Tata Steel Ltd’s shares have risen after the company’s steel numbers for September showed a jump in India and Europe, both over a year ago and sequentially. The quarter has also seen a surge in steel prices, and selling more should translate to higher profits, although higher input costs could be a dampener. Production data, however, showed slower growth than what one would expect. This trend was visible in government data released for the whole steel sector as well.
Tata Steel’s India sales rose by 19.5% over a year ago and by 13.8% sequentially while in Europe, the equivalent numbers were an increase of 15% and 8.3%, respectively.
Joint Plant Committee (JPC) data shows a 4.1% increase in India’s domestic steel consumption during the quarter. The data shows exports increasing by 56.1% over a year ago, while imports rose by 47.6%. Indian steel producers preferred to export and domestic steel availability was tight, increasing by only 2.8% and that too, because of the increase in imports.
The month of September, in fact, saw imports slowing and companies selling down inventory. One reason for this could be a reversal in rising iron ore prices, which has led to an uncertain outlook for international steel prices. Companies would not want to be holding high-priced inventory at this point.
Steady trends in domestic consumption in the quarter and growth in exports should be visible on performances of steel producers during the September quarter. Investors will also want to hear management commentary on the impact of the goods and services tax (GST) on the business.
While the temporary impact is one thing, the more permanent change is what should interest them. Research done by India Ratings and Research Pvt. Ltd provides an advance peek. The impact due to tax credit locked in pre-GST stock is one aspect. But the report says that the organized sector will benefit, as its cost of production will decline, by an estimated two percentage points, due to availability of input tax credit.
However, a higher tax rate itself means a sharp increase in working capital needs, as a company needs to pay the tax upfront while the credit will be given with a lag. Even then, large organized companies will benefit, as they may either seek better credit terms or even if they borrow to fund working capital, their cost will be relatively lower.
India Ratings also expects the unorganized sector’s costs to increase due to higher compliance cost post-GST, by about one-two percentage points. In the July-September period, “other” steel plants saw their output decline by 12.3% over a year ago. Others refer to a grouping of plants in the JPC data that excludes the larger integrated steel plants. While the GST roll-out may be a reason, demonetization and higher capacity among the bigger (and therefore more cost-efficient) companies too could be contributing factors.
The organized sector is therefore expected to get an upper hand and India Ratings expects its market share to increase, at the expense of the smaller firms. The government has introduced measures over the weekend to make life easier under GST for small producers and whether this can make a difference needs to be seen.
Shares of prominent steel companies rose after Tata Steel’s data, and the JPC data also indicates that the large companies are likely to report good numbers in the September quarter. A strong sales performance by automobile manufacturers is a healthy sign for the steel sector.
Going ahead, this is a seasonally weak period in Europe and China due to winter and holidays. That and the weakening of iron ore prices run the risk of weak steel prices for some time. Volatility in the international markets, particularly in China, remains a main factor.
In the domestic market, how soon real estate and construction markets recover, and when private spending on infrastructure revives, are key imponderables to watch for.
Source: livemint.com