Jindal Steel And Power Ltd
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Earnings Call Transcript

Earnings Call Transcript
2019-Q2

from 0
Operator

Ladies and gentlemen, good day, and welcome to the Jindal Steel and Power Limited Q2 FY '19 Earnings Conference Call hosted by Investec Capital Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ritesh Shah from Investec Capital Services. Thank you, and over to you, sir.

R
Ritesh Shah
Analyst

Thanks, Susan. Good afternoon, everybody on behalf of Investec Capital, I welcome you to Jindal Steel's conference call. We are delighted to host the management for the discussion for the quarter and the business outlook. I'll hand over the call to Nishant, he heads Investor Relations at Jindal Steel. Over to you Nishant.

N
Nishant Baranwal
Head of Investor Relations

Thank you, Ritesh. Good day, everybody. Thanks for joining us on our second quarter conference call. We have with us today, our CEO, Mr. Ansari; our CEO for JPL, Mr. Bharat Rohra; and our CFO, Mr. Deepak Sogani, without taking much time, we would -- I would request Mr. Ansari to please start to give his opening commentary. Thank you very much.

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

Thank you, Nishant. Good afternoon to everyone, and I'm very pleased to share this -- the result for this quarter with all of you. As you know, this quarter -- the second quarter is always a monsoon quarter in India, and this monsoon quarter is not really the best for the logistics as well as for the steel production because the material gets wet and so on and so forth. But despite all that, we have -- I think we have done a fairly good job. The turnover has gone up on a year-on-year basis for the standalone JSPL by 87% to INR 6,850 crores, the EBITDA has gone up to INR 1,450 crores and that's, again, an increase by 85%. And the crude steel production on a standalone basis has gone up by 46%, up to 1.3 million tonnes. On a consolidated basis also the turnover is up by 63% to about INR 10,000 crores, EBITDA is up by 61% to about INR 2,200 crores, and the production is up by 27% to 1.67 million tonnes. In this period, I also wanted to mention that, in this period, the spread between the raw material and the finished products came down a bit. And but despite that, our performance has been reasonably well. The cost push because of the iron ore prices going up and the coking coal prices going up, including the exchange rate impact, was close to about INR 4,000, but we have covered a lot of ground by increasing our production ramp-up at Angul and as well as by cutting down our cost substantially. So that is how you see those numbers, which are there. In this period, also to tell you that, in quarter 2, our Angul performance as far as iron making is concerned, it has gone up by about 10% compared to quarter 1. And the steel making has gone up by about 17% compared to quarter 1. So those -- the ramp-up is happening reasonably well. So the revenues also have gone up [indiscernible] shift, [ you see ] they have gone up by 87% as has been mentioned, and that has already been mentioned. The pellet production also went up by about 2%, year-on-year basis, to 1.62 million tonnes in this quarter. And of course, we have used a little more pellet ourselves and sold a little less compared to [ comparative ], and -- actually we exported more compared to sale in domestic area. As far as our overseas business, Oman, is concerned, in Oman, in this quarter, as we had told you earlier, we have receipts that we have -- the government of Oman has given us some additional gas for our DRI production. Earlier our capacity -- namely plate capacity used to be about 1.5 million tonnes per year, and we used to make somewhere close to about 1.43 million, 1.44 million in [indiscernible]. Adequate amount of gas was not available. So now the government of Oman has given us additional gas. And with that, we can increase our capacity, and we could increase our capacity actually, we have -- we took a shutdown for a month for the DRI to modify the entire process so that it becomes suitable for the higher rate of production. And earlier we used to produce somewhere between 180 tonnes to 185 tonnes per hour, now we have the capacity to produce 220 tonnes to 225 tonnes per hour, and that production is already gone. So that's how -- and that -- in the last quarter, you would have seen the earlier production was less. The market in Middle East also was such that the spread has come down substantially between the scrap and the finished products. At one point of time, this used to be somewhere, if you look at the Turkish rebar, which is -- which could be one of the [ asterisk ], so it used to be somewhere close to about $230, used to be their spread, and that has come down almost by about $60 in the recent past. So that's how it -- in Middle East, those numbers have happened. And in Mozambique, if you look at Mozambique, Mozambique has produced 0.5 million tonnes in the last quarter, and it has continued to ramp up. In Australia, we have produced close to about 40,000 tonnes per month on an average, so close to about 115,000 tonnes is what has been produced there. So overall, the overseas is doing reasonably well, despite the shutdown in Oman. And now that, going forward, what we can also tell you is that the prices, which had come down a bit especially they are shopping for the rebar and the long product, they have now -- we can see that the possibility of their going up is very, very visible there, both in India as well as in Middle East. And that's a good sign, we are seeing. We can also see the flat products, by and large, has remained okay. So the world steel, if you look at world steel, overall, the growth is quite appreciable, it is 1.5% -- between 1.5% to 2%. And as far is India is concerned, in the last quarter the demand went up by about 7.5%, and the same situation seems to be continuing, also, despite some issues related to the shortage of points in the market, still the demand is continuing, quite okay. So we are very hopeful that in the coming -- in the next quarter -- in this quarter as well as the next quarter that, in the second half, our performance is far better compared to what it was in the last -- in the first half.And you know, this -- the production of the steel industry is also -- we have suggested something that which we are obviously very concerned with, that could there be any negative impact coming out of the U.S./China issue. And what is clear to us is that, as of now, because the Chinese cost of production itself is quite high, we don't think that there could be any rebound coming from China, and more important coming from China to India, that's not happening. We -- in this first half, the imports from South Korea and Japan and others, which are the key countries, that, also, we have seen reduction primarily because of, I think, the exchange rate, which has been adverse for them. So overall, we don't see any fear. There is not really much of a fear of import coming in. And therefore, we think that, by and large, the prices in the coming days should be quite stable, and in fact, it should go up substantially. Having said that, now, I'll hand it over to Mr. Bharat Rohra, so that he can talk about core power. And then we can talk to, subsequently, to the CFO.

B
Bharat Rohra
Chief Executive Officer of Power Business

Good afternoon, ladies and gentlemen. The second quarter of 2019 for JSPL has seen a steady performance, that, in spite of the quarter being a monsoon quarter, where the availability of coal from the mines is a serious constraint. JPL has done well to maintain a comparative performance over the previous quarter. Generation in the quarter has been 2,427 million units, which is identical, incidentally, to the generation in the corresponding quarter last year. Turnover has increased from INR 878 crores to INR 911 crores, primarily because of higher margin on the prices prevailing in the market. EBITDA, corresponding to the price on the exchange, the coal price has also seen a high. And the EBITDA has slightly gone down to INR 305 crores as against INR 345 crores in the corresponding quarter last year but has only marginally decreased from INR 314 crores in the previous quarter to INR 304 crores in the second quarter. The reduction being solely attributable to the high price in auctions due to severe shortages of coal. The monsoon being over, the outlook for power in the near future, over a horizon of a few years, appears highly encouraging to the power sector, as capacity additions are reducing and demand is steadily increasing at a rate of 6% to 7% per annum. The government's highly ambitious solar power addition plan has also not seen huge capacity additions. And hence the country's dependence on thermal power generation is here to stay for a very, very long time.The power rates on the exchanges towards the end of Q2 have seen cap spikes before Diwali, and is expected that, after a short drop due to the holidays, the rates on the exchange have continued to be high. The strong rates are expected to be continuing till the general elections next year. And then immediately after the general elections, we have the summer peak. So in this next 6 to 8 months, the situation should be good for the power generating companies. With the rate -- with the high-power rates expected to continue, the benefits will be derived by the generators who have got adequate coal stocks. The position of coal stocks at a very large number of power plants continues to be critical, with stock levels less than just a couple of days. JPL in addition to its FSA allocations has made efforts to arrange coal from other sources and has recently [ bid ] about 7.5 lakh metric tonnes of coal from an auction conducted by ICICI. In addition to this, JPL has also started using a substantial quantum of coal imported from U.S., South Africa and Indonesia. And we plan to further improve our stocks by such similar imports. In the long term, also, JPL plans to bid for the coal mine auctions for commercial mining, and secure a sizable quantum through the same. The bidding for the commercial mining is expected to be announced soon for the power sector.The availability of coal in the coming months is also expected to improve as Coal India has given strict instructions to ramp up the mining from 1.5 million tonnes per day to 2 million tonnes per day, which is surely going to help the IPPs improve their performance. With this optimism, I would like to hand over to our CFO for his comments.

D
Deepak Sogani
Chief Financial Officer

Good afternoon, everybody. My commentary on the second quarter's performance for us. The first commentary from my side is that, in this quarter, we have touched a consolidated revenue of around INR 10,000 crores for the first time, so that's an important milestone we have achieved. The second commentary on the Angul, we just heard and strategy Angul ramp-up is happening quite well. The Angul blast furnace is now stabilizing at around 9,000 tonnes per day, [ augering ] good production coming in from Angul in the remaining quarters in this year. So that's one important milestone as well, that Angul is stabilizing and looking to do here as well in the coming quarters, which is one of the very critical operational focus areas for us as a management team. The third commentary, obviously, is on the financial performance. Our consolidated revenue this quarter was INR 2,207 crores, which was 61% higher on a y-o-y basis, and INR 1,452 crores on a standalone basis, which is also 85% higher on a y-o-y basis. So financially, obviously, this was a monsoon quarter, but we have done better than what we expected, that's on the EBITDA side. On the EBITDA per tonne, we saw a contraction happening in our EBITDA per tonne, partially expected. Due to the monsoon quarter, we were seeing bit of reduction on the NSRs, in particularly, on the long side of our business, so business was expected to be a bit slow in this quarter. And now, we see the window has opened up and you're seeing improved business outlook as we go forward into the [ first ] monsoon season. But in this quarter, we saw a total EBITDA per tonne contraction of almost INR 2,500 per tonne from INR 13,846 per tonne in the last quarter to around INR 11,500 per tonne in this reported quarter. Of which, NSR reduction was a smaller part, around INR 500 per tonne reduction out of this INR 2,500 happened on an account of some price reductions. And partly the reduction in the EBITDA per tonne was a contraction in the EBITDA per tonne happened due to higher input costs, in which, obviously iron ore and coking coal were the largest contributors, and additional costs for [ revenue ] [ indiscernible] and foreign exchange depreciation also led to a part increasing the costs. But again, in this quarter, we are seeing that some of these costs are now getting partially reversed. So hopefully, we will be able to kind of see a better outlook on the cost side as well. On the debt side, my commentary is that we are doing quite well in terms of our stated target. We have been stating that our goal is that, over a 2-year period, FY '19 and FY '20, we want to reduce consolidated debt by around INR 12,000 crores, and at the half year-end, while we are reporting to you the first half performance for the consolidated business, our net debt stands at INR 41,605 crores versus March '18 net debt of INR 42,375 crores. And also on the reported net debt given the foreign currency translation impact of INR 1,475 crores, which, if you eliminate the net debt reduction from March up to September, is INR 2,245 crores. So we have carried -- tracking our goal, we should be able to reduce a similar amount in the second half. And we're also trying to monetize, partly, Oman further to kind of reduce our debt. So maybe we will come close enough to our annual target this year. Or as the target is for 2 years, so between this year and next year, we are committed to deleverage by INR 12,000 crores. So we reinforce our statement on that. I would also like to draw your attention on the reported financials. In the reported quarter, we had an exceptional profit of INR 472 crores, relating to early redemption benefits that we gained on some privately placed debentures. So as a conscious strategy to deleverage, we bought over some debentures, which we were able to buy at some discount. So that led to this INR 472 crores of benefit. And against that, we also kind of took some impairment losses relating to old projects of around INR 216 crores. So net impacts on account of the exceptional items was around a gain of INR 256 crores. The reported EBITDA that I have spoke to you about is prior to any exceptional income, so that is purely on the operational trend, if you would. With that, I end my initial commentary, as we are happy to take questions from you.

N
Nishant Baranwal
Head of Investor Relations

Before we start the questions, I would request everybody to kindly ask most strategic questions. We in IR, myself and Shweta, are always there to deal with the numbers and the data questions. With this I will request the operator to kindly start the questions.

Operator

[Operator Instructions] The first question is from the line of Ritesh Shah from Investec Capital Services.

R
Ritesh Shah
Analyst

Sir, my first question is regarding your annual guidance, what you earlier stated was for steel at 7 million tonnes and power at 1,900 megawatts. After first half, how do you see this number? And my second question is any update on power, specifically, incremental PPS? And the status for Angul DRI unit? Both these variables are likely to impact our second half performance as well, so if you can please provide some color over here.

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

So as far as steel is concerned, you know we have broad expectation for this year. It will be -- from the Indian operations, we'll be close to about 6 million tonnes. So that's something which is there. We also have said that, in the quarter 1, we had mentioned about that, that this is likely to be over 6 million tonnes. And Oman will be somewhere close to about 1.9 million tonnes to 2 million tonnes, so that's the way it's going to be. So that's the way -- that's the kind of number as far as steel is concerned. And power, I will request Mr. Bharat Rohra to mention.

B
Bharat Rohra
Chief Executive Officer of Power Business

Yes, Ritesh, our outlook for operating the units was about 1,900 megawatts. But in the present quarter, we have been operating 1,700 megawatt units, that is 2 units of 600 megawatts and 2 units of 250 megawatts, partially loaded due to the lack of PPS. And the 1,900-megawatt would be coming towards the end of the year and the fourth quarter because, that time, we are expecting that the coal situation would improve and so would the demand for power. So that's how we are operating the plant right now. And as regards to your question about incremental PPS. So the quantum of PPS remains the same as it was in the previous quarter. And long-term and medium quarter -- medium-term PPS have not come at all. And only short-term PPS are coming for a month or 2 months, and that's all that is there in the market. So we are eagerly looking forward to medium-term PPS, which may come in the near future.

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

Yes to add on, while we are expecting our standalone volume in India to be around 6 million tonnes this year, we are likely to exit, in the last month, at a run rate of around 7 million tonnes to 7.5 million tonnes given the ramp-up that we're seeing in Angul which is likely to happen over next 2 quarters. And even in Oman, this year's outlook is around 2 million tonnes, but we may exit around 2.2 million tonnes, 2.3 million tonnes for there as well. So that's the outlook on the volume for future.

R
Ritesh Shah
Analyst

Sir, this is without the Angul DRI standalone information, what you indicated for India operations, right?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

So if we -- I'll turn to you.

B
Bharat Rohra
Chief Executive Officer of Power Business

It's okay. Yes, it's correct, because we are -- we have both the options, we are looking at both the options. What we had said earlier, also, that we want to push the blast furnace to -- for good capacity, and by good capacity, we mean somewhere close to about 10,000 tonnes, 10,500 tonnes per day. Right now, we have already touched more than 9,000 tonnes per day on several days. And so that's what we are looking for. So it is possible that we can look at starting the DRI in the next quarter. And let me also tell you this, everything is practically ready, it is only a question of the right time to start because the plants are ready, we have -- there is no further preparation, which is required to be done, we can start at any time. But as I said, we just want to push the blast furnace to its -- to a logical conclusion of capacity before we really start the DRI. And yes, these numbers are even without considering this.

R
Ritesh Shah
Analyst

Right. Sir when you say 1,900 megawatts, Q4 is it the exit run rate that we are looking at? Or what is the cumulative for the year that we should look at?

B
Bharat Rohra
Chief Executive Officer of Power Business

No, the average would -- at the end of the year it would be in the range of 1,700 megawatts.

R
Ritesh Shah
Analyst

1,700 megawatts.

B
Bharat Rohra
Chief Executive Officer of Power Business

And towards the end of the year and the fourth quarter, we are expecting to start 1 more unit of 250 megawatts.

Operator

The next question is from the line of Atul Tiwari from Citigroup.

A
Atul Tiwari
Vice President and Analyst

And congratulations on a very good set of numbers and the details given on the debt and the cash flows. Sir, just 2 questions, what was the consolidated CapEx in the first half?

D
Deepak Sogani
Chief Financial Officer

So I guess, the annual guidance for CapEx stands at INR 1,500 crores, which includes completion of the revenue balancing projects in Angul as well as the regular maintenance CapEx of INR 700 crores to INR 800 crores, right? We can [ revert ] back to you with more specifics on the balance sheet for half year. But it is tracking our annual guidance at this point of time.

A
Atul Tiwari
Vice President and Analyst

Okay. And sir, for next year, the similar kind of CapEx numbers should be expected or even a lower number?

D
Deepak Sogani
Chief Financial Officer

So I have now the data, so then just to clarify, at this point of time, at the end of half year in the balance sheet, we have around INR 770 crores of CapEx, so which is absolutely in line with our annual guidance, right? For the next year, most of the Angul related CapEx will be reversed. And therefore, we are expecting reduction in the CapEx from the current business levels.

A
Atul Tiwari
Vice President and Analyst

Okay. And, sir, reverting back to the Angul plant. So as you mean, we managed to fire up the DRI and the cool gasifier sometime in third quarter or early fourth quarter. What is a sense on the raw material availability, especially the quality and the quantity of coal that is needed? Because, a few years ago, we had an issue on those fronts and because of this, plant had faced problems.

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

So we have -- let me also tell you some -- share some good news here. We've also got some linkage for the coal gasification plant coal. And that is something where we already got that. And we expect that coal to be made available to us sometime from December and early January or so. So that coal is what we're going to use. And on top of it, there may be certain amount of shortage which is there. So whatever is the gas, we have also identified sources both from imports as well as from domestic sources, which we think we'll be able to get back whatever is the balance quantity, we should be able to manage that. So I -- the worries which we had earlier on that account, a lot of those worries are already over simply because we have bought this linkage now.

A
Atul Tiwari
Vice President and Analyst

And, sir, just in broad terms of the total required coal quantity for the gasifier, how much is covered under this linkage?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

So roughly it will be about 60%, 65% for the initial period that we are talking about. So that's the kind of number which we might be able to get on a domestic basis, partly linkage and partly the other source which is there, and there is stock that can be imported.

Operator

The next question is from the line of Rajesh Lachhani from HSBC.

R
Rajesh V. Lachhani
Analyst

Sir, my question is with regards to overseas mining assets. So if we do a rough calculation with the numbers of EBITDA you've given for Shadeed, standalone, JPL and Mozambique and subtract it from the overall consolidated EBITDA, we also see a profit at our South Africa and Australian mines. So sir, could you share these numbers, how has the profitability trended?

D
Deepak Sogani
Chief Financial Officer

So I guess, let me try and take an answer on that. Fundamentally, as we have been reporting in the last couple of quarters, given the fact that the Indian operations were stabilizing, as a management team we were able to focus much better on our international assets and both in Africa and in Australia, obviously, Oman has been doing -- has been giving a sterling performance anyways. But we have been able to improve our operating performance in both these jurisdictions to some extent. So in the reported quarter, we've seen our profitability increase from the African operations, which has led to some benefit. We've also seen some improvements in our Australian operations. So between the 2 of them, we have seen maybe some improvement over there. And in addition to that, what has happened is that, in Australia, we were -- obviously, the Australian reported currency is Australian dollar and there was some foreign currency translation that used to come while consolidating into the corporate consolidated reports. And about somewhere between INR 75 crores to INR 100 crores of -- every quarter for these foreign currency translated amounts in Australia were being expensed in the P&L. And as per the audit opinions that we have received in the current quarter, these are now being set off in the balance sheet in the Australian book. So partly due to this particular foreign currency treatment, there has been this delta, but a larger part of the benefit that you're seeing is really on account of improved operations in both Australia and Africa.

R
Rajesh V. Lachhani
Analyst

Sir, so can we expect these operations to remain profitable at the EBITDA level going forward as well?

D
Deepak Sogani
Chief Financial Officer

So Africa is certainly promising much more than the current quarter. So we are expecting that, over the next 2 quarters, we will see -- although, the base is less, the total consolidated profit you will not see a lot trickle down. But we certainly expect African operations to start delivering better profitability. As far as Australian business is concerned, obviously, on a net basis, from an EBITDA point of view, it will certainly be positive. However, this is relevant interest cost, et cetera, that comes in. So a bit of that on the cash flow, which, in Australia, will take some more time to stabilize.

Operator

The next question is from the line of Amit Dixit from Edelweiss.

A
Amit A. Dixit
Financial Analyst

A couple of questions. The first one is on the balance sheet. So we have seen EBITDA accretion in H1 to the tune of around INR 4,400 crores, but if you look at inventory, that has gone up. So it looks like -- and receivables also have gone up to an extent. So it looks like almost INR 3,000 crores of that has been used in funding working capital. And you are saying that, you know that debt level has also gone down. So just wanted to kind of reconcile these numbers? And is inventory -- higher inventory a cause of this [ upward ] movement? Or do you expect it to go down as the year goes by?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

So Amit, you're right. As a part of conscious areas, there are 2 elements on the working capital. So first of all, on the consolidated side, the working capital has gone up by almost INR 2,000 crores, not INR 3,000 crores, I think that is a standalone entry there. If you see the consolidated numbers, and you have the reported financials, so you can see that yourselves, right? So those are the numbers that we are talking about. Right? So in any case, there is an increase in the working capital, obviously, as you know, when we are trying to ramp up Angul. So partly we're kind of deploying our separate cash flow to ensure that Angul ramp-up happened as effectively and as quickly as possible, that's 1 lever. Second, obviously, in the monsoon quarter, overall business activity was a bit less. So there was a bit of increase in the inventory levels on account of that monsoon quarter as well. Going forward, we're not expecting, at least in the remaining 2 quarters, a very significant increase over the current levels from the working capital. And therefore, we should be able to use our operating cash even better from a debt leverage point of view -- deleverage point of view.

A
Amit A. Dixit
Financial Analyst

Okay. So you mean to say that, that inventory increase that we have seen, some of it would be naturally unlocked because you will sell from Angul?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

Partly yes, partly.

A
Amit A. Dixit
Financial Analyst

The second question is on Shadeed? So this quarter, I mean after successive quarters of growth, we have seen EBITDA per tonne declining in Shadeed, now going ahead of growth -- I mean, due to lower production. And going ahead, what kind of EBITDA per tonne can we see from Shadeed, particularly because now the capacities are up and running and you have got a contract also in place at a good price, I believe? So any color on that?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

So as I mentioned to you that the spread between -- in the Middle East between the scrap and the finished product that is the rebars, that came down significantly in this last quarter. At some point of time, in an earlier quarter, it used to be somewhere close to about $225, $230, and it came down by about $60, $65. This is based on the Turkish rebar, that's what -- the number I gave. Let me also share that, that against these numbers -- and if you look at the Turkish costs of production, against a spread of $160, $163, their cost of production, as far as I know, is somewhere close to about $140. So they were making only a very small amount, somewhere around $20, $25 kind of a number which they were making. Against that scenario, in Oman, when they were making close to about $80, $85, $90, we were making close to about $100, $140, $150. And also in the worst-case scenario, where we were still making somewhere close to about $50 -- $50-odd. So therefore, we have 1 major advantage out there based on our proximity and based on our cost of production, because we are an integrated steel plant. So therefore, that's the major advantage, which we have. Going forward, we expect that the rebar prices are going to -- which have softened quite a bit, they are going to go up significantly. We are also going to increase our production now because we have added a new blaster in Oman, and the capacity -- the name plate capacity is going to change from 2 million tonnes to 2.4 million tonnes. This blaster is recommissioned in the next month. And so therefore, we have the additional capacity to produce. And also more of metallics we will produce in-house rather than really buying from outside. We were buying a considerable amount of [ Middle East ], because our own capacity was limited to that extent. But now with additional gas, we will be able to get more and more metal [indiscernible] inside. Of course, we'll still need to -- because our production is increasing, we may still need to buy some more passive materials. So all in all, our cost is going to come down substantially -- significantly. And the rebar prices are also expected to go up. So we certainly consider that the spread between the -- our raw material package and the rebar will be somewhere of course about $130 to -- in the range of $130 to $150.

Operator

The next question is from the line of Sanjay Jain from Motilal Oswal Securities .

S
Sanjay Jain

My question pertains to Mr. Ansari, your opening remarks, when you talked about that there is a cost pressure up to INR 4,000 per tonne because of the iron ore prices going up, coking coal price going up and exchange related inflation. So I mean when I look at this quarter standalone numbers and divide the raw material costs with the production, I don't see raw material cost going up even in this quarter. So I mean what -- I mean how -- what I want to understand is that, is this because of the product mix? Or we are going to see this cost increasing in the subsequent quarters?

D
Deepak Sogani
Chief Financial Officer

Sanjay, Deepak here. So obviously, we need to perhaps have an offline conversation on the reconciliation of the numbers that we have given or you try to talk on. But our computations show that, on a whole, in the reported quarter, our cost has gone up by almost INR 2,000 per tonne, right? We can walk you through the different elements, and we can take it offline perhaps.

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

Yes, so let me also tell you this that our -- while I have mentioned that the raw material impact to certain things, we have also taken lot of steps to cut down our own costs. And therefore, the net impact is what the CFO has just mentioned that, that's the kind of number we have there. So that's the way it is. And there is a -- as you can see [indiscernible] so we can [ take it ] offline.

S
Sanjay Jain

That is useful. But what I want to know is, look -- how things will look in third quarter and fourth quarter? Is all the cost pressure in the numbers? Or are we are going to see some more costs increasing in the subsequent quarters?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

Actually, if you look at it, the iron ore prices, especially in reserve area, we are affected mostly, we have seen softening of the iron ore prices. That's something which is there maybe because -- I mean, we can assume that some of those units, which we are buying a lot of raw material from Odisha, the ownership has changed hands since they have their own captive mines, so they are using some of those material. And therefore, the overall demand also might be coming down a little bit. So therefore, we do expect that the iron ore prices in Odisha, which have normally gone up, that should really come down. And as before, that should be one part. The coking coal price has also gone up significantly. And we really don't think that the exchange rate is going to be any more adverse than what it is and so on. And therefore, we really don't expect that any more further adverse impact is going to take place on the coking coal business. So overall, coming in this quarter and the coming quarter, we would expect that this cost pressure will be much less compared to what it was in last year's quarter.

D
Deepak Sogani
Chief Financial Officer

And also, Sanjay, broadly, obviously, you are aware, from a seasonality point of view, Q2 is the lowest quarter in the year for the steel business. So we are very hopeful that, on the business outlook side, we will see some price improvement, which should more than offset [indiscernible] raw material [indiscernible] changes, so we should be able to maintain the business and improve it.

S
Sanjay Jain

Okay, that's useful. Can I ask one more on power business? The split between the merchants sales, which is like not medium-term and long-term of the total volumes.

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

Yes, Sanjay. The merchant sales, we are trying to be very selective in our merchant sales because of the paucity of coal. So whenever we get a conducive rate, which we have decided as a particular figure, whenever the rate is beyond that, we try to sell on the exchange. And in a quarter, not more than 10% of the sale is on the exchange, the rest of it is on the PPAs.

Operator

The next question is from the line of Vineet Maloo from Birla Sun Mutual Fund.

V
Vineet Maloo
Fund Manager

I just want to understand, what is -- I mean when is our CGP plus DRI combination going to start? Is it from January when we will get this linkage running and receiving coal from the linkage? What is the plan on that side?

D
Deepak Sogani
Chief Financial Officer

So as I have mentioned here, there are a few, let's say, indicators which will really take us to. So #1, obviously that coal needs to start coming from the linkage, that's one important thing. The other, as I mentioned that we want to push the blast furnace production to further higher levels. As currently, we have gone up to 9,000 tonnes per day on some days. We want to push it closer to about 10,000 or so. So therefore, we expect that these should be completed, let us say, by end of January or so, it will be somewhere close to that. And that will give us an opportunity to start DRI. So yes, that's the kind of time line we are looking at it. As the time progresses and as we are able to ramp it up to that kind of a level, then that's what is going to determine that. So primarily these are the 2 considerations which we have at the moment.

V
Vineet Maloo
Fund Manager

So how is the blast furnace production? Or is the targeted blast furnace production constrained for DRI and CGP or whatever? This is not exclusive, right? I mean it can happen simultaneously. I just want to understand what is stopping you from increasing production from this unit?

D
Deepak Sogani
Chief Financial Officer

So therefore -- yes, I understand from what you are mentioning. What I mentioned is that steel making -- the steel which was made in quarter 2 was almost 17% more than quarter 1. So therefore, the steel melt shop also has a ramp-up plan. It cannot happen that it doesn't have an indefinite curve that it can immediately take everything. So therefore, as for the steel -- these all these raw materials are required for steel making. As the steel making ramps up, and we push more and more blast furnace, hot metal there, so that gets absorbed, that logistics goes on, you sell that material. So therefore, there is a gradual process of doing it. If it was possibility of saying that everything can be done simultaneously, then you say it's a different matter, but in real life it doesn't happen. If, at any stage, it defies progression, that's the way it really happens. And that is how the steel making [ process ] is also taking place. And therefore, the need for steel making, the metallics needs for the steel making right now is being fulfilled by the blast furnace completely. And it will continue to be done so till, we think, that up to 10,000 or so, which is a very clear possibility to do that. And thereafter, the additional metallics will come from the DRI route. So that is the kind of linkage, which is what we are talking about.

V
Vineet Maloo
Fund Manager

So is there a fair understanding that, currently, the steel melt shop ramp up will be constrained until starting these units. Is that a fair understanding?

D
Deepak Sogani
Chief Financial Officer

It will always be. You know it is integrated plant, so you do predict 1 shop beyond and then the next one becomes a constraint, you solve that, and you do that. That's the way that the entire ramp-up happens. And the ramp-up means solving all the small, small issues, which are related to the production and the logistics and everything. That is what this is all about. So that's how the blast furnace and steel melt shop right now are going in tandem, and they are both operating. So in a way, technically, you are right that, if, today, if I had unlimited steelmaking capacity then I can use that to start the DRI and do that, absolutely. But obviously, there is a limited capacity in terms of ramp-up.

V
Vineet Maloo
Fund Manager

So one last question is, you talked about deleveraging over FY '19, FY '20 combined, right? Recently there was a press statement by Mr. Jindal that, from FY '21, you want to start a new CapEx program of taking annual capacity to 20 million tonnes. Just wanted some clarification. What is your strategic thought process about starting to get into a CapEx mode -- I mean, when the deleveraging process hasn't -- has hardly even begun?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

Oh, I think you are referring to a discussion which took place in making [indiscernible] -- in making [indiscernible] discussion where the Chief Minister of Odisha and all the other people were there. And obviously, that was a forum in which all the positive things need to be talked about and so on. That's something, which is what it is. I -- right now, I don't we really are talking about immediate investment, our focus is totally on ramp-up, making money, deleveraging, that is the focus which is there. That was a different forum.

D
Deepak Sogani
Chief Financial Officer

So I think, also, fundamentally, we have been reiterating as a management team our current focus is absolutely clear to spread the assets, Angul assets, Oman assets very well, improve our operations in the international side and deleverage, that is the focus. Now obviously, from a strategic point of view, over a longer-term horizon, we will have additional land, additional capability to build capacity, in due course, at the right time, right? Those discussions are obviously in a different context and thinking and planning and then putting it down on paper and making it happen is a long, long process. So I think we're here to say that, next 2 years, our deleverage is absolutely intact and we are working towards it. And there is no real tangible plan to kind of start doing additional and large CapEx in the near term.

V
Vineet Maloo
Fund Manager

So Deepak, this is precisely my point. So you're, again, reiterating what I said. For next 2 years, you have a very concrete deleveraging plan. But that plan -- I mean that much deleveraging, do you believe it's good enough that, from the third-year onwards, you'll embark on CapEx program. I understand the strong possibility that you want to grow long term, but that sends mixed messages to investors that, on one hand, you are talking on deleveraging, repairing our balance sheet, increasing profitability. On the other hand, you were talking about large CapEx program?

D
Deepak Sogani
Chief Financial Officer

So let me -- you have a valid point. First of all, let me say that your point of view is a valid point of view. Let me now try and kind of draw the distinction, from a managerial point of view, how we look at it, right?We, as we said, deleverage is absolutely the most important corporate objective that all of us are working towards. We are trying to do our CapEx in a very limited territory. We have been guiding our CapEx. We are saying that we are within our guidance and next year's guidance on CapEx and everything is available, right? I think, having said that, obviously, on a larger period, this is not an operating plan that we are saying that third year we will do a large CapEx. I think that's not what anyone is saying here in this room to you, right? All we are saying is that, on another front, there are different discussions that the Indian steel industry is poised to cross 200 million tonnes, 250 million tonnes, and there are different places where people talk about it, right? We are a very large player. We have a lot of stake in the industry. Amongst our different plants, we have a lot of making capacity available. So from a futuristic point of view, obviously, at some point in time, your discussions may become relevant but those are not on the radar at all at this point of time. I would like to very clearly highlight, that, as far as, in third year, we will do a very large CapEx, it's not on the radar. Okay.

V
Vineet Maloo
Fund Manager

Sure. I mean, I appreciate your point. Thanks so much. But I mean, obviously...

D
Deepak Sogani
Chief Financial Officer

And then obviously we will want to get our balance sheet.

V
Vineet Maloo
Fund Manager

Clear exchange of thought versus that we all stand on the same page about this. Maybe we'll connect later offline.

D
Deepak Sogani
Chief Financial Officer

Yes, sure. Let me also say that...

V
Vineet Maloo
Fund Manager

Including shareholders have a very clear view of where things are likely to go from a strategic point of view.

D
Deepak Sogani
Chief Financial Officer

Sure. No, so if at all there is any doubt because [indiscernible] a lot of people. Let me -- for the benefit and for removing any doubt on this matter, let me clarify very, very abundantly, right, that our focus is absolutely the same as we have been reiterating to get this INR 40,000 crores, INR 42,000 crores, it used to be INR 45,000 crores consolidated debt. We have already bought it down to INR 40,000 crores, and we are making extensive efforts to bring it down to sub INR 30,000 crores levels, right? That will be a very critical milestone for us to bring it to manageable levels, where, on a net debt to EBITDA basis, we are working at below 3 levels, so that our balance sheet is strong, so we're doing that. Number two, we are not embarking on any fresh, large CapEx initiatives at all. There is no plan, no discussions in the internal team at this point of time. In due course, if we do, obviously, we will look at options available from a strategic partnership point of view, whether we need to balance it, but those are conversations which are far in future at this point of time. And I hope I'm very clear on this matter.

Operator

The next question is from the line of Ashish Jain from Morgan Stanley.

A
Ashish G. Jain
Vice President

You may have kind of referred to this earlier, but I joined a bit late. Can you just highlight a bit more about the deleveraging that you said and the target of INR 30,000 crores, what's the roadmap for that? And what kind of strategic asset sales we are looking in that?

D
Deepak Sogani
Chief Financial Officer

High level, we have been guiding for INR 12,000 crores deleverage happening in FY '19 and FY '20 put together. While you were not on the call earlier on, we said that at the first half level, we've already achieved a deleverage of INR 2,245 crores, so we seem to be on track. This year, another similar number can happen to operations in the second half. And in the next year, maybe if this year we are -- through operations doing INR 4,000 crores plus, next year through operations, we should be able to do INR 6,000 crores plus, because our business volume will go up and we should be able to get better operating cash flows to make it happen. We are also trying to monetize Oman partially to create some more cash. So that's the larger strategy on the table. Operations is the crux, with some monetization and some improvement in our international performance. These are the 3 key levers.

A
Ashish G. Jain
Vice President

And so this does not include any potential sale of power assets or something of that? So this is more from [ ramping capacity ]?

D
Deepak Sogani
Chief Financial Officer

Right.

Operator

The next question is from the line of [ Chintan Shah ] from Investec Capital Services.

U
Unknown Analyst

So can we get an update on the SMPL mining case? And also about the inventory of 12 million, 13 million tonnes that's lying over there?

D
Deepak Sogani
Chief Financial Officer

So obviously, that's a matter where we are not directly concerned. Obviously, to some extent, we are hoping that this 12 million tonnes -- we are really confident this 12 million tonnes of our inventory is certainly secure, right? And that it should be able to come to us early. Beyond that, we have no comprehension and commentary on this matter.

U
Unknown Analyst

Okay. Sir, time lines, anything?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

As far as this material -- what we are almost saying is that, sooner or later, this material is going to come back to us. This is an iron ore, which belongs to us. We have already paid for that. So it's a question of a little time as to when this material actually comes to us, that is for sure. Now the other question is directly, I mean, as far as that [ mines ] is concerned, it's not something which is directly associated -- we are not concerned with it other than that our material is lying there. So we are waiting for whatever judgments take place, and to make sure that we are able to get back our material, that's how our interest is. And we are absolutely sure that this will happen.

D
Deepak Sogani
Chief Financial Officer

And you know further, I think, based on the judgment that has come out yesterday, which we have also [ reviewed ], our confidence that we we'll be able to get the benefit of the iron ore mines lying in the premises of SMPL will come back to us very soon is increasing, right? So we are becoming even more hopeful and confident that will happen in the near term. But we'll obviously wait and watch.

Operator

The next question is from the line of Yash Doshi from SBICAP Securities.

Y
Yash Doshi

Sir, could you please throw some light on our rail business. I believe we won a rail order from Indian Railways, so what is the status of that? And have you delivered it completely during this quarter or are there still some lines left? And also there was recent report that Indian Railway is going to tender a global -- you can say, a tender for passenger rails and we are not qualified for that, so can you please throw some light? And if we are hopeful of getting that order in future?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

So there are 2, 3 parts to this. So let me try and address one by one. The first order which we received was for about 96,000 tonnes of rail from Indian Railway, and they had given us a delivery target for about 12 months. So this is a material which we are going to complete, hopefully, in 5 months only, based on [ active ] orders, so that's the way it is. Already a substantial portion has been delivered to them. If I remember correctly, the numbers are somewhere close to about 40,000 tonnes has already delivered. So we are well and truly on the way to delight our customers' railways. We have been set up the 12 months requirement, we will finish that in about 5 months or so. And as far as other tender is concerned, there are 2 tenders which we are talking about: One is a tender from RVNL. They are also looking for a substantial quantity of rail, which is of the normal [ stem ] specification which currently the Indian Railway is using. And yes, you're absolutely right that we have mentioned to them very clearly that we have the capability to supply the entire quantity that -- I think their quantity is somewhere close to about 400,000 tonnes, certainly to more than that soon. And we have said that we can supply that entire quantity. As you are aware, the first order which we have received from Indian Railway is considered to be a developmental order. And as per their terminology, it requires about 1 year of running of operation of those rails, which we supply under the passenger and other mixed traffic. So that -- our rails are already laid out there. The trains are already running on those rails. That is something that process is on. I think that process will be completed. If we need to go purely by the Indian Railway standard, then our qualification process will be completed by later part of next year. That's in about a -- these 10 to 12 months' kind of a -- the other thing is that we have also exported substantial quantity of rail. And those rails also have -- have been used for passenger traffic for more than a year, maybe close to about 1.5 years or so. And their requirement is that it could run for 2 years. So there are some qualifying clauses which we think need to be really looked at. And that's something where we are working with the Ministry of Steel and having discussions with the Railways Ministry, that, under the Make In India Scheme, they need to look at this entire thing in a fresh light. And that's where it is at this time. We are quite hopeful that some favorable response will come as far as our capability to supply these materials is concerned. Indian Railway, per se, is also coming up with -- or they were talking about coming up with another item which is more like a head-hardened rail. And in this country, we have -- we have already made that kind of a specification and exported it. So as and when that tender comes, we will have a decision about it whether it could be -- it will be a developmental order or a complete qualification, that's a discussion we'll have subsequently. I hope that clarifies the point which you have raised.

Y
Yash Doshi

Yes, thanks a lot. And my next question is, on last quarter we guided that the Oman free cash flow would be around INR 250 million. So after slight disappointment during this quarter, are you maintaining that? Or that would be lowered down?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

We had mentioned about -- you are right that somewhere close to about INR 230 million to INR 250 million is the kind of number which will be there, EBITDA numbers which are there. And of course, in the last quarter, the numbers were less simply because the spread which was there because that was something which is down. So currently we still expect that we will be somewhere in that region only because the last -- the next 6 months, which are there, they are supposed to be much better than the first 6 months. And also, as I have explained to you, we are -- our cost of production will come down, our capacity -- volume will go up. So these 2 have positive impacts, which will be there. So we are still expecting that we should be able to kind of achieve those kind of numbers which we have mentioned in quarter 1.

Operator

The next question is from the line of Abhijith Vara from Sundaram Mutual Funds.

A
Abhijith Vara

Sir, my first question is on the short-term PPS. We are not seeing Jindal Power participating in any short-term PPS recently. Is it solely because of the coal availability? And when you're saying the coal situation will improve, how concrete is this information, in the sense, does it give you confidence that you can now participate in short-term PPS in Q4?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

You see, recently we executed a short-term PPA for Behar, which was for 2 months, and it was in the morning off-peak hours. So we just completed that. Then there was another one we did for UP. But primarily, we try to participate in the short-term PPS at a threshold price that we desire that we should get because the coal we have to buy from the auctions. So the price has to be commensurate with the auction prices, otherwise there is no point burning coal, buying it at the same prices, selling it at the same prices. There's no point in doing that. So we are very selective in picking up the short-term tenders. As regards my optimism for the availability of coal, you see now the shortage of the monsoon, et cetera, is over, and there is a lot of pressure by the Ministry of Coal on ATCL and MCL to ramp-up their production. And we have recently seen an auction of 15 [indiscernible] from Gare itself. So I'm sure that there will be more such quantum available in the forthcoming dry months. Then they are also coming up with auctions for captive use, so where JSPL would be participating. And if JSPL is going to participate, we are going to [ piggy ] that with JSPL and try to take the 25% which has been recently permitted to be sold by the captive miners to any other user. So that is where my optimism comes from.

A
Abhijith Vara

Okay, sure, sir. So second question is on EBITDA per tonne for steel division domestic. Q2 is around INR 11,400 per tonne. What is the outlook for the remainder half of the year? How do you see the cost curve moving? And what is the threat to this number, INR 11,400 per tonne?

D
Deepak Sogani
Chief Financial Officer

So right in the beginning, I did mention that this spread in this quarter and quarter 2 had -- between the raw material prices and the finished products had come down. And now I'm also seeing that the raw material prices, the iron ore prices, we are already seeing that there is softening of iron ore prices. And the coking coal prices also are expected to not -- at least not increase but maybe marginally come down. Than what is also happening, we are pushing annual ramp-up, and annual ramp-up has a major impact on our cost structure. So as more and more PCI is injected, more and more coking coal is reduced, the requirement is reduced, we will keep cutting down the costs. And that is something which will have a very positive impact. So going forward, we certainly are very hopeful that this EBITDA per tonne number will increase substantially in the -- compared to what it was in quarter 2.

A
Abhijith Vara

Sir this is despite, just to clarify, this is despite price realizations not improving, is it, in October, November compared to...

D
Deepak Sogani
Chief Financial Officer

So there are 2 elements to it. One is that, as I mentioned, that what is their [ finished price ], which is -- even if the price remains same, and if we cut down our costs, then our EBITDA per tonne goes up substantially. And cutting down our cost is something which we are already seeing is happening. We are doing it on a regular basis based on the ramp-up -- Angul ramp-up, which is happening. So that is something, which is -- even if it was raw material prices remain where they were and the finished product price remained where they were, even then, our EBITDA per tonne will increase. So that's the point which I'm trying to communicate.

A
Abhijith Vara

Sure, sir. So the guidance on EBITDA per tonne will it improve? Earlier I think you were looking at INR 10,000, INR 11,000 per tonne, right?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

This is Naushad here. If I could inject here, we never give any guidance on EBITDA per tonne. Generally, we -- because EBITDA per tonne is always a market-linked phenomenon. And so -- but we've generally been -- [indiscernible] on guiding only on the volumes. That is in our hand, that we will always do.

Operator

The next question is from the line of Amit Dixit from Edelweiss.

A
Amit A. Dixit
Financial Analyst

The first question is on pellets. It is very peculiar that last quarter saw a literal [ green run ] in pellets, where pellet prices were high. But our external pellet sales were down. Of course, I mean, you explained that you used for captive consumption. So will the trend continue going ahead? Will you be using more and more pellets in captive consumption and the external sales would remain just at the similar level as Q2? Or we are also thinking of maximizing the external sales of pellets by ramping up the plant?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

So we will -- obviously, we will continue doing both. I mean the pellet plant, we want to run obviously at full capacity, we are running very close to that. But we will keep pushing for higher iron ore output out of the pellet plant, that's number one of course. The other is, as we ramp-up the Angul plant, the iron ore [ filling ] material needs will continue going up. And therefore, there would be some more usage of pellets, that is also very, very clear. Obviously, the pellet is part of -- the integral part of the entire steel business and that's how it really happens, but that's part -- it's like a central plant that you -- we do that. But yes, we also sell this. So yes, we will -- to answer your question, yes, we'll continue pushing for higher and higher output of pellets from the pellets plant. And we will also need to use a little more of pellets as the production ramps up. But at a [ certain point ], of course, they will all be sold whichever market is the best market. Currently, we see that the Indian market might be a little better than export markets. So what -- whichever market is better, we will make sure that we deliver it to them, considering that we also have some long-term -- when I say long-term, means long-term relationship is there with the certain people, to certain customers. So we will make sure that we meet their requirement and then continue [ doing ] it.

A
Amit A. Dixit
Financial Analyst

Okay. The second question is on Oman. We have been talking about monetizing -- partially monetizing the assets, so any progress on that front? And you know, is there any time line you have in mind for closing this?

D
Deepak Sogani
Chief Financial Officer

Yes, so we're already kind of working really actively in Oman, on a project to kind of carry out this monetization. Obviously, the project is at a stage where we have not yet met within that [ another top-sell ], it will happen over a period of time. But only based on what we understand today, we are comfortable that we should be able to kind of get some cash in the bag by the end of this financial year, we are hopeful, that's where we are.

A
Amit A. Dixit
Financial Analyst

Is there any ballpark number you have set for Oman that, okay, I mean, this is the target that we need to kind of get from Oman?

D
Deepak Sogani
Chief Financial Officer

Really there is no explicit target on that. Obviously, we are trying to get deeper in the turning of the market and what is possible and, I mean, strategize on that. Eventually, we will obviously want to monetize Oman and delever our Mauritius business, and eventually delever our consolidated balance sheet. That is the goal. Whether it will happen in 1 stage or whether it will happen in more than 1 stage is a function of the market reception and the market reality. So all that is being kind of worked upon. But again, as I said, the core objective is to deleverage INR 1,000 crores in 2 years. Within that, several quarter initiatives are subsumed, one of them is this.

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

We take the last question now.

Operator

The next question is from the line of Atul Tiwari from Citigroup.

A
Atul Tiwari
Vice President and Analyst

Yes, so sir, just 1 very quick question. So this INR 11,500 of EBITDA per tonne in India business, and now since then, not that the prices have recovered and the costs are under control, and you will obviously get a lot of benefit of operating leverage in the second half because of the improved volumes. So I mean, is it fair to assume that it goes back to the first quarter level of INR 13,500 in the second half?

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

We certainly wish so. But we don't know. Obviously, we're hoping that the performance will be better. There are a lot of uncertainties. We have to wait for the end results to play out. We have to wait for the cost curve to play out. But one thing that is certain is what you mentioned right now, that we will be able to derive significantly better operational efficiencies because of ramp up and, on whole, production costs should be more efficient, our fixed cost leverage should be more efficient. So some of those things will certainly play out. So we'll obviously see how these things play out.

N
Nishant Baranwal
Head of Investor Relations

So from our side, we would like to thank everybody for joining us on this call. For further questions, you can always reach out to us. With this, over to Ritesh.

R
Ritesh Shah
Analyst

Thanks, Nishant. With that, you can close the call. Thanks all for joining.

Operator

Thank you. Ladies and gentlemen, on behalf of Investec Capital Services that concludes today's conference. Thank you for joining us. And you may now disconnect your lines. Thank you.

N
Naushad Akhter Ansari
Chief Executive Officer of Steel Business

Thank you.