Tata Steel Profit Margin Seen at Decade Low: Corporate India

Tata Steel Ltd. and Steel Authority of India Ltd., the nation’s biggest producers, are set to report their smallest profit margins in more than a decade as demand increases at the slowest pace since the global recession. The shares tumbled.

Earnings before interest, taxes, depreciation, and amortization to sales at Tata Steel’s Indian unit will be 30.1 percent in the year ending March 31, while Steel Authority’s will be 11.1 percent, according to estimates compiled by Bloomberg. Indian steel demand may expand about 1.2 percent in the fiscal year ending March 31, according to the average estimate of seven steelmakers, analysts and government officials in a Bloomberg survey.

“The policy paralysis in the government is the biggest reason behind slowing steel demand,” said Giriraj Daga, a Mumbai-based analyst at Nirmal Bang Equities Pvt. “The slowdown may stretch for the next two to three years, as companies await a better climate to revive investments.”

India’s top steelmakers, which expanded capacities by about 50 percent in the past two years anticipating a demand revival, have grappled with unsold inventory as infrastructure initiatives stalled. Prime Minister Manmohan Singh’s administration has struggled to restart more than $160 billion of projects as bureaucrats, unnerved by a string of graft probes by the top investigating agency and a possible shift in power in this year’s general elections, have delayed approvals.

Tata Steel fell 3.3 percent, the biggest decline since Sept. 30, to 394.70 rupees, while Steel Authority fell 3.2 percent, the most in four months, to 69.75 rupees at close in Mumbai. Tata shares have fallen 10 percent, while Steel Authority dropped 30 percent, in the past year. The benchmark S&P BSE Sensex has risen 5.1 percent in that period.


Steel demand rose 3.3 percent in the fiscal year ended March 31, 2013 and 0.4 percent during the global recession of 2008-09.

India’s economy will expand 5 percent in the year through March 31, the central bank forecasts, matching last year’s pace that was the slowest in a decade. Slowing growth is making it tougher for policy makers to provide jobs and boost incomes for a population of 1.2 billion and is also crimping the government’s income.

Steel is one of five industries that together draw 24 percent of bank loans and more than half of their non-performing advances, the Reserve Bank of India said in a Dec. 30 report. Factors leading to bad loans include economic slowdown, “persistent” policy logjams, delay in project approvals and aggressive expansion leading to excess capacities, it said.


Steelmakers increased capacity at the peak of the consumption cycle and took on more debt, which is a concern especially for Tata Steel and Steel Authority, said Abhisar Jain, an analyst at Mumbai-based Centrum Broking Pvt.

Tata Steel, which bought U.K.-based Corus Group for $12.9 billion in 2007, had total debts of 651.74 billion rupees ($10.5 billion) as of Sept. 30, according to data compiled by Bloomberg. It had a debt-to-equity ratio of 153 percent.

Steel Authority’s total debt stood at 225.41 billion rupees as of March 31, 2013, with a debt-to-equity ratio of 54 percent.

In 2012, Tata Steel started a 3 million metric ton blast furnace at Jamshedpur, in the eastern state of Jharkhand, increasing crude steel output at its biggest plant in India by 21 percent to 4.5 million metric tons in the six months ended Sept. 30. The company expects to start the first phase of a new 6 million ton unit in neighboring Odisha state toward the end of the financial year ending in March 2015, Managing Director T.V. Narendran said.

‘Challenging Year’

“It’s been a challenging year for Tata Steel as our expansion in capacity has coincided with a slowdown in the steel consuming sectors like automotive and construction,” Narendran said in a Dec. 26 e-mail.

Passenger car sales in India in the eight months to November dropped 5 percent to 1.16 million units, according to the Society of Indian Automobile Manufacturers. Sales of commercial vehicles fell about 18 percent to 423,911 units.

Tata Steel’s margins in India may be pressured over the two years starting April 1 as costs rise with inflation, while prices at best stay flat due to easing iron ore prices, CLSA Asia-Pacific Markets analysts Abhijeet Naik and Nitij Mangal wrote in a report dated yesterday.

A planned 721.3 billion-rupee expansion by Steel Authority has been delayed by at least two years, raising speculation the final cost could be higher. The state-run steelmaker plans to expand its annual crude steelmaking capacity by 60 percent to 21.4 million metric tons and raise output at mines.

JSW Steel

JSW Steel Ltd., India’s third-biggest producer, may buck the trend of shrinking margins as iron ore supplies from Karnataka to its largest plant in the southern state improve. Its Ebitda margin may widen to 17.39 percent from 17.06 percent in the fiscal year that ended in March 2013 , according to Bloomberg estimates.

JSW Steel’s output is set to rise more than 40 percent to 12 million tons this fiscal year as it benefits from increased ore supplies to feed its expanded capacity.

“We expect JSW to outperform sector peers in 2014,” Naik and Mangal wrote in their report. “The gradual restart of iron ore mines in Karnataka will improve JSW’s cost structure by bringing down the proportion of dumps and Orissa ore in its iron ore mix.”

Average prices at Jindal Steel & Power Ltd., controlled by lawmaker Naveen Jindal, declined 15 percent from a year ago in the three months ended Sept. 30, causing profit to halve. The Ebitda margin in the year to March is estimated shrink to 24.05 percent, the smallest ever.

“Slowing demand has had a detrimental impact on steel prices,” Jindal Steel Managing Director Ravi Uppal said in a phone interview. “Prices have bottomed out and are expected to stay at current levels, unless input prices go up.”