Corporate: JVSL Coasts Out Of The Blues

TURNAROUND
JVSL Coasts Out Of The Blues

Despite cost overruns and initial misgivings over technology, the Jindal steel project has managed to battle its way into profitability.

By Dilip Maitra

There's a new air of vitality that courses around Jindal Vijayanagar Steel Ltd's (JVSL) sprawling 3,700-acre facility at Bellary, Karnataka. Amid the loud clangs and deep drone of metal rolling and power generation at the integrated facility, JVSL's Managing Director, Sajjan Jindal, can hear the jingle of money-finally.

Four years ago when the athletic scion of the O.P. Jindal Group bet on an unorthodox steel-making technology, he was the only one in India, and third globally, to do so. The Corex technology, invented by Austrian company Voest Alpine, uses the cheaper non-coking coal and, thus, lowers the cost of steel production. But it is also largely untested and unpopular.

Indeed, JVSL faced a 10-month-long closure soon after its commissioning in September, 1998, because of technical snags. The result? Staggering cost and time overruns. Originally planned to cost Rs 4,200 crore, the 16-lakh tonne per annum (tpa) facility sucked in almost Rs 2,000 crore more. And, instead of making a pre-tax profit of Rs 725 crore in the first year of operation as promised, it ran up a net loss of Rs 148 crore.

The good news? The worst may be over for JVSL. As Jindal announced last month to a surprised 13-member board, the project has turned in its first profits of Rs 25.39 crore on a turnover of Rs 388.12 crore for the first quarter of 2000-01. By the end of the fiscal year, it could net profits of Rs 75 crore and a topline of Rs 1,400 crore. Says the 41-year-old Jindal: ''My belief in the technology and the project has been vindicated.''

On the roll

The steel market has been kind too. In the first quarter, prices of hot rolled (hr) coils rose to Rs 16,470 per tonne from the average of Rs 15,357 during the previous year. Also, the company managed to stabilise its operations and achieve a capacity utilisation of 117 per cent. Besides, the use of non-coking coal, which is 70 per cent cheaper than coking coal even after factoring in its low heat, saves Rs 760 per tonne on steel smelting. The annual savings on full capacity of 16-lakh tonnes: Rs 122 crore.

Therefore, while JVSL's current variable cost of production at Rs 9,500 per tonne may be more than Tisco's Rs 7,500, it is much lower than those of new players like Essar (estimated to be Rs 10,000) and Lloyds Steel (estimated to be Rs 12,000). Notes Suresh Nagarkatti, 57, until recently an ICICI nominee on the JVSL board: ''JVSL's cost advantage over newer steel plants makes it more viable.''

There could be more cost savings in the offing. Now, only one half of JVSL's 16 lakh tpa capacity is functional. By March next year, the second Corex module will also be working, lowering the overall cost of production. More importantly, JVSL's 3.2-million tpa pellet plant is to go on stream in October this year. Currently, the steel maker uses a mix of imported pellets and local iron ore lumps. The average cost of the two is Rs 1,600 per tonne. Internally produced pellets, in contrast, will cost only Rs 700 per tonne. That will make JVSL's consequent variable cost per tonne of Rs 8,500 the second lowest in the industry after Tisco.

The Corex technology is already helping lower the cost of power from Rs 4.20 per unit-the regular rate-to Rs 2.60. Here's why: in the blast furnace, 90 per cent of the energy generated is used for iron making, whereas the Corex process uses just 60 per cent of it. The balance energy, in the form of export gas, is available for generating power.

In JVSL's case, that will be used by Jindal Tractabel (a 50:50 joint venture with Tractabel of Belgium) to generate 260 mw, half of which is operational. Of the 260 mw, 40 mw will be used by JVSL, 80 mw by Jindal Praxair (another JV to produce oxygen for the steel plant) and the other 140 mw will be sold to the state grid.

Says S.K. Gupta, 62, Executive Vice-President, JVSL: ''In a country like India where there is abundance of non-coking coal but dearth of electricity, Corex technology is the best choice for steel making.''

Some way to go

The 12 lakh public shareholders who subscribed to JVSL's first and only public offering in 1995 will have to wait to be rewarded. Sure, the stock has recently moved up from Rs 4.50 to Rs 6.95, but given the annual interest burden of Rs 650 crore and depreciation of Rs 250 crore, the earnings per share is likely to stay unexciting.

Then, there is the issue of steel demand and price. After reaching a rock bottom of Rs 14,500 per tonne in mid last year, prices of hr coils have moved up to Rs 15,500 per tonne. The pick up in global demand and the anti-dumping duty that has been imposed by the Indian government are expected to keep prices stable at Rs 15,000 for the next few years. Says Ashutosh Satsangi, 30, of Cris-Infac, a Mumbai-based research agency: ''JVSL will be one of the more efficient players in the future if the price and demand situation does not turn hostile.''

By 2001-02, the domestic demand-supply position may tilt against JVSL. Against a total demand of 9.5 million tpa for hr coils (including 2.5 million tpa of exports), supply will be around 11.5 million tpa. JVSL's location, however, will be of help. Of the16 lakh tpa, 6 lakh tpa will be sold to group company Jindal Iron and Steel Company, which produces galvanised steel using hr coils. Another 3 lakh tpa exports will have to be made, as JVSL has taken loans under the export promotion and credit guarantee scheme.

For the remaining 7 lakh tpa, JVSL should be able to find a ready market in the capacity-deficit south India, which consumes 15 lakh tpa. Jindal, meanwhile, is hoping that his calculations prove right-again.

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