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Steel: Will government push help?

Jul 7, 2009

The steel sector witnessed a roller-coaster ride in FY09 wherein the first half of the fiscal witnessed an extraordinary spurt in demand due to an expansion in the oil and gas sector, large infrastructure spending coupled with growth in housing, consumer durables and auto sectors. However, the third quarter experienced a significant demand contraction on account of the global financial crisis, which tightened the overall liquidity conditions. This situation prevailed until the Reserve Bank of India and the Central government announced various monetary and fiscal initiatives and thus, the demand once again started picking up during fourth quarter of fiscal.

In this article, we will discuss the FY09 consolidated performance (of only domestic operations) of the major steel companies. For this purpose, we have considered three major players in the industry viz., Tata Steel, SAIL and JSW Steel. These companies constitute more than 40% of the market of steel in India.

Consolidated performance of Steel companies in FY09
(Rs m) FY08 FY09 Change
Net sales 713,252 826,826 15.9%
Expenditure 483,045 615,354 27.4%
Operating profit (EBDITA) 230,207 211,472 -8.1%
EBDITA margin (%) 32.3% 25.6%
Other income 18,028 23,130 28.3%
Interest (net) 14,779 22,032 49.1%
Depreciation 27,573 30,862 11.9%
Profit before tax 205,883 181,708 -11.7%
Extraordinary income/(expense) 4,309 (7,741)
Tax 70,672 55,616 -21.3%
Profit after tax/(loss) 139,520 118,351 -15.2%
Net profit margin (%) 19.6% 14.3%

  • The combined topline grew by a robust 16% YoY on the back of higher sales realisations during the first half of the fiscal. During the year, the sector recorded a wild swing in product prices that reached their all-time highs in the first quarter, and subsequently dropped by more than 50% during the third and fourth quarters. However realisations for the fiscal stood higher.

    As per the CMIE, CRC (cold rolled coil) prices in Mumbai were higher by 17% YoY in FY09 and since most of the other products also follow a similar pattern, average realisations for the industry also came in higher than previous year by a similar rate. On the volumes front, the saleable steel volume declined by 2% mainly due to an 8% fall in volumes of SAIL. However, Tata Steel and JSW Steel managed to grow their volumes by around 10% and 1% respectively.

  • The combined operating profits of these three companies declined by around 8% YoY as operating expenses grew at a higher rate as compared to the topline growth during the fiscal. The operating expenses grew by around 27% YoY mainly on account of higher raw material costs. The rise in raw material costs can be attributed to the impact of coking coal prices contracts entered by the companies during July 2008 when their prices were at the peak. Thus, the operating margins contracted by 6.7%, to 25.6% during FY09.

  • The combined net profits declined at an even higher rate of 15% YoY led by contraction at operating levels coupled with higher interest costs during the fiscal. Moreover, extraordinary expenses booked on account of forex losses had an adverse effect on the net profits.

What to expect?
Currently, with the government’s increased emphasis on infrastructure in order to restore the ailing economy, we believe the steel sector is likely to experience a huge growth over a long term. As a matter of fact, India’s per capita steel consumption continues to be low at 46 kg as against the global average of 198 kg. Thus we believe that the potential ahead for the country to raise its steel consumption is high. Investment in steel stocks from a long-term perspective is likely to yield attractive returns. However, investors need to take into account a prospective company’s performance over a complete steel cycle as well as its overall cost structure.

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