Mumbai: India’s second largest steel producer by domestic manufacturing capacity, JSW Steel Ltd, is considering acquisitions in the value-added steel segment as it seeks expansion and turns its sights to the local market, said Sajjan Jindal, vice-chairman and managing director.

Value-added steel refers to products such as pre-coated and galvanized steel that would add to the profitability of JSW Steel, which last week reported a 6.4% drop in net profit and 10.5% drop in sales during the quarter ended 30 June from a year earlier.

Planning big: JSW’s Sajjan Jindal plans to stoke demand by setting up retail outlets to sell the the firm’s products directly to the consumer. Ramesh Pathania / Mint

Essar Steel Ltd, JSW Steel and Tata Steel Ltd are in the fray to acquire Shree Precoated Steels Ltd, a company promoted by the Ajmera group, a Mumbai-based real estate developer, according to recent media reports.

Asked whether Shree Precoated was on his radar, Jindal said: “We did look at it. It is on our radar, but we are not flying towards it yet."

“That could be one of the options," he added. “There are so many others. There are 20 other companies in the sector."

Stand-alone manufacturers of value-added steel cannot survive, said Jindal; only fully integrated steel operations can survive.

JSW Steel, in a span of about 10 years, has become India’s largest private sector steel maker by domestic capacity, overtaking Tata Steel. But Jindal is more keen that his company be known as the world’s lowest cost converter of steel from iron ore.

“Our conversion cost is probably the lowest in the world. It is about $95 (Rs4,579) per tonne. Anything below $100 per tonne is among the lowest," he said. “The Chinese steel makers do not go public with their costs and I don’t know how the Russians arrive at their costs (for manufacturing steel)."

JSW enjoys several advantages over its competitors although it procures a bulk of the raw materials it requires at market rates. “JSW Steel is the only major steel producer based in southern India that enjoys proximity to customers in both southern and western regions," says a 5 June report by Motilal Oswal Securities Ltd. “This is a significant advantage because inland freight costs are high in India due to poor infrastructure."

The company’s consolidated debt-equity ratio is about 2:1, considered high in the sector.

Chintan Mehta of Asit C Mehta Investment Intermediates Ltd in a 9 June report on JSW wrote: “With constant pressure on steel prices, the high debt burden could erode the company’s profitability and hence is a major concern."

Jindal understands this. He said his company is targeting a debt-equity ratio of 1.5:1, by the end of the fiscal year. The company has armed itself with approval to raise $1 billion (Rs4.82 crore) through a sale of securities to qualified institutional buyers. JSW will launch the sale when the timing is right, said Jindal.

JSW’s US operations have caused the company pain. Demand has dropped at its US mills amid the global recession. The US pipe mill is running at 10% while the plate mill is running at 25% of production capacity as a result of weak US demand.

“If we could take the plate mill plant to 50% and pipe mill to 25% , we would be very happy," Jindal said.

“There is no demand (in the US market)," he said. “We are looking at exports from there, but it is not a low-cost production base. We hope that the US market will turn around."

But Jindal said his company’s rapid domestic expansion “means the drag on our books due to the US operations will be marginal".

In Mozambique, the company has shelved development work on a coal mine. Jindal said the coal content was found to be of poor quality. In Chile, the company will take a decision on prospective investments after October, he added.

IDFC-SSKI’s Chirag Shah and Ritesh Shah wrote in a report: “On account of the sharp slide in raw material (iron ore and coking coal) spot prices, JSW has put on hold its iron ore and coal mining projects in Chile and Mozambique, respectively."

In a change of strategy, JSW, which is ramping up steel making capacity, will be concentrating more on the domestic market in the coming months. The company plans to raise capacity to 11 million tonnes (mt) from 7.8 mt by 31 March 2011. By 2020, Jindal wants to raise manufacturing capacity to as much as 32 mt.

This year JSW plans to manufacture 6.5 mt.

“Demand for steel in India is very strong. More supply creates more demand," Jindal said.

Jindal also plans to stoke demand by setting up JSW Steel retail outlets in “every nook and corner" to sell the company’s products directly to the consumer.

Last year, JSW reduced exports under government pressure. This year, it needs no prodding.

“We have taken a conscious decision to gradually reduce our exports and focus more on the domestic market," Jindal said.

JSW’s exports last year comprised about 28% of total sales. The quarter ended 30 June saw the share of exports halve to 14%.

“We are now focused on India. India is our growth market. This market needs to be exploited," Jindal said. “We must really add capacity in India rather than add capacities overseas. One can run a lot faster if you are unburdened by the past."