Expansion drive curbs steel firms' profit growth

Modernisation and expansion at most steel companies appear to have taken a toll on short-term profitability.

A glance at the first quarter performance of the Big Five ""Steel Authority of India (SAIL), Tata Steel, JSW Steel, Essar Steel and Ispat Industries""show that the combined net profit has increased 2.66 per cent on a gross sales increase of around 30 per cent.

SAIL and Tata Steel were the only two companies among the five to register an increase in net profit. SAIL managed to record its highest-ever first quarter net profit at Rs 1,386 crore compared with Rs 1123.84 crore, an increase of 23 per cent. Gross sales increased by 34.38 per cent to Rs 8,695.28 crore.

Tata Steel registered a 3 per cent increase in net profit on gross sales increase of 10.82 per cent. JSW Steel registered a dip in net profit by 15 per cent to Rs 170.3 crore, with gross sales also recording a 0.9 per cent decrease.

Essar Steel's net profit decreased from Rs 207.71 crore to Rs 41.13 crore despite gross sales growth from Rs 1812.95 crore to Rs 1,902.85 crore.

Ispat Industries recorded an increase in net loss from Rs 79.49 crore (after adjusting for Ispat Metallics) to Rs 111.49 crore, while gross sales increased by more than 44 per cent.

SAIL sources said the public sector managed to record an improvement in performance as techno economic parameters were much better.

Moreover, interest cost, which was up for most companies on account of modernisation and expansion, was down for SAIL owing to loan repayments.

The company not only reaped the benefits of three price hikes in the first quarter in flat products but also saw a price escalation in rails and wheels and axles, despite a relatively stable long products market.

Tata Steel managed an allround improvement in labour productivity and operational efficiency.

Raw material consumption came down and the company's share in value-added product segment such as auto went up, while sales of branded products also showed an increased.

The other three of the major producers were largely hit by modernisation and expansion programmes.

JSW Steel's hot strip mill was shut down for 37 days on account of mordernisation during the last quarter, resulting in 54 per cent drop in hot rolled coil production.

Essar Steel was hit by high interest cost as the company increased capacity to 4.6 million tonne. Ispat Industries saw a higher interest and depreciation as the company capitalised the 1,260 tpd oxygen plant commissioned in January.

The outlook for the next quarter is likely to be stable as industry expects a softening in the third and fourth quarters even though volumes growth is expected to be maintained.

The softening would be a fallout of the demand-supply mismatch in China. China recorded its highestever production in the last month at 37 million tonne, leading to a price drop of $40-$50.

The ripple effect of the steel guzzling market is likely to catch up with other markets and the domestic steel industry would also feel its impact.