Steel firms expected to make big gains: Top 5 companies’ PAT estimated to rise 121 per cent

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Mumbai | Published: September 5, 2018 3:18:37 AM

Even as users of steel bear the burden of higher costs, manufacturers are set to reap a bonanza on the back of strong prices and safeguards from imports. While the government was to have phased out the safeguard duties, these are still applicable.

Steel firms expected to make big gains

Even as users of steel bear the burden of higher costs, manufacturers are set to reap a bonanza on the back of strong prices and safeguards from imports. While the government was to have phased out the safeguard duties, these are still applicable.

The combined adjusted profit after tax (PAT) for the top five steelcos is estimated to rise 121% on a year-on-year basis to Rs 21,210 crore in 2018-2019 on the back of a favourable demand environment, limited capacity addition and lower imports compared to four years ago.

The net revenues for the same set of companies is estimated to surge 27% to nearly `3.80 lakh crore and operating profit could go up by 34% y-o-y to `65,638 crore, according to analyst estimates.
While the demand environment continues to be favourable with a large part of consumption coming in from user industries like automobiles, appliances etc, the government’s increased impetus on infrastructure development and affordable housing is also driving the steel offtake. In addition, a tight control on imports is also understood to be helping Indian steelmakers.

Analysts at Edelweiss Securities said in a recent report that imports are expected to remain around 8% of consumption due to protectionism. “This is a far cry from FY15-16 when imports made up 12-14%,” the report noted.

Tata Steel managing director TV Narendran recently said the sector is becoming more organised and the actions of the Chinese government taken on environmental regulation is also adding to the costs of production for most of the Chinese players, particularly the smaller guys, who are the disruptors. “It’s more the smaller guys who used to disrupt the markets and we are seeing that that problem is getting less and less,” he told analysts over a conference call.

India turned net importer of steel in Q1FY19. JSW Steel director (commercial and marketing) Jayant Acharya said there has been a 15% increase in steel imports into India on a y-o-y basis and the imports have gone up by 31% sequentially.

Meanwhile, analysts expect the domestic steel market to remain tight for the next two years as capacity augmentation is expected to be just 7 million tonnes through FY20 against incremental demand of 6-7 MTPA per year; production and demand growth are likely to remain in a range of 6-7% each.

Companies, too, are bullish on the demand environment and expect the second half of the current financial year to be better with rural demand on the upswing. Acharya told analysts recently that in the last two quarters, demand has grown by about 8.7%, which is better than the previous expectations.

The growth has been visible as the year has started on a positive note for steelcos. Higher realisations driven by sharp increase in steel prices helped Indian steel majors — Tata Steel, JSW Steel, Jindal Steel and Power (JSPL) and Steel Authority of India (SAIL) — post better than expected earnings for the three months of April-June 2018. Operating profits surged during the period for companies on the back of prices holding strong — hot-rolled coil (HRC) prices were up 14% on a year-on-year basis.

Tata Steel on a standalone basis, for instance, reported Ebitda per tonne of over `17,000, which was about 61% higher on a y-o-y basis, and about 8% up compared with the March quarter number of `15,872 per tonne. The increase for JSW Steel was even more prominent as the Ebitda per tonne doubled on a y-o-y basis to nearly `12,600 and came in about 5.5% higher sequentially. The company has been ramping up its value-added segment capacity and stable HRC prices are expected to augur well for the company in the coming quarters as well.

Other companies such as JSPL reported a sharp 45% y-o-y surge in steel Ebitda per tonne to `13,410, while SAIL in a complete turnaround reported `7,877 of Ebitda per tonne versus a negative `277 per tonne in the corresponding quarter last year.

“The domestic prices have remained buoyant, driven by accelerated economic activities, and despite first quarter being a seasonally weaker period, India has done reasonably well,” Narendran said.

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