Tata steel & SAIL: Pricing power, March volumes to buoy steel cos

Tata Steel and SAIL had a great December quarter. A robust steel demand in the domestic market, coupled with a lower raw material cost, worked well for these companies. Net profit almost doubled compared with the same period last year.

The results have beaten the Street estimates by a good margin and this was reflected in their stock prices. Shares of Tata Steel and SAIL surged by 4.8% and 1.6%, respectively, on Thursday. The Sensex remained flat, though.
Demand for steel has remained strong in India, thanks to domestic rural demand.

Majority of the top steel producers have reported a sales volume growth of 25-80% in Q3. Sales volume of SAIL and Tata Steel grew by nearly one-fourth and one-half, respectively. The topline could have grown at a faster rate had the sales realisation remained high. Going forward, realisations are likely to improve.

Most of the companies have raised their product prices by Rs 1,000-2,000 per tonne in the past one month. With continuous rise in global steel prices, domestic prices would have to move further upwards. Due to a falling raw material cost, the bottomline of these two companies grew at a much faster rate during the quarter.

The average cost of this key raw material was 40-50% lower compared to the same period last year. For instance, the cost of coking coal per tonne of steel was $185 during the third quarter of FY10 and this is much lesser than $300 it paid during the December 2008 quarter.

The lower raw material cost had a positive impact on operating margins of both the companies. As mentioned in the earnings preview report earlier in ET, the operating margin expanded more in the case of SAIL, which is less integrated. The recent upward trend in raw material prices is going to put pressure on the margin.

The impact, however, will be visible from the June 2010 quarter, after the revision of annual coking coal contracts. At the same time, the full impact of recent hike in steel prices will be reflected in the fourth quarter.

Also the March quarter, typically, has the highest sales volume among all four quarters. All these factors indicate that the March quarter is going to be a big bonanza for steel companies.