IMPACT: STEEL

INTERIM BUDGET

MEASURES

• Reduction in peak customs duty rate by 5 per cent.
• Abolition of special additional duty.
• The cut in duties applicable to project imports could also help steel manufacturers.
• Reduction of basic customs duty on non-coking coal from 25 per cent to 15 per cent.

IMPACT
Overall impact of duty cut on coal would be beneficial for the sector as rising coal prices were one of the primary reasons for the steep rise in steel prices. As a result, input costs could be marginally lower in the foreseeable future.

However, recent steel price hikes may have to be rolled back in view of the duty cut on coal. Cost of production could come down by 5-7 per cent.

Duty cuts unlikely to lead to higher steel imports as domestic prices of most grades of steel continue to be lower.

OUTLOOK
Steel scrips have been on the forefront of the market rally witnessed during 2003. The surge in steel prices has come on the back of an improvement in demand-supply scenario. Steel prices have also improved steadily, thus enhancing the industry's price realisation.

Moreover, a significant reduction in interest rates over the past three years has enabled many debt-laden companies to restructure their borrowings and save on interest costs.

Steel prices continue to be buoyant on the back of strong domestic as well as global demand. Analysts expect global demand for steel to rise on the strength of rising demand in China and CIS countries.

Steel demand in China is expected to rise by 12.8 per cent in 2004, while the global demand for steel is expected to rise by 5.90 per cent.

The huge surge in demand has also prompted the Indian steel companies to go on a investment spree of late.

The companies have also put in improved financial performance in 2002-03 on the back of higher exports and work force rationalisation.

Improved realisations led to better capacity utilisation which led to better margins during the year.

While the markets seems happy with the valuations of leading companies like Tisco, they feel that the valuations of the some second rung companies have run ahead of their fundamentals.

Impact - Positive

SAIL
Duty cut on coal will have a positive impact on India's largest steel producer.

Steel Authority of India imports almost Rs 2,000 crore of coal for steam and its bill is expected to shrink considerably.

SAIL achieved a record net profit of Rs 1,498 crore in the April-December period of 2003-04, Rs 2,000 crore increase compared to April-December, 2002 when the company had suffered a net loss of Rs 546 crore.

Reduced borrowing and improved financials have brought down the company's debt-equity ratio in 2003 from 6.5 at the beginning of the year to 2.5 at the end of December.

JINDAL IRON & STEEL
The company's import bills are expected to come down following the duty cut on coal. Jisco is expected to benefit considerably from the merger with group company Jindal Vijaynagar Steel (JVSL).

According to the analysts, the proposed merger will create an integrated steel player with a much stronger balance sheet. The earnings of the merged entity is expected to rebound from an 2002-03 loss to profits of Rs 7.3 billion.

The company's ongoing expansion, better steel prices and a sharp reduction in debt and the resultant interest cost as well as the tax shield from JVSL is expected to drive earnings growth. The scrip trades at Rs 256 levels at a P/E of 6.

TATA STEEL
Not much impact expected on Tisco for a major proportion of steel sold by the company is through long-term contracts wherein domestic prices are much lower than landed costs of imported steel.

However, considering the fact that the company is planning an expansion programme worth Rs 2,000-crore, a large part of which is through the project-import route, the company is expected to benefit from duty reductions on project imports from 25 per cent to 10 per cent.

The company's third quarter 2003-04 sales volumes were flat due to shutdown at one its blast furnaces. However, the management has reiterated its target of 8 per cent volume growth in 2003-04.