JSW Steel, Hindalco turn focus to logistics to bulwark operating margins

With realisations continuing to be muted, domestic metal firms are increasingly paying attention to lowering expenses

With realisations continuing to be muted, domestic metal companies are increasingly focusing on lowering expenses. These firms have, in fact, identified logistics as one of the major areas where costs can be curtailed to safeguard operating margins.

“Logistics cost in our country is very high. To become more competitive in this market, it is important to lower cost,” said Seshagiri Rao, managing director and group chief financial officer, JSW Steel. 

In the June quarter, the Sajjan Jindal-led company reported strong performance despite one per cent rise in realisations, mainly on lower overall expenses and higher volumes. Currently, the logistics and transportation segment forms around 15-20 per cent of JSW Steel’s total expenses.

Hindalco Industries, the country’s largest aluminium producer, is another metal company chalking a similar strategy to protect its margins in the coming quarters. “Supply chain and logistics segment is one of the biggest areas where we plan to cut costs. Currently, about 15 per cent of the total cost comes from logistics. We plan to bring it down below 10 per cent over the next two years,” Satish Pai, managing director, Aditya Birla Group, had told Business Standard.

Hindalco Industries reported a higher-than-expected net profit at Rs 294 crore in the quarter ended June, even as net sales declined on a year-on-year basis, mainly because of a sharp fall in expenses. Realisations of the company dropped due to fall in London Metal Exchange (LME) prices, which hit the top line. Average LME prices for aluminium and copper were lower by 11 per cent and 22 per cent, respectively, against the corresponding period last year. Net sales were down 13 per cent, from the same period last year. Lower power and fuel costs helped Hindalco’s total cost to come down by 19 per cent in the June quarter, helping earnings before interest, taxes, depreciation, and amortisation (Ebitda) move up despite lower revenues. The company’s Ebitda in the June quarter stood at Rs 1,351 crore, against Rs 1,004 crore in the corresponding period last year.

Companies were looking to switch to cheaper modes of transportation, depending on the geographical presence of their facilities within the country. “Since all our plants are port-based, we are switching to coastal shipping instead of railways to transport finished goods in the southern and eastern region. For transportation of finished goods in the northern part of the country, we will move to using railways instead of roadways,” said Vikram Amin, executive director, strategy & business development, Essar Steel.

The unlisted company plans to lower its logistic costs by one per cent, from the current four to five per cent towards outgoing transportation of finished goods. “Overall, we have kept moving targets, which will be reviewed quarterly. We want to take as much advantage as possible,” said Amin.

Tuesday’s railway freight hike for coal will, however, come in the way of their plans to bring down costs. Metal companies use coal as fuel in their plants. “We have plans to switch to coastal transportation, from road, at present, and use bigger capesize vessels for carrying material. But with the Railways hiking coal freight by nearly 19 per cent, our plan to increase reliance on railways from roadways will be hit badly,” said Rao of JSW Steel. 

Also Read: Railways Raises Short Distance Coal Freight

JSW Steel relies entirely on e-auctioned coal to meet its requirement and, hence, the freight hike is expected to impact the company significantly. Apart from up to 10 per cent base hike in freight rates, Rs 55 per tonne charge at loading and unloading of coal for distance more than 100 km is also a burden.

Essar Steel, however, says it will remain unaffected by the rail freight hike, as the company is already transporting the commodity via sea. 

Brokerages were of the view that while port-based facilities of Essar Steel and Dolvi plant of JSW Steel will remain insulated from higher coal freight by railways, the 12-million-tonne Vijayanagar facility of the latter could take a hit. Hindalco, on the other hand, has conveyor belt, with around 25-30 per cent of its coal supply secured and will, hence, face limited brunt.