Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Companies / Tata Steel, SAIL profit margins seen at decade low
BackBack

Tata Steel, SAIL profit margins seen at decade low

India's top steel makers have grappled with unsold inventory as infrastructure initiatives stalled

Indian steel demand may expand about 1.2% in the fiscal year ending 31 March, according to the average estimate of seven steel makers, analysts and government officials in a Bloomberg survey. Premium
Indian steel demand may expand about 1.2% in the fiscal year ending 31 March, according to the average estimate of seven steel makers, analysts and government officials in a Bloomberg survey.

Mumbai:Tata Steel Ltd and Steel Authority of India Ltd (SAIL), the nation’s biggest producers, are set to report their smallest profit margins in more than a decade as demand increases at the slowest pace since the global recession. The shares fell.

Earnings before interest, taxes, depreciation, and amortization to sales at Tata Steel’s Indian unit will be 30.1% in the year ending 31 March, while SAIL’s will be 11.1%, according to estimates compiled by Bloomberg. Indian steel demand may expand about 1.2% in the fiscal year ending 31 March, according to the average estimate of seven steel makers, analysts and government officials in a Bloomberg survey.

“The policy paralysis in the government is the biggest reason behind slowing steel demand," said Giriraj Daga, a Mumbai-based analyst at Nirmal Bang Equities Pvt. Ltd. “The slowdown may stretch for the next two to three years, as companies await a better climate to revive investments."

India’s top steel makers, which expanded capacities by about 50% in the past two years anticipating a demand revival, have grappled with unsold inventory as infrastructure initiatives stalled. Prime Minister Manmohan Singh’s administration has struggled to restart more than $160 billion of projects as bureaucrats, unnerved by a string of graft probes by the top investigating agency and a possible shift in power in this year’s general elections, have delayed approvals.

Tata Steel fell as much as 2.3% to 399.05, the most since 12 November. The shares traded at 399.85 as of 12:10pm in Mumbai, extending their decline in the past year to 9.4%. SAIL fell as much as 3.2% to 69.75 and traded at 70.05. The stock has fallen 30% since 7 January 2013. The benchmark BSE Sensex has risen 5.1% in that period.

Demand

Steel demand rose 3.3% in the fiscal year ended 31 March 2013 and 0.4% during the global recession of 2008-09.

India’s economy will expand 5% in the year through 31 March, the central bank forecasts, matching last year’s pace that was the slowest in a decade. Slowing growth is making it tougher for policymakers to provide jobs and boost incomes for a population of 1.2 billion and is also crimping the government’s income.

Steel is one of five industries that together draw 24% of bank loans and more than half of their non-performing advances, the Reserve Bank of India (RBI) said in a 30 December report. Factors leading to bad loans include economic slowdown, persistent policy logjams, delay in project approvals and aggressive expansion leading to excess capacities, it said.

Debt

“Steel makers increased capacity at the peak of the consumption cycle and took on more debt, which is a concern especially for Tata Steel and SAIL," said Abhisar Jain, an analyst at Mumbai-based Centrum Broking Pvt. Ltd.

Tata Steel, which bought UK-based Corus Group for $12.9 billion in 2007, had total debts of 65,174 crore as of 30 September, according to data compiled by Bloomberg. It had a debt-to-equity ratio of 153%.

SAIL’s total debt stood at 22,541 crore as of 31 March, with a debt-to-equity ratio of 54%.

In 2012, Tata Steel started a 3 million tonnes blast furnace at Jamshedpur in Jharkhand, increasing crude steel output at its biggest plant in India by 21% to 4.5 million tonnes in the six months ended 30 September. The company expects to start the first phase of a new 6 million tonnes unit in Odisha towards the end of the fiscal year ending in March 2015, managing director T.V. Narendran said.

‘Challenging year’

“It’s been a challenging year for Tata Steel as our expansion in capacity has coincided with a slowdown in the steel-consuming sectors such as automotive and construction," Narendran said in a 26 December email.

Passenger car sales in India in the eight months to November dropped 5% to 1.16 million units, according to the Society of Indian Automobile Manufacturers (Siam). Sales of commercial vehicles fell about 18% to 423,911 units.

“Tata Steel’s margins in India may be pressured over the two years starting 1 April as costs rise with inflation, while prices at best stay flat due to easing iron ore prices," CLSA Asia-Pacific Markets analysts Abhijeet Naik and Nitij Mangal wrote in a report dated Monday.

A planned 72,130 crore expansion by SAIL has been delayed by at least two years, raising speculation the final cost could be higher. The state-run steel maker plans to expand its annual crude steelmaking capacity by 60% to 21.4 million tonnes and raise output at mines.

JSW Steel

JSW Steel Ltd, India’s third-biggest producer, may buck the trend of shrinking margins as iron ore supplies from Karnataka to its largest plant in the state improve. Its Ebitda margin may widen to 17.39% from 17.06% in the fiscal year that ended in March 2013 , according to Bloomberg estimates.

JSW Steel’s output is set to rise more than 40% to 12 million tonnes this fiscal year as it benefits from increased ore supplies to feed its expanded capacity.

“We expect JSW to outperform sector peers in 2014," Naik and Mangal wrote in their report. The gradual restart of iron ore mines in Karnataka will improve JSW’s cost structure by bringing down the proportion of dumps and Odisha ore in its iron ore mix.

Average prices at Jindal Steel and Power Ltd, controlled by Naveen Jindal, declined 15% from a year ago in the three months ended 30 September, causing profit to halve. The Ebitda margin in the year to March is estimated shrink to 24.05%, the smallest ever.

“Slowing demand has had a detrimental impact on steel prices," Jindal Steel managing director Ravi Uppal said in a phone interview. “Prices have bottomed out and are expected to stay at current levels, unless input prices go up." Bloomberg

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 07 Jan 2014, 01:07 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App

Chat with MintGenie