Financial Daily from THE HINDU group of publications
Sunday, Nov 13, 2005
Financial Daily from THE HINDU group of publications Sunday, Nov 13, 2005 |
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Industry & Economy
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Steel Amidst volatile price situation ... Cost control, product mix boost steel cos' numbers
By Shyam G Menon
Mumbai , Nov. 12 AMIDST a volatile price situation, efforts to keep costs down and a better product mix were the winning factors for steel companies, their second quarter numbers have shown. During the just ended quarter, steel prices edged down but input costs, particularly that of coking coal, moved up. With demand for steel staying buoyant, it was higher volume that helped companies report a substantially improved turnover. According to Mr B. Muthuraman, Managing Director, Tata Steel, drivers of profitability in the sector would continue to be cost-reduction measures, volumes, product mix and steel prices. Tata Steel was able to sustain its profit growth primarily on the back of cost-pruning efforts, richer product mix and enhancing its branded product offerings. The company, which is the largest private steel player, had reported a 12.5 per cent increase in net profit for the second quarter to Rs 1,045.42 crore (Rs 929.58 crore for the year ago period). Higher other income at Rs 118.79 crore (Rs 57.04 crore) helped in keeping the net profit up. Despite a drop in steel prices, the company's net sales had moved up to Rs 3,865 crore (Rs 3,738 crore). It was attributed to higher volumes and a better product mix. As coal prices had risen considerably, Tata Steel had also resorted to the use of domestic coal. The rise in input costs nevertheless impacted the second quarter performance of Steel Authority of India Ltd (SAIL). It reported a 6.4 per cent decline in profit before tax to Rs 1,707 crore given the higher price of indigenous and imported coal. But its sales turnover grew by 6.7 per cent to Rs 7,889 crore. Analysts tracking the steel sector believe that Tata Steel and SAIL are better positioned to face the volatile situation in steel prices and input costs, as they are integrated manufacturers of the product. Enam Securities, in an analysis of SAIL's second quarter performance, said it expected a further pick-up in volume offtake that would help the company reduce its inventory level. "In the medium term, however, we believe SAIL, being an integrated producer, is best placed to capitalise on the favourable industry outlook. While the tax benefit of IISCO merger will be available in the second half, we adjust the tax rate to reflect the actual tax paid so far," Mr Jagdishwar Toppo, Analyst, Enam, said in his report. Essar Steel had reported a lower profit of Rs 420.4 crore (Rs 523.93 crore) at the EBITDA level but total income rose 10.5 per cent to Rs 1,589.30 crore during the second quarter. The company was also driving up its production of value-added products to hedge against volatile price situations. Mr Sajjan Jindal, Vice-Chairman and Managing Director, JSW Steel, also highlighted the price volatility at a press briefing while explaining the price hike and soon thereafter the price reduction, which his company effected recently. "There is volatility and steel is a global play," he said. JSW Steel had reported a 20 per cent dip in net profit for the second quarter to Rs 106.29 crore (Rs 132.79 crore) but a growth in net sales by 2.8 per cent to Rs 1,540 crore (Rs 1,498 crore). "I have always said that last year was a fluke for the steel industry. It should not be taken as a standard for comparison," Mr Jindal said on the high steel prices recorded along with tremendous wealth generation by the industry in the previous fiscal. Global prices may soften According to Mr Muthuraman, global steel prices were expected to soften due to `significant inventory overhang.' World steel production during the January-September 2005 period was higher by 6.3 per cent at 819 million tonnes. Global steel demand is forecast to grow by 4-5 per cent during 2005 and 2006. Indian steel demand is projected to grow at a faster pace of 7 per cent in FY 2006. The optimism was reflected by Dr B.N. Singh, Joint Managing Director and CEO, JSW Steel, who felt that industry fortunes would be better in the third quarter of the current fiscal, as post-monsoon demand and resumption of construction activity would begin to kick in.
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