Stripped To Its Core

A restructured Jindal Stainless placed its bets on stainless steel. The focus has now paid off.

At 39, Ratan Jindal, Managing Director, Jindal Stainless Ltd (jsl) has seen the company complete a full circle from stainless steel to other segments of the steel industry and back to stainless steel. Jsl' history in steel had begun with the manufacturing of mild steel hot rolled plates and coils in 1971. On account of rising scrap prices in the late '70s, the company shifted into stainless steel (ss). As the market opened up, it further diversified. Around the mid-1980s, to 1990's jsl moved into cold rolled stainless steel-a commodity that was then imported into the country-and mild steel, hot rolled coils and even to sponge iron. Says Ratan: "But now we are back with a clear focus on stainless steel."

Ratan, who is the third of the four sons of O.P. Jindal, founder of the groups, is determined that Jindal steals a march over other producers of stainless steel in the country. "Based on our focus on stainless steel, the company has undergone a restructuring exercise. All the other divisions are hived off as either subsidiaries or as separate companies." says Ratan.

Jsl's genesis has a strong bearing on the situation today. As flagship company of the Rs 6,000 crore O.P. Jindal group, jal ventured into making ss in Hisar, Haryana in 1977. " At the time, steel was all imported from Japan and was a very expensive item," recalls Ratan. Till the early 1980s, jsl, then the only producer of stainless steel in the country -cashed in heavily on the Indian penchant for steel utensils. But by the mid-80s, when smaller units got in to the cold rolling of stainless steel strips, the going got tough for jsl. "Seeing a market for cold rolled mild steel used for making glavanised sheets and oil barrels, we immediately made a change-over, adding other grades like carbon, galvnised, sponge iron. We even ventured into power. This was good, as the investment climate then backed such projects,' says Ratan. Like most entrepreneurs who sprang up in the '70s and '80s, the Jindals raised money from investors to set up new projects. Over the last 12 years, jsl has visited the capital market over five times - including two international offerings - raising approximately Rs 2,000 crore in the form of equity and debt.

"This has now changed. Investors want a more focused company. If you have three to four different products, the investors get confused while valuing the company. Hence, based on the investor perception, we restructured with a clear focus on stainless steel," ads Ratan. He explains the rationable behind jsl's hive offs: "While on our road shows abroad, investors showed preference for 'more focused' companies".

The other historical reason for clubbing new projects into one company was the fact that putting such investments under one roof led to tax benefits, duty protections and other fiscal incentives. The system then encouraged entrepreneurs to promote new ventures in the same company. "This has more or less disappeared and does not hold good anymore, "explains Arvind Parakh, senior vice president, corporate finance jal. Parakh, who joined the company in 1996, has been a keen force in the restructuring move.

There are other reasons for the recast at jsl. According to N.C. Mathur, director, corporate and international marketing, the stainless steel market continues to improve. Though stainless steel accounts for a mere 2.2 per cent of the total world steel production, it accounts for over 10 per cent of the total revenue for the steel industry. With the pick-up in Asian demand, product prices have gone up against other steel product segments. In the international market, the prices of cold rolled ss a years ago was $1,200 per tonne, it peaked to $1,800 in March 2000 and currently hovers around $1,600. Besides, the global stainless steel supply and demand fundamentals have improved dramatically in virtually every region and product line. "Therefore, we have stuck on to the stainless steel segment of the steel industry. The apparent consumption of ss in India over the last eight years has grown by 12 per cent as against a growth rateof 6 per cent for the entire steel industry." Says Mathur.

Till March 1998, jsl operated with five units: one stainless steel unit in Hisar (Haryana), a ferro chrome outfit in Visakhapatnam, a sponge iron plant, an engineering unit and a power plant in Raigrah and Raipur (both in Madhya Praesh) besides a cold rolling division in Vasind (Maharahtra). "In order to streamline jsl and its operations, to concentrate on its ss business, the company mooted a scheme of restructuring that envisaged the sale and spin off of certain divisions of its historical businesses. The first was the hiving off sponge iron along with power and engineering, all located in Madhya Pradesh, into a new company: Jindal Steel and Power Ltd (jspl). The scheme was subsequently implemented and has been split in a ratio of 3:2. jsl 's equity of Rs 31.52 crore was split and Rs 12.60 crore transferred into jspl with the residual capital of Rs 18.92 crore remaining with jsl, "explains Ratan.

The next aspect of the reorganisation of jsl, was the selling of the cold rolling facilities at Vasind. Chalked out as part of the restructuring move, this has to be sold to group company-Jindal Iron and Steel Company (jisco) - for Rs 65 crore. An all-cash deal which was subsequently converted into 40 per cent cash and 60 per cent to be paid in the next three years. Though the shareholders and creditors duly approved the move - and jisco was ready to buy the cr facilities - bankers SBI, who had given jisco working capital loans, had reservations about the timing of the move. Hence it could not be sold. "We then planned a fresh scheme of restructuring, and hived off Vasind unit as a subsidiary of jsl, "says Ratan.

Following the divestment of the Madhya Pradesh units, jsl at present comprises the ss facilities at Hisar, the ferro chrome (a key component used in the mnufacture of ss) unit at Visakapatnam and the mould steel cold rolling facilities at Vasind. With this, the company is the largest integrated producer of stainless steel (ss) in India, and boasts of a capacity of 2.50 lakh tones per annum (tpa) in terms of volumes of molten stainless steel, 3 lakh tpa of hot rolling capacity and 30,000 tpa of ss cold rolled products. In addition, the company is also the sole producer of 10,000 tpa of blade steel in India and one of four producers of this grade in the world.

Ever since jsl's focus on stainless steel gathered momentum, the financial health of the company has stolen a march over other steel companies. For the last three years to March 2000, jsl's sales figure logged a compounded average growth rate (CAGR) of 30 per cent to Rs 1,064.10 crore. By increasing value addition and other cost-cutting measures, jsl enjoyed a good operating margin, which for the same period grew at a CAGR of 46 per cent to Rs 221.50 crore. Against this, the top line CAGR for the steel industry during the same period was 10 per cent, while the operating profit was a negative figure.