India: Steel Sales Up But Margins Contract

The BSE Sensex is down by nearly 50% since the start of the year 2008, while the BSE metal index is down by around 72%. The investors, on account of fears of economic recession in the US and European markets and the expected slow down in the domestic markets have made a rather hasty retreat from the steel pack.

the steel industry is an important component of the metal index. In this article, we will discuss the consolidated performance of the major companies in the steel sector during 2QFY09. For this purpose, we have considered three major players in the industry. Tata Steel, SAIL and JSW Steel. These companies constitute more than 40% of the market share of steel in India.

Consolidated performance of Steel companies in Q2FY09

(Rs m)	2QFY08	2QFY09	Change
Net sales	163,824	232,918	42.2%
Expenditure	110,549	163,420	47.8%
Operating profit (EBDITA)	53,275	69,498	30.5%
EBDITA margin (%)	32.5%	29.8%
Other income	5,705	7,700	35.0%
Interest (net)	3,166	4,983	57.4%
Depreciation	6,416	7,657	19.3%
Profit before tax	49,398	64,558	30.7%
Extraordinary income/(expense)	903	(3,454)
Tax	16,279	19,955	22.6%
Profit after tax/(loss)	34,023	41,149	20.9%
Net profit margin (%)	20.8%	17.7%

The consolidated topline grew by 42% YoY during the quarter. This was significantly higher than the 10% YoY growth witnessed during 2QFY08. The topline growth was largely a result of improved realisations than volume. It should be noted that had the government not exerted pressure on the companies to not raise their prices, the growth in topline would have been even higher.

The operating profits growth came in at a lower rate of 30.5% YoY as compared to the topline as input costs grew at a higher rate than the topline. This has led to the contraction in the EBITDA margins by 270 bps to 29.8%. During the quarter, only Tata Steel had improved its margins while SAIL and JSW Steel experienced a fall in the same.

The bottomline growth came in at a lower 21% YoY as compared to the topline mainly on account of contraction at the operating levels. Had the growth in the taxes and depreciation not been benign, the sectors would have witnessed much lower growth in bottomline. The net profit margins declined by 300 bps to 18%.

Though steel companies have fallen off the radar of investors over realisations as well as demand related fears, it may be noted that if India needs to grow at a sustainable rate of 7%-8% over the long term, steel will have to play a vital role. It should be also considered that India is still a net importer of steel. Thus, taking these factors into account, investment in steel stocks, especially at current depressed valuations are likely to yield attractive returns from a long-term perspective. However, investors need to take into account the company’s performance over a complete steel cycle as well as its overall cost structure.