Companies are hoping the worst is behind them (Bloomberg file)
Companies are hoping the worst is behind them (Bloomberg file)

Top steel makers brace for long winter, cut capex to conserve cash

  • Over the last four quarters, operating profit margins of the domestic steel industry have been on a slippery ground, declining steadily to 18.2% in Q1 FY20 from 22.6% in Q1 FY19
  • Sluggish domestic demand from end-user segments has led to a slowdown in consumption growth

Mumbai: After a lacklustre performance in the second quarter, several top domestic steelmakers are cutting down on capital expenditure and conserving cash, for what can be described as a long winter before demand revives. Tata Steel, JSW Steel and Jindal Steel and Power (JSPL) have decided to slash their capital expenditure for the year.

Tata Steel, the country's largest private steel maker, reported a consolidated net profit of Rs3302 crore for the September quarter, its profit rising solely because of a one-time favourable tax impact of 4,233 crore. JSW Steel, the second largest, also benefited from an exceptional deferred tax provision writeback of 1,976 crore in the quarter. The profit before tax, for its part, was 688 crore for the quarter, falling 77.2% year-on-year. Tata, Steel, on the other hand, reported a pre-tax loss. JSPL posted a consolidated net loss of 399.31 crore for the quarter, against a consolidated net profit of 279.17 crore in the year-ago period.

Commenting on Tata Steel, Bhaskar Basu of brokerage firm Jefferies has maintained his underperform call. “Any optimism around margin expansion in Indian operation appears overdone while European margins will stay under pressure. We expect the net debt levels of Tata Steel to also stay elevated," he said.

The profitability in operations has nosedived as steel prices fell. For Tata Steel, Ebitda/tonne of steel fell to 9,238 from 16,368 in the quarter, while on a consolidated basis, it crashed to 6,156 crore from 12,713.

For JSPL, steel sales were down 7% quarter-on-quarter while operating profit per tonne fell by Rs1,800 to 9,437 per tonne. For JSW, the corresponding figure was Rs7,768, down from Rs12,118 per tonne last quarter.

Over the last four quarters, operating profit margins of the domestic steel industry have been on a slippery ground, declining steadily to 18.2% in Q1 FY20 from 22.6% in Q1 FY19, with production falling to match this. Sluggish domestic demand from end-user segments, including automobile, consumer durable, capital goods, construction and real estate sectors, has led to a slowdown in consumption growth.

A Crisil research report from September found that smaller steel mills have undertaken maintenance shutdowns ranging from a week to a few weeks through the second quarter. In a recent conversation with Mint, RK Goyal, managing director Kalyani Steel, a manufacturer of autograde steel, said: “There are no buyers in the market today. It is not iron ore problems for us but sales are not happening. We have cut production by 25-40% in the last 15 days. There are just no prices in the market today."

Companies have uniformly slashed their capital expenditure plans for the fiscal.

JSW cut the year’s outlay to 11,000 crore from 15,708 crore, and trimmed its sales guidance to 16mt for the year from 16.95 million tonnes (mt). "We feel that we will be able to meet 97% of the guidance," MVS Seshagiri Rao, joint managing director and group CFO, JSW Steel, said. "Even if we perform in the second half of this fiscal as well as we did last year, we will not be able to make up for the losses incurred in the first half."

Tata Steel’s management has also said it would recalibrate its capital expenditure plan for FY20, which had been 8300 crore,. In the second quarter, the company spent Rs2,325 crore in the September quarter and Rs4,895 crore so far this fiscal. However, it might consider scaling back capital expenditure if the market sentiment does not improve. "We are focusing on unlocking value from our capital expenditure plans and not on increasing volumes," Koushik Chatterjee, executive director and CFO, Tata Steel, said at a press conference on Wednesday. This is the second time this fiscal that Tata Steel has cut its capex guidance, which had stood at 11,000 crore at the start of the year.

The dismal market sentiment has also affected Tata Steel’s debt reduction plans. Tata Steel has gross debt of 1,11,549 crore, which went up by 4900 crore through the quarter. The company had a stated aim of reducing debt by $1 billion a year. But the management indicated they will only be able to pay back about $500 million of that target this year.

Companies are hoping the worst is behind them. Seasonally, the October-March period is better in terms of steel consumption, as the annual monsoon season ends and construction activity resumes. The average domestic spreads over April-September 2019 were well below the average FY19 levels, a research report by Crisil said. “However, with raw materials playing catch-up, the spreads are likely to improve in second half of the year. But a substantial pick up in the consumer demand and government and private sector spending is required to arrest the fall in demand."

Chatterjee of Tata Steel echoed the sentiment in a post-earnings interaction with journalists. “We need consumption to return, especially in the rural market, and consumers have to become optimistic about the future. This means more money in the hands of buyers, either through lower taxes or higher minimum support prices in agriculture. This will lead to consumption returning either as vehicle purchases or as demand for white goods like refrigerators and washing machines." Until then, these companies are in wait and watch mode.