The deadline for conversion of warrants is just a fortnight away, and the promoters of JSW Steel are yet to do the same. Speaking to CNBC-TV18, Mr Seshagiri Rao joint managing director and group chief financial officer said that promoters will not be able to subscribe to warrants due to lack of funding availability.
He said that “Prices of iron ore have dropped and raising money in the market has becoming difficult. So we have to see whether it is possible to subscribe to these warrants.”
25% of the warrants have already been paid for at the time of allotment, but they will be forfeited if the warrants are not converted in time.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee.
Q - Before we get to what's happening with demand and volume trends, just one update on the e-auction. When will the next tranche take place in terms of sales and at what kind of prices is iron ore sold for companies like you?
A - E-auctions started in the month of September and so far total of 12.86 million tonne of iron ore has been auctioned. Out of that, nine million tonne has been sold in the e-auction. JSW Steel could get around 5.7 million tones out of this.
Due to improving iron ore supplies to JSW Steel through e-auctions, we operated at around 63% capacity utilization in the month of October, and it improved to 68% in November. Based on improvement in the e-auction material, there can be some improvement in the capacity utilization in December. So it is progressing as on date.
In the e-auction, the prices have not been corrected to the extent of the drop internationally. Due to demand-supply dynamics, the prices of iron ore corrected from USD 189 to USD 125-140. Whereas in the e-auction, prices are kept relatively at a higher level compared to the international prices. That is why 30% of the iron ore which is auctioned is not sold in the e-auction.
Q - Next week apparently is the deadline for the warrant conversion to promoters to the tune of almost INR 1600 crore. Can you take us through what exactly will happen on the 15th of December and whether this conversion will go through?
A - Already 25% has been paid by the promoters when the warrants were issued. In the current market conditions, where prices have dropped and raising money in the market is becoming difficult, we have to see whether it is possible to subscribe to these warrants.
Q - If it is not subscribed to, that 25%, upfront payment will be forfeited completely. It is just a few days away, so surely you would have had some discussions with the promoters on what their course of action would be?
A - Taking into account the difficulty in raising money today, it is very unlikely that the warrants will be subscribed. So as per SEBI guidelines, whatever amount that has been paid that will be forfeited.
Q - Also FCCB is due in June 2012. Any decision that’s been taken on that regard, whether you would want to re-price it or repay it?
A - JSW Steel will be able to pay this amount out of its own cash generation, so we have made arrangements to pay this amount and we will meet the commitments if the conversion doesn’t take place on the due date that is in June 2012.
Q - On core business, how are things progressing? We have been getting some worrying reports in terms of large destocking that’s happened globally on steel and the fact that prices as well are beginning to come off. How would you describe the situation for the next three-four months?
A - As far as demand is concerned, it is relatively weak. In India the first seven months of this year, the demand has grown only by 3.5%. Generally the steel demand tracks the GDP growth. Even though GDP in the second quarter has grown by 6.9%, we are not happy at that, but steel demand is growing nearly 3.5% significantly lower than the GDP growth. The component of the GDP growth is majorly driven by the service sector, so the investment demand is coming down. Steel demand is also getting reflected in line with the very low investment demand and taking that into account, overall steel demand in this year is expected to be between 4-5%, as against 10% in the last financial year.
Internationally, we are seeing some slowdown in the steel demand from the countries like Japan, Europe and also China. In the overall demand side, there is some slowdown. Inline with that, the production cuts have happened, capacity utilization in the month of October is lower by 2.2% worldwide and particularly the marginal cost producers are cutting down production. So the demand-supply dynamics is expected to change in the months to come.
Coming back to India, the second half of the financial year will be better than the first half. The trend which we are seeing in the month of October, the demand went up to 3.5% as against 1.9% in the first six months of the year. The auto demand is coming back, consumer durables demand is reasonably okay and produce demand is okay. So taking that into account, the second half is expected to be better. The overall demand for the year is in the range of 4-5%.
Q - At the level of capacity utilization, will you report breakeven or are you likely to report losses?
A - Our breakeven is only 45%, therefore we have enough cushion in the overall capacity utilization and we will be able to show positive results
Source - CNBC-TV18
