CFO Leaders: David Versus Goliath - JSW Steel Versus Tata Steel
From a crippling debt crisis in the late 90s to now rivaling erstwhile market leader Tata Steel Ltd. in size and cost efficiency, the story of JSW Steel Ltd. is one of David taking on Goliath. Today the two are almost similar in size, though JSW Steel, founded in 1982, retains the crown by a slim margin with its latest acquisition boosting capacity to over 21 million tonnes per annum whereas Tata Steel, founded in 1907, has a 20 mtpa capacity in India.
Big financial bets and cost leadership helped JSW Steel prevail, explains Seshagiri Rao, joint managing director and chief executive officer of JSW Steel, on BloombergQuint’s special series - CFO Leaders (watch full show video below).
Rao says it would be tough to pull a similar size coup today. “If anybody wanted to set up a steel plant or expand the steel business, times have changed. I don’t think it is possible to do what we did in 2001 because the banking system has changed.”
Curiously, while Tata Steel spent the last two decades acquiring international capacity, which its now trying to shed, JSW Steel mostly stayed focused on the domestic market till a recent foray into Europe and additional capacity acquisition in the U.S. That said, both have aggressive local capacity expansion plans. Rao explains the difference in strategy and also talks about how JSW Steel was able to access new technology.
India is the world’s second largest steel producer with a total production capacity of close to 140 mtpa, that the government hopes will double to 300 mtpa by 2030.
Building A Steel Company Today
If you were to start a new steel company on your own, what will be your strategy?
Seshagiri Rao: If anybody wanted to set up a steel plant or expand the steel business, times have changed. I don’t think it is possible(to do what we did in 2001, because the banking system has changed. Whether India as a country should set up steel when there is excess of global supply? India is equipped in producing steel at very competitive cost. Once you are convinced on that issue, then where to set up, what kind of technology and route should we follow. If you want to set up a steel plant, then you can set up near the market or near the raw material. If you want to set up near the raw material then you have to go east and north and to set up near the market you have to set up in west and south. You have to take that call.
India requires lot of steel. In the National Steel Policy, they are talking about 300 million tonnes of steel capacity by 2030 whereas our capacity is 140 mtpa today. 160 mtpa of steel is required. Look at the steel companies today and their plans upto 2030. We have given our strategy of (going up to ) 40 mtpa. Whether 160 million tons can be filled by the existing players? Not possible.
What about the funding/banking today is different that you can’t achieve the same thing?
Seshagiri Rao: Today there is a large corporate borrowers’ concept which has been introduced by Reserve Bank of India. If anyone is borrowing more than Rs 10,000 crore, then any incremental borrowing, 50 percent of that, has to be from marketable instruments. You can’t go to Indian banks and borrow that. If they want to set up a 1 mtpa greenfield project, it costs Rs 7,000-8,000 crore. One mtpa is not a very big economic size. Today, (the right) economic size is 5 mtpa, which may cost Rs 15,000-20,000 crore. If you have to set up that, the Indian banking system cannot give you money. So, you have to raise money from global banks or marketable instruments. Steel plants require longer tenure of 10-14 years financing. In India if you have to raise any instrument via market, it is not possible to raise more than three years other than private placements, go to LIC etc.... In the Indian markets, other than Indian banking system, long tenure is not possible. Then you may have to look at global markets. If you are an existing company and you have a credit rating you can access the international market. If you are a new company and you want to access the global market, it is not possible. Even assuming that you will be able to raise, the kind of rates you have to pay is 12 percent in dollar terms for debt. Equity is a different concept. So, funding is not so easy as it used to be in past. So, be careful about funding requirements and how your capital structure would be.
Watch Seshagiri Rao discuss JSW Steel vs Tata Steel here...
JSW Steel vs Tata Steel
What does your SWOT analysis of JSW Steel and Tata Steel tell you about the strength and weaknesses of each?
Seshagiri Rao: I don’t want to talk about weakness and strength of Tata Steel. As far as JSW Steel is concerned, we are in the top 36 world-class steel companies. There is an internationally reputed firm which evaluated all these companies based on 23 parameters. Of that JSW Steel is number eight in the world, whereas Tata Steel is number 15.
Tata Steel is a great company. They have capacity of 18 mtpa and they have a strategy of expanding further in India. May be in 2007, they focused on global markets than Indian markets. But we never left India and continued to grow in India.
Do you think that was your big winning point?
Seshagiri Rao: That could be the reason. We continue to focus on the Indian market which is a growing market. That is why in the evaluation of these 23 parameters we got 10/10 on the parameter of presence in growth market - because we have big presence in India.
You didn’t go abroad because you didn’t have the balance sheet strength that Tata Steel did then?
Seshagiri Rao: If I look at 2001, 2010 and 2019, there are huge amount of changes which have happened globally. If you look at 2016-2019, the world is moving towards protectionism. We have customers all over the world. We supply steel. 55 percent of Indian steel exports are from JSW Steel. So, we have a lot of customers. If we want to supply steel from India, when this is the (protectionist) environment which will be there in the future, then we will lose the customers. Therefore, we have a complete different strategy relative to competition.
It doesn’t mean I don’t want to grow in India. We are already saying we want to be a 40 mtpa steel company in India, which is 15 percent of 300 mtpa. At the same time, melted and manufactured within U.S. has a premium. If I produce slabs within the U.S. and use it for value addition, all government projects we are eligible to submit. Like in India locally produced steel 15 percent weightage will come in government projects, same story is in U.S. and Europe. Therefore having a manufacturing presence in those countries to serve our customers (is the goal), as long it is making sense and overall competitiveness is concerned.
We have changed our strategy in last one and a half years. Today we have 4 mtpa capacity overseas, 3 mtpa in the U.S. and 1 mtpa in Europe. In this I have 22 percent Return On Capital Employed (ROCE). For return on capital employed, we are at number 5 in the world. When I am employing my capital in the U.S., for instance I have invested $280 million for 3 mtpa steel plant. In India, it is not possible to set up a plant with $280 million. So, capital given to 3 mtpa capacity is very competitive. Then that will have advantages in ability to bid for government projects and ability to access high realisation. Also, gas - which is available for a lower cost relative to the world in U.S., my operating cost will be competitive.
Did you get lucky that you did not go into bigger global forays like Tata Steel did with Corus?
Seshagiri Rao: At that time the focus was mainly on Indian markets. So, strategy wise, and up to 2010, we only looked at forward and backward integration globally, and steel making only in India. That is how we worked until 2010. It didn’t fit with our strategy.
Besides that difference in approach on international markets, what else distinguishes your strategy from Tata Steel’s?
Seshagiri Rao: Our weakness is not having iron ore and captive coal, so we made other areas strong. If you want to move in high end value chain of steel industry then you need technology. Automotive steel, electrical steel or tinplate steel, some of these are closed technologies. Even those who are producing will not give it. So, there are different models which the steel industry is following, including our competition. They also tied up with foreign players to get this technology, particularly automotive steel. But it is not an aligning interest - which means they set up some joint venture and under it there may be 40-50 percent and steel will be supplied by this (jv) company. We brought in Japan’s JFE into our company and sold 15 percent of our parent company. They gave a billion dollars into the company. So, there is no conflict in whatever value we are creating. Interest is aligned, so they said we’ll give you technology. They gave us automotive steel technology. We set up 2.3 mtpa of automotive steel. We have 29 percent market share in automotive market. We have set up electrical steel which is working at 100 percent capacity.
You believe you got direct access to technology only because you parted with an equity stake. As a CFO, how do you look at the decision of giving away your equity?
Seshagiri Rao: That was very important. In 2010, after the global crises, steel prices went down. The reasons for margins coming under pressure is that you are in commodity-grade steel making. Unless you move to value added, this volatility will continue to hit us when the cycle changes. That’s why we thought we should do it. We had been talking to JFE for 5-7 years time. It ended in 2010 and we could take the call to sell the equity and bring them in. it helped the company to completely transform in 8-9 years time.
Then the weakness we had in the iron ore and coal side, which there also we worked a lot helped us to pass through the difficult phase of 2011. We have to buy iron ore at a very high cost. Again, (the question was) how to buy inferior quality ore at low cost, which others cannot use, so then we will be able to be competitive. With that we invested in a beneficiation plant at Vijayanagar at 20 million ton and we invested Rs 500-600 crore. We created capacity with an objective that we’ll be able to buy 50-51 percent (fe) iron ore which is available cheaper and then we will be able to convert it into usable iron ore and use it in the steel plant. Suddenly in 2011, a mining ban happened in Karnataka. All the mines were stopped. Then there was no way we could continue our production in 2011 as iron ore was not available where we were - in the midst of iron ore belt. It was not possible to get iron ore (from elsewhere) at that time because no logistics were available from outside Karnataka. But there was 25-30 million ton of iron ore stocks which could not be sold as they were not usable at that time. So, they were available with mining companies. The Supreme Court gave permission that stocks can be sold. The only company which could use those stocks was JSW Steel because we had the beneficiation plant. That is how we survived the 2011 mining ban crisis.
What else have you done better than Tata Steel and vice-a-versa?
Seshagiri Rao: We have done very well in terms of product mix. If you look at sales realisation, which are publically available information, adjusted for other sales revenues our realisations are higher because of the product mix. We have that advantage.
In terms of conversion cost, we have a clear, distinct advantage. As far as competition is concerned, they have a clear advantage in terms of 100 percent captive iron ore and they have 50-60 percent captive coking coal. Assuming we move towards captive iron ore and captive coking coal, we may not get same benefit as that of competition because we have participated in auction whereas they got the mines via allocation. That advantage will always remain for them.
Watch the full CFO Leaders show with Seshagiri Rao here...
In this second edition of CFO Leaders - Rao, one of India’s leading CFOs, talks about the financial challenges of building a challenger business.
Joining the discussion with their perspectives and questions were several finance leaders from across India inc.
Vijay Mansukhani, Managing Director, Mirc Electronics Ltd.
Vimal Agarwal, CFO, Parag Milk Foods
Kumar Thakkar, Proprietor, Nova Steel
Keval Jain, Managing Director, Keval Kiran
Kaushik Shah, General Manager - Finance, Brilliant Polymers Pvt. Ltd.
Manish Dedhia, Joint Managing Director and CFO, Mitsu Chem Plast Ltd.
Hemal Uchat, Partner - M&A Tax, PwC India
Simone Reis, Co-head M&A Practice, Nishith Desai Associates