­sets,” says Agrawal of Moti­lal Oswal. “There are al­ways op­por­tu­ni­ties for re­fi­nanc­ing and re­duc­ing costs,” says Rao. JSW Steel’s in­ter­est costs came down by 16 ba­sis points to 7.16 per cent in the March 2016 fi­nan­cial year be­cause of re­fi­nanc­ing. “We want to keep our debt to EBITDA ra­tio at 3.75 and our debt to equity ra­tio at 1.75. Whether we go for or­ganic or in­or­ganic ex­pan­sions, th­ese ra­tios will be kept in mind. At present, the first ra­tio is within lim­its, while the sec­ond is slightly above.”

Sa­j­jan Jin­dal ex­udes op­ti­mism. “The struc­tural re­forms un­der­taken by the gov­ern­ment are ex­pected to give im­pe­tus to sus­tain­able growth in the core sec­tors of econ­omy,” he says.

Photo By Bandeep Singh


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