The Hindu Business Line : `Reduction in interest outflow will boost bottom line'

JINDAL Steel and Power Ltd (JSPL) runs India's largest coal-based sponge iron manufacturing plant. It has, in a short period, expanded its activities into the related fields of steel manufacture and power generation. Spotting a strong growth opportunity in the power sector, last year it floated a subsidiary company - Jindal Power Ltd (JPL) - for setting up a 1,000-MW plant. It recently announced the completion of several projects three to nine months ahead of schedule, an achievement that is likely to boost its bottom line. It has also been able to cut its interest outflow considerably. Mr Sushil Maroo, Vice-President, Corporate Finance, JSPL, and one of the Directors of JPL, talks to Business Line about the company's plans for the coming years. Excerpts:

During 2003-04 your company has taken up several big projects. What is the total investment commitment undertaken for these and to what extent will the projects be reflected in the current year, i.e., 2004-05's, financial performance?

In the year 2003-04, we took up several big projects costing Rs 550 crore. We are happy that these projects are getting completed by December 2004, around three to nine months ahead of schedule. We made this effort to avail ourselves of the benefit of firm sponge iron prices and good profit in the power business. After completion of these projects, our sponge iron capacity will go up from 6,50,000 tonnes per annum (tpa) to 13,10,000 tpa. Our power generation capacity will increase from 205 MW to 255 MW. The steel melting shop capacity will increase from four lakh tpa to 11.5 lakh tpa and the coal washery capacity from the present 25 lakh tpa to 60 lakh tpa.

The earlier completion of these projects will help in increasing the turnover and profits of the company for part of the financial year 2004-05 and for the full financial year 2005-06 and onwards. Depending on price and quantity, we would be looking forward to a turnover of Rs 1,500 crore-Rs 1,600 crore in fiscal 2006-07.

Apart from these, in April 2004, ahead of schedule, we have also completed a 55 MW power project that was slated for September 2004 at a project cost of Rs 207 crore. This too will enhance our profitability in the current financial year.

You have undertaken certain cost cutting exercises such like restructuring debts and saving on interest outflow. How far have they paid off?

We have done major pruning in our cost of funds in the year 2003-04. We have converted large amount of rupee loans, approximately $60 million (Rs 264 crore) into foreign currency loans to reduce rate of interest and prepaid loans of Rs 175 crore to UTI Bank, IDBI and ICICI. Our average interest rate was 11.5 per cent in the year 2002-03 and has been brought down to 6.5 per cent by the end of March 2004. We are planning to bring it down further to 5 per cent by the end of March 2005. This reduction in interest rate has given tremendous benefit to our bottom line. But these reductions in the financing cost will not be visible as we are capitalising more and more projects, and interest on these commissioned projects gets added to financing cost.

What are your future plans in the power business?

We will be a major player in the power sector in the future. The subsidiary company - Jindal Power Ltd - is setting up a 1,000 MW power project and initially setting up a 500 MW power plant. JSPL is taking majority stake in this company. JSPL has already decided to get a license for power trading. The 500 MW project of Jindal Power will cost Rs 2,142 crore with debt equity of 70:30 - Rs 1,500 crore debt and Rs 642-crore equity. The debt component has already been tied up.

Since JPL is an unlisted entity promoted by JSPL, what benefits do JSPL shareholders get out of the subsidiary's power projects?

This is a unique project as it has its own pithead coal mine. No engineering, procurement and commissioning contractor has been appointed, because JSPL will provide project consultancy support in setting up this project. No operation and maintenance contractor has been appointed, as JPL will operate the power plant on its own with the help of technical support of JSPL. JSPL will extend expertise to JPL in coal mining, setting up, operations and maintenance of the power plant as well as sale of power.

JSPL has already entered into a Power Purchase Agreement (PPA) with JPL to purchase 350 MW power. This power will be sold by JPL at Rs 2.10/Kwh to JSPL from the year 2007-08 onwards on a fixed tariff basis for the next 12 years with no variation in tariff except changes in Government laws relating to royalty, taxes, duties, etc.

After completion of the total 1,000 MW power project by JPL, JSPL will have an access to 1,255 MW (1,000 MW from JPL and 255 MW from its own captive generation). At that point of time, i.e., 2007-08, this will make us one of the largest players in the private sector with our own production and distribution capacities.