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Higher input costs may squeeze Indian steel companies’ margins

Higher input costs may squeeze Indian steel companies’ margins
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First Published: Fri, Apr 18 2008. 12 31 AM IST

Updated: Fri, Apr 18 2008. 12 31 AM IST
Mumbai: Indian steel companies are expected to post healthy profits and good margins in the fourth quarter of the fiscal year that ended 31 March on the back of higher product prices, but that’s about all the good news they have got.
The steel makers, already under pressure to cut prices and reduce exports, are likely to see operational margins squeezed in the current fiscal year by the sharp inflationary trend for key ingredients that include coking coal and iron ore.
A Mint poll of five analysts suggests a revenue growth of 20-25% in the fourth quarter, mainly on the back of higher realizations, for steel companies. It predicts a similar growth in earnings before interest, taxes, depreciation and amortization, or Ebitda, for the sector on an average.
The figure represents a steady rise over the year. Revenue growth for steel makers in the preceding three quarters was 16.93%, 15.41% and 19.12%, respectively. Ebitda growth was 19.02%, 18.31% and 13.18%, respectively.
“We expect the margins for the integrated steel makers to increase by as much as Rs2,000 per tonne in the fourth quarter, while for other firms, they could rise about Rs1,000 a tonne,” said Rakesh Arora, an analyst with Macquarie Research.
Steel prices rose about 30% in January-March, with prices for hot-rolled coils quoting at about Rs39,000 a tonne — including a raw material surcharge of Rs5,000 — at the end of March. In calendar year 2007, the prices rose only 4-5%.
For the long term, analysts are wary about margin pressures, as a near 300% rise in the prices of coking coal is likely to hurt even integrated steel producers.
Tata Steel Ltd, the country’s biggest private sector steel maker, is shielded at least partly from the price hikes as it has its own coal mines and needs to buy only about 30% of its coal requirement from outside. But others such as state-owned Steel Authority of India Ltd (SAIL) and private sector JSW Steel Ltd are not so blessed. Coking coal accounts for 53% of Tata Steel’s total raw material cost, which will increase to around 57% of its total raw material cost after the price revision, domestic brokerage First Global said.
SAIL, which depends on state-owned Coal India Ltd for 30% of its coal requirements and imports the rest, is likely to be hit in the long term due to the price rise. Most of the hikes are effective from 1 April. About 70% of SAIL’s raw material cost goes towards coking coal. This will rise to about 80% after the price revision, First Global said in a report.
Considering the price rise, SAIL’s raw material cost is expected to rise by 90% in fiscal 2009 over the previous year, which will pull down its earnings dramatically, it added.
For the quarter, analysts are expecting a 12% growth in net profit for Tata Steel and about 15% for SAIL.
On the other hand, firms with no captive mines, such as JSW, would bear the brunt of the price hikes. Analysts believe JSW’s profits will fall by about 4% in the quarter. JSW is also likely to see a fall in its Ebitda by about 4%. Revenue, however, will grow at 20-25% on the back of higher realizations, according to the poll.
JSW imports 3.5 million tonnes of coking coal and buys 30% of its iron ore from NMDC Ltd, India’s largest producer. It meets only about one-third of its iron ore requirements from captive sources.
Iron ore prices have risen sharply in the global market, leading to rate increases by domestic miners. NMDC raised prices by 47% with retrospective effect from October. It is slated to announce another big hike soon, sector experts said.
South Korea’s Posco, the world’s fourth largest steel maker, announced earlier this week better-than-expected results for the January-March quarter and raised its 2008 sales target. But, despite that, it kept its operating profit target unchanged, indicating that a price hike effected for its products may not make up for the huge jump in input costs.
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First Published: Fri, Apr 18 2008. 12 31 AM IST