Tune in to our chat with Mr. Satish Kumar Bandi, Chairman & Managing Director at Steel Exchange India Ltd to know what’s aiding the business, what’s driving turnaround and what’s in store for the company in coming years!
Karunya Rao: The MD of Steel Exchange India Limited joins us to talk about what’s aiding the business, what’s driving the turnaround and what’s in store for the company in the coming years. Mr. Satish Kumar Bandi is helming the company and is here with us today. Mr. Bandi, thank you so much for taking time out and joining us.
Satish Kumar Bandi: Thank you Karunya for giving this opportunity. It’s a pleasure to be associating with you in this. Likewise and you know we’ve seen a very impressive turnaround in the business.
Karunya Rao: Your revenue has been scaling up and the stock market has also rewarded the company. Your stock has seen a 60 percent spike in the last six months. But of course, all of it matters only if you can not only turn around but also grow the business in a sustainable way. Tell us where is Steel Exchange headed from here and what kind of growth do you foresee?
Satish Kumar Bandi: Actually, we have acquired some companies and put this all together. And we went through a lot of hardships in getting to this stage and because it was just what we acquired was just a base shell. Only because of the locational advantage we had and the proximity to all the raw material resources was what made us acquire this asset.
Then after acquisition, the steel markets went bad. Then Covid came. So, there were multiple factors but we weathered all those and today we are where we are. Now the company is on a growth path. So, by end of September, we’ll be completing our upgradation and we’ll be increasing the efficiency and the production capacity will be around half a million tons is always presently at 0.3 million tons.
So once the efficiency comes into play, then the per ton of steel production comes down very much and there’ll be a lot of difference in terms of EBITDA. So, currently we are doing it about 9 to 10 crores per month of EBITDA which after November is expected to go to about 18 to 20 crores of EBITDA provided the markets are steady. Otherwise, we get the figure of about 15 crores is I mean just a normal thing and the second part for of the bottleneck is that we have got high-cost debt. Our interest costs are being a lot of the so we are also going for some low-cost funding like equity funding low-cost equity funding.
Karunya Rao: By when is that expected to come in if at all?
Satish Kumar Bandi: We are going for a rights issue and we hope to do that somewhere around July-August for about 150 crores to take care of our working capital requirements and because the company has been neglected for so many years because of cash constraints, we are refurbishing the whole thing.
We already incurred about 60 crores and we need about 20-30 crores more or less at face value. But we are confident that because everything is already in place, by September, from the third quarter onwards, we’ll reap the benefits of whatever effort we are putting and steel markets have also improved now.
Karunya Rao: If we look at how the company was till about five years ago, you were generating losses but now things are picking up…you’re seeing some pre-tax profits, your ROCE has improved quite well. Where are the growth returns mainly coming from which segments are driving this recovery?
Satish Kumar Bandi: If you see the growth, it is purely from production aspects – from the sales – only from the production of steel. And we are a premium brand in our local interval plan because all our production is sold in the local interval, and we got considerable demand. Actually, we will always have a backlog of orders to execute because people pay in advance. Slowly we are improving our cash flows. So as the cash flows are improving, the margins are improving the production capacities are improving – not to the desired level – but currently we are doing about 18,000 to 20,000 tons which from June on, will be 25,000 tons and come November, we’ll be doing around 5 lakh tons. That means around 30 to 33,000 tons.
Karunya Rao: Okay so just going back to what you were saying about refinancing your debt…there have been some recent reinvestment activities as well. How is that capital being utilized and let’s say tomorrow – like you were saying that some more money from investors might be coming in – how do you plan to utilize those funds what’s the what’s the idea there?
Satish Kumar Bandi: We had a very high cost rate of around 22 percent and it was around 450 crores over a period of four years. We had a recent debt switching and now we have got around 400 crores of debt – 375 crores to be specific – and at around 20 percent we have got it now which is also pretty high still. So now we are going for an equity investment. We’re looking for equity of about 125 to 150 crores by way of rights issue. So basically all that we are raising is to maintain our cash flow because today we are not able to maintain our inventories even. So primarily it will be used for working capital and reformation of this thing so we can generate more EBITDA and we have a cash sweep mechanism with our lenders, where we want to retire the debt. And once we have a lock-in period with them, for about six months or a year or so, when things fall in place and everything is what you achieve then we can go for a very low cost debt to banks or something that will really make a lot of difference in EBITDA.
Karunya Rao: Since you are operating in a cyclical sector…in the last few years the financials were also affected by unfavourable industry cycle or there was reduced demand for steel and other things. But now, like you said, things are looking up. The steel industry is looking ripe for revival. So, how do you plan to make the most of it because up until now even though the steel demand bounced back very sharply, your company’s performance is still lagging compared to some of your peers. So, how do you plan to change that?
Satish Kumar Bandi: What has been our bane was high-cost finance and we didn’t have the required cash or finance required to support the production. But now we are slowly improving – from zero we have brought it to a decent level and probably with another 100-150 crores of rights issue, we will be in a state to maintain the required inventory of raw materials. Today, we run it like a just-in-time inventory, which is very difficult for the steel industry. So we get caught in the cycle – your raw metal price increase but because you are in advanced booking, you have to meet all of them so you make a loss and once the benefit comes, we don’t get the benefit. Even if the steel price increases, we have already sold it at a lower price – so these things were hampering us. But now it is improving. For us, the cyclicality of steel was never an issue because we operate in a limited market where our product has got sufficient demand. So raw metal price fluctuation is what decides the EBITDA margins and when demand is very high, you get a premium also for it. But basically raw material drives the raw metal cost and availability drives the price.
Karunya Rao: Okay when you said you were looking at getting in some investors.. last year also we all read the news about JSPL looking to buy stake in the company and now you’re also saying that you’re talking to some investors. So is inorganic expansion going to be the main plan or main strategy to expand from here on? Let’s say you get the required capital through inorganic expansion or through other routes – what is the bigger picture what is it that you envision for the company in the in the next four-five years?
Satish Kumar Bandi: Basically, we have an infrastructure ready where you can scale it to 1.5 ton 1.5 million ton steel plant in about 18 months to 24 months with around 1500 crores of investment that is required. Today, if you’re talking of a 1 million ton steel plant, you’re talking of a minimum in the investment of four thousand five hundred crore rupees and a time frame of around three-eight years depending on the bottlenecks. Luckily, we got the infrastructure ready where you can set. We only had to buy the equipment, put it and get the required environmental clearances, so site maintenance can be done. At that juncture (during talks with JSPL), we wanted somebody to help us scale up to that level but things didn’t pan out because we thought that we are more valuable. I mean the current valuation of our company is not right, we say it should be much more based on the asset value and the proximity to raw materials in the port and already set up infrastructure to scale it.
So we thought because for 500k tons we can do it ourselves. So with once we do half a million – 500k means five lakh tons – once we reach that half a million tons then probably we are talking of a bit of around 250 crores every year. So at that juncture, we will properly plan and we are already doing the legwork and the pre-feasibility report and the drawing board is active for that 1.5 million to scale it to 1.3 to 1.5 million tons so we intend to go by the DRA route adding 400-500. I mean, it’s a thousand tons DRA kilns and then going for two electric arc furnace in the port. Once we achieve that as per plan, then we are talking of big EBITDAs and you are in competition with big wigs, and for us the advantage will be focusing more on specialty steel – that is the idea in future – small batches so that is where we put the small arc furnaces of going for very heavy arc 100 tons regular batch so you can get higher quality control and small quantities of required material can be made like premium defence grades and high carbon steels then premium alloy steels all these things.
Karunya Rao: All of this sounds very exciting and looks like you have a lot in the pipeline in the coming few quarters to look forward to but if we look at it from a market standpoint. As an investor, what should I expect in the coming years? How can I as an investor reap the rewards from here on because already the stock has run-up 700 percent but you’re still thinking that it’s not reached the valuation which you would have liked.
Satish Kumar Bandi: With small investment, you can scale it to a very high capacity plan and then we are talking of anywhere between 800 to 1000 crores per year. With the kind of setup we have, it was very easily scalable if it was not for several negative factors like Covid, market recession, then funds availability – what we planned, didn’t come in time. But now, we’re slowly reaching there. I can’t say we are fully there and people know this industry is a very transparent industry. It is a very old sector, not something where you do some disruption and you review valuations and all. So basically, our peers are trading at around 13 or 14, some are around 18 so that is a gap which we can bridge. Everybody looks at it this way if we can do it, how soon we can do it and your team expects to reach your goals. We are going for right issue that we planned – we’ll do it in August. You really don’t know how stock markets will process various events like Israel conflict.
When we went for this acquisition long time back, we needed 150 crores to acquire Goldstar Steel and Alloys, which we acquired. So we wanted to go for a GDR ADR issue as suggested by the consultants and that time, the Lehman Brothers crisis happened and the market went bust. We couldn’t raise money, so we had to do it internally. The struggles started from there, then the acquisition took a long time in BIFR. It’s a government body, we thought it will be done in two years but it took almost five years in 2000. Once we started in 2007, we could we could get it only in 2012 from the BIFR. So in five years’ time, the existing promoters, they create a lot of havoc because for them also it is getting delayed. So all these bottlenecks come, then we thought okay we have reached there then based our plan, we had some excess power capacity, which we were selling at a very high price and suddenly the State Bank operation happened. But now things seem to be on track – we have weathered all those storms. So we are very confident. If any other storm comes, we’ll weather it. There might be a small delay but it won’t stop us from achieving what we want.
Karunya Rao: Well that sounds very encouraging and now we have a better clarity on what’s been going on at SEIL. Thank you so much Mr. Bandi once again for speaking to us and sharing your game plan to expand and grow the business.
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