JSW Steel Ltd (JSWSTEEL) Q2 FY23 Earnings Concall Transcript

JSW Steel Ltd (NSE:JSWSTEEL) Q2 FY23 Earnings Concall dated Oct. 21, 2022

Corporate Participants:

Ashwin Bajaj — Group Head – Investor Relations

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Jayant Acharya — Deputy Managing Director

Analysts:

Satyadeep Jain — Ambit Capital — Analyst

Amit Dixit — ICICI Securities — Analyst

Vishal Chandak — Motilal Oswal — Analyst

Sumangal Nevatia — Kotak Securities — Analyst

Indrajit Agarwal — CLSA India — Analyst

Pinakin Parekh — JPMorgan Chase — Analyst

Kirtan Mehta — BOB Capital Markets — Analyst

Ritesh Shah — Investec India — Analyst

Abhiram Iyer — Deutsche Bank — Analyst

Ritwik Sheth — Oneup Financial — Analyst

Prashant Kutty — Emkay Global — Analyst

Presentation:

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 — Group Head – Investor Relations

Yeah. Thank you, Neerav, and 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 off with opening remarks by Mr. Rao, and then we will open the floor for Q&A.

So with that, over to you, Mr. Rao.

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

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 two major crisis, twin crisis, one is very high inflation, which in some countries is 40-year high and very high elevated energy prices. So to address these two twin crisis, the macroeconomic stability and reducing the surge in inflation have become the key objectives of many countries in calibrating their monetary and fiscal policies.

So since the starting of 2022, over 90 Central Banks in the world aggressively increased the interest rates. The fallout 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 remaining stubborn, and 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 remains stable and strong, and the credit growth is getting accelerated. It is over 18% year-on-year growth in the credit. The manufacturing industry, the capacity utilization is around 74%, 75%, which is the highest level in the last three years, even though, there are headwinds in the domestic economy by way of slowing external demand, geopolitical crisis — risks and very high energy 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 following the slowing demand in the steel, there is a rapid cutback in the steel production in number of countries. In the first eight months of the calendar year, the total steel production cut was 68 million tons. Out of that 42 million ton is in China and 26 million ton is in the rest of the world.

What is interesting here is that even though there is a drop of 26 million ton in the rest of the world, there are two 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 cost, squeeze in margins, where 29% of the steel companies in China are very close to bankruptcy. If that is the situation, where we are seeing 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 we look at the production growth was only 1.55%, is very, very small. But the production of — 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 ton on the standalone basis the production and 5.58 million ton production after including Bhushan Power and Steel.

But here what is very important and interesting is the total sales volume. Sales volume on a standalone basis is 5 million ton, 5.01 million ton [Phonetic], and on a consolidated basis, it is 5.63 million tons. The sales volume went up by 47%. Over and above that, out of this 5.63 million tons, we have sold in the domestic market 5.07 million tons, which is a growth of 47% quarter-on-quarter.

This is the first time, where we have crossed 5 million ton mark, and we have increased our market share to 80% in the domestic market. Even though exports have fallen by 37%, our volume of exports in the last quarter was 560,000 tons — 5,60,000 [Phonetic] tons, which is 10% of the total sales.

Our value added sales volume have 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 INR10,000 lower than the quarter one.

There are [Phonetic] costs that have not kept pace 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 INR5,200 per ton. So there is a pressure or a drop in the margins to the extent of INR4,800 per ton in the Q2 on a standalone basis. Because of costs have not gone down to the extent, where steel prices have fallen, the margins got adjusted 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 ton, it has not neutralized the fall in the steel price. With that, on standalone basis, the EBITDA was INR1,742 crores in the last quarter. EBITDA per ton was INR3,479.

The other subsidiaries are concerned, particularly domestic subsidiaries, Bhushan Power and Steel has negatively contributed in the last quarter, where we made INR698 crores of EBITDA in the Q1, which turned out to be a negative INR183 crores. So the kind of challenges we had faced in Bhushan Power and Steel in the last quarter were majorly due to monsoon, very heavy monsoon in Orissa.

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 in Orissa. Over and above that logistics constraint, adding to that is a heavy monsoon.

These three 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, fuel consumption have 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 INR183 crores.

Same story in the Coated. Coated, there was high inventory of hot rolled coils, 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 a positive EBITDA from other subsidiaries like ARCL and JIGPL, net-net after netting of the negative EBITDA from Bhushan Power and Steel and JSW Coated, the contribution to the overall consolidated EBITDA from domestic operations unfortunately was a negative to the extent of INR48 crores.

Overseas, also similar story, that is why you would find that the consolidated EBITDA was only higher by INR10 crores per [Phonetic] standalone. But in the overseas, the Baytown in USA has done reasonably well because the plate prices have not fallen to the extent the HR coil 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 pig iron and scrap, which was to be marked down because 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 [Phonetic] million.

In Italy, there is a positive EBITDA of EUR1.02 million. So net-net, even overseas have not positively contributed negative EBITDA of INR191 crores. So even on consolidation basis, there were some positive contribution in the consolidation entries. The net incremental contribution on consolidation of overseas and domestic subsidiaries together is only INR10 crores. The consolidated EBITDA is therefore was INR1,752 crores, which is INR3,052 per ton.

And there are two more items below the EBITDA line, which are exceptional items that is relating to our sale of 70% holding in Chilean mines. As you know, in the previous year, we have fully provided for the Chile iron ore mines that we stopped the operations there. Subsequently, we have sold our holding of 70%. But during this period, there was foreign currency translation reserve, as per the accounting standards as and when we sell, we can revert to P&L. So that amount was INR335 crores. Because this is an exceptional item, we were surely [Phonetic] below the line. So this is one item, which is appearing as exceptional, INR335 crores.

The second is relating to Bhushan Power and Steel. Bhushan Power and Steel had a coal mine, which got cancelled. They had incurred certain expenditures. They made a claim. Those claims were admitted, and part of their amounts were received. So that’s why we have booked as an exceptional item, which is INR256 crores. There are [Phonetic] two items together is INR591 crores. I’ll spend one minute on the exceptional — on the one-off items in the last quarter — in the Q2 that we have explained in the Q1.

There is approximately INR1,480 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 four together is INR1,480 crores, which will translate to INR2,578 per ton. If these one-off items are not there, the consolidated EBITDA, which is INR1,752 crores could have been INR3,232 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 standalone operations, the profit after tax was a negative INR915 crores in this quarter.

The debt as on 30th June was INR65,719 crores, which is lower by INR1,502 crores, but the foreign currency translation has increased the debt for the first half of the financial year by INR2,584 crores. That means if foreign currency translation loss is not there, debt could have been lower by INR4,000 crores, whereas this INR2,500 crores translation loss increased the debt to that extent. So that is why the debt as on 30th September was INR65,719 crores. The acceptances on the revenue account is 2484 [Phonetic] and the capital account $31 million. The debt to equity is 1.04 [Phonetic], debt to EBITDA is 2.7 [Phonetic].

We have spent capex of INR6,694 crores. We have commissioned TIN2. We have commissioned our CAL2 in our downstream unit. We have also commissioned Battery A of our Coke Oven plant. So whatever coke 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 Dolvi. 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 ton at Vijayanagar is going on as per schedule. We will complete by 31st March, 2024. Similarly downstream Color Coating Line at Rajput and also Jammu and Kashmir is going on. They are 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 ton production, and we also said 24 million tons of sales. So whatever production we have achieved, 11.19 million ton 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 very close to our guidance of 25 million ton. Similarly sales, we have given the guidance of 24 million. We have done 10.12 million ton in the first half, so we will do the balance in the second half, and we will complete — we will achieve our guidance for the full year.

So with that, I will stop here and any questions we’re here to take. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Amit Dixit from ICICI Securities. Please go ahead.

Amit Dixit — ICICI Securities — Analyst

Yeah. Good evening, everyone, and thanks for the opportunity, sir. I have couple of questions. The first one is issue on coking coal cost. So while you mentioned that coking coal cost in consumption terms have 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 steep, 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 two questions, sir.

Jayant Acharya — Deputy Managing Director

Yeah. 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 two to quarter three.

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 three.

Amit Dixit — ICICI Securities — Analyst

Okay. That’s great. Thanks and all the best, sir.

Jayant Acharya — Deputy Managing Director

Thank you.

Operator

Thank you. Next question is from the line of Satyadeep Jain from Ambit Capital. Please go ahead.

Satyadeep Jain — Ambit Capital — Analyst

Hi, thank you for the opportunity. Just a couple of questions. One is I think a lingering question for the past few months on the export duty, it’s been few [Phonetic] months now and all the companies are — have not recalibrated their capex plan. So what confidence is there that by the time these capacities come you’re not looking at a situation, where the export duty is there, and there is an oversupply of steel in the domestic market? Is there anything that gives management confidence to go ahead with this capex plan, as of now? That’s the first question.

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

No. 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 since September is 4.5%, as against 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 milled [Phonetic] — steel milled 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 little bit of lag by the time it gets reflected in the WPI numbers.

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 India.

Satyadeep Jain — Ambit Capital — Analyst

Okay. And we’re seeing the big talks with the government on this possibly continue to be constructive. Just a 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 premium to import prices and can that last?

And related to that would be typically we’d see some kind of — you mentioned supply response globally, I know, demand 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 [Indecipherable], banking that we historically see in the industry when there is a month — there is a downturn and there is a margin compression?

Jayant Acharya — Deputy Managing Director

Yeah. So from an import perspective first, so imports if you see coming into the country are arrivals, which have been booked also probably two months, three 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 are seeing 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 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 cold 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 import should also stabilize.

Satyadeep Jain — Ambit Capital — Analyst

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

Jayant Acharya — Deputy Managing Director

Supply response from the domestic market. So from a — if you look from a domestic — international — 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 ton 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 tons to 117 million tons 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 two quarters, the orders, which have been tendered and basically placed contribute to almost 19 million tons of additional steel requirement, projects announced and projects tendered.

If you look at the automotive as well, the automotive which was, let’s say, 5 million units in quarter one has gone to 6 million plus in quarter two. And going forward into quarter three, 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 capital [Phonetic] goods, infra goods, 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 maybe 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 situation.

Satyadeep Jain — Ambit Capital — Analyst

Thank you. Just one clarify, you are saying, given where international prices are — domestic — that you don’t see any pressure on domestic prices and the current international prices or import parity prices?

Jayant Acharya — Deputy Managing Director

Yeah. So if you know [Phonetic], 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 the 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.

Satyadeep Jain — Ambit Capital — Analyst

Thank you so much.

Operator

Thank you. I request all the participants please restrict to two questions per participant. The next question is from the line of Vishal Chandak from Motilal Oswal. Please go ahead.

Vishal Chandak — Motilal Oswal — Analyst

Thank you for the opportunity and wish you all a very Happy Diwali. Sir, my question was with regard to the long-term expansion plans, now we had in the past seen that it was expected that the export duty will come off in a month, maybe in two months, but it has not gone off even now, and media reports suggest 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 two years, if they are still commissioned, we would see a diluted 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 — Deputy Managing Director

So from a hot rolled perspective, if you really look at the new capacities coming in, the current hot rolled — free hot rolled demand in the countries in the range of 22 million tons. If it is growing at a rate of about 10% to 11%, which we are seeing now, you will be seeing a demand of between 2 million tons to 2.5 million tons of hot rolled coil on a free hot rolled basis. That is net of captive consumption for cold rolled coated downstream consumptions. So that is by and large 1 mill [Phonetic] 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 two years to three years, if you look at it, I think that is more or less matching if you take a three year timeframe with the kind of demand generation we are seeing. Keeping in mind that exports have sharply come down in the last six months, the next few years we’ll see calibrated exports coming back.

So therefore in addition to the domestic demand, which we just spoke about, let’s say, 2.5 million tons each year, in three year 7.5 million tons, the balance can easily be placed in the domestic market. So in the next three years, I think from that perspective up to 10 million ton capacity in India can be easily absorbed.

Vishal Chandak — Motilal Oswal — Analyst

Thank you for the elaborate answer, sir. 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 we still would want to proceed with our announced projects with the same aggressive speed, as we have done in the past?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

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

So this debt we will 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 INR2,900 crores on the capex, we reduced our debt by INR1,500 crores in the Q2 or Q1. This effort will continue.

One important point here is, we have reduced our inventories by 4,34,000 tons in the last quarter and used that cash to reduce the debt. We are also planning in the second half to reduce our inventories by another 4,00,000 tons 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 — Motilal Oswal — Analyst

Sir, actually my question was [Speech Overlap] regards to the additional capex that we had planned beyond 2024?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Beyond ’23, ’24, we have not announced anything. So we will just watch [Phonetic] the situation. At appropriate time, we will take the call. We have no plans now to announce any fresh capex.

Operator

Thank you. A request to all the participants, please restrict to two questions per participant. The next question is from the line of Sumangal Nevatia from Kotak Securities. Please go ahead.

Sumangal Nevatia — Kotak Securities — Analyst

Hi. Yeah. Good evening, and thanks for the opportunity. My first question is on our volumes. We’ve done a very good job on the sales front. And in the opening remarks, you [Phonetic] mentioned that we’ve gained market share. Just want to understand as far as what are we doing right here to gain market share? And whom are we taking market share from? Is it from the secondary steel sector or also from the primary steel producers?

Jayant Acharya — Deputy Managing Director

Yeah. 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 [Phonetic] 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 coat — 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 SOP is now at 61% plus. Our galvalume, we are at almost at 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 two tire, three tire vendors replacement markets have drawn in 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 in automotive. Share of business in automotive has also moved up. And we are continuing to do well in the OEM space like appliances, OEM going into solar, OEM tinplate packaging manufacturers. So by and large, across the industrial space also, we have done well. So these two have contributed to an increased domestic share.

I would say we have replaced some part of the secondary market, where — especially in the long products space, where the prices of the secondary, if you were to look at rebars 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 — Kotak Securities — Analyst

Got it. That’s very elaborate. Thanks. The next question, please 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 [Phonetic] up against this INR198 [Phonetic] crore odd loss, what is the guidance given that both in U.S. and Europe, the macro is just deteriorating further. So just some guidance on the international operations as well? Thanks.

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

On the iron ore side, whatever reductions that have happened in the last quarter, it has happened in phases. It has not happened in the month of September. The full benefit of that reduction will get reflected, if not more reductions in this quarter.

Number two 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. I am not putting a 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 into Q2.

Jayant Acharya — Deputy Managing Director

What was the second question you had mentioned?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Overseas. Yeah. As regards to be 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 $800, $900 and the plate prices at $1,600, $1,700 a huge [Phonetic] difference. So there will be some correction in our view in the plate prices.

So the kind of EBITDA we have seen in Baytown will get moderated. But at the same time, the losses will not be there in Ohio. Why we are saying there wouldn’t 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 as prices in USA is concerned. So with that we don’t expect a very big negative from U.S. If at all, it could be positive from here on.

Sumangal Nevatia — Kotak Securities — Analyst

Understood. This exceptional of INR1480 [Phonetic] crore is — that’s the consol level, right? Is it possible to share the breakup of what is NRV, export duty, MTM?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Yeah. The inventory and NRV together is around INR1,100 crores. Foreign currency loss is around INR330 crores and export duty is around INR60 crores.

Sumangal Nevatia — Kotak Securities — Analyst

And at the standalone level, will it be any different?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

It is slightly lower. This was slightly less [Phonetic] significantly lower. This 1,480 [Phonetic] number is INR706 crores.

Sumangal Nevatia — Kotak Securities — Analyst

INR706 crores. Okay.

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Yeah.

Sumangal Nevatia — Kotak Securities — Analyst

Okay. And the breakup if it’s possible?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

FX loss is around INR150 crores; duty is around INR25 crores, so the INR530 crores is inventory loss.

Sumangal Nevatia — Kotak Securities — Analyst

Got it. Thank you, and all the best.

Operator

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

Indrajit Agarwal — CLSA India — Analyst

Hi, thanks for the opportunity. Couple of questions. One on the recent inductment to the Board? And what is the end outcome here that we expect from — like we have inducted [Indecipherable] from the SMS? And does it anyway link to our green steel or low carbon steel objective over the medium term?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

No. 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 skill. So earlier, Mr. Malay Mukherjee, who was the Technical Director on our Board, Independent Director on our Board, but unfortunately he expired, so we have filled up the position with the Technical Director, then we have scanned various candidates.

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

Indrajit Agarwal — CLSA India — Analyst

Sure. Thank you. Second is on this MOU with Smartex. Any kind of capex or broad targets we have in terms of medium term? I understand we have a $1 billion decarbonization fund. Anything over and above that, that we can really look at over the medium term?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Smartex is having a lot of potential because it is a very comprehensive ecosystem he has created on one platform. In this platform, we not only get the funding, he arranged funding for the potential projects. He also brought in the entire research ecosystem into the platform. And he also brought the users of that technology on pilot basis and later on to commercial basis to arrange funding for pilot projects and also if required on the 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 an MOU, trying to understand each other better. So it will take some more time really to share more details on that. But it has lot of potential.

Indrajit Agarwal — CLSA India — Analyst

Sure. My last question is on IBM price, the kind of this agreement that we have in terms of the surveyed price by IBM about couple of quarters back. Do you think that is past us? Currently are the IBM price more or less in sync with the market prices or do you think there is still some bit of differentiation that is still to be corrected?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

No in the EMC [Phonetic] there are rules, there is always some inconsistency, which does not reflect what is happening at the market prices because any captive mine 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 may 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.

Indrajit Agarwal — CLSA India — Analyst

Sure. Thank you. That’s all from my side. Happy Diwali to you.

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Thank you. Same to you.

Operator

Thank you. The next question is from the line of Pinakin Parekh from JPMorgan Chase. Please go ahead.

Pinakin Parekh — JPMorgan Chase — Analyst

Yeah. Thank you. 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 hit in the first half is over INR3,400 crores on the P&L.

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

No. As far as the NRV losses 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 tons of inventory 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 a lower margin on the opening inventory, that could happen.

Then regard — 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 policy will remain that we will continue to cover our liabilities in 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 are longer. If rupee depreciates further from the level, as on 30th September, there could be FX loss that could come in, in future.

Pinakin Parekh — JPMorgan Chase — 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 INR65,000 crore debt and given the capex program that the Company is committed to, where should the debt peak out from your end in this current steel margin environment?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

No. Considering our cash flow position and our projections for the next half year, so what we intend to do is not to increase this debt. We wanted to reduce this debt and also meet our capex program. So in our view, we should — we will be able to do it.

Pinakin Parekh — JPMorgan Chase — Analyst

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

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Yes.

Pinakin Parekh — JPMorgan Chase — Analyst

Understood. Thank you very much.

Operator

Thank you. The next question is from the line of Kirtan Mehta from BOB Capital Markets. Please go ahead.

Kirtan Mehta — BOB Capital Markets — Analyst

Thank you, sir, for giving this opportunity. Couple of questions on the project ramp up side. So could you guide us on the Vijayanagar expansion in terms of the project milestone, which has been achieved? And what are the key milestones that we would be looking over the next three months to six months?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

There is lot of noise. I am not able to hear you fully. If you can repeat.

Kirtan Mehta — BOB Capital Markets — Analyst

Yes, sir.

Operator

Kirtan, sorry, there is still a lot of disturbance from your background. May I request you to rejoin the queue, please. Thank you. The next question is from the line of Ritesh Shah from Investec India. Please go ahead.

Ritesh Shah — Investec India — Analyst

Yeah. Hi, sir. 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. 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 [Phonetic] come to 220 [Phonetic], 230 [Phonetic] levels. So should we see this benefit even in Q4? That’s one.

Second is basically sir, you indicated on pricing. If we just look at Korean Won, Japanese Yen, these currencies have depreciated far more than the Indian rupee. So if one had to take a price call even on import parity basis into Q4, how should one broadly look at the spread? So the question is on spreads partly on coking coal and partly on pricing? Thank you. That’s the first question.

Jayant Acharya — Deputy Managing Director

So on the coking coal side, visibility beyond the quarter Ritesh is very difficult. So as of now, what we’re seeing is for the quarter three, and this is where we feel that $80 will be a change, a drop from quarter two to quarter three. 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 with depreciation of the rupee and the kind of volatility do not want to take a risk. So therefore two months, three months prior to book and wait for the material to come, not knowing how the situation is going to pan out, it gives you an automatic buffer.

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

Ritesh Shah — Investec India — Analyst

Perfect, sir. This is very helpful, Sir, second question, we — I just read up in the JFE annual report, it 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 no timeline specified over there. If you could provide some color on how we should understand this?

Jayant Acharya — Deputy Managing Director

So we have been discussing with JFE from a point of view of certain products to be basically got or rather produced in India and one of them is CRGO that is still at 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 on the project.

Ritesh Shah — Investec India — 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 inclusion [Phonetic]? Like are we looking at a separate JV? How should we understand this, sir?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

We are 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 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 any dilution of JSW Steel, that won’t be there. Then we’ll see — we will explain to you the structure once we take this call.

Ritesh Shah — Investec India — Analyst

Sure, sir and thank you so much for the answers. Wish you good luck.

Operator

Thank you. The next question is from the line of Abhiram Iyer from Deutsche Bank. Please go ahead.

Abhiram Iyer — Deutsche Bank — Analyst

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

And question two if I may, our current net debt, if you look — if you include sort of acceptances as well, stands at around 3.5x [Phonetic]. So is there any ratings pressure or is there any agency impact from the rating agencies that you see going forward?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Number one, as far as the buyback of outstanding bonds are concerned, there are lot of regulations in India if we want to buyback. The due loan if you want to raise that has to be longer maturity than the outstanding debt and they should have a lower cost. So that would 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 accruals. We’re examining that possibility for the buyback of bonds. But it is on the table.

Number two, what is the next question you asked?

Abhiram Iyer — Deutsche Bank — Analyst

Sorry, I mentioned that if you look at acceptances as well, our net debt has increased sort of 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 issue with regards to our ratings of the bonds?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

No from the ratings and the covenants point of view, there is no issue at all. Number two is, if you see the outstanding acceptances on the quarter one was $2.74 billion, which is already brought down to $2.48 billion. When coking coal prices started coming down, this number continues to come down. So therefore, we don’t expect any pressure from either point of view on covenants and from rating.

Abhiram Iyer — Deutsche Bank — Analyst

Got it. Thank you for the answer, sir.

Operator

Thank you. The next question is from the line of Ritwik Sheth [Phonetic] from Oneup Financial [Phonetic]. Please go ahead.

Ritwik Sheth — Oneup Financial — Analyst

Hello. Hi, sir, thank you for the opportunity. Sir my question is regarding to the global supply and in that context the supply, which is coming from India. If we see no 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 taxes lifted, what is the potential that we see in the export markets for Indian players and especially for us since we have a good amount of volume growth coming in the next two years?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

No. 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 illustrated. So in the Asian and Middle East, they are the two 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 two regions, therefore, it is possible for India to compete and then export from the Indian markets.

Number two, as far as JSW is concerned, we have now capacity at Dolvi, and 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.

Ritwik Sheth — Oneup Financial — Analyst

Okay. So on FY ’25 basis and we have more than 30 million ton at standalone and BPSL level, what would be the ideal mix for our exports?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

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 the range we continue to operate. We never exit. And at the same time, we don’t export too much of quantities. So that is how we manage based on export realizations and export demand under domestic demand and domestic price. So in that range, we will be there.

Ritwik Sheth — Oneup Financial — Analyst

Sure. And sir…

Jayant Acharya — Deputy Managing Director

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 ton 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 may be stabilize, but it will stabilize upwardly. So there is — once the export duty from India, which will go right [Phonetic] at 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.

Ritwik Sheth — Oneup Financial — Analyst

Right. So India would be…

Operator

Sorry to interrupt, you, Ritwik. I’ll request you to come back in the question queue for a follow-up question. The next question is from the line of Prashant Kutty [Phonetic] from Emkay Global. Please go ahead.

Prashant Kutty — Emkay Global — Analyst

Hi, sir. Good evening, and thanks for the opportunity. Sir, just wanted to understand from you the hedging consideration — hedging, whether to — whether or not to hedge our forex debt? What is the consideration? And how do you think about this, sir? And what is the hedging costs 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?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

No. The cost of forward cover, the hedging cost is also volatile. If you look at few months back, it used to be 4%. Now, it is 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 per the capital account is concerned, where liabilities are spread over a period of time, six years, seven 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 forward cover.

Therefore, if you hedge or don’t hedge, if you take the entire horizon of the tenure of the loan, then we don’t lose, but there could be some volatility because of that capital account translation is concerned. That is why we have taken a call, short-term, we will cover. Long-term capital account liabilities are concerned, they remain unhedged. 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.

Prashant Kutty — Emkay Global — Analyst

Understood, sir. Great, sir and perfect. And sir just quickly one second question. Sir you have done 5 million ton sales this quarter, which was — and the effort required to do this is huge, herculean effort of so many plants, so many products, so many raw material movements. rates, etc, but the EBITDA is — not commensurate, as you would agree because of the industry constraints, etc, industry is not doing that great etc [Phonetic]. 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, JSW also will do that. Sir then — and on top of that there is the decarbonization, etc, which we may require spending in future. Sir would you — is it fair to expect the government also contribute something to this decarbonization efforts to the sector and to the industry and to JSW? What is your view sir?

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

No. I fully shared our view. This decarbonization requires huge amount of capex. This is a big challenge for the entire industry. So there is enough representations to the government that they should facilitate either grants or 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.

Prashant Kutty — Emkay Global — Analyst

Understood, sir. Thanks, sir, and all the best.

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Thank you.

Operator

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

Seshagiri Rao — Joint Managing Director and Group Chief Financial Officer

Thank you. Thank you very much. And as far as Q2 is concerned, the majority of the losses is attributable to one-off items, our fall in the selling price now that is behind us, in the Q3 we have extra volumes that are coming in, plus the incremental inventory, which were built-in in the first half — first quarter of this financial year, another 4 lakh [Phonetic] tons we will be able to sell, and our BPSL, we have completed another 0.7 million ton 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, there is a possibility of incremental capacity production that can come in. So there will be more volumes in the second half. And the reduction in coking coal price and the 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 festive 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.

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

Jayant Acharya — Deputy Managing Director

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

Operator

[Operator Closing Remarks]