STEEL
Integrated steel companies maintained their net profit growth in the second quarter at 17.65 per cent as against 16 per cent in the first quarter, thanks to Tata Steel and Jindal Steel, which recorded over 50 per cent rise in net profit. The sales growth was robust at 41.91 per cent compared to 37.14 per cent in the first quarter.
However, the cost of raw materials, particularly iron ore and coal, moved up by 52 per cent compared to sales growth of 41.91 per cent. This impacted operating margins, which declined 342 basis points year-on-year (y-o-y) and 183 basis points over the sequential quarter.
Domestic manufacturers passed on to consumers the last price hike in June 2008 despite stringent Government control. But they had to roll back the hike in July 2008. Also, global steel prices dipped in mid-September, leading to a 40 per cent decline in the prices of billets and long products from their peaks at home.
The cost of funds shot up by 82.3 per cent, though marginally lower compared to a 100 per cent rise in the first quarter. The second quarter was a period of interest rate resets for most domestic steel companies, which witnessed a 50 basis point increase in working capital borrowing due to tight inter-bank liquidity. With dealers struggling with liquidity and sedate order inflows, inventory build-up for most steelmakers was significant.
| (In %) | Sales | CRM | NP |
| SAIL | 33.56 | 52.76 | 18.20 |
| Tata Steel | 43.14 | 72.75 | 50.13 |
| JSW Steel | 58.46 | 116.01 | -40.57 |
| Ispat Inds | 57.97 | 79.13 | Net loss |
| JSL | -3.16 | -5.52 | Net loss |
| Total | 41.91 | 51.75 | 17.65 |
The steel companies also provided translation losses of Rs 1,424 crore on account of currency fluctuations. Ispat Industries and JSL Steel posted quarterly losses, while profit of Tata Steel and JSW Steel was severely impacted on account of forex losses. Also, the government has been supportive of the industry. It recently removed export taxes on semi-finished and longs so that domestic prices stay competitive with falling global prices. Domestic producers, on their part, have also slashed prices across product categories by Rs 4,000-6,000 per tonne to remain competitive.
Now, fears of a recession has led to a sudden drop in steel demand and, as a result, steel prices have plunged sharply.
Starting September 2008, the global financial turmoil has left its adverse impact on the steel industry. Prices of steel products have declined 25 per cent in last one month and by 40 per cent from their peak in June 2008. Spot prices of raw materials such as iron ore and coal too have fallen by 61 per cent and 33 per cent respectively. Ferro alloy prices have also plunged 40 per cent from their peak in last one month.
CONSTRUCTION
Construction companies in the field of infrastructure development did well during the second quarter by posting a sales growth of over 40 per cent, while net profit grew at a slower pace of 34 per cent. The net profit growth rate was hurt due to a 62 per cent increase in cost of raw materials and a 54 per cent rise in interest cost.
The sales growth came about on the back of robust order books and faster order execution. Construction companies also witnessed a 52 per cent growth in order inflows during the quarter under review. These firms have witnessed a slowdown in road, building and housing segments. There could be a temporary slowdown in the near term due to the upcoming general elections.
The operating margins of the construction companies declined marginally by 7 basis points y-o-y, but were higher by 127 basis points over the sequential quarter. Their combined net profit grew by 34 per cent as net margins declined by 48 basis points with interest cost going up by 54 per cent on account of increased debt requirements. HCC and Patel Engineering have recorded the maximum increased interest cost as percentage of sales.
The sector is facing macro challenges such as availability of funds and high interest rates. These concerns become even more important for highly-leveraged companies. Despite a strong sales growth, Patel Engineering witnessed a modest increase in net profit on account of rising interest cost. IVRCL Infra Projects posted a strong sales growth, which was duly translated into a net profit growth because the higher interest expenditure was offset by higher other income.
| (In %) | Sales | CRM | NP |
| Punj Lloyd | 52.47 | 47.82 | 180.68 |
| IVRCL Infra | 65.8 | 54.43 | 61.99 |
| Nag Const | 55.92 | 59.53 | 25.71 |
| Simplex Infra | 74.63 | 87.77 | 46.96 |
| HCC | 18.27 | 50.46 | 71.45 |
| Total | 44.71 | 60.88 | 34.04 |
At present, the top three construction companies have strong order book-to-sales ratio of 2.6 times of the turnover in 2007-08, which will largely protect the expected top line growth in FY09. However, expected tight credit availability during the elections and deteriorating investments in end segments may lead to sluggish order inflows.
CEMENT
The cement sector reported a 15.1 per cent sales growth, while its net profit declined by 25.8 per cent on account of higher cost of raw materials and interest burden. The company-wise performance showed a mixed trend with south-based companies posting a decent growth and most companies in the western region recording a single-digit growth in net sales. The decline in the net profit was across the country on account of the increase in input cost.
The revenue growth was driven by an 11.6 per cent rise in volumes and a 5.1 per cent jump in the average realisation. Birla Corporation, Prism Cement, Mysore Cement and Andhra Cement witnessed a decline in sales, while Ambuja Cement, ACC, JK Cement and Mangalam Cement showed a single-digit growth in net sales. However, players like India Cement, Shree Cement, Madras Cement and Dalmia Cement recorded over 20 per cent growth in net sales.
| (In %) | Sales | CRM | NP |
| ACC | 8.96 | 9.68 | -0.05 |
| UltraTech | 19.58 | 31.63 | -11.66 |
| Ambuja | 7.78 | 32.25 | -7.40 |
| India Cements | 25.21 | 18.53 | -39.69 |
| Madras Cement | 33.48 | 45.31 | -6.02 |
| Total | 15.08 | 23.66 | -25.81 |
The cement sector faced margin pressures during the quarter on account of an increase in their overall cost. Operating margins of cement companies have declined by 838 basis points y-o-y and 669 basis points on the sequential quarter to 26.12 per cent. During the quarter, the sector witnessed a sharp increase in power and fuel cost because of higher prices of imported coal, pet coke and freight cost (on higher diesel price). The poor operating performance, higher interest and depreciation charges led most companies to report a decline in net profit.
Given the slowdown in the construction and real estate sectors, and the substantial addition of fresh cement capacities over the next four to six quarters, cement analysts at Sharekhan expect companies’ utilisation rate to decline and average realisation to soften. This will outweigh any easing in the cost pressures due to the recent correction in the prices of coal, oil and other basic raw materials.
FMCG
Fast moving consumer goods (FMCG) companies in the business of personal care and food products reported strong sales growth, while cigarette firms, which have diversified into agro and FMCG products, had modest sales growth in the second quarter. However, the net profit growth for food products and personal care firms was around 15 per cent, while for cigarette firms it was around 5 per cent.
Operating margins for all the three categories declined by 150-300 basis points as many companies could not pass on the higher raw material cost to consumers due to price competitions. Most FMCG companies could not be benefited from easing commodity prices as these firms had high raw material inventory levels.
Analysts expect sales growth momentum to continue due to an expected demand growth from rural consumers. Rural income and sentiment are on an uptick due to food price inflation, farm loan waiver, satisfactory monsoon and employment generation schemes. Rural consumers account for 50 per cent of FMCG consumption. Correction in commodity prices and ad rates is likely to boost margins in the fourth quarter. Analysts expect soap and detergent players, in particular, and all FMCG players, in general, to benefit from the correction in crude oil prices.
FMCG analysts at Motilal Oswal research have lowered volume growth estimates in some product categories such as toilet soaps, detergents and paints due to reduction in consumer demand. The slowdown in construction activity would impact paints demand growth. The decline in prices of key inputs such as palm oil, LAB and packaging have come down from their highs.
| (In %) | Sales | CRM | NP |
| HUL | 19.71 | 37.11 | 33.95 |
| ITC | 15.08 | 30.79 | 4.13 |
| Nestle India | 22.15 | 31.01 | 13.53 |
| Britannia Inds | 27.29 | 35.52 | 9.96 |
| Nirma | 40.4 | 65.24 | -97.88 |
| Total | 20.86 | 36.45 | 10.55 |
According to FMCG analysts at Edelweiss Securities, Hindustan Unilever (HUL) and Godrej Consumer Products (GCPL) are likely to be the biggest beneficiaries of the meltdown in commodity prices. For HUL, soap and detergents account for 44 per cent of net sales, while for GCPL, soaps account for 60 per cent of its standalone sales. Falling palm oil, LAB and crude oil prices augur well for all FMCG companies as these are key inputs for making soaps, detergents and packaging materials respectively.
PHARMA
Companies in the pharmaceutical sector delivered a mixed bag in the second quarter. Sun Pharmaceutical Industries, Lupin, IPCA Laboratories and Cadila Healthcare performed better than expected, while Ranbaxy Laboratories and Wockhardt reported poor results. Piramal Healthcare, Glenmark Pharmaceuticals and Elder Pharmaceuticals reported results in line with analysts’ expectations of good sales growth.
The poor show put up by the sector is attributed to the weakness in the rupee against US dollar and Euro.
While the weaker rupee benefited companies operationally, it also dented the profitability as it led to translation losses on balance sheet items and mark-to-market (MTM) losses on outstanding hedges. Pharmaceuticals companies posted a 36 per cent decline in net profit on account of MTM losses on currency fluctuation and hedging of export revenues. The combined MTM loss stood at Rs 874 crore, which was 68 per cent of the total net profit in the second quarter.
Many companies that had taken forward covers expecting rupee appreciation had to book MTM forex losses as most of these covers had been taken at exchange rate of Rs 39-42 per dollar. The companies that have taken foreign debt to fund acquisitions have provided for MTM forex losses.
| (In %) | Sales | CRM | NP |
| Cipla | 25.49 | 11.8 | -20.56 |
| Ranbaxy Labs | 10.42 | 9.67 | -309.88 |
| Sun Pharma | 24.62 | 17.65 | 55.59 |
| Dr Reddy’s Labs | 6.39 | 0.46 | -27.19 |
| Lupin | 8.00 | -5.00 | 11.74 |
| Total | 18.15 | 15.97 | -36.60 |
Ranbaxy Laboratories, Cipla, Aurobindo Pharmaceuticals, Orchid Chemicals, Wockhardt and Piramal Healthcare reported MTM losses, which led to a decline in their net profit. Sun Pharmaceuticals, Lupin, Cadila Healthcare and Divi’s Labs reported an increase in net profit on account of robust growth in net sales.
According to pharma analysts of ICICI Securities, companies with large MTM forex losses in 2008-09 include Ranbaxy, Cipla, Jubilant Organosys, Biocon and Piramal Healthcare. The interest cost, which rose 518 per cent for the sector in the second quarter, has hurt the profitability of Cipla, Ranbaxy Labs, Dr Reddy's Labs, Piramal Healthcare, Aurobindo Pharma and Orchid Chemicals.
FERTILLERS
The three months ending September 2008 has been an excellent quarter for the fertilisers sector, which posted an aggregate net profit growth of 66 per cent on the back of an 84 per cent rise in net sales. A strong revenue growth of over 75 per cent was seen in state-owned companies such as RCF and FACT, while private sector companies Mangalore Chemicals, Chambal Fertilisers, Zuari Industries and Tata Chemicals recorded a sales growth of over 100 per cent each. The sector saw a robust rise in revenues because the high input cost burden was passed on to the end users. The sector also clocked high trading volumes.
On the net profit front, RCF (up 116.6 per cent), Mangalore Fertilisers (77.4 per cent), GSFC (94.7 per cent) and Coromandel Fertilisers (73 per cent) outperformed all others in the sector. The improvement in profitability of fertiliser firms is attributed to inventory gain in DAP & complex fertiliser business and strong volumes in urea.
The government-regulated fertiliser industry got a boost from the recent policy change from ‘cost plus’ to ‘import parity’ pricing on new capacity creation. The new policy encourages shifting to natural gas as a feedstock and provides subsidy based on ‘nutrient content’ as against the product-based subsidy. These measures are likely to enhance profitability and returns on equity (ROE) as import-based realisations are much higher and the cost of natural gas is half of Naphtha, the input being used today.
| (In %) | Sales | CRM | NP |
| Tata Chemicals | 186.91 | 184.90 | 51.39 |
| Coromandel Fert | 88.78 | 237.49 | 73.06 |
| RCF | 75.64 | 59.74 | 116.61 |
| Zuari Ind | 151.43 | 140.88 | 22.91 |
| National Fertilizer | 68.58 | 21.37 | 42.81 |
| Total | 83.67 | 106.93 | 66.05 |
There is a fixed ROE of 12 per cent on their existing capacity and a shift to natural gas will help cut working capital. Natural gas is the most efficient feedstock for urea. Indigenous gas production is likely to double by 2011 due to the KG basin gas. The government has given the highest priority to fertilisers in the supply of incremental gas.
According to a Merrill Lynch research, margins are expected to improve by 100 basis points due to energy sufficiency.
However, the new urea policy will be losing sheen due to falling prices of fertilisers in the international markets. Urea prices have fallen from the end-September level of $550 a tonne to below $300 a tonne now, offsetting the benefits from the new policy. DAP prices have started softening from $1,160 a tonne to $950 a tonne now.
