INVESTORS have always been concerned about putting their money in Steel Authority of India Ltd (SAIL), and the latest quarterly earnings have only heightened their worries. The state-owned company posted its first ever loss in over a decade during the April-June quarter.
SAIL said its April-June quarter net loss at Rs 321.64 crore was due to lower realisations as most of its clients preferred to buy cheaper steel from China, while a steep increase in cost of power to run its plants dented its earnings further. Revenue also fell by about 16% to Rs 9677.05 crore. Net sales realisation was down by around 15% year-on-year, as inventory increased by 250,000 tonne during the quarter, as it was accumulated and not sold due to subdued market demand, analysts say.
The state-run steel company, one of the five big firms owned by the Indian government, had reported a profit of Rs 529.88 crore on total income of Rs 11536.98 crore during the same period last year. The loss, if it continues, would also dent the income that the government gets as dividend for its 75% stake in the New Delhi-based company.
The worse-than-expected earnings announcement on August 14, has seen share prices of SAIL hit a 52-week low to Rs 53.95 a piece on the same day. That isn’t surprising considering that SAIL’s stocks have underperformed the broader S&P BSE in the past three years at least. The share prices of the company are down by about a third as on August 21, while the benchmark index has declined 0.48% during the same period.
The latest quarterly loss indicates bad times ahead for the country’s steelmakers who have been hurt by tepid demand at home and large-scale dumping of cheaper steel mainly from China and also from Japan, South Korea and Russia. Though domestic steel consumption witnessed a modest increase of about 7% during the quarter, surge in imports and a decline in exports resulted in loss of market share for Indian steelmakers. Import of steel into India jumped 54% during April and June, while exports fell sharply by 31%.
Added to this is the steep decline in steel prices imported from China, which are down $80 per tonne since April 1, and have further declined by $48 per tonne in the one-month through August 17, Credit Suisse analysts wrote in a note to investors last week. The current prices of Chinese steel post the decline is now at a 12-year low, they say. The brokerage says steel prices in India have also fallen during the same period by $67, and $25, per tonne respectively. Still, domestic prices are high compared to imported Chinese steel.
The government had imposed a 15% increase in import duty in a bid to limit imports, narrow its trade deficit and safeguard Indian steelmakers. That increase in taxes, they said, “would only reduce the gap by $15 per tonne” which is unlikely to give any respite to the ailing steelmakers including SAIL. The duty benefit takes time to reach to the last mile, adding to the existing woes, they said.
Still, there is some hope for the industry. Traders expect the prices of steel to fall about $20 in the next two months, they say, “implying little hope of a revival in prices in (seasonally stronger) August”.
SAIL chairman Rakesh Singh told investors after the earnings announcement that price stability could return if the government further increases the duty on imports of steel. Singh, who is also the secretary at the ministry of steel and mines, wasn’t available for comments on whether the government intends to increase import duty, till the story went to print.
Steelmakers including SAIL have, however, filed a safeguard petition for hot rolled coils (HRC). In a safeguard petition, companies ask the government to prevent large-scale cheap import of a particular product that puts domestic manufacturers under jeopardy, denting their profits. HRC is a crucial steel product that Indian firms produce and face pressure both in terms of sales and margins, due to dumping.
Dumping by China is the latest reason that SAIL gives for its disappointing earnings, but other parameters too indicate its weak performance compared to its peers. SAIL’s interest outflow jumped about 45% to Rs 443 crore during the quarter from a year earlier, while its loans at the end of June increased 31% to Rs 31,688 crore. The jump in interest and debt comes even as six of its eight plants were loss-making during the quarter, and the company took more loans to run them.
The SAIL management is hopeful of a turnaround in operations and financials once its ongoing expansion of products and plants is complete. For instance, SAIL plans to make more specialised products for Indian railways, one of its biggest clients, and also for the various upcoming metro rail projects in the country, according to its latest presentation to investors.
Considering the challenges the company faces and the potential obstacles to growth, Credit Suisse has maintained its underperformer rating on the stock.
The brokerage has slashed estimates for SAIL’s earnings before interest, tax, depreciation, and amortisation (Ebidta) for every tonne of steel to 23 for the current fiscal year through March 2016, and 27 for the next fiscal that
begins in April 2016—less than half of the past fiscal’s Ebidta of 58 per tonne of steel. This would mean that SAIL is likely to post an operational loss for the full year, Credit Suisse adds.