By Swati Pandey / Reuters
Mumbai: The Indian government’s decision to levy export tax on steel products may lead operating profit margins at pipe companies shrink by at least 4%, analysts said.
“Profits would shrink... It would straight away shave off at least 4% on the margins of the exporters,” Amol Rao, an analyst with PINC Research said.
India, a major exporter of pipes especially to the Middle East, on 10 May issued a notification, making 15 categories of steel products eligible for a 10-15% export tax. The levies were announced by the finance minister on 29 April.
Shares in Jindal Saw and Welspun Gujarat have dipped around 13% each with Maharashtra Seamless and Usha Martin falling 7% since 29 April, compared with the Metal index’s 5% rise in the same period.
Company officials have asked for a withdrawal of export tax on pipes from the ministry and are awaiting a response.
“I’m waiting for a notification on the revision of the tax. If it doesn’t come over the next 10 days, I would downgrade these stocks,” Rao said.
Steel pipe makers such as Jindal Saw and Maharashtra Seamless export around 25-40% of their output, with Man Industries and Welspun Gujarat Stahl Rohren exporting 80% annually.
“It would be a major set-back for us. We will have to re-negotiate prices with our clients,” K.G. Mantri, senior vice president of corporate affairs at Man Industries, told Reuters.
“We manufacture using imported steel. There’s no need for an export tax as it is not affecting domestic supplies. That’s irrational,” Mantri stated.“I believe there’s a re-consideration in the government,” he added.
“Man, which produces 1 million tonnes pipes annually, will see a 5-8% hit on its margin. The earnings per share of the company may fall to Rs6.7 from earlier expectations of Rs17,” said Alok Agarwal, senior analyst at Motilal Oswal Securities.
“The companies will either have to hold the exports, defer consignments or raise prices. Either ways they’ll lose their competitiveness,” he noted.
Demand for pipes overseas have been rising due to huge activities in the refinery space, dwindling reserves and higher energy costs, analysts said.
Welspun Gujarat, which is laying cross-country pipelines in the Gulf, had an order book of Rs46 billion as on 29 April.
A Welspun spokeswoman refused to comment but Motilal’s Agarwal said the company’s margins will narrow to around 7% in 2008/09 from 16.5%, while FY09 earnings per share will tumble to Rs8 from the earlier estimate of Rs29.5.
Maharashtra Seamless on the other hand is looking to reduce dependence on exports, a senior official said. Exports contributed 25% of their revenue last year.
“We will try and pass on to the customers and the rest we will bear on the profits. The company currently has Rs1 billion of export orders and the tax will put some pressure on margins,” Anil Jain, chief finance officer said.
Analysts expect Jindal Saw and PSL Ltd to be insulated against the tax due to higher dependence on local markets.