JSW Steel Ltd

NSE:JSWSTEEL

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to JSW Steel Limited Q2 FY '23 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ashwin Bajaj, Group Head of Investor Relations, JSW Steel Limited. Thank you and over to you, Mr. Bajaj.

[Ashwin Bajaj, executive]

Yes. Thank you, Neerav. And a very good evening, ladies and gentlemen. This is Ashwin Bajaj and it's a pleasure to welcome you to JSW Steel's earnings call for Q2 FY '23. We have with us today the management team represented by Mr. Seshagiri Rao, Joint Managing Director and Group CFO; Mr. Jayant Acharya, Deputy Managing Director; Mr. Rajeev Pai, CFO; and Mr. G.S. Rathore, Chief Operating Officer.

We will start up with opening remarks by Mr. Rao and then we'll open the floor for Q&A.

So with that, over to you Mr. Rao.

[M. Rao, executive]

Good evening and we welcome you all for the briefing session of the second quarter FY '23 performance of JSW Steel. The world is going through 2 major crises, twin crisis. One is very high inflation, which in some countries is 40-year high and very high elevated LNG prices. So to address these 2 full crises, the macroeconomic stability and reducing the surging inflation have become the key objectives of many countries in calibrating the monetary and fiscal policy.

So since the starting of 2022, over 90 central banks in the world aggressively increased the interest rates. The fall out of that is very tough financial conditions, narrowing liquidity in the global markets, which also is having an impact on the overall outlook for growth going forward. But these aggressive monetary policies is not addressing the supply side issues. So inflation remains stubborn and the countries and the central banks continued their path of increasing the interest rates.

So this is the kind of scenario which we are seeing as far as the global markets are concerned. In India, the domestic demand being very stable and strong and the credit growth is getting accelerated, have been over 18% year-on-year, growth in the credit. The manufacturing industries and capacity utilization is around 74%, 75% to achieve the highest level in the last 3 years.

Even though there are headwinds in the domestic economy by way of slowing external demand, geopolitical crisis and very high LNG prices. Even with those headwinds, we are seeing a good traction and momentum as far as the domestic market is concerned. Global steel sector, considering falling or slowing demand in the steel industry during the rapid cutback in the steel production in a number of countries.

In the past 8 months of the calendar year, the total steel production cut was 68 million tonnes. Out of that, 42 million tonnes in China and 26 million tonnes is in the rest of the world. What is interesting here is that even though there is a drop of 26 million tonnes in the rest of the world, there are 2 places where there is a positive growth. That is India and the second is Middle East.

That is where the India story lies when you look at the numbers globally as regards to steel production cuts that are happening across the world due to slowing demand, falling steel prices, elevated raw material costs, squeeze in margins, where 29% of the steel companies in China are very close to bankruptcy if that is a situation where we have seen a very positive outlook in the Indian growth story. In India, the consumption even though year-on-year in the first half, it has grown over 11%. But the quarter-on-quarter, if you look at the production growth was only 1.55%. It's very, very small. But the production quarter-on-quarter, it was negative by 3.25%. So there was some slowdown in the quarter majorly attributable to very severe monsoon that was seen in India in the last quarter.

But the imports are increasing, that is a matter of concern. If you see quarter-on-quarter, it went up by 23%. And at the same time, exports have fallen by 37.5%. So in that context, if you look at the story of JSW Steel, I think it is a volume story in the last quarter. We have achieved 4.95 million tonnes on a stand-alone basis, the production and 5.58 million tonne production after including Bhushan Power & Steel.

But here, what is very important and interesting is the total sales volume. Sales volume on a stand-alone basis is 5 million tonnes, 5.501 million tonnes and on a consolidated basis, it is 5.63 million tonnes. The sales volume went up by 47%. Over and above that, out of this 5.63 million tonnes, we have sold in the domestic market 5.07 million tonnes, which is a growth of 47% quarter-on-quarter.

It is the first time where we have crossed 5 million tonne mark. And we have increased our market share to 18% in the domestic market. Even though exports have fallen by 37%, our volume of exports in the last quarter was 560,000 tonnes, 560,000 tonnes, which is 10% of the total sales. Our value-added sales volume has gone up by 24% quarter-on-quarter. Our retail sales, our sales in the renewable sector, our sales to automotive sector all have gone up in the last quarter that has made us to increase our overall sales volume in the domestic market.

But in spite of increasing sales volume, the margins were under tremendous pressure as is prevalent in the steel sector globally, the reasons being very steep fall in the net sales realization. Net sales realization on a blended basis have fallen by 14%, which was INR 10,000 lower than the quarter 1. The costs are not get paid with the fall in steel prices as we have been guiding in the last quarter that we had high cost raw material inventory that they were to be consumed in the Q2, therefore, margins will be under pressure in the Q2.

In line with our guidance, the costs have fallen by only INR 5,200 per tonne. So there is a pressure and a drop in the margins to the extent of INR 4,800 per tonne in the Q2 on a stand-alone basis. Because our costs have not gone down to the extent where steel prices have fallen, the margins got existed to that extent. The coal price in the last quarter was $381 which went into consumption as against $421. So even though it was lower by $40 per tonne, it has not neutralized the fall in the steel price.

With that, on a stand-alone basis, the EBITDA was INR 1,742 crores in the last quarter. EBITDA per tonne was INR 3,479. The other subsidiaries are concerned, particularly domestic subsidiaries, Bhushan Power & Steel has negatively contributed in the last quarter where we raised INR 698 crores of EBITDA in the Q1, which turned out to be a negative INR 183 crores. So the kind of challenges we had faced in Bhushan Power & Steel in the last quarter were majorly due to monsoon, very heavy monsoon in India, we were not able to transport the iron ore and coal from the ports and the mines. One problem was the availability of iron ore, because of the duty on iron ore, many of the independent mining companies, they stopped mining. So overall availability is reduced [indiscernible]. Over and above that logistics constraint, adding to that is the heavy monsoon. These 3 together, we could not operate the plant in the smooth manner in the last quarter.

So that is the reason why the costs really have gone up, steel consumption has gone up. Costs were very, very high. That is why the company did not do well. So the EBITDA from BPSL was a negative of INR 183 crores. Same story in the Coated. Coated, there was high inventory of [indiscernible] price, which were at higher levels.

So the high cost inventory was to be absorbed. So that is why even Coated has shown a negative EBITDA. Even though there is positive EBITDA from other subsidiaries like ARCL, JIGPL, net-net, after meeting of the negative EBITDA from Bhushan Power & Steel and as in the Coated, the contribution to the overall consolidated EBITDA from domestic operations unfortunately was a negative to the extent of INR 48 crores. Overseas, also similar story. That is why you would find that the consolidated EBITDA was only higher by INR 10 crores over stand-alone.

So in the overseas, the breakdown in the U.S.A. has done reasonably well because the plate prices have not fallen to the extent that oil prices have fallen even though demand was weak in the U.S. The Baytown facility showed an EBITDA of $24.7 million, whereas Ohio, because they had high-cost raw material inventory like [indiscernible] and the scrap, which was to be marked down, so the prices have come down. There was inventory losses, which was there in Ohio. That is why the operating EBITDA loss in Ohio was $40.26 million. So net-net, we have lost in U.S. $15.54 million. In Italy, there is a positive EBITDA of EUR 1.02 million. So net-net, even overseas have not positively contributed, negative EBITDA of INR 191 crores.

So even on a consolidation basis, there were some positive contributions in the consolidation -- consolidation increase. The net incremental contribution on consolidation of overseas and domestic subsidiaries together is only INR 10 crores. The consolidated EBITDA is therefore, was INR 1,752 crores, which is INR 3,052 per tonne. And there are 2 more items below the EBITDA line, which are exceptional items. That is relating to our sale of 70% holding in Chilean mine. As you know, in the previous year, we have fully provided for the Chile iron ore mines and we stopped the operations there.

Subsequently, we have sold our holding of 70%. But during this period, there were foreign currency translation reserves as per the company standard as and when we sell, we can revert to P&L. So that amount was INR 335 crores because this is an exceptional item, we will show below the line. So this is the one item which is recurring as exceptional, INR 335 crores.

The second is relating to Bhushan Power & Steel. Bhushan Power & Steel had a coal mine which got canceled. They had incurred certain expenditure. They made a claim. Those claims were admitted. And part of the amounts were received, that's why we have booked as an exceptional item, which is INR 256 crores. There were 2 items together INR 591 crores.

I'll spend one minute on the exceptional -- on the one-off items in the last -- in the Q2. The way I explained in the Q1, there is approximately INR 1,480 crores in the consolidated accounts, which are one-off items. These one-off items are NRVs, inventory losses, foreign exchange losses on account of translation of outstanding foreign currency debt and the export duty paid on the exports. All these 4 together is INR 1,480 crores which will translate to INR 2,578 per tonne.

If these one-off items are not there, the consolidated EBITDA, which is INR 1,752 crores could have been INR 3,232 crores, which would have covered full interest and depreciation. With this exceptional item and one-off items plus negative contribution from domestic and overseas subsidiaries and fall in the margins in the stand-alone operations, the profit after tax was a negative INR 915 crores in this quarter.

The debt as on 30th June was INR 65,719 crores, which is lower by INR 1,502 crores. But the foreign currency translation has increased the debt for the first half of the financial year by INR 2,584 crores. That means the foreign currency translation loss is not there, debt could have been lower by INR 4,000 crores, whereas this INR 2,500 crores translation loss increased the debt to that extent.

So that is why the debt as on 30th September was INR 65,719 crores. The acceptances on the revenue account is INR 2,484 and the capital account of $31 million. The debt to equity is 1.04; debt-to-EBITDA is 2.7. We have spent CapEx of INR 6,694 crores. We have commissioned [ Tin 2 ], we have commissioned our [ CAL 2 ] in our downstream unit. We have also commissioned battery A of our co-coal plants. So whatever coal we are buying in the Q2, a significant captive coke is available now. There is no need for us to buy the coke.

Similarly, we have commissioned the power plant at Golgi. So our power cost also will come down in the Q3. So these are the units which we have commissioned in the Q2. So the projects under implementation the 5 million tonnes at Vijayanagar is going on as per schedule. We will complete by 31st March 2024. Similarly, downstream color-coating line at Rajkot and also Jammu & Kashmir is going on. They're all in schedule.

We are looking at as far as the Q3 is concerned more positively because we have given the guidance of 25 million tonne production and we also said 24 million tonnes of sales. So whatever production we have received 11.19 million tonnes of total crude steel production in the first half of the financial year, we will be able to achieve the balance in the second half.

So we will be close to our guidance of 25 million tonnes. Similarly, sales, we have given the guidance of 24 million tonnes. We have done 10.12 million tonnes in the first half. So we will do the balance in the second half and we will complete -- we will review our guidance for the full year.

So with that, I will stop here and any questions are here today. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of [ Amit Dixit ] from ICICI Securities.

[Unknown Analyst]

I have a couple of questions. The first one is essentially on coking coal costs. So while you mentioned that coking coal cost in consumption terms has gone down by just $40 in this quarter, how much do you expect it to come off in Q3 FY '23? That is the first question.

The second one is on the realization drop. So while Q-o-Q realization drop was expectedly seen. However, going ahead, there could be certain contracts that could be renegotiated downwards. So do you expect a further slip in blended realization going ahead despite spot prices remaining broadly stable Q-o-Q? These are the 2 questions, sir.

[Jayant Acharya, executive]

Yes. So I think on the coal side, as far as Q3 is concerned, we see a drop in the coal flowing through into our system. So the coal on a quarter-to-quarter basis should drop in the range of $80-odd quarter 2 to quarter 3.

As far as prices are concerned, prices, as you rightly said, the normal prices, the monthly prices have bottomed out. More or less we feel that contractually also prices are now stable, except for maybe small quantities, which may get recalibrated, we do not see any further drop in blended realizations in quarter 3.

[Operator]

Next question is from the line of Satyadeep Jain from AMBIT Capital.

[Satyadeep Jain, analyst]

Just a couple of questions. One is, I think, a regular question for the past few months on the export duty. Since a few months now and all the companies are -- have not recalibrated their CapEx plan. So what confidence is there that by the time this capacity comes, we're not looking at a situation where the export duties here and there oversupply of exceeding domestic market? Is there anything that gives management confidence to go ahead with this kind of kind of a plan? That's the first question.

[M. Rao, executive]

So if you see the WPI numbers which the government of India has been giving month-after-month, if I see the September month, they are showing the inflation in the steel prices in September is 4.5% and it was 27% in the month of April 2022. That means even as per the WPI number, the steel inflation number has come down from 27% to 4.5%. Last time also I was explaining, if you see the same, the main -- the steel mint numbers which have been published for flat steel in the month of September versus September of last year, it has fallen by 14%.

So there will be a little bit of lag by the time it gets reflected in the WPI number. So therefore, these numbers are being closely watched even by the government. They have been telling us that the whole purpose of imposing the export duty is to contain inflation. So the WPI is already reduced from 15.4% in the month of April '22 to 10.7% in the month of September. So it has come down drastically. If somebody analyzes the composition of this 10.7%, it is not from manufactured products. Manufactured product contribution is very limited, even though the weight of this is 64.2%. So considering this, we feel that the government of India will take a call on the export duty because the objective is to reduce the inflation, but not to discourage export of steel from the U.S.

[Satyadeep Jain, analyst]

Okay. And I think the talk to the government on this possibly continued to be constructive. Just the second question, sir, on the -- you mentioned imports have picked up in the recent past. Can you remind us, sir, where is the import parity, I think, some confusion and are Indian steel prices trading at a premium to import prices and can that last? And related to that would be typically we see some kind of -- you mentioned supply response globally. I know the market situation is relatively better here.

But given the margin squeeze, where are the high-cost players in India? And do you see some response, whether it is what [indiscernible] that we historically seen in the industry when there's a downturn and there's a margin compression?

[Jayant Acharya, executive]

Yes. So from an import perspective first, so imports if you see coming into the country are arrivals which have been booked also for the 2, 3 months back. Some of them were Russian as well, which have started coming into the market now. Post the depreciation or rather the strength of the U.S. dollar versus the ruble, the bookings from Russia has also dried out.

We have seen very little change in the international arrivals coming in terms of price. By and large, prices, offers have stabilized. So from a price perspective, I don't see there is too much of a change between the current prices of international levels to further drops. I don't see that eventuality. But from a volume perspective, the downstream products, we see that the imports have picked up.

And that is mostly in this coal-rolled and coated space. We feel that this will maybe even out in this quarter. We don't see too much of imports coming in since the viability of the international market also to supply at low prices is very limited. So going forward, I think imports should also stabilize.

[Satyadeep Jain, analyst]

Okay. The second related question to that, in terms of supply response within the domestic market?

[Jayant Acharya, executive]

Supply response from the domestic market. So from -- if you look from a domestic growth perspective, 11.5% is the growth in the domestic market in India vis-a-vis last year. Our demand is roughly at 56 million tonne range in the first half of this year in India. Growing going by the growth rates in the past, if we grow at about another 12% rate in H2 as well, we are likely to end with a number anywhere between 115 million to 117 million tonnes of demand in this year.

Indian domestic demand is, therefore, showing a very strong growth driven by -- we are seeing various sectors contributing to this. Construction and infra is one of the primary sectors here. In the last 2 quarters, the orders which have been tendered and basically placed contribute to almost 19 million tonnes of additional steel requirements, projects announced and projects standard.

If you look at the automotive as well, the automotive which was, let's say 5 million units in quarter 1 has gone to 6 million plus in quarter 2. And going forward into quarter 3, it is estimated that it will grow by another 8% to 6.5 million plus. If you look at general engineering side, I think we are seeing very good traction in various equipments like attributes, infra boots, construction equipments, consumer durables, pumps and compressors, mining equipments. Most of them are well above the pre-pandemic levels.

So general engineering is also doing quite well. So these are basically driving the demand in India. So we therefore feel that in the second half, which is seasonally also a better period, the demand in India will be good. So from a supply/demand perspective, it will be well-balanced. The sector which is likely to be more impacted here is probably the secondary sector, which contributes almost 40% of the total production in the country.

That sector will also be facing some pain with respect to higher cost of energy coal and higher disruptions, mainly because of higher interest rates, which are likely to pan out in the remaining part of this year. So maybe there will be some outages from those smaller producers, which will be there in the market as well to balance the supply and demand.

[Satyadeep Jain, analyst]

Just want to clarify, you're saying given the international prices are domestic, you don't see any pressure on domestic prices and the current international prices or import parity prices?

[Jayant Acharya, executive]

Yes. So if you -- the international price ranges anywhere between $620 to $650 in that level in different countries. You will find low offers, maybe slightly below that as well, but those are far and few. So if you were to really take these numbers with a depreciated rupee, we are not too far off from the domestic prices. If you take countries which have an import duty into the country, then vis-a-vis that I think domestic prices are well-placed.

[Operator]

[Operator Instructions] The next question is from the line of Vishal Chandak from Motilal Oswal.

[Vishal Chandak, analyst]

So my question was with regard to the long-term expansion plans. Now we had in the past seemed that it was expected that the export duty will come up in a month, maybe in 2 months, but it has not gone up even now. And media report suggests that probably this could be at best looked at by the end of this financial year. So in light of that, if these projects which we have and the competition has planned over the next 2 years, if they are still commissioned, we would see a dilutive of HR coil in the market. So how do we look at our projects from a long-term perspective? This year obviously is challenging. I'm thinking more from a long-term perspective, how do we look at these projects?

[Jayant Acharya, executive]

So from a hot-roll perspective, if you really look at the new capacities coming in, the current hot-rolled free hot-rolled demand in the country is in the range of 22 million tonnes. If it is growing at the rate of about 10% to 11%, which we are seeing now, you will be seeing a demand of between 2 million to 2.5 million tonnes of hot-rolled costs on a free hot-rolled basis. That is net of captive consumption for cold-rolled coated constant consumptions.

So that is, by and large, one mill a year which is required in India to basically balance the overall demand situation. The capacities, which would be coming up in the country in the next 2 to 3 years, if you look at it, I think that is more or less matching if you take a 3-year time frame with the kind of demand generation we are seeing.

Keeping in mind that exports have sharply come down in the last 6 months, the next few years, we'll see a calibrated exports coming back. So therefore, in addition to the domestic demand which we just spoke about, let's say, 2.5 million tonnes each year in 3 years, 7.5 million tonnes. The balance can easily be placed in the domestic market. So in the next 3 years, I think from that perspective, up to 10 million tonne capacity in India can be easily absorbed.

[Vishal Chandak, analyst]

Just one more follow-up question on the debt side. Do we have any plans -- given the downturn in the steel sector, do we have any plans for conserving cash, reducing debt? Or do we still would want to proceed with our announced projects with the same aggressive speed as we have done in the past?

[M. Rao, executive]

As far as debt is concerned on a relative basis, still we are at 2.7x debt-to-EBITDA and debt-to-equity is 1.04x. And the projects which we already kicked off in advanced stages and by completing by 31st March '24, there will be a huge advantage in terms of capacity that will be available with when India requires more steel in the year '24-'25. Therefore, we are not looking at now to stop the project and reduce the debt.

So the debt we continue to work on how to bring it down from the current levels as we have done in the first quarter. In spite of lower EBITDA, lower free cash flow, in spite of spending INR 2,900 crores on the CapEx, we reduced our debt by INR 1,500 crores in the Q2 over Q1. This effort will continue. One important point here is we have reduced our inventories by 434,000 tonnes in the last quarter and used cash to reduce the debt.

We are also planning in the second half to reduce our inventories by another 400,000 tonnes in the second half. With that more cash will be available to reduce the debt. So our effort is to reduce the debt. And at the same time complete the CapEx program, which we already announced as per the schedule.

[Vishal Chandak, analyst]

Sir, actually my question was more -- not to the additional CapEx that we had planned beyond 2024?

[M. Rao, executive]

Beyond '23-'24, we have not announced anything. So we have just watched the situation. At appropriate time, we'll take the call. We have no plans now to announce any fresh CapEx.

[Operator]

The next question is from the line of Sumangal Nevatia from Kotak Securities.

[Sumangal Nevatia, analyst]

My first question is on our volumes. We've done a very good job on the sales front. And in the opening remarks, you mentioned that we've gained market share. I just want to understand as far as what are we doing right here to gain market share? And who are we taking market share from, is it from the secondary steel sector or also from the primary steel producers?

[Jayant Acharya, executive]

Yes. So the -- as we said, there are certain areas we have done well in the domestic market. So one of them is that we, over the last few years, we have been consistently developing our retail network, both in terms of deeper penetration and increasing our reach.

So we have been able to now have more than 1,500 branded stores across the entire country. These are direct branded stores in addition to our distribution, in addition to the retail. Out of the about -- in the last quarter, we have done about 217 new stores. Out of that, 120 are in the new towns and about 100-odd -- 97-odd are in the existing towns. So every quarter, we continue to add our retail branded retail network in new towns, increasing our penetration in the rural market.

Therefore, you will see the results of this across all our sales in the retail sector across various product lines. Just to give you a feel in color-coated -- in the total Coated business, our -- in the first half of this year, our total domestic sales have gone up by 64%. Our color-coated SOB is now at 61% plus. Our Galvalume, we are at almost 78% level.

At tinplate, we are at 40% plus level. The entire -- in the value-added space, apart from these products, we have penetrated in the cold-rolled market as well through our retail channels, primarily, again, automotive market doing well. So 2 Tier, 3 Tier vendors, replacement markets have drawn in a lot of cold-rolled as well. So the retail market through an active participation through branded retail through reaching out to MSMEs has done quite well in a structured way.

In addition to that, we have been able to tap the project markets quite well. Oil and gas, wind from our Anjar plate mill, we have been able to tap those markets. Automotive, we have continued to grow our business and automotive share of business and automotive has also moved up. And we are continuing to do well in the OEM space like appliances, OEM going into solar, with tinplate packaging manufacturers. So by and large, across the industrial space also, we have done well.

So these 2 have contributed to an increase resulted share. I would say we have replaced some part of the secondary market, where especially in the long product space where the prices of the secondary, if you were to look at way bars or wire rods are not very different from where the primary prices are. And therefore, today, given a choice at the same price level, primary is being preferred.

Also, the secondary mills had certain outages because of monsoons, because of iron ore supply disruptions in the last quarter, we have been able to replace and dip into those pockets as well. So by and large, these are the reasons why we have been able to do well in volumes.

[Sumangal Nevatia, analyst]

My next question is one on iron ore. Given the lag in IBM prices, I mean what sort of cost reduction on iron ore did we see in 2Q? And what would be in 3Q? And also in the international operations, I mean against this INR 198 crores odd loss, what is the guidance given that both in U.S. and Europe, the macro is deteriorating further, so just some guidance on the international operations as well.

[M. Rao, executive]

So on the iron ore side, whatever reductions that have happened in the last quarter, it has happened in phases. It does not happened in month of September. But the key benefit of that reduction will get reflected, if not more reductions in this quarter. Number 2 is, as you rightly said, the IBM prices got revised downwards, particularly low-grade iron ores.

So that benefit also will come now from Q3 onwards. So I will not put the finger here and say this is that reduction which can happen. But there will be a significant flow of lower cost of iron ore plus lower cost of coal plus lower cost of power that would come in the Q2.

[Jayant Acharya, executive]

What was the second question you had mentioned?

[M. Rao, executive]

Overseas, yes. In regards to the overseas operations are concerned, as I mentioned, the plate prices have not fallen the way HR coil prices have fallen. But there is a huge difference. The difference is not sustainable in our view. So when HR coil price is at about $800, $900 and the plate prices at $1,600, $1,700, the issue is different. So there will be some correction in our view in the plate prices. So the kind of EBITDA we have seen in Baytown, we get moderated.

But at the same time, the losses will not be there in Ohio. While we are saying there would be any losses because we've already done mark-to-market of all the raw materials at Ohio as on 30th September. We don't expect further drop because we feel that it is bottomed out as far prices in the U.S. was concerned. So in that we don't expect a very big negative from the U.S., if at all, it could be positive from here.

[Sumangal Nevatia, analyst]

Understood. And this exceptional of INR 1,480 crores, that's the consolidated level, right? Is it possible to share the breakup of what is NRV, export duty MTM?

[M. Rao, executive]

Yes. The inventory and NRV together is around INR 1,100 crores. Foreign currency loss is around INR 330 crores and export duty is around INR 60 crores.

[Sumangal Nevatia, analyst]

And at the stand-alone level, will it be any different?

[M. Rao, executive]

It is slightly lower. This was slightly, very significantly lower. This INR 1,480 crores number is INR 706 crores.

[Sumangal Nevatia, analyst]

INR 706 crores, okay. And the breakup, if it's possible?

[M. Rao, executive]

The FX loss is around INR 150 crores. Duty is around 25 crores, would be INR 530 crores free inventory.

[Operator]

The next question is from the line of Indrajit Agarwal from CLSA India.

[Indrajit Agarwal, analyst]

A couple of questions. One on the recent investment to the Board. And what is the end outcome here that we expect from -- like we have inducted Mr. Foswell from the SMS. And does it anyway link to our green steel or low carbon steel objective over the medium term?

[M. Rao, executive]

So when you see our Board of Directors composition, we wanted to have each skill that is required to have an effective Board. We induct that person with that scale. So earlier, Mr. Mani Mukherjee, who was the Technical Director on our Board, Independent Director of our Board, the opportunity re-expired. So we've filled up that position with a technical director. Then we have found various candidates.

We find this person who we have inducted has a very good experience in this area. He has credentials. He has Indian experience and overseas experience as well in the steel-related sector for a very long time. Therefore, his contribution, we feel is very immense to the Board in how we got in that. And whatever experience he has, I think he will continue to contribute in calibrating the strategy of the company.

[Indrajit Agarwal, analyst]

Sure. Second is on this MoU with Smart Tex, any kind of CapEx or broad targets we have in terms of medium term? I understand we have $1 million de-carbonization fund. Anything over and above that that we can really look at over the medium term?

[M. Rao, executive]

Smart Tex is having a lot of potential because it is a very comprehensive ecosystem we have created on one platform. In this platform, we not only get the funding, we're already funding for the potential projects. We also brought in the entire research ecosystem into the platform. And it's also brought the users of that technology on private basis and later on to commercial basis. The range funding for our pilot projects and also if required on a commercial basis. So that's why it is a very comprehensive end-to-end solution for migrating to green steel solution. So we have signed a MoU trying to understand it the better. So it will take some more time really to share more details on that, but it has a lot of potential.

[Indrajit Agarwal, analyst]

Sure. And my last question is on IBM price, the kind of disagreement that we have in terms of the price by IBM about a couple of quarters back. Do you think that is passed us? Currently are the IBM price more or less in sync with the market prices? Or do you think there's still some bit of differentiation that is still to be corrected?

[M. Rao, executive]

No. In the -- if you see, there are rules. There is always some inconsistency, which does not reflect what is happening at the marketplaces because any captive mines supplying for captive purpose, they are excluded. Similarly, the non-captive mines that is merchant mines, which are brought in auction, supplying for captive purpose, there is a different treatment as per the rules. So there are certain inconsistencies, which have been pointed out to the government. They are looking into it and that there will be some changes which can come in, in the MCDR rules. So that situation will remain, but as on date if you look at it, it is better than what it was.

[Operator]

The next question is from the line of Pinakin Parekh from JPMorgan Chase.

[Pinakin Parekh, analyst]

Sir, my first question is that if steel prices and currencies remain where they are, can we see a repeat of this FX NRV losses to continue in the third quarter because the cumulative within the first half is over INR 3,400 crores on the P&L?

[M. Rao, executive]

No. As far as the NRV markets are concerned, we don't expect NRV losses will come. Then as far as the inventory losses are concerned, there is still 1.8 million tonnes of winter at the average cost of production of the last quarter as on beginning of this quarter. So the costs are coming down. Therefore, I don't call it as inventory loss. I call it as lower margins on the opening inventory. That could happen.

Then as regards to FX loss, there won't be any FX loss on revenue account relating to revenue side liabilities. But on the capital side, our quality will remain that we will continue to cover our liabilities on the capital account for the payments falling due within the next 12 months to 24 months. So that policy has not changed whereas the foreign currency liabilities were longer. If rupee depreciates further from the levels as on 30th September, there could be FX loss that could come in, in the future.

[Pinakin Parekh, analyst]

Understood. And sir, my second question is just going back on to the balance sheet. If we annualize the first half reported EBITDA, the net debt to EBITDA is just over 5x now. The first half was impacted by multiple one-offs. But at INR 65,000 crores debt and given the CapEx program that the company is committed to, where should the debt peak out from here and in this current steel margin environment?

[M. Rao, executive]

So considering our cash flow position and our projection for the next half year, so what we intend to do is not to increase the debt. We wanted to reduce the debt and also meet our CapEx program. So in our view, we should -- we will be able to do it.

[Pinakin Parekh, analyst]

In the current steel margin environment, do you believe the company will be able to do it, sir?

[M. Rao, executive]

Yes.

[Operator]

The next question is from the line of Kirtan Mehta from BOB Capital Markets.

[Kirtan Mehta, analyst]

A couple of questions on the -- side. So could you guide us on the region our expansion in terms of the project management and what average that we would be looking over the next 3 to 6 months?

[M. Rao, executive]

There's a lot of noise, so I'm not able to hear you. Please, if you can repeat.

[Operator]

Kirtan, sorry, there's still a lot of disturbance from your background. The next question is from the line of Ritesh Shah from Investec India.

[Ritesh Shah, analyst]

A couple of questions. First for Jayant sir. Sir, you indicated in the next quarter, we expect coking coal consumption basis to decline by $80. I just wanted to have a sense on how should we look at this number into Q4. Have we booked incremental volumes given coking coal did come to $220, $230 level? So should we see this benefit even in Q4? That's one. Second is basically that you indicated on pricing. If we just look at Korean won, Japanese yen, are these currencies have depreciated far more than the Indian rupee? If one had to take a price call even on an import parity basis into Q4, how should one broadly look at the spreads, so the question is on spreads, partly on coking coal and partly on pricing?

[Jayant Acharya, executive]

So the coking coal side, visibility beyond the quarter, Ritesh, is very difficult. So as of now what we are seeing is for the quarter 3 and this is where we feel that $80 will be a change, a drop from quarter 2 to quarter 3. But directionally, as you've seen in the last few days, coking coal has again climbed up somewhat. Again, it could be a traction for the winter months. We have to see how it goes. And depending on how the situation pans out, it will impact Q4, but very difficult to give you a feel on how it will pan out in Q4.

As far as pricing is concerned, internationally, yes, there are depreciation of currencies against the dollar. But margins for most of the steel producers are quite stretched. Therefore, the ability to really put across steel at a very low price into India could be for some quantity, but I don't see that happening for large quantities.

So therefore, domestic point of view, if you see in this volatile market, we noticed that most of the customers, the depreciation of the rupee and the kind of volatility do not want to take a risk. So therefore, 2, 3 months prior to book and wait for the material to come, not knowing how the situation is going to pan out gives you an automatic buffer.

So I think these 2 things combined, I feel that quarter 4 being a seasonally stronger quarter should be better from a perspective of both demand. And on the price side, as we said, it has bottomed out. Usually, the prices do go up in the quarter 4. We will see how the situation pans out from the economic and steel demand point of view.

[Ritesh Shah, analyst]

Perfect, sir. This is very helpful. Sir, second question, we just set up in the GSE annual report that talks about potential investment into specialty steel. If one relates to the PLI, which is offered by the government of India, how should we look at this? Like there's obviously more time line specified over there? If you could provide some color on how we should understand this?

[Jayant Acharya, executive]

So we have been discussing with JP from a point of view of certain products to be basically got or rather produced in India and one of them is [ ARGO ]. That is still at an exploratory stage. And I think that's the one you may be talking about from a PLI angle as well. So both the parties are discussing the project. And the study is on. We will take a view soon and let you know once we have a full clarity of the project.

[Ritesh Shah, analyst]

Sure. Sir, if I just may squeeze in for Rao sir. Sir, would it mean some change in shareholding structure? Or how should we look at the infusion, are we looking at a separate JV? How should we understand this, sir?

[M. Rao, executive]

So we're still discussing with them the modalities. First we have to see that there is enough demand and the project is viable at what cost. These things -- there is a feasibility study, which is being undertaken by both the parties. So I think in this quarter, we will have more clarity on this. Once that is done, then we will look at the structure. But I don't think it will be re-dilution of JSW Steel. That won't be there. Then we'll see -- we'll explain to you the structure once we take the call.

[Operator]

The next question is from the line of [ Abhiram Iyer ] from Deutsche Bank.

[Unknown Analyst]

And my questions actually pertain to the FX impact, as you mentioned. Sir, given the fact that the foreign currency debt currently trades quite low in the market and we continuously sort of see and the rupee depreciation, is there any plan to initiate any buyback here? That's question 1.

And question 2, if I may. Our current net debt, if you look -- if you include sort of acceptances as well stands at around 3.5x. So is there any ratings pressure? Or is there any agency impact from the rating agencies that you see going forward?

[M. Rao, executive]

As far as the buyback of outstanding bonds are concerned, there are a lot of regulations in India if we want to buy back. We do loan, if you want to raise that has to be longer maturity than the outstanding debt and you should have a lower cost. So that will be very difficult to do. In the meantime, any other window that is available for buyback out of Indian rupee loans are out of cash equivalent. We're examining that possibility for the buyback of bonds, but it is on the table. Number 2, what is the next question, last?

[Unknown Analyst]

Sorry, I mentioned that if you look at acceptances as well our net debt has been increased sort up to 3.5x level. And given that upcoming quarters will also be a bit difficult, although this might be a trough, this will increase further. So are we seeing any issues with regards to our ratings of the bonds?

[M. Rao, executive]

No, from the ratings and the covenants point of view, there is no issue at all. Number 2 is, if you see the outstanding acceptances on the quarter 1 was $2.74 billion, which is already brought down to $2.48 billion. And coking coal prices started coming down. This number continues to come down. So therefore, we don't expect any pressure from agency point of view on -- and from ratings.

[Operator]

Next question is from the line of [ Ritwik Seth ] from [ One-up Financial ].

[Unknown Analyst]

Sir, my question is regarding to the global supply and in that context, the supply, which is coming from India. If we see global capacities coming up and production has also dried up and the electricity cost is also higher significantly. So in that context, once the export tax is lifted, what is the potential that we see in the export market for Indian players and especially for us since we have a good amount of volume growth coming in, in the next 2 years?

[M. Rao, executive]

As far as the export opportunities are concerned, I think it is possible for Indian companies really to export flat products from India. Even though the demand is not very strong in the global market for the reasons which I just already solicited, so the Asian and Middle East, there are 2 places where there is reasonably a good demand.

So even the WSA, if you look at it, they are projecting a positive demand growth in these 2 regions. It would be possible for India to complete and then export from the Indian markets. Number 2, as far as JSW is concerned, we have now capacity at fully. We also now expanded at BPSL. So it is possible to get additional volumes and then take this opportunity of exporting if duty is removed.

[Unknown Analyst]

Okay. So on a FY '25 basis and we have more than 30 million tonnes at stand-alone and BPSL level. What would be the ideal mix for our exports?

[M. Rao, executive]

Exports, if you really see in the past, we came down as low as 10%, but we went up as high as 30%. So that is a range we continue to operate. We never exit. And at the same time, we don't export to the quantities. So that is how we manage based on export realizations and export demand and the domestic demand and domestic price. So in that range, we will be there.

[Jayant Acharya, executive]

Also just to add one point here is if you look at the European market, the production cuts which have taken place in the last few months, on an annualized basis, it's almost close to 20 million tonnes equivalent. So the situation of energy, the way it is going forward, the situation of labor going forward, that space may not change too much. It will -- the energy cost will maybe stabilize, but it will stabilize upwardly.

So there is -- once the export duty from India, which will go by some point of time, I think we will be able to get an opportunity into the European market back again with the kind of product base which we have been doing.

[Operator]

[Operator Instructions] The next question is from the line of [ Prashanth Kota ] from Emkay Global.

[Unknown Analyst]

So just wanted to understand from you the hedging consider hedging whether or not to hedge our ForEx debt, what is the concentration? How do you think about this? And what is the hedging cost generally per annum to hedge, let's say, $1 billion of your ForEx debt? Just your thought process on this, sir, please, if you could?

[M. Rao, executive]

No. The cost of around and hedging cost is also volatile. If you look at few months back, few months back, it used to be 4%. Now we did in the range of 2.5% to 2.75%. So it has come down. So then as far as the hedging policy is concerned, after evaluating various options that are available, we have taken a call that all the revenue liabilities should be hedged 100%.

And as for the capital account is concerned, where liabilities are spread over a period of time, 6, 7 years, if you look at in the past period, the average rate of depreciation of rupee is lower or equal than the rate of depreciation of the rate of FX.

Therefore, to hedge or don't hedge, if you take the entire horizon of the tenure of the loan, then you will -- don't lose. But there could be some volatility because of that capital account translation is concerned. That is why we have taken the call. Short-term, we will cover, long-term capital account liabilities are concerned will be un-hedged. But accepting the translation loss, sometimes it hits the P&L. There won't be any actual loss if you take the entire period of the loan.

[Unknown Analyst]

And sir, just quickly one second question. Sir, we have done 5 million tonne sales this quarter. And the effort required to be is a huge herculean effort, also many plants, so many products, so many raw material movements, rates, et cetera. So -- but the EBITDA, not commercial as you would agree because the industry customers, et cetera, industry is not doing that great extent.

But then we have to continue to grow and continue to meet the aspiration of the country in terms of demand as a sector also there we will have to be there. And out of it, there is a decarbonization, et cetera, which maybe spending in future. Sir, would you -- is it fair to expect that government also contribute something to the decarbonization efforts to the sector and to the industry and to JSW? What is your view, sir?

[M. Rao, executive]

We'll share with you this decarbonization requires huge amount of CapEx. This is a big challenge for the entire industry. So there are enough representations to the government that they should facilitate -- pay the grants of concessional finance for the industry to transition to decarbonization, but I'm not sure how much it can happen. But in the developed world, it is happening.

If you look at either Europe or Canada or other countries, there is a huge amount of support that is being given by the government. So hopefully, that will come in, if not by the government, by the various other parties who are willing to support this initiative.

[Operator]

I now hand the conference over to the management for closing comments.

[M. Rao, executive]

Thank you. Thank you very much. And as far as Q2 is concerned, the majority of the losses is attributable to one-off items are fall in the selling price. Now that is behind us. In the Q3, we have extra volumes that are coming in. Yes, the incremental inventory which was beaten in the first quarter of this financial year, rather we'll be able to sell. And our BPSL, we have completed another 0.7 million tonne expansion that incremental capacity is there. Dolvi Expansion project is operating at 80% capacity utilization. So that can increase production.

At Vijayanagar last quarter, it suffered again lack of iron ore. So there were the possibility of incremental capacity production that can come in. So there will be more volume in the second half. And reductions in coking coal price and iron ore price and the power cost will come into the consumption in the next quarter.

So second half, we are looking at much positively. And at the same time, Indian steel demand is expected to be better post-monsoon and post-festival season. So we're looking at more positively the second half. And we are focusing on completing the balance CapEx program as we have planned and everything is going on track.

With that I wish you and your families, very Happy Diwali. Thank you very much.

[Jayant Acharya, executive]

Thank you, ladies and gentlemen. I wish you a Happy Diwali and feel free to get in touch if you have further questions.

[Operator]

Thank you very much. On behalf of JSW Steel Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.