Market equations

The stainless market has largely been growing in the shadow of carbon steel everywhere on the planet. But while in developed markets it has carved a niche in specific areas, in emerging ones it is only on the threshold of claiming its rightful position, with growing acceptance in several applications. “It is simple. Those who could see merit in the life cycle cost theory, have also begun considering stainless-steel-based solutions. For instance, take the case of Japan. They have changed the water supply line with corrosion-free stainless-steel pipes and are saving $4-5 billion every year,” Abhyuday points out.    

According to a report prepared by the Indian Stainless Steel Development Association (ISSDA), the apex industry body of stainless-steel manufacturers, the metal’s current production level in the country is just 3.2 million tonnes as against carbon steel’s 100 million tonnes. Globally, the total volume base of stainless-steel production is close to 51 million tonnes with China having the lion’s share of 30 million tonnes or 60 per cent. As against this, the total steel production globally is close to 1.9 billion tonnes with China again having more than half of the share. In terms of stainless steel production pattern, flat products rule the roost with a nearly 80 per cent share.

In terms of utility segments, household usage, mostly in the form of utensils, still commands a hefty 44 per cent share, followed by capital goods (30 per cent), auto, railways & transport (13 per cent) and construction & infrastructure (12 per cent). Well established players in food processing, dairy and pharma also have been using stainless steel applications for better quality outputs.

 Industry stakeholders will vouch for the fact that much of the growth in the non-utensil segments has happened in the last couple of decades as its share in household products was close to 90 per cent in the 1980s. In the current equation where Indian players have developed a commendable capacity in carbon steel, the stainless-steel share may appear to be too small, at 3 per cent, but even then, its share in value terms is in the 12-15 per cent range.

When it comes to production capacity of flat stainless products which is currently in the range of five million tonnes, Jindal, with its two primary units in Hisar and Jajpur (Odisha) lead the pack with 1.9 million tonnes capacity. MSMEs account for nearly 1.4 million tonnes capacity, followed by the 1.45 million tonne contribution from other major players like BRG, Rimjhim, Shah, and Valley Industries. SAIL’s Salem unit has a capacity base of less than half-a-million tonnes. With this kind of profile and production base, India often vies with Indonesia as the second largest producer, while China remains the unchallenged monarch, globally.

But China’s dominance (even the capacity base created in Indonesia has been created by Chinese metal giants) often turns out to be a major spoiler for manufacturers in India, especially during the cycles when the protective duty structure is not in play. The current spell is one such example. “China and Indonesia provide non-WTO compliant subsidies to their manufacturers in the region of 20 to 30 per cent. They have destabilised all the Global SS markets. China is the largest manufacturer and exporter of stainless-steel flat products, with about 30 per cent surplus capacity,” says KK Pahuja, President, ISSDA while pointing out that with India being the major dumping ground, most organised manufacturers are facing existential issues. “SAIL’s Salem unit is already on the disinvestment list. Plus, many of the other prominent players have their cases lying with the National Company Law Tribunal (NCLT). The import-led catastrophe has also played a role in this,” he adds.

The ISSDA report specifically mentions that companies like Valley Iron, Rimjhim, and SSP have been struggling for business and are operating at less than 50 per cent capacity, while BRG, Shah Alloys and multiple MSME stainless-steel plants are either in NCLT or on the verge of closing down.

The industry is particularly miffed that in this year’s budget, the government announced the temporary suspension of CVD on Chinese stainless-steel imports and the revocation of provisional CVD on Indonesian products. This has led to an unprecedented surge in imports from China and Indonesia. According to an estimate, import volumes increased by 227 per cent from an average of 34,105 MT in July last year to 77,337 MT in the same month this year.

The All-India Stainless Steel Cold Rollers Association, a leading body for producing and supplying stainless steel in India, had earlier knocked at the doors of the finance ministry asking for immediate relief via trade barriers. “As we are recovering from Covid, if the CVD is not urgently imposed, our MSME members will not be able to hold on and will shut down and become traders. We submit that the China CVD suspension be withdrawn from 1 October, 2021, and CVD on Indonesia is also imposed.” This was written in a letter sent to the finance minister. But even with all these difficulties, the stainless-steel game remains interesting from a demand perspective.

“It is a milestone that the consumption of stainless steel in India touched a new peak of 2.5 kg per capita in 2019, registering an increase of 150 per cent in eight years. The per capita consumption was a meagre 1.2 kg in 2010. This feat has also taken India to the league of the top 15 countries in the world in terms of the per capita consumption of stainless steel,” points out Vijay Sharma, Whole Time Director of Jindal Stainless.

The next big frontier for players in the stainless fray is the consumption level rising to 5kg/person in the coming years. And many believe this is achievable as stainless steel finds an indispensable place across myriad sectors, including railways & metro, nuclear, public utilities and infrastructure, transportation, the process industry, and kitchenware.

Turnaround story  

Jindal Stainless is part of this universe where, as industry analysts point out, it has emerged and consolidated its leadership positioning after successfully battling with its own set of critical challenges. And much of this is probably due to the fact that developing a large-scale stainless-steel unit has been one of the clear objectives of the group since its inception. A close examination of its chronological evolution clearly reflects a marked emphasis on developing this business in an era when its end-usage connect was primarily with the household utensils segment.

In 1970, a mini-steel plant, which initially produced hot rolled carbon steel coils, plates, slabs and blooms, was established as Jindal Strips at Hisar. This marked the birth of not just Jindal Stainless, but the entire OP Jindal Group of companies. In terms of giving a specific push to the stainless-steel business, a big move was made in 1978 with the introduction of Argon-Oxygen Decarburisation (AOD) technology which resulted in the first indigenously manufactured stainless steel in the country.

In 1991, the company became an exclusive producer of stainless-steel strips for making razor and surgical blades in India – this is still is one of the major offerings of its Hisar plant. Four years later, it added stainless steel precision strips to its product portfolio, which was another major move. In 2000, Jindal Stainless opened a 40,000-tonne cold rolling facility, Massilon Stainless, in Ohio, USA to manufacture thin grades of stainless steel for the USA market. The unit was, however, closed down after the 9/11 incident.

“In FY15, after we got approval for the railway siding in Jajpur, we haven’t looked back as the turnaround in our operational performance has been phenomenal. In fiscal 2020, JSL exited the corporate debt restructuring process by redeeming Rs558 crore of optionally convertible redeemable preference shares held by its lenders, and additionally paying the entire recompense liability of Rs275 crore,” says Abhyuday.

The company is now seeking the merger of the two units and has got the approval of creditors and shareholders, the stock exchanges and SEBI. It is now waiting for the final clearance from the NCLT, Chandigarh (after approval by other agencies, this could be just a formality) which is expected to happen before the end of the current fiscal. And with the combined power of its two major units, it is raring to start a new growth chapter, as Abhyuday emphasises.    

New chapter

The prospects of beginning a new chapter are also supported by other factors which include broader operational strengths and recent performance. “Jindal Stainless has the capability of producing 200, 300, and 400 series of stainless steel as well as duplex and specialised stainless-steel products used in a wide range of applications, some of which are extremely strategic. Over the years, Jindal Stainless has substantially expanded its product portfolio to modern and future-ready applications across nuclear, railways, automobiles, and defence segments,” Sharma emphasises, while adding that the company produces more than 50 grades of stainless steel, including special products like razor blade steel, coin blanks (cupronickel, aluminium bronze, ferritic, and bi-metallic), and precision strips (as thin as 0.05mm).

The company today boasts of a strong network that serves customers through 10 domestic and 12 international offices spread across the US, EU, United Arab Emirates, Russia, and Vietnam. “Our total exports are about 20 per cent of total sales volume and are adjusted as per domestic demand. Fifty per cent of our exports are routed to developed economies like the EU, North America and the remaining to other countries like Russia, Middle East, SE Asia, Latin America, etc. Our export footprint covers about 60 countries,” he adds.

In terms of recent financial performance, both the units as per a recent analysis report by ICICI Securities, are on the rebound after the Covid impact which resulted in a modest dip in the business for everyone in the fray. From a topline of Rs9,400 crore in FY21, JSHL’s earnings are expected to cross Rs14,000 crore, registering a CAGR of 23 per cent between FY21-23. In the same period, the income of JSL is expected to touch Rs18,000 crore from the current level of around Rs12,000 crore.

“If things remain normal, the near run projections (next two-three years) for stainless steel in the country are quite positive given the government backed expenditure in infrastructure. There will also be demand for applications in domains like the railways and construction. The annual growth in the near run is expected to be in the double-digit trajectory,” says Rohit Sadaka, Director, India-Ratings. 

At the end of the first half of the current fiscal, robust growth trends are clearly visible. JSL’s first half revenue growth is a staggering 96 per cent (refer to the graph) while JSHL’s income has gone up by 110 per cent. “Sales volume in H2FY22 is likely to be higher than H1FY22. Automotive is the only sector that is not doing well for the company. Growth in other segments has picked up. Automotive shipments comprised 12 per cent of the total sales mix in the normal operating environment. It is down to 8 per cent now,” Edelweiss Securities maintained in its recent analysis of the company’s performance.

Year 2002 saw Jindal Strips’ big-ticket restructuring and, as part of the exercise, the manufacturing operations of Jindal Stainless were spun off as a separate unit under the command of Ratan Jindal. A little prior to this, the patriarch had divided the company in four units handing over the command to his four sons. In 2003, Ratan Jindal set the ball rolling for setting up an integrated stainless-steel project at Kalinga Nagar Industrial Complex in the Jajpur District of Odisha.

This became the second plant of the group, eventually giving it a decisive edge in terms of production capacity and market leadership positioning in the country. Around the same time, the stainless-steel unit established a foothold in the southeast Asian & Oceania markets with the acquisition of a stainless-steel Cold Rolling Plant in Indonesia. In 2007, it formed an international JV and established Iberjindal SL, a service centre in Spain. 2011 was a critical year as its Hisar facility was upgraded to 8,00,000 tonnes capacity, and production began at the Jajpur facility with a capacity equivalent to Hisar’s.

However, making the Odisha plant work for the group was not a smooth affair and it led to a serious financial crisis which was responded to by creating two units (the Hisar unit was a performer all through this spell). “Getting the requisite approvals and building basic infrastructure took a very long time. All these put together resulted in a high debt burden and that prompted the lenders and the company to adopt an Asset Monetisation Plan (AMP). Accordingly, Jindal Stainless (Hisar) was incorporated and listed as a separate entity,” says Abhyuday while adding that the company eventually spent Rs12,000-Rs13,000 crore in the 800-acre-plus plant and the infrastructure around it (for the bringing in of raw materials and the evacuation of finished products). Amidst all the troubles which the company had faced on account of its Odisha unit, the mainstay Hisar continued to remain a performing unit and major point of strength.

However, for future long-term growth, a large-scale positioning in Odisha was imperative as the 300-acre land-locked plant in Hisar was inching close to its optimal level. Abhyuday calls this a calculated gamble which has finally paid off with growth in demand and significant streamlining of its supply chain bottlenecks, and adds: “We substituted high-cost propane with cheaper coke oven gas. Our Jajpur plant is supported by a captive power plant of 264 megawatts (MW) which covers the bulk of its electricity requirements. We’ve made our processes flexible enough to shift production to stainless steel series with lower nickel content (such as 400 and 200 series) depending on market requirements, which adds to cost efficiencies.”

There have been marked improvements on other performance fronts. The company claims it has streamlined its sourcing process. Historically, imports accounted for more than 60 per cent of raw material sourcing. But that has now changed. For example, 100 per cent of pure nickel is sourced from domestic suppliers whereas previously all of it had to be imported.

Likewise, 70 per cent of Ferro Nickel had to be imported – now 70 per cent is domestically procured. According to company officials, the company also brought in cutting edge technological inputs in serving its customers. For instance, it overhauled its order book system from Made-To-Order to Made-To-Anticipation (MTA) which requires increased reliance on Data Analytics – using historical data to predict present and future demand.

This has reduced lead time by a third for the majority of customers. Additionally, it has also launched e-commerce for its highest selling SKUs, and digitised the entire process from raw material orders and stock replenishments to order booking and payments.

And amidst the set of positive supporting elements, there is also the critical aspect of reduction in debt. The external long-term debt of Rs3,405 crore in FY17 has been reduced to less than Rs1,400 crore at the end of Q1FY22. “Owing to our sustained focus on cost optimisation and significant improvements in profitability and the financial risk profile, along with superior market position coupled with sizeable exports presence, CRISIL Ratings recently upgraded the long-term credit facilities of JSL by three notches from BBB+ to A+. Short-term credit facilities of JSL have been rated ‘CRISIL A1+’,” points out Anurag Mantri, Group CFO, Jindal Stainless.

Combined power – implications

“In our view, JSL is in a sweet spot given its imminent merger with Jindal Stainless (Hisar) Ltd and a favourable price environment,” Edelweiss Securities analysis has maintained. The latter part of the comment is obviously a reference to the firming up of the price of stainless-steel products following an escalation in the cost of raw materials.

The more critical element obviously is: how does the combined power change the equation for the company? As per a company’s internal assessment, the merger would help it enter the league of the top 10 global stainless-steel producers (at eighth rank with the current combined capacity of 1.9 million tonnes) like Tsingshan, TISCO and POSCO. This will make the company a very large-scale one-stop shop for high volume and niche product lines. It will have a single window for sales and after-sales service (which enhances customer satisfaction) and the merger will facilitate a stronger global footprint and an extensive domestic network.

There would be enhanced operational synergy with JSL’s port and raw material proximity, and international finishing capabilities with JSHL’s strategically located facility. Most importantly, it would result in a stronger balance sheet and leverage ratios for the combined entity starting with an annual revenue base of over Rs20,000 crore.

The practical benefits can be gauged from the fact that the merger would make JSL India’s third largest container business provider to the shipping lines with an average supply of 60,000 containers per year. And the merged entity is expected to result in a 10 per cent reduction in logistics cost (Rs1,500-1,700 crore). “This would mark the consolidation of complementing strength.

JSL is largely focused on high-volume stainless-steel offerings and has been actively catering to sectors like railway, architecture, automobiles and infrastructure. On the other hand, JSHL is focused on high-margin specialised products and has been actively catering to value-added segments viz precision strips, razor blade and coin blanks,” Vijay Sharma points out. Furthermore, the merger drive is also expected to sweeten the deal for the existing shareholders with a swap ratio of 1:1.95. For each share held in JSHL, a shareholder will get 1.95 shares of JSL or the commanding entity after the merger.

The icing on the cake is: the anticipation of the merger benefits of the two companies has already resulted in their respective share prices going through the roof in the past one year in a growing market. JSL’s share price has touched Rs207 level from the low of Rs60 in the past 52 weeks. For Jindal Hisar, the 52 week high is over Rs350 as against the lowest mark of Rs109 in the same period. JSL and JSHL stocks have been the leading performers in the past year in the metal and mining sector though their market cap is relatively smaller vis-a-vis other metal giants.

Meanwhile, the merger drive is expected to make Jindal Stainless a more formidable entity both within the country and outside. It has set afoot capex-backed expansion plans which will add to its steely base. “Capacity expansion plans with moderate investments, with a keen focus on in-house innovations, will also take shape, aligned with the growing demand in the domestic and export markets. We are planning to double the melting capacity at Jajpur from 1.1 MTPA to 2.1 MTPA by FY23,” Ratan Jindal, Chairman had mentioned in his message to stakeholders carried in the last annual report. 

“The estimated capex of this brownfield expansion is Rs2,150 crore, which is less than one-third of the greenfield capex cost for the corresponding enhancement. The three-pronged expansion plan constitutes an expansion of melting capacity, and commensurate strengthening of backward and forward integration,”  Mantri explains.

Simultaneously, a brownfield expansion plan at JSHL has been also set afoot which will cost the company Rs450 crore. The plan entails a three-fold expansion of precision strip capacity from the current base of 22,000 tonnes per annum (TPA) in two phases. It would strengthen the company’s presence in segments such as auto, process industry, and oil & petrochemicals, and also cater to niche segments like aerospace and electric vehicles. 

The other element of the Hisar-centric capacity addition plan includes giving a serious push to steel blade capacity from the current base of 14,000 TPA to 24,000 TPA – again in two phases. At the same time, the company is keen to take a shot at acquiring the Salem plant of SAIL when it is finally put up for sale as part of the government’s disinvestment process.

“We will definitely go for it,” Abhyuday says while emphasising that the company will focus more on expanding its domestic base in the near to medium term and not seriously contemplate acquisitions abroad. The young scion of Jindal Stainless, who is now credited to have steered the ship well, seems to have his priorities right in place.