Still in the quagmire

While regulatory changes have helped stem the flood of imports, domestic supply has grown and added to the competitive pressure

India was the only major steel consuming market in the world, which exhibited a growth in 2015-16. The year also witnessed India going ahead of the US to become the third largest steel producing country in the world. That’s not all. According to the WSA forecast, India would witness over 5 per cent demand growth this and the next year. This was amply reflected in the performance, projections, and targets of the leading steel makers in the country.

Nearly a fortnight ago, Tata Steel reported 10-fold jump in its net loss to Rs 3,183 crore for the quarter ended June 30 compared with a net loss of Rs 317 crore in the corresponding quarter last year. The company’s earnings before interest, tax, depreciation and amortisation (Ebitda) in the quarter stood at Rs 3,270 crore, up 21 per cent from the year-ago period, due to improved operating performance across India, Europe and Southeast Asia.

The company said its loss from discontinued operations of Rs 3,296 crore was recognised on account of divestment of Long Steel UK. The sale was completed during the quarter. The total comprehensive income for the period was loss of Rs 2,833 crore due to the divestment. Tata Steel UK is currently progressing with the divestment of the specialty steel business and the pipe mills in Hartlepool. The company said it would continue discussions with industry players to explore options for a strategic collaboration through a potential joint venture.

“In Europe, the positive impact of the structural restructuring undertaken in the UK in the last 6 months along with a weaker British pound, cost reduction measures and an effective hedging strategy on raw material imports have enabled the business to report better performance for the quarter,” said Koushik Chatterjee, group executive director (finance and corporate).

However, despite the muted market demand, Tata Steel’s India business improved its underlying Ebitda performance by 310 basis points compared with the previous quarter and its 6 million tonne per annum (mtpa) integrated steel plant at Kalinganagar in the Jajpur district of Odisha started commercial production in May.

If what TV Narendran, managing director of Tata Steel India and Southeast Asia, says is anything to go by, seasonal headwinds and a slowdown in a large iron consuming sector like real estate affected steel demand in the quarter. While the regulatory changes have helped stem the flood of imports, domestic supply has increased and added to the competitive pressure.

The steel maker feels realisations in the current quarter (July-September) are expected to be affected by lower demand from large steel consuming sectors due to monsoon. Demand is expected to pick up after monsoon and the festive season on the back of increase in disposable income.

JSW Steel, the other leading steel maker, has seen more than 52-fold increase in its profit at Rs 1,109 crore during the quarter against Rs 21.2 crore in year-ago period, boosted by operational performance despite higher tax cost. Its total income from operations grew by 1.9 per cent to Rs 12,885.8 crore in the June quarter from Rs 12,647.4 crore in corresponding period of last financial year. Operating profit (Ebitda) also shot up 91.7 per cent to Rs 3,269.4 crore and margin expanded by 1,190 basis points at 25.4 per cent on yearly basis. Ebitda per tonne was also strong at Rs 9,200, higher by 70.4 per cent year-on-year and 58.6 per cent quarter-on-quarter.

The company has also increased production at Vijayanagar and Dolvi, which were recommissioned in the fourth quarter of FY16 after modification and capacity expansion.

When it comes to public sector steel maker, Steel Authority of India (SAIL) has targeted to increase its production and sales in 2016-17 by 20 per cent over last year. Ramp-up of production from its new units is not only increasing production quantum and leading to better quality of products, but has also helped in reducing cost of production. Higher production from the new units and rationalisation of output from cost-intensive routes have resulted in reduction in variable cost of production by 10 per cent in the fourth quarter compared with the first quarter in FY16 and the trend continues.

Over and above its ongoing modernisation and expansion programme, which is on the verge of completion, SAIL has taken up new projects to improve its product mix and profitability. The installation of a 3 mtpa capacity, 2,250 mm wide hot strip mill at Rourkela plant, which is scheduled to be commissioned in 2018, will enable SAIL to produce high quality hot rolled coils, including advanced high strength grades, to cater to the growing automotive industry in the country.

“In conjunction with the initiatives by the Centre for increasing steel demand, it is the responsibility of all leading steel producers in to increase iron consumption. Initiatives like increasing steel intensity in construction and infrastructure projects by propagating the advantages of steel over other materials with respect to lifecycle analysis-based costing, assured quality, safety and pace of construction would be helpful in this regard,” feels PK Singh, SAIL chairman. Stressing a positive future outlook, he said the greater emphasis on increasing growth rate of the manufacturing sector, infrastructure development, higher rates of urbanisation and rising middle class population could promise a vibrant domestic steel industry in the country.

Sector analysts are of the view that the Centre had actually stepped in at a critical juncture and undertook necessary corrective trade measures in the form of minimum import price (MIP) mechanism, introduced in February, followed by imposition of provisional anti-dumping duty for hot and cold rolled flat products that has helped ease a lot of pressure for the domestic steel industry.

Rating agency Icra, for instance, said the health of the domestic steel industry in the second half of FY17 would critically depend upon the government’s decision on the minimum import price (MIP) extension, and the final outcome of the recent anti-dumping investigations initiated by the directorate general of anti-dumping and allied duties.

In a report, Icra said a 25 per cent increase in domestic steel prices till the middle of June would have led to better profitability for steel companies in the first quarter of FY17 despite 11 per cent and 9 per cent hikes in iron ore and coking coal prices, respectively, in this period. But this is unlikely to significantly boost their liquidity and coverage indicators, given the continuing high debt levels of domestic steel companies, it said.

International steel prices have been extremely volatile since February. Chinese HRC (hot rolled coil) export offers, after increasing sharply by around 80 per cent and reaching a recent high of around $470 per tonne in April, have seen a steep correction of almost 30 per cent since then. Given the uncertainty surrounding the government’s decision on extending MIP beyond August 5, domestic steel prices have been on a decline since mid-June, correcting by 8 per cent in the last one month, Icra said. The central government finally decided to extend the MIP regime on 66 items till October 4.

ritwikmukherjee@mydigitalfc.com

1) Company review: Tata Steel

Business & background: Tata Steel is world’s 11th and India’s second-largest steel producer. The company has manufacturing operations in 26 countries and employs around 80,500 people.

Prospects: The company reported a 53.9 per cent decline in net profit at Rs 575.43 crore in Q1FY17 compared with Q1FY16. Its revenues increased 13.5 per cent in Q1 and stood at Rs 10,323 crore. According a Emkay Global report, Tata Steel reported a strong performance in Q1, with standalone revenue coming in at Rs 10,300 crore, up 1.5 per cent YoY. This was mainly due to better than expected realisations. The company’s Ebitda stood at Rs 2,220 crore, a 19 per cent rise YoY. “Scope of significant improvement over our estimates is little given volatility in steel and raw material prices. On the other hand, recent sharp rise in coking coal prices if sustains, can weigh on the margins further going ahead,” it added.

Valuation: AT Friday’s close, the stock traded at 42.9 times the EPS for the past four quarters.

2) Company review: JSW Steel

Business & background: The flagship company of over $11 billion JSW Group, JSW Steel is one of India’ leading integrated steel manufacturers. The company’s installed annual capacity is 18 million tonne.

Prospects: The company’s net profit skyrocketed by 857 per cent in Q1FY17 at Rs 1,82.41 crore from Q1FY16. Its revenues rose 18.69 per cent in Q1FY17 against and stood at Rs 12,021.21 cro­re. According to a HDFC Securities report, the firm re­p­orted strong results in Q1 owing to hig­her exports and str­ong growth in auto sales. The firm pos­ted an Ebitda per tonne of Rs 8,937, up 81.6 per cent YoY. “The steel industry is expected to continue enjoying some form of protection. With this ass­umption, JSTL should deliver solid profitability growth,” it added. At the same time, a fall in domestic and global steel prices witnessed in July will lower realisations, and strong coking coal pricing will further hurt margins, it added.

Valuation: The stock traded value to EPS could not be determined due to losses made in the past four quarters.

3) Company review: SAIL

Business & background: State-owned Steel Authority of India (SAIL) is one of India’s largest steel-making companies, and has an annual turnover of $6.4 billion. The firm’s annual production is 13.9 million tonne.

Prospects: SAIL’s revenues declined 2.78 per cent and stood at Rs 9,238.08 crore in Q1FY17. But the company’s net profit made a healthy gain of 66.4 per cent from Q1FY16 to stand at Rs 535.52 crore. Acc­o­­rding to a Emkay Global rep­ort, Q1 saw SAIL repor­ting better-th­a­n-expected perfor­mance at the operating level primarily due to lower than expected raw input costs. After posting losses for three straight quarters, the company reported Ebitda of Rs 240 crore, up 164 per cent YoY.

Valuation: The stock traded value to EPS could not be determined due to losses made in the past four quarters.

4) Company review: JSPL

Business & background: With turnover of approximately $3.3 billion, Jindal Steel and Power is a part of the diversified Jindal Group conglomerate. It is a leading player in steel, power, mining, oil and gas and infrastructure.

Prospects: The company’s Q1FY17 net sales stood at Rs 3,123.50 crore and net profit was up by 3.50 per cent from Q1FY16 to stand at Rs 276.65 crore. According to a Antique Stock Broking rep­ort, JSPL’s Q1FY17 consol­idated Ebitda, at Rs 984 crore, fell 2.5 per cent YoY and was higher sequen­tially by 9.8 per cent. The fir­m’s net steel real­i­sations were subdu­ed in Q1 impacted by weak demand. “Steel realisations are likely to recover in Q2FY17 with the extension of MIP, imposition of anti-dumping duties and revival in steel demand,” it added.

Valuation: The stock traded value to EPS could not be determined due to losses made in the past four quarters.

(Compiled by Kuldeep Panwar)

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