JSW Steel Ltd (JSWSTEEL) Q2 FY22 Earnings Concall Transcript

JSW Steel Ltd (NSE:JSWSTEEL) Q2 FY22 Earnings Concall dated Oct. 21, 2021

Corporate Participants:

Ashwin Bajaj — Group Head – Investor Relations

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Analysts:

Kamlesh Bagmar — Prabhudas Lilladher Pvt. Ltd. — Analyst

Amit Dixit — Edelweiss — Analyst

Pinakin Parekh — JPMorgan — Analyst

Jayant Acharya — JSW Steel Ltd — Analyst

Sumangal Nevatia — Kotak Securities — Analyst

Indrajit Agarwal — CLSA — Analyst

Abhishek Poddar — HDFC Mutual Fund — Analyst

Vishal Chandak — DAM Capital — Analyst

Bhavin Chheda — Enam Holdings — Analyst

Ritesh Shah — Investec — Analyst

Rashi Chopra — Citigroup — Analyst

Sidhai Ciker — UTI Asset Management — Analyst

Rahul Jain — Systematix — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Q2 FY22 Earnings Conference Call of JSW Steel hosted by Prabhudas Lilladher Private Limited. As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] I now hand the conference over to Mr Kamlesh Bagmar from Prabhudas Lilladher Private Limited. Thank you, and over to you, sir.

Kamlesh Bagmar — Prabhudas Lilladher Pvt. Ltd. — Analyst

Yeah. Thank you, Rituja. Good evening, everyone, and thanks for logging in for JSW Steel 2Q FY 22 earnings call. Firstly, I want to thank the management for giving Prabhudas Lilladher Private Limited an opportunity to host the call. Now I would hand over the call to Ashwin Bajaj, Group Head-Investor Relations to introduce the management and take the call forward. Over to you Ashwin.

Ashwin Bajaj — Group Head – Investor Relations

Yeah. Thank you Kamlesh and thanks for hosting the call today for us. Good evening, ladies and gentlemen, this is Ashwin Bajaj and it’s my pleasure to welcome you to JSW Steel’s Earnings call for Q2 FY22. We have with us today the management team represented by Mr Seshagiri Rao, Joint Managing Director and Group CFO, Dr Vinod Nowal, Deputy Managing Director, Mr Jayant Acharya, Director Commercial and Marketing and Mr Rajeev Pai, Chief Financial Officer.

We will start with opening remarks by Mr Rao, and then open the floor to Q&A. So with that, over to you Mr Rao.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Good evening everybody. I welcome you to the briefing of our quarter, second quarter performance for the financial year 2021-22. The second quarter is generally a little subdued due to monsoon in India. At the beginning of the quarter we thought we had to tackle about subdued demand in India and we need to do more exports. But the way the kind of surprises and challenges that have come in the energy crisis, so that shortage of energy across the world has brought a lot of volatility. Coking coal prices have shot up to unsustainable levels of $400 per ton. That is in a very, very short span of time.

Over and above that the Chinese policies which are weeding around 2 themes of widespread or common prosperity and also the decarbonization. Those policies, which have been finalized by China. That led to the visible slowdown in the overall economy. That also led to lower investments in the residential property sector. So we have seen a contracting steel demand in China month after month. In the month of July we observed that the steel demand has fallen by 13%, which went down in the month of August by 18%. In the month of September, it went down by 24%.

So the steel demand in China in the first 9 months of the calendar year has fallen to 731 million ton as against 736 million ton in the previous 9 months. So 0.7% lower demand in China, majorly due to the reasons, which I just explained. The rest of the world is not exactly the way Chinese steel demand has fallen, notwithstanding the re-resurgence of infections in some regions and resultant lockdowns, and energy crisis in some of the regions. We have seen a good steel demand as the rest of the world is concerned, majorly due to strong manufacturing activity in interest rates and government focus on the infrastructure, energy transition. These are some of the reasons, which we could see why the steel demand in the rest of the world was stronger.

Taking these factors into account, WSA, when they’ve given short-range outlook in the month of October, they are exactly on the dot. They said the steel demand in the current calendar year, which grew by 4.5%, whereas if you look at region-wise breakup of the demand, China’s demand will come down by 1%, which you already mentioned that it has come down by 0.7% in the first 9 months is more or less similar to what WSA has been saying. In the rest of the world, the steel demand will grow by 11.5%. So what I would like to share with you is that at one side when Chinese steel demand is falling, rest of the world steel demand is reasonably okay.

In this context, if I look at as far as India is concerned, we have consumed 49 million tons of steel in the first 6 months of the financial year. Which is almost 13, 14 million ton more than the corresponding period of last year. Generally, the second half will be much better. Already we are seeing signs of improvement in the construction infrastructure project following the monsoon. So we expect as we guided in the beginning that the demand in the second half will be strong and we will be close 110 million ton as we have mentioned. In addition to this, there are some more developments which I would like to share with you. I am very happy to say that our respected Chairman and Managing Director, Mr Sajjan Jindal has been elected as the Chairman of Old Steel Association for the year 21-22. It’s the first time an Indian representing to occupy this position and preserve this position.

You also must have noticed in our communications to stock exchanges and press releases, we have issued world’s first dollar denominated sustainability linked bonds from the steel sector globally first time. I’m also happy to share that JSW Steel secured the steely award from WSA for excellence in the life cycle assessment for development and promotion of new product, Neosteel TMT Bars. In addition to that one historical notable event that has happened is the commissioning of the first time 5 million tonne brownfield expansion commissioning at once in India. We have commissioned the largest blast furnace along with melt shop of 350 ton converters. This is a very, very important event in the history of JSW Steel.

As we have guided that there will be production of 1.5 million ton incrementally from our expansion project. And we will be able to sell 1.4 million ton from this expansion. Now it will be a reality. I’m also happy to share that it is a very, very smooth, start-up and we are reasonably confident that we’ll be able to ramp up the capacity quickly. In this context, if you see our results, it is highest ever consolidated quarterly revenue, highest operating EBITDA and highest net profit.

Volume numbers as we already shared, the 4.1 million tonne of crude steel production 91% capacity utilization. If there were no shutdowns at Vijayanagar plant for converters and also in Salem plant in blast furnace, the capacity utilization could have been higher. That is why you will see sequentially a flat capacity utilization and production the sales on a standalone basis is 3.787 million tons. On a consolidated basis it is 3.83 million tons. But what is interesting in the sales profile is that our exports have gone up, as I mentioned the domestic demand in this quarter is a bit subdued. We have supplemented with higher exports in this quarter. It is 38% of the total sales, a growth of 22% quarter-on-quarter in the overall export mix.

Our value-added steel product mix has been at 60% selling the 51% in the previous year. So we have maintained like in the quarter one, quarter one is around 61%, are more or less at the same level as regards to sale of our value-added steel products. Our retail sales have gone up quarter-on-quarter by 25%. Our branded sales have gone up.

Our sales in the solar and appliances segment, they have gone up quite substantially quarter-on-quarter or year-on-year. They are some of the highlights of our sales mix. But, in spite of that, if we look at the sales consolidated number is 3.83 million ton and year-on-year basis it was slightly lowe, due to mainly accumulation of inventories which has happened in the first half of this financial year. It is almost half a million ton accumulation of inventory when I compare with as on 31st March, 21. If we compare 30th June, it is a 1 lakh ton more inventory.

As we have been explaining the kind of constraints in the Port Logistics availability of containers and a very high. Shipping freight. There are some of the reasons where the port stocks remained at elevated levels even during this quarter. Our effort is going for that to reduce these inventories that are accumulated almost half a million ton in the first half of this year. If I look at the blended NSR cost and EBITDA per ton on a standalone basis. The blended NSR quarter-on-quarter went up by 5% but the cost pressures are severe is at 2 points. One is coking coal prices have gone up globally. We have been guiding that in this quarter, there will be a $30 per ton incremental cost, we need to absorb on the coking coal that got reflected in the consumption.

But what has happened in the iron ore prices because of the lower demand by China, the prices crashed from $230 plus globally to $120 per ton, which is almost 50% reduction globally. So Indian iron ore prices have not moved the way global prices have moved. That is why we have to bear the brunt of very high unsustainable coking coal prices that have gone up because of various reasons globally. Over and above that, the benefit of lower iron ore prices internationally has not come to the Indian steel industry, the prices are still at elevated levels in India. Because of this reason the cost sequentially, went up by 19% and the blended NSR went up by only 5%. The net impact of this, the EBITDA per ton on a standalone basis was 22,900 rupees per ton, sequentially lower by 3,374 rupees.

So the EBITDA standalone is 8,673 crores, but only other income. Just, I would like to highlight one point is that Bhushan Power and Steel at the time when we made the investments through an SPV, we have mentioned that we hold 49% in the company and we also hold the optionally fully convertible debentures balance instrument where we have the right to convert into equity as and when it gets converted then our holding will go up to 83.28%. So we exercise that option as on 1st October 2021. So from 1st October, 2021, now we have control through SPV and VPSM we hold 83.28%. So from third quarter onwards, there will be a consolidation of VPSM results and the debt while we announce Q3 results onwards.

Then at the time when we have to be converted, there is a remeasurement of the fair value VFCDs. So when we did that there is an additional income, which has come as other income which is approximately 702 crores of rupees. Net of tax impact the net profit has gone up due to this it is 559 crores. After considering that the profit after tax on a standalone basis is 5,383 crores. Our iron ore captive has gone up from 42% to 50% in this quarter. Coming back to the overseas operations as we have been guiding, there will be continuous improvement in the overall operations.

The EBITDA from US operations, both Baytown and amendment together, it went up to $61.4 million as against $43 million in the last quarter, sequential quarter. So there is good improvement as far as the contribution from US is concerned. At the same time the Italian operations also recorded a positive EBITDA in the last quarter, which is EUR6.1 million as against a loss of EUR5 million sequentially in the quarter one.

So from overseas, I think it is a good turnaround, the EBITDA contribution was 485 crore rupees compared to sequential number of 282 crores in the Q1. Indian subsidiaries also have done quite well. Either coated ARCL, VTPL, other subsidiaries all together contributed 1194 crores. Sequentially it is higher when compared to level 45 number in Q1. So the net addition after existing consolidated adjustments this has given on the consolidation 1745 crore EBITDA incrementally, both Indian and overseas operations together.

So with that, the operating EBITDA, on a consolidated basis is 10,417 crores. So here what is important here as we have been guiding in the Q1 the EBITDA was 10,274 crores. In the Q2, notwithstanding the EBITDA margin per ton has come down. Still we could show an higher EBITDA in the Q2 over Q1 is 10,417 crores, which is 32%. EBITDA per ton was 26,172 rupees per tonne in the quarter two.

Over and above, contribution from overseas operations and also Indian subsidiaries. The joint venture companies under control, particularly BPSL have done extremely well. So in the last quarter, they have posted a net profit of 1448 crores. So taking into account the proportionate profit pertaining to JSW Steel and also proportionate from monitor, the additionally, the share of joint venture contribution was 603 crores in the last quarter as against 323 in the quarter one.

So with all this. I think the highest ever profit after tax of 7,179 crores for the quarter, here what is important is that in the entire financial year, FY 21, when JSW Steel posted an EBITDA of 20,141 crores, in the first half itself they EBITDA posted by the company is 20,691 crores. So it is higher than the entire year of last year, the first half EBITDA. Similarly, the profit after-tax number, it is 13,079 crores is the net profit for first 6 months as against 7,873 crores of last year, for full year.

One more thing here is generally we — when we announced the results we don’t add the production and sales numbers of the companies under joint control and also overseas operations. So if I look at the standalone consolidate — standalone production number of 4.1. If we add the Mingo junction production and also the monit ispat, the JSSPL, JSW Ispat Specialty Steel Products and also BPSL both together 5.07 million tons of crude steel production in one quarter, we have done. If I look at first half this number is 10.14 million tons. So in the Q2, there is a growth of 29% in the crude steel production.

Similarly in the sales side, the similar number on a comparable basis is 4.83 million tons, which is a 14% growth. These are all very sizable numbers in terms of both production and sales, if I consolidate the companies under joint control also. The overall debt of the company has gone up slightly in this quarter compared to Q1 is 55,394 crores as against 54,900 crores. So there is a final close approximately, the increase in the net debt, because there is an increase in inventory and overall working capital investments happened in the first 6 months. Total 8,200 crores is the total investments which we have made in the working capital either in terms of increase in inventories or increase in iron ore inventories or the stocks built — raw material built for commissioning our — commencement of production at our dual unit. Altogether there is incremental 8,200 crores. We expect part of this 8,200 crores will get released in the second half.

The debt to equity, debt to EBITDA everything has improved substantially either compared to 30 June, or 31st March. I’m also happy to say that the projects, which we have taken up at Vijayanagar brownfield expansion of 5 million tonne is progressing quite well. What is not commissioned at Vijaynagar is only CCL 2 that we will be commissioning in Q3 ’22 and one color coated line that is in Q3, we will commission that also. The cocoa plant we will do in phases, partly in this financial year, partly in the next financial year. So these are what is going on at Vijayanagar other than brownfield expansions.

At Watchin and Tarapore more or less everything has been completed, excepting one galvanizing line, which we are commissioning in this quarter and cal line and tinplate line that we will do in March and June, 2022. With that these projects, which we have taken up in the last 3 years more or less get complete.

Then the outlook. Just, I would like to spend one or two minutes here. As regards to the overall demand. As I mentioned, we expect Indian steel demand will pick up in the second half. As far as the global steel demand, particularly is very increasing when we hear WSA shortly in the outlook, so we expect this demand will remain strong going forward and it will accelerate as far as India is concerned.

Then the iron ore side, the kind of demand, which is falling from China, so we expect iron prices to fall further from the current levels. Coking coal prices are at a very elevated levels. So we anticipate that there will be some correction downwards in the coking coal prices, but as long as these costs remain at this level, so we expect steel prices also for pick up, they won’t fall down because of very high and elevated cost pressures, which are there right now.

In view of this volatility, which we have seen in the coking coal price, which is very difficult for any company to manage, we are also observing what is happening globally. The company’s, when such exceptional situations arise, they contemplate looking at additional surcharges to put on those unsustainable increases. So as and when the prices come down the benefit will pass it on to the customer. If it goes up, it will be increased. We are also looking at very seriously the kind of volatility we are seeing in the coking coal prices and our Indian companies dependency, industrial company dependency on import of coking coal. We’re also looking at whether we should introduce the energy surcharge compensating for the increase in the coking coal prices.

Then the Dolvi operations are concerned, as I mentioned, the expansion project, the costs will be lower when compared to the existing operations. So it is a gas-based and DRI is used in the mix, whereas in the expansion project, it is completely hot metal. Therefore the costs are expected to be significantly lower in our expansion Dolvi unit and almost 1.5 million ton production and 1.4 million ton sales from Dolvi expansion. We expect the benefit of lower cost will come to us.

With that I open the floor for any clarifications or questions. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Amit Dixit from Edelweiss. Please go ahead.

Amit Dixit — Edelweiss — Analyst

Good evening, sir. Thanks for taking my question. I have couple of questions. The first one is on the pro forma deck including DSPL and what would be the EBITDA of DSPL in this quarter and what is the sales volume you’re contemplating for the year?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

The EBITDA for BPSL in the quarter two, the net profit was 1448 crores and the EBITDA was 2022 crores.

Amit Dixit — Edelweiss — Analyst

And pro forma debt number including BPSL?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

In the BPSL the debt outstanding as on 30th June was 9,000 crores. 0We have prepaid part of the debt in October. So we have prepaid 1400 crores, 1800 crores in this quarter. So the debt will come down 9,000 minus 1800 crores. So, the pro forma will have as on date is 7,200.

Amit Dixit — Edelweiss — Analyst

So it will be a 55000 plus 7200 whatever. So that is the pro forma debt of the company as a whole, as of now.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Right.

Amit Dixit — Edelweiss — Analyst

The second question is on — we have seen that in this quarter, it has come down significantly compared to last quarter, any specific reason for the same?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Can you repeat the question please?

Amit Dixit — Edelweiss — Analyst

Iron ore royalty cost that we report on the P&L in the standalone number, it has come down significantly. So just wanted to know the reason for the same.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

In the last quarter, our one-year MDPA commitment, we had to meet in June. That’s why the dispatches were significantly higher in the last quarters. Whereas in this quarter. It is lower by 3 million ton whatever we have commitment corresponding to this year to that extent, we have done. If we have seen in the previous year. In the quarter one the despite quarter one and quarter 2, the dispatches were lower that was made up in the Q3 and Q4 and also partly in the Q1. That is why the premium paid in the Q1 or quarter was higher relative to the Q2 despite this were lower by 3 million tonnes.

Amit Dixit — Edelweiss — Analyst

Okay got it. So this is more reflective of a sustaining royalty label, I mean going ahead.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Sorry?

Amit Dixit — Edelweiss — Analyst

So this is more a reflection of the sustainable royalty level that we can consider the premium label actually. if your dispatches and all remain the same.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

All right. Approximately at that level. But the premium will depend upon market price. So we have to look at what would be the market price it can go up or down, but the volumes will be in the similar range.

Amit Dixit — Edelweiss — Analyst

Great. Sir. Thanks, and all the best.

Operator

Thank you. The next question is from the line of Pinakin from JP Morgan. Please go ahead.

Pinakin Parekh — JPMorgan — Analyst

Thank you very much. So my first question. I am sorry but I did not get the number you mentioned BPCL EBITDA in the second quarter was, how much?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

2022, EBITDA per ton was 23,000 rupees.

Pinakin Parekh — JPMorgan — Analyst

Sir, just trying to understand that EBITDA per ton at BPCL was 23,000 rupees and for JSW stand-alone operations was also similar number. So do you expect this convergence to say because the expectation of the BPCL assets are relatively higher cost assets and it will take some time for the margins to recover?

Operator

I am sorry to interrupt, Mr. Pinakin, but your voice is breaking sir. Can you please check.

Pinakin Parekh — JPMorgan — Analyst

Sure. I mean, the expectation was that the BPCL asset was higher cost, the margins are similar, so should we expect this convergence of margins to sustain?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Number one, when you compare with JSW Steel on a blended basis, you have to look at, we have multiple locations and the cost structure in each location was different. And look at Dolvi, it is completely gas based naturally gas based plant. So the cost structure was different. And the iron ore cost for getting from what is stated the freight similarly within other cost that was the first, so EBITDA margins per ton and location basis is different. So as far as BPSL is concerned, there are lot of things which are happening as I mentioned to you cost reduction with is getting commissioned and we have recently commissioned the coal plant. So, there are lot of things which we have done to reduce the cost. Further, so we are assuming the steel prices will remain healthy. At the same levels then do vary going forward.

Pinakin Parekh — JPMorgan — Analyst

Understood, sir. This is very helpful. Just trying to understand the steel price was coking coal cost movement both now, correct me if I’m wrong, but what we understand is that flat product prices have seen little bit price hike in the month of October I think is logical to assume that change the has more in the second half domestically business to have higher premiums and also the tailwind of what the price contracts to reset. So there will be a material NSR increase against that. Sir, there will be a coking coal and gas price increase also support. We did that, so how should look at it enough at this point of time our contract materially or in the out it versus what the second quarter levels there?

Jayant Acharya — JSW Steel Ltd — Analyst

So on the question side the coking coal side numbers, which we had guided last time for quarter 2 was $30 to $35 more than the previous quarter and that has played out, we were in the range of $58 for quarter 2, we expect that the coking coal price impact for quarters 3 will be higher by about $500 per ton.

As you said, rightly. The impact of the cost increase is getting reflected gradually in the market. The prices of steel products in India which was lagging the international price. Second is now going up October. We have seen some price increases and going forward in November and in December, we see price adjustments going upwards to balance the cost increase we have also Leo. The iron ore side, which the cost reductions, which we are expecting on the node side could neutralize some of the cost impact.

Pinakin Parekh — JPMorgan — Analyst

And sir, what about the gas cost increase at Dolvi, given I mean, what is the JSW source of gas for the Dolvi operation?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Natural gas whatever we are buying both at Dolvi and is at the market price, because they have nothing available under APM. So we are buying whatever market price is there. That’s why the costs have gone up. As far as Dolvi is concerned, but here what is important as you mentioned, is the expansion project is not gas based. So the cost there is, as I mentioned, close to to 15-20 client lower than the existing operations in Dolvi.

Pinakin Parekh — JPMorgan — Analyst

Thank you very much sir.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

One more important information is the total debt of sell when we took over was 10,800 crores and at the same time, we also had the SPV additional debt of 2000 filed crores so total debt, which we raised is 13,300 crores, including the debt in the SPV out of that total paid including payments made in October is 3,300 crores was prepaid. So the balance debt that is there today 10,000 crores at one correction to the numbers, which I mentioned.

Operator

Thank you. The next question is from the line of Sumangal Nevatia from Kotak Securities. Please go ahead.

Sumangal Nevatia — Kotak Securities — Analyst

Yeah, good evening and thank you for the opportunity. Just continuing on the previous question, just want to understand this could be cost a little bit better, so one is $500 is on a per ton of people are we talking or on the steel. And second, what would be our inventory in terms of number of months then for the 4th quarter, are we, I mean already buying at the current $350, $400 per tonne prices?

Jayant Acharya — JSW Steel Ltd — Analyst

So the cost, which we indicated $95 to $100 is per tonne of coking coal. As far as the inventory is concerned, we usually have inventories of about 2 months in the system.

Sumangal Nevatia — Kotak Securities — Analyst

Understood. And I mean, with respect to I mean is there any truth hedging or any long-term or medium-term contracts available in the market, which we might benefit from onwards or it’s entirely on market base?

Jayant Acharya — JSW Steel Ltd — Analyst

So the liquidity in the coking coal market. As you may be aware is limited purchase perspective. So yeah, I think we have contractual pricing and index-linked mechanisms for coking coal which would so we way of calculating the cost for coking coal arrivals into India. However, our stocks in the system, which are there will be we 45 to 60 days.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

With regards to the cost is concerned, as James mentioned around $500 per ton per tonne of coking coal is the increase which we knew, we may have to absorbed in the quarter 3. But at the same time iron ore prices correction that happened from 6,560 rupees peak. We have seen in June to 4,760 rupees current price 1800 rupees per ton were annuities has reduced the prices so this reduction in the iron ore price that also will get reflected by.

There is a lower annual prices, if not more reductions that may happen in iron ore that will compensate to some extent to the increase in the coking coal cost the 3rd point is the Dolby expansion, which I already highlighted that debt is significantly at 15% to 20% lower than the existing operations. That benefit will also come in the Q3.

Over and above that, the turnaround of overseas operations which also attached upon we the capacity utilization it mineralization and Baytown is in the range of around 55% that is expected to go up. So some more upside in terms of overall improvement in EBITDA from overseas will, downstream where the contribution by JSW coated was in the last quarter, significantly higher than either one corresponding quarter of last year. So we expect good volumes from quoted and a better margins there. So all this could gather, the bigger the additional benefits, which would flow over and low, the volume growth in India, which can happen.

In addition to that listen to all these factors, we are also contemplating as I mentioned about energy subject. Is it possible to pass it on. If, for the current unsustainable coking coal prices continue. Hello.

Operator

Thank you. The next question is from the line of Indrajit Agarwal from CLSA. Please go ahead.

Indrajit Agarwal — CLSA — Analyst

Hi, thank you for the opportunity. My first question is on the royalty that is stable on iron ore — from JSW. So what is the rate of royalty we are paying on that iron ore? And one BPSL comes as subsidiary, will it have a lower of royalty or because the subsidiary we will continue with the higher rate after the company comes in?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

As per my understanding royalty payment is concerned, any mines, which are secured in auction those companies can supply to subsidiaries for captive finance for up to 25% of the total production without any implication of additional anything that is, that is to be supplied in excess of 25% from the captive mines then then extra royalties applicable similarly it other than main for investors.

Today, we have 2 mines out of 4 mines. In no worries, sir, will in our unfortunately the captive mine balance mindsight think will be able to supply we build any problem that we can surprise to anybody. There is no restriction in the auction mines other than capital. Capital 25% we can supply.

Indrajit Agarwal — CLSA — Analyst

And my second question is on the surcharge that you refer to on higher fuel costs. What would be the difference between like taking it as a. And I say increasing the prices, I mean we can also take chain spaces as and when the first quarter. So is there any other you vacation or is it more or less held in a separate line item?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

No, the coking coal prices. The rate moved up every day 15 $20 per ton. This is very difficult for any company to manage this type of volatility and at the same time, the rate went up, it may come down.

We don’t want to have any extra from this increase in coking coal, a reduction in coking coal. So whatever to the base, the prices have gone up, we wanted to separate line item, if it comes down the benefit will be passed on what we are contemplating. We have not taken the call yet.

Indrajit Agarwal — CLSA — Analyst

And last year, again on BPSL, any kind of run rate that we should be looking at for the second half. And next year in terms of production and sales force. What is the kind of ramp up we can expect?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

They are operating right now at a level of annualized basis 2.7, 2.8 million tons. They’re already spending money to complete the expansion to 3.5 million ton 3.5 to 5 million ton so, at least, and also the reduction in the cost of production by setting up the plans. If the PCA System. The line plant plus other improvements, which they’re doing their spending almost so this will get completed partly by end of this financial year. And also partly in the next year. So these benefits also will come higher volumes, lower costs that can come in from BPSL.

Operator

Thank you. ladies and gentlemen and order to ensure that the management is able to address questions from all participants in this conference call, please limit your questions to 2 per participant for any further questions you may come back for a follow-up. The next question is from the line of Abhishek Poddar from HDFC Mutual Fund. Please go ahead.

Abhishek Poddar — HDFC Mutual Fund — Analyst

Yeah, thanks for taking my question. In terms of steel realization compared to 2Q average how has the spot rebar and HRC prices moved? Any color on that?

Jayant Acharya — JSW Steel Ltd — Analyst

You’re asking the question is regarding movement of current prices with the average?

Abhishek Poddar — HDFC Mutual Fund — Analyst

Yes, just trying to see how much increase we have taken.

Jayant Acharya — JSW Steel Ltd — Analyst

The increases in the month of October. We have been able to begin the month of July to September in India from a demand perspective, was weak and a seasonally weak quarter and we mentioned that in the earlier deliberations. So the price improvement have started taking place from October. So we have increased between 1500 in flat as on 1st October for the month of October.

And we have increased a long products in the range of 3.5000 rupees per tonne October, there have been some intermittent increases in the, during the course of the month for some retail market. But I think that is for a smaller portion of the volumes. The, we are looking at how the overall demand and the price absorption plays out and we are hoping to increase prices and corrected upwards from 1st November how to do the surcharge mechanism as a backdrop, the price is something, as we said, we are contemplating and will look into and accordingly implement.

Abhishek Poddar — HDFC Mutual Fund — Analyst

Understood. And compared to export realization, how does the HRC price and domestic market faring for us?

Jayant Acharya — JSW Steel Ltd — Analyst

As we had mentioned earlier also the international markets over the last 6 months have been very robust. International prices have been higher, as we know in US and Europe. The prices are much higher than what is prevalent in Asia, India has been among the lower priced markets globally in the past few months, so we are now seeing the Indian prices picking up and if you were to look at the value added space, I think the international markets and Indian markets will probably be very similar in nature.

With respect to realizations going forward as far as High Court is concerned, I think there are certain markets, which are our restricted right now because of certain quarters and certain safeguard measures so hard coal prices vary from region to region, but by and large, I would say that the domestic price pickup post November may make the domestic prices, slightly higher than the export price.

Abhishek Poddar — HDFC Mutual Fund — Analyst

And just one last question regarding the tax losses at BPAs and how much and how we’ll be utilizing it?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

It remains as a separate independent entity until Supreme Court judgment comes in, final outcome comes in. So here only our holding has increased to 83% it will become subsidiary today through SPD.

Abhishek Poddar — HDFC Mutual Fund — Analyst

Okay, understood. Sir. Thanks.

Operator

Thank you. The next question is from the line of Vishal Chandak from DAM Capital. Please go ahead.

Vishal Chandak — DAM Capital — Analyst

Yeah, thank you for the opportunity and congratulations on very good set of numbers, sir. So my first question is with respect to the thermal coal prices and how is it going to impact our cost of production in the third quarter, given the strong rise in the Indonesian coal prices?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

The thermal coal prices are going up because we have 600MW captive unit, it was another and also got PPA with the end of the energy for another 600MW. So on this 400 megawatts, whatever cost increase that will happen in the variable cost due to increase in the thermal coal prices.

So that would come in the point here is we are setting up or we have already commissioned part of part of it. One 75, plus 16, 235 megawatt power plant using the gases that would come out of blast furnace in cocoa in it. Julie so there the cost increases won’t be there due to power, so in 3rd power the consider it’s I have been repeatedly highlighting that the cost of operation of the expansion project is much cheaper compared to the existing operation of 5 million in doing this power cost will be much less in the expansion project.

Vishal Chandak — DAM Capital — Analyst

Would it be safe to assume that the overall cost thermal cost impact would be close to about 2000 to 2,500 rupees on a, on a blended basis at the company-wide level in Q3? Because still a sizable amount for coal is imported.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Generally, on an average 600 units per ton of steel is a consumption so then I leave it to you how much it will take based on thermal coal pricing, is it goes on changing, it’s very difficult to say this in the price. So whatever price you take for the unit and add to that 70, 80 towards fixed cost, but that is the cost of power.

Vishal Chandak — DAM Capital — Analyst

And sir. My second question was again the pressure for BPSL. Now we are increasing the capacity of from 2.6 to 3.5 million through balance of plant so by when can we expect to reach 3.5 million tonnes capacity is operating right wouldn’t have to 5 million tons.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Sure. As on date it is operating at 100% of existing capacity, so we are spending 1500 crores for cost reduction plus expansion to 3.5 million ton this is expected to be completed in the, in the first half of next financial year so the expansion from 3.5 to 5 million tonne. We are spending another 2000 crores of so that is expected to be completed by end of FY 23 or in early 24 financial year.

Vishal Chandak — DAM Capital — Analyst

So if everything falls in place by end of FY 23 BPSL itself would be 5 million tons.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Correct.

Vishal Chandak — DAM Capital — Analyst

And on top of it we have Vijayanagar coming in by second half of FY 23 with another 5 million tons.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Vijayanagar 5 million tonne will come by FY24 end.

Vishal Chandak — DAM Capital — Analyst

So I don’t know entry year timeframe, about 15 million tonnes or not 12.5 million tons of incremental capacity. Are we looking at exports market again or we believe that Indian market would be wide enough to absorb this kind of a volume?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Vishal I mentioned in my opening remarks that the demand will be 110 million ton in this year against 94 million ton last year. So 16 million tonne incremental demand you’re expecting. And the exports last year is 70 million ton in the first 6 months, we have already done 11 million tonne as a country so, exports are quite strong from India. So taking these 2 factors so into account, in my view, there is enough demand that could be available in India absorb the capacity if capacity is come there could be shortages.

Operator

Mr Vishal Chandak may we request you to please rejoin the queue. We have participants waiting for their turn. Thank you. Participants are requested to please limit your questions to 2 per participant. The next question is from the line of Bhavin Chheda from Enam Holdings. Please go ahead.

Bhavin Chheda — Enam Holdings — Analyst

Yes congratulations on turning around overseas subsidiaries and a good performance that we’ve been power also the positive. So first question on the Bhushan Power. There was no exceptional in this 23,000 EBITDA per ton if the things remain constant steel price hike and coking coal increases so EBITDA will be in line with whatever JSW Steel is doing right now?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

The way you have to look at the EBITDA per ton number is basically still you’re comparing with standalone numbers with BP integrated operation including downstream yeah. So it’s really want to compare apples to apples, then you to add JSW coated EBITDA also to give the industry stand-alone and then compare, then we will definitely in a blended basis, it is higher. BPSL out of the 2.8 million tons, a significant portion of that is so large frame that is way the margins are quite healthy.

Bhavin Chheda — Enam Holdings — Analyst

Sure. And sir, what was the figure of revenue and capital acceptances in the quarter?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Raw material acceptance slightly have gone up because coking coal prices, have gone up globally. It is $1014 million is the raw material acceptances, but the capital acceptances, we continue to pay it is outstanding is 369 million, so it is 1383, both raw material and the capital acceptances together which has come down from 1520 in June 30. So there is a reduction in the overall acceptances of majorly in the capital side.

Operator

Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.

Ritesh Shah — Investec — Analyst

Hi, sir. Thanks for the opportunity. Two questions, one is how should one understand or make of the residual 17% stake in BPSL. Any timelines of targets that we’re looking at over here? After conversion now it is 83.28 and balance is held by the group company. That is the amount they have contributed. That is why they are holding is 17 around 17% as on date. In addition to that, there is a 2,500 crore of debt outstanding.

Along with accrued interest in that company in the SPV, what I’m going to say 2,500 crores, there are warrants that are available, both to the shareholders at the relevant time who will contribute. How much they will contribute to the 2005 crore payment based on that the holding and change but as on date to those in final trading is a debt, then it is 83 and 17. I was trying to understand, basically you indicated, there is a Supreme Court verdict, which is also there and there is a tax angle also which is there. I’m just trying to understand when will we see the entity entirely merged so that there could be a tax benefit at the consol level as well.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

If we see the ratios today they’re compatible what the yield of this key ratios are there. But because of the Supreme Court litigation is pending. If we are very difficult to hazard a guess when it will be decided when we can take a call on this issue, then we can decide on this issue. So therefore, we have to wait eventually for the Supreme Court litigation outcome. Pending that now, consolidation will happen as a subsidiary.

Operator

Tank you. The next question is from the line of Rashi Chopra from Citigroup. Please go ahead.

Rashi Chopra — Citigroup — Analyst

Thank you. Just I was trying to understand if you’re saying that coking coal prices will go up by about $100 in this quarter, that’s obviously not capturing peak prices. And while we are anticipating, price, price increases to come through in the next couple of months. Would they be enough to offset that inflation and second is how much, what is the bond if you’re likely to see in the iron ore prices in this quarter?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Iron ore prices, as I mentioned to you there is an 1800 rupees reduction in India would show is not reflected to major extent the benefit in the in the accounts. In Q2, so that benefit will come any further reductions. Sir, if I look at the drop in international prices for versus local prices. There is a big gap. So we expect some more corrections will happen in the prices that benefit will come. So that utilized to some extent. The increase in the coking coal price.

Rashi Chopra — Citigroup — Analyst

And the other thing is that the energy sources that you were referring to. Now it’s obviously price increases in India have been seen price increases have been slow given they’ve been more or less constant in the last few months. And now, it’s a gradual uplift. So it’s a little easy for the even if you bring in energy surcharge in to pass on the benefits eventually on reversal. But will we find an EV to pass it on if implemented?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

So this is a new concept to India. As far as overseas is concerned, not only in steel sector in other sectors. It is prevalent the concept is more so that’s why we are not saying we’ve already taken a call to do this we are contemplating because the markets are so uncertain so volatile every day. If it goes up by $50 come down that have hit on it, it is very difficult to manage that type of volatility. So this concept to internationally accepted. We are also looking at discuss we customers and then take a call.

Rashi Chopra — Citigroup — Analyst

Thank you. Just one last question on Bhushan Power. Next year’s capex will be about 2000 crores, right. And how much do we build in for this year?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Total capex is 3,500 crores, including 1500 crores for capacity expansion to 3.5 million ton and cost reduction, both together is 3,500 crores. This amount will be spent over a period of 2 years, 2.5 years.

Rashi Chopra — Citigroup — Analyst

Okay, thank you.

Operator

Thank you. The next question is from the line of Sidhai Ciker [Phonetic] from UTI Asset Management. Please go ahead.

Sidhai Ciker — UTI Asset Management — Analyst

Congratulations for good set of numbers. On the Bhushan Power this made you told, our total debt is around cutting down credit, which is an of or 3003 hundred in the, on this one expenses. So this project of this 3,000 is it included accretive impact that we are seeing in 55,000 crore.

And second, I mean you said that out of this 3,300 crore has been repaid. So if it’s in the — means entier10,000 is now only –?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

No, I think I have to correct you, the numbers would take it to you at the time when we took over Bhushan Power and Steel the debt was 10,800 crores yeah. Then there was another 2,500 crores in the SPV. So the total debt at the time of the COVID was 13,003 and accruals, out of that we hope prepaid 3,300 crores, that means BP plus SPV together the debt outstanding is 10,000 crores okay.

So this 10,000 crores is not included in JW scheme 5,400 crores number which we have given it so as and when we consolidate in this quarter. Next, this quarter, then it get consolidated along with the EBITDA.

Sidhai Ciker — UTI Asset Management — Analyst

So, currently it is out of this 55000 crore?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Correct.

Sidhai Ciker — UTI Asset Management — Analyst

Thanks.

Operator

Thank you. Ladies and gentlemen, this will be the last question for today which is from the line of Rahul Jain from Systematix. Please go ahead.

Rahul Jain — Systematix — Analyst

Yeah, hi, sir. So I just wanted to check on your volume. So are we maintaining guidance for this year of 18.5 and 17.5 for production?

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Yeah. If you see Rahul, the first 6 months we have postpaid production of 8.2 million ton from existing operations. We have given the guidance of 17 million ton from existing operations. So if we can make adjustments of shutdowns, which has happened in the Q2. And oxygen shortage in the, in the Q1, which will not be there in the Q3 and Q4. So 17 million tonne we will be able to achieve rating from existing operations.

Similarly, the way we have now — we have smooth commissioning of our expansion project at 1.5 million ton from a expansion. We are confident that we’ll be able to get from there. So 18.5 million ton is within achievable reach.

Rahul Jain — Systematix — Analyst

And what about the downstream, are we fully equipped now on the expanded operations for — in the other JSW quarter?

Jayant Acharya — JSW Steel Ltd — Analyst

Yeah. We are fully equipped except for all the lines have started except for one line in for galvanized NGL in Basin, which should start up in the next few months. Other than that all the units are operating now fully in a stabilized manner.

Rahul Jain — Systematix — Analyst

Yeah, thank you so much.

Operator

Thank you. Ladies and gentlemen, as this was the last question for today. I would now like to hand the conference over to the management for closing comments.

Kamlesh Bagmar — Prabhudas Lilladher Pvt. Ltd. — Analyst

Thank you, ladies and gentlemen for joining us today. If you have further questions please feel to contact us at Investor Relations. Thank you again.

Seshagiri Rao — Joint Managing Director And Group Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]