Top steel producers, including Tata Steel Ltd, JSW Steel Ltd and Jindal Steel and Power Ltd (JSPL), have cut capital expenditure plans, anticipating weak demand following a depressing second quarter, conserving cash for the long haul.
Tata Steel, India’s largest private steel maker, reported consolidated net profit of ₹3,302 crore in the second quarter, thanks solely to a one-time favourable tax impact of ₹4,233 crore. JSW Steel, the second largest, also benefited from a one-time deferred tax provision write-back of ₹1,976 crore in the quarter.
Profit before tax, for its part, was ₹688 crore for the quarter, falling 77.2% from a year earlier. Tata Steel, on the other hand, reported a pre-tax loss. JSPL posted a consolidated loss of ₹399.31 crore for the quarter, against a consolidated net profit of ₹279.17 crore a year ago.
Bhaskar Basu, an analyst at brokerage Jefferies, has maintained his underperform call on Tata Steel. “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.
Profitability plunged as steel prices fell. For Tata Steel India, Ebitda/tonne of steel fell to ₹9,238 from ₹16,368 in the year-ago quarter, while on a consolidated basis, it crashed from ₹12,713 to ₹6,156 crore. For JSPL, steel sales were down 7% from the preceding quarter, while operating profit per tonne fell by ₹1,800 to ₹9,437 per tonne. For JSW, the corresponding figure was ₹7,768, down from ₹12,118 per tonne from the last quarter.
Over the last four quarters, operating profit margin of the domestic steel industry have been slipping, narrowing steadily from 22.6% in Q1FY19 to 18.2% in Q1FY20, and production dropped steadily to match this. Sluggish domestic demand from end-user segments, including auto, consumer durable, capital goods, construction and realty sectors, has led to a slowdown in consumption growth.
A Crisil research report from September found that smaller steel mills have undertaken maintenance shut-downs ranging from one week to a few weeks through the second quarter. In a recent interview, R.K. Goyal, managing director of Kalyani Steel, which makes auto grade 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."
JSW has cut capex for 2019-20 from ₹15,708 crore to ₹11,000 crore while also trimming its sales forecast from 16.95 million tonnes (mt) for the year to 16mt. “We feel that we will be able to meet 97% of the guidance," said M.V.S. Seshagiri Rao, joint managing director and group chief financial officer (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 had set its FY20 capex at ₹8,300 crore. In the second quarter, the firm spent ₹2,325 crore and ₹4,895 crore so far this fiscal. However, it might consider scaling back if 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, had said. 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.