It was a tough quarter for Jindal Steel and Power Ltd (JSPL) on many fronts. The most visible after-effect of its troubles was an eye-popping loss of Rs.1,619 crore in the three months ended 31 December.
The one-off event causing this loss was known—the penalty imposed on coal fields at the rate of Rs.295 per tonne of the fuel extracted, which for JSPL, amounted to Rs.3,089 crore. But it has charged only Rs.1,794 crore to profits and the rest has been shown as recoverable, as it claims this amount has been paid under protest. If its contention is rejected, then this amount too can be added as an exceptional item of expenditure at a future date. The company’s auditors have also qualified its accounts with respect to the manner in which this expense has been calculated.
The company’s consolidated revenue declined by 1.9% over the year-ago period, but it managed to hold the decline in operating profit margin to 40 basis points (bps). Sequentially, margin was down by 96 bps. One basis point is 0.01%.
On its business front, its steel and power divisions faced a difficult period. In the steel industry, the company encountered higher raw material prices due to a tight domestic supply situation. But steel prices were under pressure due to falling global prices. Ironically, global iron ore prices were falling steeply in the quarter, although local prices held firm. Falling steel prices, China’s weaker demand and Russia’s rouble devaluation led to an increase in cheaper imports. Thus, pressure on realizations and increasing costs pinched its steel business performance.
Relatively speaking, the power business was in good shape, with both segment revenues and profits at around the same level as the September quarter. The company’s newly commissioned units did not operate at full capacity. Lower rates in the merchant power market and coal shortages were the main reasons cited.
The coal field auctions are one near-term trigger to watch out for. The company has bid for the cancelled blocks, and if it manages to secure its coal requirements for both steel and power operations, it will remove uncertainty both on availability and pricing. The price it has to pay for these fields may affect its debt situation, though.
JSPL also expects the government’s efforts to remove roadblocks for mining in iron ore will ease the tight supply situation. Steel companies have cited iron ore sourced from Odisha having already become cheaper in the past one month. On power, once JSPL’s coal supply situation clears, it should also be in a position to sign power purchase agreements for the new capacity, securing demand.
Among all these, the easing of iron ore prices should have an immediate impact on costs for its steel plant. The coal auction outcome is uncertain. There is also the matter of weak global demand for steel and falling prices.
But if the global situation does not worsen further, if the domestic economy recovers and steel demand recovers, then JSPL should be operating in a better environment in 2015-16.
The writer doesn’t own shares in the above-mentioned companies.
