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Steel: No looking back - Views on News from Equitymaster
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  • Jun 6, 2003

    Steel: No looking back

    ‘No looking back’ is what the steel industry would want in FY04. It would rather look ahead and want to keep going strong. Year FY03 saw the fortunes change for the steel industry. The industry’s performance was nothing less than spectacular and indications are that going forward, FY04 could well be another good year for the industry, if not better than last year. However, the performance of the industry was a result of more than one factor. Before looking at some of the factors, let us look at a brief performance snapshot of some key players in the industry.

    Looking back…
      Sales Operating profits
    (Rs m) FY02 FY03 Change FY02 FY03 Change
    SAIL 140,645 174,472 24.1% 3,488 20,209 479.4%
    TISCO 67,079 87,213 30.0% 12,712 23,020 81.1%
    Essar 20,136 30,131 49.6% 1,006 4,741 371.4%
    JISCO 10,435 15,567 49.2% 831 3,116 275.0%

    Domestic steel industry registered a strong growth in FY03. Total steel consumption grew by a little over 5% as compared to a 7% rise in finished steel production. Exports also played an important role, growing by 37% YoY. Industry vibrancy benefited players immensely. As can be seen from the table above, steel companies managed to post huge topline growths in fiscal FY03. The primary cause for this rise has been the sharp upsurge (40%-50%) witnessed in steel prices. Undoubtedly, this rise in steel prices was a factor of strong demand, but prices played a bigger role towards topline growth.

    Efficiency bonus…
      Expenditure (% of net sales) Interest (% of net sales)
      FY02 FY03 FY02 FY03
    SAIL 97.5% 88.4% 11.1% 7.6%
    TISCO 81.0% 73.6% 5.5% 3.5%
    Essar 95.0% 86.4% 34.5% 18.4%
    JISCO 92.0% 80.0% 11.4% 6.7%

    However, it would be unfair to take away credit from steel companies by saying that their performance was primarily a result of strong steel prices. Undoubtedly, higher prices did contribute to the improved profitability, but enhanced operational efficiencies also had an important role to play in delivering the performance. The above table indicates the improvement on a couple of parameters viz. operating expenditure and interest. Reduction in expenditure was achieved by improving operational factors like raw materials consumption and power. Employee rationalizing exercise (VRS) also yielded positive results on the staff costs front. On the other hand, interest outgo was curtailed by undertaking a huge debt restructuring exercise. Taking advantage of the prevailing low interest rates, various companies restructured their high cost debts at lower interest rates, while they also managed to retire a part of their debt. The industry also received ample support from the government and financial institutions on this front.

    The industry is hopeful of continuing its growth story in the current fiscal also. However, it would be a slower rate due to the high base effect in FY03. Amongst the various causes for optimism, the primary reason seems to be the continuing growth in China. It must be noted here that about 20% of world production and 25% of world consumption is controlled by China. Hence, it has a telling effect on the global steel industry and consequently the prices. The country is likely to clock a plus 7% growth rate in the medium term. It is likely to maintain its consumption since the country has started huge construction projects in preparation for the Olympics 2008.

    Apart from that, Indian steel companies are actively looking at exploring opportunities in the international markets. Steel export growth is likely to continue at a firm pace. This is because Indian steel companies have an edge over their global peers on the cost front, as the operating costs are comparatively lower in India. Easy availability of raw materials (iron ore) and cheap labour provide major cost advantages to domestic steel companies. Concerns of lack of modernisation/technology, lower labour productivity and higher power costs also seem to be taking a back seat. Moreover, benefits of reduced costs of debt are likely to accrue for some time to come. Thus, for now, positives outweigh the negatives and steel industry looks set for a buoyant FY04. But beyond that, once the China factor fades, then the true resilience of Indian steel companies will be put to test.



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