Enthused by the government’s new growth initiatives, Steel Authority of India Ltd (Sail) chairman CS Verma expects no less than 8-9% growth in steel demand in the current fiscal, from an anaemic 3.1% last fiscal. In an exclusive interview with Surya Sarathi Ray of FE, Verma, who is also chairman of the Indian Steel Association, anticipates what is in store for the industry. Excerpts:
Fitch has recently downgraded Sail’s long-term foreign currency issuer default rating to negative, reflecting the company’s higher leverage, subdued operating performance and low profitability. What is your reaction to that?
Most of Sail’s borrowings are from domestic sources, for which ratings of India Ratings Research and Care are available. For both short-term and the long-term borrowings, Sail has the highest ratings from these agencies, which are among the best in the industry. Sail’s current debt-equity ratio at 0.64:1, as on December 31, 2014, is healthy and much better than most of the steel companies in the high-growth phase. The Ebitda, PBT and PAT for Sail have all shown an increase in Q3 FY’15 vis-à-vis Q3 FY’14. Even for nine-month FY15, the Ebitda, PBT and PAT have shown an increase over CPLY (corresponding period last year), after excluding the exceptional income of R1,056 crore in the last fiscal.
How was the performance on the production front?
The year 2014-15 has been a landmark one for Sail as in this year we have commenced integrated operations from the new facilities under modex (modernisation and expansion) in two steel plants. Production of hot metal and crude steel in 2014-15 has been higher than the previous year and a much higher growth is envisaged in 2015-16.
What was the percentage of growth in production and in net profit?
Hot metal growth was 7% and crude steel 2% in 2014-15 as compared to the previous year. The financial results for 2014-15 are being compiled, net profit has not yet been compiled. Our hot metal capacity has increased to 19 mtpa as on April 1, following commissioning of the expanded capacity in Burnpur and in Rourkela. In this current fiscal, capacity addition in Bhilai will also take place, taking the hot metal capacity
to 23 mtpa.
Given the 3.1% growth in steel demand last fiscal, what is your estimate for the current fiscal?
Consumption growth as a percentage is higher in India than the global level. The production growth percentage in India has also been higher. If you see the trend of the first two months of the calendar year, Indian steel production has overtaken US production, and India has become the third largest steel producing nation. These are all positive signals. We are very optimistic about steel demand picking up domestically in the current fiscal itself and production is also likely to keep pace with the same. The declining trend in the prices has stopped. There is no decline in the prices in the months of March and in April. Prices have been slightly firming up.
Have you raised the prices?
We make adjustments in the rebate we offer, without changing the price. This is done keeping in view the market dynamics. When the rebate is reduced, it means that the prices have stopped declining.
In which categories have the prices firmed up?
Both for long and flat products.
What is your guess on prices for the current fiscal?
As I said, prices have started firming up. There is no scope for prices to come down further as they are already historically low.
If that is the case, then your realisation will also improve this fiscal. What is the present rate of realisation and to what extent it is going to improve? What would be your total sales?
Realisation will largely depend on market conditions and the prevailing prices. However, going forward, in view of commissioning of new mills under the current modex, Sail’s product mix will be enriched, which will fetch us higher realisations. Total sales are also estimated to go up above 14 mt in commensurate with a higher production capacity of Sail in FY’16 over the previous year.
What kind of demand growth you are expecting in the current fiscal?
The country is looking at 7%+ GDP growth. The IMF has revised upwards the outlook for India’s growth from 6.3% January to 7.5% for 2015 and 2016 on the basis of recent policy reforms, a consequent pickup in investment and lower oil prices. I am expecting that in the new fiscal, the growth in steel demand should not be less than 8-9 %.
Steel imports grew by 71%. How difficult is the situation for the domestic industry?
In 2014-15, the rise in imports of steel by 75% has resulted in subdued sales for the domestic producers. The issue has been taken up with the government by the Indian Steel Association for a hike in the import duty. In the Union budget, an enabling provision has been made to enhance the duty up to 15% for steel.
Exports are losing ground.
With the global steel industry operating at less than 75% capacity, implying about 25% surplus capacity, exporting steel is indeed challenging. Besides, stronger rupee vis-à-vis other international currencies is also impacting exports. However, in 2014-15, in tonnage terms there is only a marginal shortfall in exports as compared to 2013-14.
How big a threat China is on the Indian steel industry?
I can’t say China is a threat to Indian steel industry specifically. On an equal footing, integrated and large steel mills in India are well geared up to meet the Chinese challenges. The threat is for small mills, induction furnaces, which may get adversely affected due to an unprecedented surge of Chinese imports. China has about 279 million tonnes of surplus capacity. There is a scope for the small mills to improve efficiency to meet the challenge.
Newer capacities are coming in from Sail, Tata Steel, RINL and others amidst low capacity utilisation. Is there enough demand to absorb such additional capacities?
In 2008, worldwide there was a shortage of steel. This resulted in capacity addition by all major players. Steel capacities are added in spikes, whereas the increase in consumption follows a relatively smoother trajectory. This may have resulted in a temporary phase of oversupply of steel, but on a long-term basis, I am very optimistic about pick-up in domestic steel demand, which should improve the scenario. A number of measures taken in India to revive growth is likely to show its impact in the coming months in a sustained manner. If you look at our capacity utilisation in the last three-four months, it is better than the global average.
Are you setting up a steel plant at Telengana?
No. We were required to make a feasibility report. The feasibility report is under evaluation.