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Indian Steel Industry

Weakening demand and lower realisations in its international operations will mean continuing pressure on Tata Steel’s financials.
The last time Tata Steel reported a fall in revenues and a significant drop in net profits was in 2001 and 2002. This was mainly on account of a global recession and falling steel prices, resulting in lower demand for steel and significant erosion in margins. The turnaround came in 2003 as it reported higher sales and net profits. It seems to have come full circle once again.
Recently, the company’s rating was downgraded by Moody’s Investors Service. This time, the concerns are more on account of its international operations and worsening global steel outlook, resulting in deterioration in the company’s financial conditions. “The operating parameters like EBIDTA margins are decelerating quickly.
Also, its high debt of $13-14 billion is a concern in light of very little visibility over future cash flow on account of a sharp fall in steel demand and prices,” says Ivan Palacios, assistant vice president – analyst, Moody’s Singapore. So, will it do an encore?
Overseas worries
During Q3FY09, Tata Steel reported a 42.5 per cent drop in consolidated net profit to Rs 810 crore, which was better than analysts’ expectations of a loss. The outperformance, to an extent, was also on account of hedging gains (in Corus, UK) reported in Q3. With concerns over international operations not expected to ease anytime soon, analysts believe that the performance in FY10 will be hit significantly.
Today, the biggest challenge for Tata Steel is its international operations. The company currently has total crude steel capacity of about 30 million tonnes. Since over 70 per cent is accounted for by its operations in Europe and South East Asia, these regions have a significant bearing on consolidated financials of the company.
For instance, during the first nine months of FY09, the EBDITA margins for the consolidated entity stood at 15 per cent,...