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Steel: Sales up but margins contract - Views on News from Equitymaster
 
 
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  • Nov 11, 2008

    Steel: Sales up but margins contract

    The BSE-Sensex is down by nearly 50% since the start of the year 2008, while the BSE metal index is down by around 72%. The investors, on account of fears of economic recession in the US and European markets and the expected slow down in the domestic markets have made a rather 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 2QFY09. 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 share of steel in India.

    Consolidated performance of Steel companies in Q2FY09
    (Rs m) 2QFY08 2QFY09 Change
    Net sales 163,824 232,918 42.2%
    Expenditure 110,549 163,420 47.8%
    Operating profit (EBDITA) 53,275 69,498 30.5%
    EBDITA margin (%) 32.5% 29.8%
    Other income 5,705 7,700 35.0%
    Interest (net) 3,166 4,983 57.4%
    Depreciation 6,416 7,657 19.3%
    Profit before tax 49,398 64,558 30.7%
    Extraordinary income/(expense) 903 (3,454)
    Tax 16,279 19,955 22.6%
    Profit after tax/(loss) 34,023 41,149 20.9%
    Net profit margin (%) 20.8% 17.7%

    The consolidated topline grew by 42% YoY during the quarter. This was significantly higher than the 10% YoY growth witnessed during 2QFY08. The topline growth was largely a result of improved realisations than volumes. It should be noted that had the government not exerted pressure on the companies to not raise their prices, the growth in topline would have been even higher.

    The operating profits growth came in at a lower rate of 30.5% YoY as compared to the topline as input costs grew at a higher rate than the topline. This has led to the contraction in the EBITDA margins by 270 bps to 29.8%. During the quarter, only Tata Steel had improved its margins while SAIL and JSW Steel experienced a fall in the same.

    The bottomline growth came in at a lower 21% YoY as compared to the topline mainly on account of contraction at the operating levels. Had the growth in the taxes and depreciation not been benign, the sectors would have witnessed much lower growth in bottomline. The net profit margins declined by 300 bps to 18%.

    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 7%-8% 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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