Stainless show

Boom conditions in the stainless steel industry continue unabated

Jindal Stainless Ltd (JSL) has reported a 27 per cent decline in its Q4FY04 net profit to Rs 27.4 crore.

However, if one removes extraordinary items, which surged to Rs 32.83 crore in Q4FY04 (primarily due to discarding of assets worth Rs 14. 15 crore and unrecoverable advances worth Rs 18.66 crore), the company's profit would have actually grown 52 per cent to Rs 60.23 crore.

In the previous year, stainless steel operations were carried out under Jindal Strips but since then these operations have been transferred to Jindal Stainless.

Domestic demand for stainless products has been strong due to the domestic housing construction boom, as stainless steel is widely used in kitchen sinks, doors, window frames and knobs. This helped the company boost domestic sales by 11 per cent in the last quarter to Rs 410.94 crore.

Also, exports, especially to China, have shown no signs of waning in Q4FY04 and overseas sales grew 100 per cent to Rs 396.04 crore. While the company's core operations have grown, it has been grappling with rising supply chain costs "" the international price of coal has jumped approximately 18 per cent in Q1CY04 and chromite prices too have risen by around 10 per cent.

As a result, cost of raw materials jumped 32 per cent to Rs 445.72 crore in Q4FY04. These costs are expected to be in check in the future, with the government recently reducing import duties and the company actively taking steps to hedge its costs.

Jindal Stainless' operating profit rose 13 per cent to Rs 110.36 crore however, operating margins were under pressure, falling 460 basis points to 14.3 per cent in the March quarter.

Going forward, the company is well-positioned to exploit the boom conditions in the stainless steel industry "" it is in the process of setting up a Rs 950-crore greenfield project at Dubri in Orissa "" it will produce approximately 1.5 lakh tonne ferro chrome, 30,000 tonne ferro manganese, 60,000 tonne silco manganese and three lakh tonne coke-oven battery.

Also, the company is upgrading its facilities at Hissar for increasing the mill capacity from four to five lakh tonne, steel melting capacity from five to 5.5 lakh tonne and cold-rolled strips to 1.5 lakh tonne.

NRI deposit rate cut

For the fourth time, the Reserve Bank of India has reduced the rate of interest payable to NRI depositors. Since the central bank first reduced NRI interest rates in July, growth in rupee-denominated NRE deposits has fallen substantially "" the accretion to these deposits was $907 million in April, $627 million in May and $876 million in June, compared with $186 million in December and $154 million in January.

In fact, NRE deposit growth started falling as early as August, when the accretion to these deposits went down to $193 million compared with July's $580 million.

The further lowering of interest rates in September and October ensured that the inflows into these deposits remained muted. To be sure, there was a sharp jump in NRE deposits in October, but that was on account of the repayment of the Resurgent India bonds, some of which were converted into deposits.

The new trend that has been seen in the last few months, however, is the increase in dollar-denominated FCNR(B) deposits. In fact, from consistently negative figures for inflows into these deposits in the earlier months of calendar 2003, FCNR (B) deposits saw inflows of $198 million in December and $123 million in January 2004.

Also, taking ICICI Bank's interest rates, the rate of interest for a one-year fixed deposit for an NRE account was 1.63 per cent, (with effect from April 1), compared with 1.25 per cent for a one-year FCNR (B) deposit (with effect from April 12).

It would accordingly only make sense to invest in dollar denominated deposits if one felt that the rupee would depreciate against the dollar in the next one year. What's more a one-year certificate of deposit in the US earns 1.65 per cent on an average, well above the FCNR (B) rate.

Nevertheless, the increase in FCNR(B) accounts has compensated to some extent for the lower inflows into NRE accounts, and the December and January total NRE inflows were $425 million, not too different from the $449 million during these two months a year ago.

With the one-year US dollar Libor currently at around 1.61 per cent, there won't really be much of a difference in the interest rate in fixed deposits.

However, with the ceiling for NRE savings bank rates at six-month Libor, or 1.28 for US dollar deposits, there will be a substantial lowering of the rate of interest, since NRE savings bank deposits paid 3.5 per cent.

On the whole, however, the main reasons for the addition to forex reserves in the last few months have been FII inflows and remittances, and it's unlikely that lowering the NRI deposit rates will make much of a difference.

With contributions from Amriteshwar Mathur