As Jindal brothers’ businesses overlap, competition rises
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Mumbai: In the 16 years since the late O.P. Jindal divided his iron and steel business among his four sons, Sajjan Jindal and Naveen Jindal have plotted their own individual paths to the top of the industry.
Sajjan Jindal, at 54 the eldest of the sons, followed a high-speed expansionary strategy while Naveen Jindal, at 44 the youngest and clearly the more conservative of the two, chose to tie up his raw material supplies before proceeding with growth plans.
But as the two Jindal empires grow, their paths are crossing more often, often pitting the brothers against each other, but also raising the bar on competitiveness and performance across the entire steel sector.
Now, Sajjan Jindal’s JSW Steel Ltd and Naveen Jindal’s Jindal Steel and Power Ltd (JSPL) are in competing talks to buy parts of the insolvent Italian steelmaker Lucchini SpA, Reuters reported on Wednesday, citing unnamed people.
Whoever succeeds will gain a foothold in Europe, where Tata Steel Ltd has a big presence after its 2007 acquisition of Anglo-Dutch steelmaker Corus Group Plc.
The bid for Lucchini comes soon after the brothers made similar competing bids for UK steel trader Stemcor Holdings Ltd’s Indian assets, a 4 million tonne (mt) pellet plant and two mines in Odisha.
Both the Italian and Indian assets are fraught with risk—Lucchini has a blast furnace that has been closed because of environmental issues. In Odisha, companies including Stemcor face the risk of a potential Supreme Court ban on mining; the apex court is hearing a case related to illegal mining and environmental violations by miners in the eastern state.
Yet, in their race for rapid growth, both brothers have been willing to take risks.
Sajjan Jindal and Naveen Jindal have taken competing positions on other fronts as well.
In the last few months, they have launched media campaigns on opposite sides of a duty hike debate. In January, the newly formed Pellet Manufacturers’ Association of India, of which JSPL is a part, wrote to the media, campaigning for a removal of the 5% export duty on iron ore pellets imposed a day earlier. Pellets are processed tablets of iron ore that can be used as raw material for steel making.
That’s not surprising. JSPL has a captive mine, enough iron ore and wants to export its surplus.
On the other hand, Sajjan Jindal’s JSW Steel, which doesn’t have any captive iron ore supply, lobbied for a 30% hike in the export duty on iron pellets, writing a note to the media in February.
“The Jindal brothers are seen at loggerheads, but the fact is they are looking at protecting their own shareholders’ interests and that is why they are campaigning for their own individual benefits,” said Giriraj Daga, senior metals analyst at Nirmal Bang Equities Pvt Ltd. “These are signs of increasing stress in the steel industry. These companies are as desperate to tie up raw material supply as for markets for sale of their products.”
Sajjan Jindal and Naveen Jindal declined to be interviewed for this story.
“The Jindals always claimed they operated in different regions and their product categories were different. But as their businesses have grown, they have started to overlap,” said a mining executive who did not wish to be named. “So they do compete.”
The Jindal brothers’ desire to grow and expand has heightened competition in the entire Indian steel sector that produced 78mt of the alloy in 2012-13. Their ambition has led to early adoption of new technologies and has prodded older and more established companies into fast-tracking their own expansion and modernization plans, analysts say.
“Jindals have been more aggressive with capacity expansions and that has forced old guards Steel Authority of India (Sail) and Tata Steel to add capacity to remain relevant,” said Rakesh Arora, managing director and research head at Macquarie Capital Securities (India) Pvt. Ltd.
Sajjan Jindal has expanded through organic and inorganic means. What started as a 1.2mt steel plant in Karnataka has grown to 14.3mt capacity across three locations, the third largest after Tata Steel’s 29mt and Sail’s 16.62mt. JSW has projected a capacity of 40mt in the next decade, which matches Sail’s target.
Naveen Jindal, who inherited the Raigarh plant in Chhattisgarh (the hived off-Jindal Strips sponge iron division) and Jindal Power, has only lately starting focusing on steel.
Steel has been a small business for him with the 3mt Raigarh steel unit, but the company is in the midst of an expansion drive, targeting a capacity of 20mt in the next decade.
To be sure, the brothers have not been the only ones to have expanded their steel businesses in an economy that was expected to continue growing at an 8% pace before the onset of the global financial crisis in 2008. Tata Steel started working on a new plant in Odisha in 2006 and acquired Corus the following year. Sail embarked on a Rs.70,000 crore expansion plan in 2010; its total capacity will jump to 24mt in the next fiscal.
“Everybody has expanded. But these two companies have tried to bring in new things—new technology, new product lines and innovative ways of marketing,” said Chirag Shah, director of research at Barclays Capital. “They have taken the leap of faith.”
JSW Steel was the first to bring in the cheaper and environmentally friendly Corex technology into India as early as in 1995 at its Karnataka plant. Corex is a smelting reduction process that eliminates the need for sinter and coking plants for treating iron ore and coal, which is necessary with the blast furnace technology.
Jindal Steel has adopted modern coal gasification technology at its Odisha plant that can convert coal into combustible gas, reducing costs. The coal gasification plant, ready to be commissioned, will turn non-coking coal into syn-gas that will be used to produce sponge iron that will in turn be used to make steel.
There have been bold steps in the market as well. JSW Steel has rolled out an ambitious steel retailing business with plans to have 5,000 stores in five years to cash in on rising rural and agricultural consumption.
The third area where the Jindals’ paths cross is in geographical and product segments. JSW Steel has plants in Maharashtra, Tamil Nadu and Karnataka with a focus on flat steel—used mainly for automobiles and consumer goods—that it sells in south Indian markets. JSPL is focused on north India with plants in Chhattisgarh and Odisha primarily making long steel used for construction and rails.
But over the last one year or so, Sajjan Jindal has announced new plans or reiterated existing plans for building new factories in the east—in Odisha, West Bengal and Jharkhand—which is the younger brother’s turf.
Naveen Jindal has plans to start producing flat steel for automobiles that will put him in competition with the elder brother. To be sure, an expansion in new products or geographies will also mean direct competition with the older firms—Tata Steel and Sail.
“We are aiming to be highly profitable and sustain the business cycle,” Seshagiri Rao, joint managing director and group chief financial officer of JSW, said.
That isn’t going to be easy.
Sales growth is slowing and profitability is increasingly under threat owing to overcapacity, competition and economic slowdown.
Operating margins of all big steelmakers have shrunk in the past five years. JSPL’s margins have slipped by 10 percentage points in the five years to fiscal 2013 while JSW’s fell by 11 percentage points.
In fiscal 2014, JSPL’s consolidated profits after tax (net of minority interest and share of associates) fell 34.3% from a year ago to Rs.1,910.36 crore. JSW Ltd’s fiscal 2014 profits are yet to be announced.
“The competitive scenario is anyway intensive in the steel industry,” says Chirag Shah of Barclays. The competition between the brothers “will just change (shrink) the margins since steel is just a margins game.”
Given that steel is in a downcycle—because of concerns such as the likely Chinese slowdown—investors would be looking at the balance sheets of these two companies as well. J.P.Morgan India Pvt. Ltd estimates a debt-to-equity ratio of 2.41 times for JSW at the end of this fiscal.
JSPL’s consolidated debt-to-equity ratio stood at 1.51 at the end of fiscal 2014.
Beyond financials too, both have confronted their share of trouble. Naveen Jindal’s Bolivian iron ore plan failed, Sajjan Jindal’s efforts to secure iron ore has backfired. Both have got into hassles with the Central Bureau of Investigation over their raw material procurement methods, and some coal blocks of JSPL have been cancelled. This is something which could affect their ability to raise capital and expand.
Still, the Jindal brothers have cooperated for mutual benefit as well.
“We exchange a lot of information technology, knowledge, experience... For example they are one of our customers. There are a lot of products we sell to them. We also buy products from them. We have very positive relationship with all the Jindal group of companies,” Ravi Uppal, JSPL’s managing director and chief executive officer, said in a recent interview about ties with JSW Steel.
That doesn’t mean the brothers will shy away from competition; their rival bids for Lucchini testify to that.