Price prop

High HR coil prices will aid steel firms better figures in FY04

Steel companies have repaid around Rs 8,000 crore of their outstanding debt in FY04. This development would result in a drop in operating costs for steel firms and it would be reflected in the profit and loss account over the next three-six months.

Analysts point out that an upsurge in the industry's fortunes in FY04 has made this development possible.

The reduction in bank financing charges for steel companies is expected to be quite large. In the case of Steel Authority of India Ltd (SAIL), the company is expected to save approximately Rs 400 crore annually (its interest expenditure in FY03 was Rs 1,334.02 crore), while Tata Steel would lower its interest burden by around Rs 30 crore (it spent Rs 304.82 on this account in FY03).

Other comparatively smaller players are also expected to report improved cash flow positions due to a drop in the debt burden "" Essar Steel is expected to save around Rs 210 crore annually and in the case of Jisco it is expected to benefit by Rs 132 crore.

However, the crucial driver of profits in FY04 is surging demand for hot-rolled (HR) coil which has pushed product prices to around $545 per tonne in Q4 FY04. At the same time, there has been a rise in key input costs such as coke, iron ore and steel scrap "" but hedging policies undertaken at steel companies should mitigate this impact.

As a result, analysts expect Tata Steel's net profit to triple in FY04 through a combination of higher sales volumes and higher pricing.

Meanwhile, Jisco is expected to record a 33 per cent rise in profit in FY04 and SAIL is expected to end the year in the black, as compared to a Rs 304.31 crore loss in FY03.

One area for concern over the next five-seven months for Indian steel firms is that demand from the key Chinese market is expected to slow down.

China's central bank, in a bid to slow down the growth in the economy, has tightened the bank's reserve requirements for the third time in the last eight months.

The latest initiative requires most banks to hold reserves equal to at least 7.5 per cent of their outstanding loans and other capital commitments, and in the case of some weaker banks it was set at eight per cent.

This move is expected to make it harder for banks to finance new infrastructure projects. It also echoes the statement made around two months earlier by the Chinese National People's Congress calling for a slowdown in investment, to counter overheating in the economy.

With the Chinese demand for steel expected to slow down by September 2005 due to these policy measures and coupled with the 50 million tonne expansion projects currently underway in the Middle Kingdom, it is expected that a surplus of 80 million tonne will be created there by the end of 2005.

That will force Chinese steel makers to sell their surplus output in overseas markets, which could force HR coil prices back to $275-300 a tonne.

Rural upturn benefits Finolex

The current boom in the agricultural sector, coupled with the state and local governments increasing their budgets for rural projects, has boosted the demand for PVC pipes and fittings, and PVCs made by Finolex Industries.

As a result, Finolex Industries' net profit has grown 61 per cent to Rs 12.47 crore (excluding other income) in the quarter ended March 31, 2004.

The company witnessed a 43 per cent rise in the sales of PVC pipes and a 7.5 per cent growth in PVCs. While there has been an improvement in the demand conditions, company sources point out that they have been grappling with a rising supply chain cost.

The price of the key raw material ethylene dichloride has gone up by $50 in Q4 FY04 to reach approximately $350 per tonne. And this was reflected in the cost of raw materials, which jumped up 6.4 per cent to Rs 91.9 crore in Q4 FY04.

On a positive note, employee costs have declined 27 per cent to Rs 7.36 crore in Q4 FY04. However, surging sales reduced the impact of rising raw material costs. Raw material to net sales ratio in Q4 FY04 declined 300 basis points to 35.5 per cent in Q4 FY04.

As a result, operating profit margins in Q4 FY04 grew 114 basis points to 18.57 per cent and operating profits grew 32.8 per cent to Rs 48.05 crore. However, the company's net profit in FY04 has declined 26 per cent to Rs 42.9 crore (excluding other income).

Other income in FY04 has grown 118 per cent in FY04 to Rs 47.17 crore "" primarily due to gains accruing from treasury operations and foreign exchange gains.

Going forward, the company has aggressive expansion plans "" it is expanding from its existing markets in the south and west, to make its products available in the rapidly growing agricultural states of Punjab, Haryana and Himachal Pradesh.

Coupled with a number of large rural water supply schemes on the anvil in several states, demand for PVC products is set to rise. The company is hoping to leverage this anticipated surge in demand by its plan to expand the PVC resin capacity from 130,000 tonne to 260,000 tonne.

With contributions from Amriteshwar Mathur