Rolling Out Controversy

For Sajjan Jindal, Jindal Vijayanagar Steel Ltd (JVSL) is his dream project. An ambitious attempt at consolidating the groups presence in the steel business, the 37-year-old scion of the Jindal family has been its most vocal supporter since the plans were taken off the drawing board a little less than three years ago. Yet, today, as the project slips up on schedules and cost projections, JVSL is turning out to be a nightmare for the cash-strapped Rs 2,400 crore Jindal group.

Everything that could go wrong with the project, has. It is way off schedule. The first phase of JVSL would have gone on stream in March 1997 but it may well be the end of the year before the project gets off the ground. What is worse is that the Jindals went public with a massive Rs 680 crore issue two years ago for JVSL and investors are now dumping the scrip for its poor performance the scrip is languishing at around Rs 7 today. The delay has also pushed up costs from Rs 3,300 crore to Rs 4,138 crore. Add to this the scrutiny the groups financial practices and dealings have come under and JVSL is already being tagged a non-starter by many analysts and competitors. The fact that the groups existing steel capacities are underutilised and its companies are facing a cash crunch, are further pulling down JVSLs market value.

 

This has not shaken Sajjan Jindal, vice chairman of Jindal Iron and Steel Company (Jisco), who declares that JVSL is on the priority list. And all other group plans and projects are being put on hold while he realises his dream. The Rs 2,600 crore joint venture with the French company Ugine for making stainless steel has been shelved; so too a 6 million tpa refinery at Vishakapatnam too has been shelved and; the 1000 mw power project with Malaysian company Genting is on the backburner. The focus is on maintaining our existing business at full capacity and JVSL, says Sajjan Jindal.

Situated at Vijayanagar, Karnataka, the JVSLs 1.67 mt plant will make hot rolled (HR) coils. It will have captive power and oxygen plants and captive mining and port development facilities. Observers and analysts have no complaints about the way the plant was conceived, only the manner in which it is being executed. Firstly, they believe that Sajjan Jindal was overambitious in hoping to commission the plan in just 32 months. Similar projects by TISCO took 39 months and that by Essar 43 months. Though Jindal accepts that he overestimated the commissioning period, he blames the delays in various state government clearances.

Another problem is with the technology. According to Jindal, JVSL is going to be the countrys most efficient steel plant as it uses the worlds latest steel making technology corex, which shaves off around 20 per cent in investment and 20-25 per cent of production cost as compared to the blast furnace route. It saves the time and cost in sintering the hot metal and passing it through the coke oven. Also by using non coking coal, it is more environment friendly. In the long run there is an advantage in using non coking coal which is in abundance, therefore, avoiding bottlenecks, says Hozefa Topiwala, analyst, First Global Finance.

But, analysts also feel that just using the corex technology would not make JVSL cost efficient over its rival. TISCO, for instance has captive coking coal mines which gives it edge over others. Besides, as Prabhat Awasthi, analyst SSKI, says, the corex technology would help in bringing down the production and operating costs but it is too early to comment on the success of the technology. This is the third steel plant of this kind in the world and the South African plant ISCOR, though successful, is small with a capacity of three lakh tonnes, says Awasthi. POSCO, also using the same technology, in Korea, is smaller than JVSL and has a capacity of 6 lakh tonnes.

The risk with such projects is that, if the technology fails, the investment Rs 4,138 crore in the case of JVSL could have junk value. TISCO had experimented with a Rs 42 crore energy optimising furnace last year but today the plant has no value. Awasthi also points out that unless there is simultaneous commissioning and operations of the oxygen and power plant, the project may not take off. Warns Topiwala. Firstly, the technology is not tried and tested and secondly, Jindals are known for bad management. In 1995 Jindals raised Rs 680 crore as equity for JVSL. Of this Rs 130 crore was put into Sun Invest, a 100 per cent subsidiary of JVSL. All this works against the group and the project.

However, for the Jindals, JVSL would solve a lot of problems. Especially for its flagship, Jisco. For instance, the company currently imports 15 per cent of its HR coils requirements through imports. With fluctuating prices of this product we are getting played around by the suppliers of raw material which has a bearing on our final product, says S Jindal. With JVSLs support JISCO would become the second biggest cold roller and largest galvanising company in India. And for this JISCO has contributed Rs 70 crore as equity in JVSL to hold 14 per cent of its stake. JISCO would also be the largest buyer of JVSLs products it is expected to pick up 6,00,000 tpa. JVSL is expected to have a turnover of Rs 2,000 by the year 2,000, more than JISCO which is likely to do Rs 1,700 crore.

After providing for Jiscos needs, the Jindals plan to export 4,00,000 tonnes of HR coils a year. JVSLs market would be eight Asian countries, three African countries and two countries each in Middle-East and Latin America. These projections however assume that the market for HR coils would be growing fast enough to absorb all the new capacity coming up. The Jindals say that demand in the targeted export markets is growing at 8-9 per cent. But analysts are sceptical. With TISCO adding 0.3 mt, Essar, 0.7 mt and Lloyds around 0.1 mt this year, they expect excess supply in HR coils. While demand for HR coils is growing at 5-6 per cent, its supply is growing by around 10 per cent. By the end of 1996-97 there would be an excess supply of around 3 mt, says Awasthi.

Besides, 92 tonne per month of HR coils are being dumped in the Indian market by the CIS countries. Although of poor quality, they are a threat to Indian companies. More important, even for JVSL to stabilise its quality of HR production, it would take a minimum of two to two-and-a-half years. Sajjan Jindal is unruffled. The surplus (after JISCO and export) is expected to be consumed in South India itself with a market size of 2.5 mt. Also, as the only integrated steel plant in South India, JVSL would have a freight cost advantage of Rs 1,000 per tonne. This along with low operating costs due to COREX technology will give JVSL an edge, says Jindal.

Still, analysts are not buying. For one, the JVSL products would still be of lower quality than that of SAIL and Tisco, initially. Besides, HR coils are not sold at market prices but at negotiated prices. How much edge will JVSL enjoy over the established player has to be seen, says Topiwala. Awasthi also points out that JVSL cant put up a fight due to its small size of 1.6 mt against 11 mt of SAIL, 3 mt of TISCO and 2 mt of Essar.

Underlying the markets critical approach to JVSL is the trouble that the group is having raising resources. For many, the fact that the Jindals have had to float joint ventures (Jvs) for JVSLs oxygen and power plants, is proof of the groups inability to fund the project on their own. Sajjan Jindal vehemently denies this and says that the Jvs are meant to improve management practices. This is the prevailing concept worldwide with steel plants, he counters. Utility services, as they are called for British Steel and the US Steel, operate as separate companies. We dont want these companies to lose their focus because of our obsession with steel. We are also having talks with the British Steel and NKK for a technical tie-up. We want to shorten our three year learning curve to less than two years, he says.

Unfortunately for him, his optimism is not rubbing off on the market. Foreign borrowings are likely to put Jindals in a cash tight position. Rupee depreciation is inevitable. This coupled with high inflation rate is bound to affect the exchange rate adversely and repayment of loans is going to be very costly for them, says Topiwala. If you dont have ambition you dont grow and this is not just me but all Jindalites feel so, says Sajjan Jindal. He must hope the markets feel the same way.

Counting on JVSL

Plans

The Rs. 4138 crore 1.6 mt integrated steel plant is expected to make JISCO the No. 1 galvanising plant and No. 2 cold rolling plant in the country.

JISCO would buy 6,00,000 tpa of HR coil from JVSL. With this, it also hopes to capture 10 per cent of the 2.5 mt southern market.

It would use Corex technology which is 20 per cent cost efficient than the blast furnace route.

Risks

Already running six months behind schedule with a cost overrun of Rs. 83.8 crore.

Bottlenecking problems if the captive oxygen and power plants dont go on stream simultaneously.

The entire project would have a junk value if Corex technology which commands only one per cent of total hot metal production fails.

If you dont have ambition, you dont grow and this is not just me saying so, but all Jindalites feel the same way, says Sajjan Jindal