June 20 (Bloomberg) -- Uttam Galva Steels Ltd., the Indian unit of ArcelorMittal, is targeting a 20 percent increase in profit over the next two years as demand at home bucks a global slump sparked by Europe’s debt crisis.
The need for vehicles, refrigerators and washing machines in the world’s second-most populous nation will help the Mumbai-based steelmaker cut its dependence on Europe, Deputy Managing Director Ankit Miglani said in an interview. Earnings before interest, tax, depreciation and amortization may climb to 6.2 billion rupees ($111 million) in the year ending March 2014 from 5.2 billion rupees in the last fiscal year, he said.
“The focus is on India as this will be a high-demand zone,” he said. “Europe has affected not only us but the entire world and mills are operating at lower capacities.”
Steel demand in India will increase 8 percent this year compared with 5.5 percent in the previous 12 months, according to government forecasts, even as growth in Asia’s third-biggest economy slowed to the least in almost a decade. Prime Minister Manmohan Singh’s plan to spend $1 trillion over the next five years on public works will also spur demand. Overseas sales of the alloy slumped 30 percent in April-May period.
“Exports have fallen steeply despite a weakening rupee as international prices fell and Europe, which is one of its main markets, is facing a slowdown,” said Niraj Shah, an analyst at Mumbai-based Fortune Equity Brokers (India) Ltd. “Local steelmakers are better off getting higher returns here as the demand in India looks fairly strong.”
Uttam Galva extended gains, rising 2.7 percent to close at 73.40 rupees in Mumbai, the highest level in almost eight weeks. The key Sensitive Index rose 0.2 percent. ArcelorMittal, controlled by billionaire Lakshmi N. Mittal, climbed as much as 2.7 percent to 12.49 euros and traded at 12.40 euros as of 12:44 p.m. in Amsterdam.
Uttam Galva has risen 47 percent this year, compared with a 12 percent drop in the shares of its Luxembourg-based parent.
Total vehicle sales in India rose 10.5 percent in May from a year earlier, undeterred by borrowing costs near a three-year high and costlier gasoline, compared with a 24 percent slide in April for Europe, according to data compiled by Bloomberg.
As disposable incomes rise in India, demand for consumer durable products including refrigerators and washing machines is expected to grow more than 50 percent to 520 billion rupees by 2015, according to industry group Associated Chambers of Commerce and Industry of India. The domestic market accounted for half of Uttam Galva’s sales last year, up from about 30 percent in 2009, Miglani said.
ArcelorMittal, which holds a 34 percent stake in Uttam Galva, has shuttered or idled plants in Belgium, Spain, France and Luxembourg in the past nine months. Growth in world steel demand this year is forecast to slow to 3.6 percent from 5.6 percent, while Europe may be see a 1.2 percent contraction, according to the World Steel Association.
Europe’s financial crisis has reduced sales at PSA Peugeot Citroen, Fiat SpA and Renault SA by 15 percent or more in the first five months of the year, according to the European Automobile Manufacturers’ Association. In contrast, Indian car sales are forecast to grow 12 percent this year, according to data from the Society of Indian Automobile Manufacturers.
Fiat will cut investments in Europe by 500 million euros ($631 million) and Peugeot plans to sell a larger stake in its trucking unit as the region’s automakers grapple with an extended market slump. The drop in European car sales accelerated in May to 8.4 percent, the eighth consecutive monthly decline, according to ACEA figures released June 15.
European steel-plant shutdowns are inevitable as overcapacity pushes the price of the metal lower, shrinking earnings, regional lobby group Eurofer said June 13. Valuations have fallen to an almost eight-year low, based on the Bloomberg Europe Steel Index of shares, as the region’s economic crisis adds to pressure from competition for sales.
Uttam Galva will complete a 5 billion rupee investment to increase factory efficiency and product quality by the end of next year, Miglani said. Net income rose 2 percent to 779.6 million rupees in the year ended March 31. Sales gained 3 percent to 51.7 billion rupees.
The company plans to increase output by 18 percent to 1 million tons in the year ending March 31, and all of that addition will be sold locally, Miglani said.
India’s steel prices will closely track the local currency, Miglani said. Should the Indian rupee weaken, it will discourage steel imports and shore up local prices, he said. The rupee has fallen 9.1 percent this quarter, the worst-performing currency in Asia, according to data compiled by Bloomberg.
“India is such a large country that steel consumption is bound to go up,” A.S. Firoz, chief economist at the steel ministry, said in a phone interview. “The per capita consumption is still very low.”
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