On September 29, Sajjan Jindal celebrated Dussehra with his family and colleagues at JSW Centre, the headquarters of JSW Group in Mumbai's Bandra Kurla Complex. Like in the past, he donned traditional headgear and moved his feet to the tunes of garba. His wife Sangita, son Parth and daughter-in-law Anushree, joined the celebrations. While the rest of Mumbai continued the celebrations over the next few days, Jindal took a flight to London. He had no time to dally, what with the group on the verge of massive expansion, even venturing outside its comfort zone of steel, power and cement where it has been a dominant player for decades.
JSW is now foraying into paint manufacturing, financial services and electric vehicles. Alongside, the largest steelmaker in the country - JSW Steel has a capacity of 18 million tonnes (MT) per annum, surpassing state-owned SAIL's 17.5 MT and Tata Steel's 12.7 MT - intends to grow even larger, building new capacity as well as acquiring sick assets and turning them around. Expansion of cement and port businesses is on the cards as well. "There have been no new investments in these sectors for the last few years, so we anticipate supply constraints once the growth momentum picks up," Jindal tells Business Today. "This is an opportune time to invest to take advantage of the upcoming growth cycle."
What lies ahead for Jindal? The Rs66,000-crore JSW Group already has an aggregate debt of Rs60,000 crore, and his ambitious plans will only raise the figure. The new steel capacity he wants to add will require investment of more than Rs26,800 crore over the next three years, including Rs15,000 crore to double the capacity of the plant in Dolvi, Maharashtra, from five million to 10 MT. The company's ports in Maharashtra and Goa and the new terminal in Paradip (Odisha) will need Rs7,000 crore for expansion as it plans to expand capacity from 70 MT to 200 MT by 2020 to become the only Indian conglomerate that can pose a challenge to the Adani Group's steep rise in the sector. The electric vehicles (EVs) plant he wants to set up in Gujarat will require Rs4,000 crore. Besides, there will be investments in cement, power and paints that are yet to be quantified. Jindal will surely need low-cost capital, so as not to over-leverage his balance sheet, as well as partnerships, especially in EVs.
Jindal's steel business has been through tough times before emerging as the country's biggest. In 1998, he attempted a giant leap and fell short. He set up a second steel company, Jindal Vijaynagar Steel (JVSL) - distinct from the Jindal Iron and Steel Co (JISCO) he was running then - to build a 1.2 MT integrated steel plant at Vijaynagar, Karnataka, costing Rs4,000 crore. (JISCO and JVSL were later merged to form JSW Steel in 2004.) But the night before the plant was to go on-stream, unseasonal rains lashed the area and halted the coal conveyor belt.
Jindal launched a salvage effort. He personally joined his workers in manually feeding coal to the furnace, but the coal, too, had got wet and the machines, one by one, ground to a halt. The half-melted iron stuck to the pot and hardened as the heating stopped. "We had to virtually cut the pot to remove the iron," says an old timer.
Though Jindal showed unwavering will and restarted operations within six months, the cost was heavy, with JVSL running up a debt of Rs5,000 crore and given the adverse market conditions then, having to sell below the production cost. In 2000, it had to go in for corporate debt restructuring (CDR). It took JVSL five years to come out of CDR.
Acquire to Conquer
But that is now a distant memory. Conditions were such that many industry peers suffered the same fate then, with some like Ispat Industries never able to overcome their situation. Ispat was finally taken over by Jindal in 2010 and merged with JSW Steel. (The Dolvi plant, now billed for expansion, was part of Ispat.) It is among the 10 acquisitions Jindal has made, starting with Southern Iron Ore Steel Co (SISCOL) in Salem, Tamil Nadu, in 2004, thereby increasing JSW Steel's original capacity 11 times to become the country's foremost steelmaker.
The decade since the global financial downturn of 2008 has not been an easy one for the steel industry, with a global slowdown in the commodities market lasting several years. But JSW Steel has risen above it - its income has grown 340 per cent to Rs55,757.97 crore and its profit 108 per cent to Rs3,454.05 crore. It has expanded its range of steel from flats, long, special and value-added categories to include high value-added, auto and electrical grade steel as well. The entry into auto and electrical grade steel was facilitated by the tie-up with Japanese steelmaker JFE, which acquired a 15 per cent stake in JSW Steel in 2010. "Our company can convert iron ore into steel at a cost of $115 per tonne, which is the world's most economical," says Seshagiri Rao, Joint Managing Director. The average cost of the major players (who are without mines) in India are above $250 a tonne.
There have been other hurdles, notably the Supreme Court decision of August 2011 to ban mining in Karnataka's Bellary-Hospet region. JSW Steel was sourcing 50 per cent of the iron ore for its Vijaynagar plant from the region. Steel production also dropped by half, while profit in that quarter plunged 72 per cent. Coking coal supply was also hit - but it taught Jindal a valuable lesson: he needed captive iron ore mines, just like rival Tata Steel. Accordingly, JSW Steel won five iron ore mines in Karnataka with an estimated reserve of 111 MT in October 2016. These are expected to meet around 20 per cent of the Vijaynagar plant's requirements. The company also won a mine in Jharkhand, which has extractable coal reserves of 30 MT.
Man of Steel
"Sajjan Jindal is a man of steel," says Raamdeo Agrawal, Co-founder and Managing Director, Motilal Oswal Financial Services. "He understands the steel business better than anybody in India. He has proved his skill by turning around loss-making steel companies." The case of Ispat, the best known of JSW Steel's acquisitions, illustrates this perfectly.
When it was taken over, Ispat had posted an operating EBITDA loss of Rs77 crore the previous year and had an outstanding debt of Rs7,300 crore. Within three years, in 2012/13, it achieved an operating profit of Rs1,180 crore. "Just putting money into an ailing company will not turn it around," says Rao. "Before making acquisitions, we always look at the synergies we can bring in." Despite its losses, Ispat's 3.3 MT Dolvi plant had the latest steelmaking technology. JSW Steel also reduced input costs by sourcing cheaper coal and buying power from Jindal Energy. Ispat had been buying power from the grid at Rs7.50 per unit, while JSW Energy was selling it at Rs4.50 per unit - the same price it offered JSW Steel. "By saving Rs3 per unit, we reduced costs by Rs45 crore per month," adds Rao.
The merger also enabled JSW Steel to slash logistics costs. It had steel-coating plants in Vasind and Tarapur - both in Maharashtra - which were supplied hot-rolled coil (HRC) steel from the distant Vijaynagar plant, costing the company Rs1,500 per tonne of steel in transportation. The steel coating plants began sourcing their requirements from the Dolvi plant in Maharashtra, reducing transportation expense. Simultaneously, Ispat's Bangalore buyers were supplied with steel from the Vijaynagar plant, once again slashing transportation costs from Rs1,500 to Rs400 per tonne. "So it was a two-way synergy. Overall savings in logistics were over Rs2,000 per tonne," says Rao.
No doubt the Dolvi plant needed additional investment, too - Jindal put in around Rs1,800 crore to increase its capacity from 3.3 MT to 5 MT, which lowered the overall capital cost. He built a pellet-making unit so that the plant no longer had to buy iron ore lumps and outsource the task. He is also building a coke oven. The blast furnace gas generated by the plant is also being used for a 55 MW captive power plant. Bulk sourcing of raw material and debt refinancing also brought down expenditure. The story of SISCOL, Jindal's first acquisition - since renamed Salem Works - which, too, was loss-making when it was taken over, is similar.
Not that every acquisition of Jindal's has paid off. Two in particular - both from family members - have disappointed. The first was the 2007 purchase of three US companies making steel plates and pipes, in which his elder brother Prithviraj Jindal had a substantial stake, for $810 million. They were all loss-making, with net losses of $42 million against revenues of $510 million in 2006/07.
Jindal had expected to recover costs, including that of the acquisition, in four years. But the company has had to write-off loans worth Rs6,208.74 crore to the US holding company. In the first quarter of this financial year, the US plate and pipe mill had an operating income of $5.1 million on revenues of $58.67 million, which suggest it is showing signs of recovery. However, JSW Steel (US) is still consistently making losses. The other 'family' acquisition - still to be completed - is the Chhattisgarh power plant, run by brother Naveen Jindal-led JSPL. The JSW Group's power arm, JSW Energy, agreed in 2016 to take over it for Rs6,500 crore, much to the concern of its investors, due to coal shortages and lack of long-term power purchase agreements.
JSW Energy once set itself the goal of 10,000 MW by 2020, but with current capacity at 4,500 MW, is now rethinking the matter. With the country now power-surplus, and demand growing at 6 per cent annually, too much capacity could lead to assets lying idle. "We're keen to acquire stressed power assets, but they have to be at mine pit heads or close to them, where PPAs are either already in force or can be entered into at competitive rates," says a JSW Energy official. The growing debt of the company, at Rs14,350 crore, also needs to be kept an eye on. "JSW Energy is already slightly overleveraged and merchant power has few takers," says Sanjay Sethi, CEO and Managing Director, Nestor Consulting India. Again, the future of thermal power is itself in doubt. "Since the world is moving towards renewable energy, we are not quite sure about building more thermal capacity," says Rao.
Setbacks and Challenges
Despite its slew of acquisitions earlier, in the last two years, most of Jindal's takeover efforts have failed to come off. JSW Cement was keen on the 11 MT cement plants of French giant LafargeHolcim when they were put on the block, but in mid-2016, Nirma Ltd bagged the deal. JSW Steel had been considering acquiring the UK assets of Tata Steel, but the company reached a joint venture agreement with Germany's Thyssenkrupp instead. As part of a consortium, JSW Steel also submitted a bid for the loss-making 10 MT steel plant Ilva in Italy, but it went to the rival ArcelorMittal-led consortium. It is now trying to buy long products maker Aferpi (old name Lucchini SpA), the second-largest steel producer in Italy, to expand its presence into Europe.
JSW Energy had a binding agreement with the Jaypee Group to buy its 500 MW thermal power plant at Bina, Madhya Pradesh, but the deal was scrapped. It had a non-binding pact to acquire the power business of the ailing Monnet Ispat and Energy as well - run by Sajjan Jindal's brother-in-law Sandeep Jajodia - but efforts to take over the company stalled after the Reserve Bank of India asked lenders to initiate insolvency proceedings against it. Its offer to buy a controlling stake in Monnet through the strategic debt restructuring (SDR) route was turned down by the State Bank of India-led consortium formed after the RBI directive.
Jindal is still hopeful of acquiring Monnet Ispat, and even has his eye on the crisis-hit Bhushan Steel and Bhushan Power & Steel. According to the banking sources, JSW is among the buyers which have submitted "expressions of interest" (EoIs) in Monnet's assets to the Insolvency Resolution Professional appointed for it under the new Insolvency Law. Monnet's total debt is around Rs10,330 crore. Jindal is also in talks with investors to make a bid for Bhushan Steel. The steel industry continues to stagnate despite the recent improvement of market conditions, which is precisely why the JSW Group sees an opportunity, expecting a shortage of steel by 2021. "Banks are not funding steel companies because of their non-performing assets and steel companies are unable to take up projects because their balance sheets are stressed," says Rao. ""We are well positioned to take a call on investments in the sector." Jindal is also in the race to buy 30 per cent stake in Jaiprakash Power Ventures, which is up for sale.
There is also a concerted effort to raise JSW's brand image, with the new forays, which are all consumer-facing, part of the effort. The driving force is Jindal's son, Parth Jindal, Managing Director, JSW Cement. "I enjoy marketing and brand building, while dad enjoys manufacturing," he says. "Most of our businesses, barring cement and steel retail, are B2B. So, we did not bother much about our brand earlier."
"If you ask a layman, he will still say that the biggest steel company is Tata Steel," he laments. A sobering experience in Bhubaneshwar while he was with JSW Steel convinced him of the need to improve the group's image. He met a number of dealers during a visit to the city and without disclosing his identity asked them which brand they would recommend for a house he was planning to build. To his shock, barring one, all recommended Tata Steel. "I asked them why. One dealer said Tata Steel products were the best. The company was also prompt in replacing defective samples. He even believed Tata Steel was made from pure iron ore, while JSW Steel came from scrap iron." On his return to Mumbai, he promptly sat down with JSW Steel's marketing team and reworked the incentive schemes for dealers and their influencers. Parth's stewardship of JSW Cement has so far been effective. The company's revenue has grown to Rs1,289.81 crore in 2015/16, against Rs165.96 crore five years ago, while net profit stood at Rs89.25 crore in the same year, after three years of consecutive losses.
The foray into paint manufacturing, in particular, is Parth's brainchild. "JSW is keen on entering sectors where brand plays a big role in influencing consumer decisions," says Jindal. The choice of paints was dictated by the group's core strengths in steel and cement. "You need steel and cement to build a house and finally you need to paint it," says Parth. In a consumer business like paints, distribution will be crucial. "A major barrier for a new entrant is supply chain complexity," adds Parth.
The entry into EVs is an outcome of the government's stated intention of encouraging them heavily in coming years. "The Jindals will be pursuing it as a business opportunity," says Raghu Vishwanath, MD of brand valuation company Vertebrand. The advantage is that it is a completely new arena, with only one company, Mahindra & Mahindra, having manufactured EVs in all these years. "We feel there is a level-playing field," says Sajjan Jindal. "India has demonstrated strong advocacy for electric mobility. JSW Energy is, therefore, venturing in this space given the advantage of its free cash flows."
The EV plant will be built at Vanod village in Gujarat's Surendranagar district, with the company having already signed a MoU with the state government, committing to set up infrastructure for recharging and producing electrical batteries as well. It is also in talks with China's auto giant Zhejiang Geely Holding Group for a partnership to provide technical support. What are JSW Energy prospects in EVs, given that all the major auto companies in the country are also venturing into this segment? "It will have to connect directly with the customer unlike in B2B," says Devangshu Dutta, CEO of retail and consumer consultancy Third Eyesight. "This will require a shift in mindset and a cultural change, in addition to technical capabilities."
But the debt remains and is bound to get bigger with the new ventures. How does the group plan to cope? JFE's equity infusion of around Rs5,410 crore in JSW Steel in 2010 was sought primarily to reduce the company's debt. JFE may well put in more funds - its spokesman has said the group has held discussions with JSW on possible investments in the new opportunities offered by India. "We would prefer to acquire sick mills in Eastern India and are open to partnering with JFE Holdings," says Rao.
Analysts say there is no need to worry too much about the burgeoning debt. "At a time when India is looking for growth, it is best to buy assets," says Agrawal of Motilal Oswal. "There are always opportunities for refinancing and reducing costs," says Rao. JSW Steel's interest costs came down by 16 basis points to 7.16 per cent in the March 2016 financial year because of refinancing. "We want to keep our debt to EBITDA ratio at 3.75 and our debt to equity ratio at 1.75. Whether we go for organic or inorganic expansions, these ratios will be kept in mind. At present, the first ratio is within limits, while the second is slightly above."
Sajjan Jindal exudes optimism. "The structural reforms undertaken by the government are expected to give impetus to sustainable growth in the core sectors of economy," he says.