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Cover Story
 

Enter ‘Tactical’ Strategy
In a Superlative & most Insightful analysis, B&E Documents how Corporate Leaders have Transformed their Organisations & Implemented continental strategic shifts that have Rewritten Global Management case books
Issue Date - 17/02/2011
 
Gaining temper!

Jspl immensely benefitted from timely backward integration which has enabled it to make a potentially much stronger bet into the power sector
By : Virat Bahri

Just like steel goes through extreme conditions of temperature and pressure before being ready to market, steel companies globally have been going through tremendous upheavals in the recent past, be it the fluctuating raw material costs, errant demand from China in particular, recessionary impact, commoditisation or the spectre of being on the wrong side of M&As.

In the midst of these trends, Jindal Steel & Power Ltd. has had a particularly interesting track record, which can be gauged by the fact that it was adjudged the second highest value creator in the world last year by Boston Consulting Group (BCG) last year, on the parameter of Total Shareholder Return for the years 2005-2009. And it is not a mere coincidence that the company has been on its toes and ahead of many of its peers in terms of identifying new opportunities and capitalising on them.

Of primary importance has been the vertically integrated model that the company has followed. JSPL decided in advance that raw material security would be a major red flag in the future, and has been scouting overseas to secure raw material linkages for itself. It faced considerable challenges in securing the mining rights for the El Mutun mines in Bolivia, which is one of the largest reserves of iron ore in the world, with reserves of 40 billion tonnes (JSPL will make investments of $2.1 billion in developing the mine over a period of 8 years). They have similarly secured raw material linkages in Africa, Indonesia and Australia, and are still looking for more. Global assets have immense underlying risk, but JSPL has hardly shown a lack of appetite for the same. Interestingly, this was one area that opened up a whole new business opportunity for JSPL into power, and encouraged it to move beyond captive power to power trading. John Elmore, Director (Strategy & Business Coordination), JSPL, comments to B&E, “You don’t try and divert too much from your core, otherwise you have a tendency to fail. We have been leveraging our strength in raw materials. So power actually played very well to JSPL’s strengths because of the coal mines and our ability to get raw materials.” The company set up India’s first private mega power plant when it set up the 1000 MW thermal plant in Raigarh in 2007 with investments of Rs.43.1 billion.

 
JSPL posted net sales of Rs.110.83 billion in FY 2009-10, a growth of 2% yoy, but what is truly interesting is that its profits stood at Rs.36.34 billion, a growth of 26% yoy. Also, the power business contributed Rs.23.18 billion in terms of profits, testimony to what the move to power is achieving for the company. In the period from 2004-05 to 2008-09, net sales and other income has grown at a CAGR of 36.1% while PAT has grown at a CAGR of 31.4%. Net worth of the company, in turn, has grown at a CAGR of 42.2%.

Going forward, the company expects to have a much larger play in both steel and power. On the anvil is a 2400 MW thermal power plant to supplement the Raigarh plant and a 2610 MW power plant at Jharkhand. It also plans to set up 6100MW hydropower plants in a JV with the Hydro Power Development Corporation of Arunachal Pradesh Limited (HPDCAPL).

The critical challenge for the company will be how to manage this growth. As John explains, “As JSPL gets bigger, factors like execution and how do you institutionalize some of the things that you’ve done become important, as the promoter cannot stay involved in every aspect of the business.” JSPL is also undergoing a brand repositioning as it seeks to strengthen its base beyond India. On the other hand, it also consciously avoids making huge expansions in one go, lest the cycle may turn.

While they have not yet got into retail like Essar, the company is also undertaking intense customer contact initiatives, which Naveen Jindal is himself leading. The critical inflexion point, which is the Rs.7 billion listing of their power business, is expected to happen some time in May-June this year. Provided the listing goes as planned, JSPL would be able to unleash a spectacular momentum in the power business, which will assume much greater significance over time. And it is all about analysis and evaluation of trends well before they occur. As John says, “If you say that you have to make a change for today, you are already late!”

          

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