Stock Fundamentals

Q2 outlook bleak for steel firms

Satya Sontanam | Updated on October 20, 2019 Published on October 20, 2019

Operating profits, margins may face pressure due to low volumes and realisations

The results season is here and market players are ready for some serious number crunching. In order to understand Q2 results of the top steel players, one should first look at earnings and the operational numbers of three private players – Tata Steel, JSW Steel and JSPL (steel business ) in Q1.

During the second quarter, the global steel demand was muted, and it weighed on steel prices across geographies, including India. The fall in prices of raw materials — iron ore and coking coal — gave some relief though.

Recap of Q1

The April-June quarter of FY20 was an unpleasant period for steel players operationally. The net profits of Tata Steel, JSW Steel and JSPL in Q1 fell by 63 per cent, 57 per cent and 33 per cent respectively compared to profits in the year-ago period.

This was led by weak growth in sales volumes, lower realisations and a steep rise in raw material costs. While the revenue growth of companies — in the same order mentioned above was — 1.27 per cent, -3.4 per cent and five percent y-o-y, operating profits fell by about 14 per cent, 27 per cent and 2 per cent y-o-y.

Expectations for Q2FY20

According to ICRA India, domestic consumption of steel in July and August, at about 16.98 million tonnes, was muted. The consumption in the corresponding months of 2018 was 16.39 mt.

This is reflected in the sales volumes recorded for September quarter by Tata Steel. While the group’s sales volumes at 7.03 million tonnes grew by about 5 per cent sequentially, it fell by 3 per cent compared to Q2 of FY19.

While JSW Steel did not release their sales figures for the quarter, the management, in an interview with BusinessLine, stated that the demand for the commodity continued to be under pressure in the last few months with weak demand from the automotive sector.

Beating the trend, JSPL reported 10 per cent y-o-y growth in sales volume in Q2. Its resilience against the cyclicality could be on account of higher exposure (nearly 60 per cent) to rail steel and other value added products.

Low realisations & costs

Data from ICRA reveals that steel prices in the first two months of the second quarter were lower by ₹7,000-₹8,000 per tonne compared to last year.

One concern is that the prices are lower by ₹2,700-₹4,800 compared to the average steel prices in the first quarter of FY20.

Meanwhile, a look into the trend of iron ore and coking prices show that they have softened in the September quarter. Consumption cost of coking coal may come down by $4-$5 per tonne. The import cost of iron ore came down from above $100 level in Q1 this fiscal year to $80-$90 per tonne towards the second quarter end.


Tata Steel has pointed out that gains from lower cost will benefit the company only in the coming quarters. With low volumes, weak realisations and reduced cost benefits, the operating profit and margins could be under pressure in Q2.

JSW Steel has stated in earnings concall of Q1 that consumption cost of both iron ore and coking coal will be lower in the September 2019 quarter. While this could help preserve margins, good growth in operating profit in absolute terms is unlikely. For JSPL, margins will be under pressure but a 10 per cent volume growth would limit the contraction in operating profit.

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Published on October 20, 2019
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