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Steel: 3QFY09 review

Feb 9, 2009

The BSE-Sensex is down by more than 50% since the start of the year 2008, while the BSE metal index is down by around 75%. The investors, on account of economic recession in the US and European markets and the continued slowdown in the domestic markets have made a hasty retreat from the steel pack. Steel industry is an important component of the metal index. In this article, we will discuss the consolidated performance of the major companies in the steel sector during 3QFY09. For this purpose, we have considered three major players in the industry viz. Tata Steel, SAIL and JSW. These companies constitute more than 40% of the market share of steel in India.

Consolidated Performance of Steel companies in 3QFY09
(Rs m) 3QFY08 3QFY09 Change
Net sales 170,703 165,495 -3.1%
Expenditure 113,635 136,870 20.4%
Operating profit (EBDITA) 57,069 28,625 -49.8%
EBDITA margin (%) 33.4% 17.3%
Other income 3,965 5,643 42.3%
Interest (net) 4,977 6,893 38.5%
Depreciation 6,951 7,848 12.9%
Profit before tax 49,106 19,528 -60.2%
Extraordinary income/(expense) 479 (1,268)
Tax 16,271 7,703 -52.7%
Profit after tax/(loss) 33,314 10,556 -68.3%
Net profit margin (%) 19.5% 6.4%

The consolidated topline declined by around 3.1% YoY on the back of lower sales realizations and volumes growth during the quarter. The quarter was witness to a severe contraction in demand from important consumers of steel like the auto and the construction sectors. The lower demand in turn also put pressure on prices, thus resulting into a double whammy for steel companies.

The operating profits declined at higher rate of 49.8% YoY as compared to topline as operating expenditure grew at a higher rate during the quarter. This was primarily on account of the effect of higher prices of coking coal contracts entered during the first half of 2008 that increased the raw material costs of companies like Tata Steel and SAIL. The operating margins declined by 16.1% during the quarter.

The bottomline declined at a still higher rate of 68.3% YoY on account of higher interest and depreciation charges. Had there been no growth in other income and the decline in taxes, the bottomline decline would have been even worse.

Though steel companies have fallen off the radar of investors over realisations as well as demand related fears, it may be noted that if India needs to grow at a sustainable rate of around 7% over the long term, steel will have to play a vital role. It should be also considered that India is still a net importer of steel. Thus, taking these factors into account, investment in steel stocks, especially at current depressed valuations are likely to yield attractive returns from a long-term perspective. However, investors need to take into account the company's performance over a complete steel cycle as well as its overall cost structure.

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