Rising infrastructure spending buoys steelmakers’ Q2 show

Rising infrastructure spending, growing consumer goods market have driven the good performance of the Indian steel companies in the second quarter of FY’08. IISI (International Iron & Steel Institute) has forecast that steel sector will grow at around 7% globally for next two years and 13% in emerging economies. Since around 75% of growth comes from BRIC (Brazil, Russia, India and China) countries, all major Indian steel manufacturers have announced huge expansion plans.

The top six companies, which accounts for around 70% of the total production capacity, reported encouraging results during the second quarter of FY ’08. The aggregate y-o-y growth for second quarter in net sales, operating profit and net profit are 11.4%, 12.7% and 9.7% respectively.These figures are in line with the IISI forecast, which has forecast a growth of around 12% for India.

Government-owned SAIL, the country’s largest steel producer, reported a 7.3% y-o-y growth in net sales for the quarter ended September ’07. Its operating profit reported a 5.5% y-o-y growth during the same period. The interesting thing to see is that even though raw material costs have fallen, the growth in personnel cost is phenomenal, a whopping 43%. This has reduced the operating margin by 60 basis points to 36.5%.

Jindal Steel & Power steals the show with a superb 60.7% y-o-y growth in its net sales. The operating profit and net profit were also very impressive, growing by 56.5% and 48% respectively compared to the same period last year. This growth was driven by higher production volume. Not surprisingly, the stock has appreciated by over 70% in the past one month.

Even Tata steel, India’s largest private sector steel producer managed to show a good performance in the last quarter, though it was still below market expectations.

Its net sales for the quarter ended September ’07 stood at Rs 4,785 crore, a growth of 14% from the last quarter. The growth has come from increased sales to car manufactures and infrastructure companies.Most companies have managed to maintain their operating margin through better operating efficiencies and increase in steel price to offset the increasing raw material costs.

Many companies are also increasing the production of their downstream products that gives a better profit margin.The biggest challenge faced by the domestic steel companies is increasing raw material costs. Those which have complete backward integration to frontline operations are going to see soaring profits.

Others will have to improve the operational efficiencies and acquire better bargaining power with their customers to maintain the operating margin. China has put in place new guidelines, which discourages the export of crude steel. This will be very helpful for Indian steel companies which until recently were concerned about rising steel export from China.

Going forward, steel prices will have a 20-30% rise next year. Even companies like Arcelor Mittal have already announced the price rise in their US market. This kind of increase in steel price will help Indian steel producers in better realisation in sales.With interest rates coming down and infrastructure spending going up, the sector is going to do well the coming quarters.