Falling Prices & Shrinking Export Market Affects Essar Steel's Performance
Global Steel Scenario – Apparent consumption plummets by 10%
Apparent consumption for flat steel products on a global basis, over the past 1½ years has plummeted by 10%. Specific declines included the USA at 26%, South Amercia at 14%, Japan at 13% and Europe, Major Asia and Rest of World each in the 8-9% range. On the other hand, there exists excess capacity of about 50 million tons in the world market, which has adversely affected the steel prices globally.
Hot-rolled coils (HRC) prices currently at around US$155 - 160/t in the international spot markets are way below the breakeven price for most steel companies. The price was ruling at about US $175 pmt during the corresponding period last year.
Global Steel Trade – Increasing trade barriers
Most developed nations including USA, Canada, W. Europe & some of the S E Asian countries have raised trade barriers making exports of steel almost impossible. This has consequently shrunk the global steel market and it is estimated as a result that about 30 million tons of surplus steel is exploring alternate markets, India being a probable destination.
Indian hot-rolled coil exports have declined by over 26% in the period April to December of the current year as compared to the corresponding period last year.
Essar Steel has been the largest exporter of hot-rolled coils for the last 5 years, exporting over 40% of its production. However, due to shrinkage of export market, the exports of the company have registered a substantial decline. Despite this drop, the Company continues to be the largest exporter of hot-rolled coils from the country.
Domestic Scenario – Excess supply continues
The situation in the domestic market has further worsened due to the export surplus being diverted locally exerting pressure on the domestic steel prices. The domestic oversupply is to the tune of 2.5 – 3.0 million tons.
Company’s Operating Performance
Despite weak sentiments in the domestic market, the company positioned itself aggressively in the market to increase its domestic sales by 13% to 2.86 lakh tons from 2.54 lakh tons in the corresponding period of last year and by 31% compared to the previous quarter of the current year. This has marginally offset the dip in exports, which has been steep at 55.5% to 0.56 lakh tons vis-à-vis 1.25 lakh tons in the corresponding period last year, as a result of trade barriers and depressed price levels in the international market.
This necessitated the regulation of production. The production of hot-rolled coil (HRC) dropped by 13% to 3.36 lakh tons during the quarter from 3.85 lakh tons in the corresponding quarter last year in line with the market demand. However, the production is up by 5% compared to the previous quarter of the current fiscal.
For the period ended December 2001, the Company has liquidated its finished goods inventory by 41% at 65,000 tons as compared to 111,000 tons in the corresponding period last year.
Financial Performance
The third quarter was extremely difficult for Essar Steel and for the steel industry overall. Despite this, the Company improved its EBITDA by 224% to Rs.53.18 cr. from Rs.16.41 cr. in the previous quarter of the current fiscal. Earnings were negatively affected due to the continued decline in the prices. While the sales volume declined by 10% compared to corresponding period of last year, the sales income dropped by 25% due to the drop in average sales realisation by over 18% at Rs.3,000 pmt vis-à-vis the corresponding quarter last year. The total sales for the three months ended December 31, 2001, declined to Rs.468.05 cr. from Rs.621.67 cr. in the corresponding period a year earlier.
After providing for total expenses at Rs.414.87 cr. (Rs.495.44 cr. in the corresponding quarter last year), earnings before interest, taxes, depreciation and amortization (EBITDA) for the three months ended December 31, 2001, were Rs.53.18 cr., compared to Rs.126.23 cr. in the third quarter of previous year. The company made provision for the interest & other finance charges at Rs.150.48 cr. (Rs.125.45 cr. in the corresponding quarter last year) and depreciation at Rs.108.11 cr. (against write back of Rs.28.28 cr. in the corresponding quarter last year). After deferred tax credit of Rs.79.18 cr. for the quarter under review, the company has reported a loss of Rs.142.15 cr. as against the profit of Rs.15.08 cr. in the corresponding period last year and loss of Rs.262.77 cr. in the second quarter of this year.
Commenting on the performance, Shri J. Mehra, MD said, “We have done everything within our control to contain the costs, but the drop in prices by 18% severely affected our performance. However, the fall in price has bottomed out and are expected to stabilise & firm up in the coming quarter, based on which we foresee substantial improvement in the performance of the Company.”
Outlook
The Company is working towards enhancing its domestic market share due to the shrinkage in export potential to ramp up its capacity utilisation. Alongwith the comprehensive restructuring, the Company is expected to become resilient to the future downturns.
ESSAR STEEL LIMITED
Regd. Office : Post Hazira, Pin 394 270, Dist Surat
Corp.Office : Essar House, 11 Keshavrao Khadye Marg, Mahalaxmi, Mumbai 400 034.
Unaudited Financial Results (Provisional) for the period / quarter ended 31st December, 2001
Particulars
Quarter ended
Period ended
(Rs in crore)
Previous Year
31.12.2001
31.12.2000
31.12.2001
31.12.2000
ended 31.03.2001
(audited)
Sales
464.65
615.49
1,519.49
1,986.23
2,518.83
Other Income
3.40
6.18
10.88
30.15
46.22
468.05
621.67
1,530.37
2,016.38
2,565.05
Expenditure
(a)(Increase) / Decrease in Finished Goods / Work-in-Progress
11.94
12.62
113.10
(14.42)
(54.20)
(b)Materials Consumed
187.09
272.72
665.73
806.84
1,043.07
(c)Power, Fuel and water
114.54
90.34
336.06
384.53
516.21
(d)Staff Cost
12.08
11.40
37.82
36.92
48.80
(e)Other Expenditure
89.22
108.36
254.08
284.60
403.47
Profit before Interest, Depreciation, Amortisation and Taxation (EBIDTA)
53.18
126.23
123.58
517.91
607.70
Finance Cost (Net)
150.48
125.45
459.03
325.86
647.07
Profit / (Loss) before Depreciation, Amortisation and Taxation
(97.30)
0.78
(335.45)
192.05
(39.37)
Deferred Revenue Expenditure written off
15.92
13.98
47.41
40.55
67.44
Depreciation (Previous year net of write back of depreciation for earlier years)
108.11
(28.28)
315.12
130.53
239.10
Profit / (Loss) before Taxation
(221.33)
15.08
(697.98)
20.97
(345.91)
Provision for Current Tax
-
-
-
-
-
Provision for Deferred Tax
(79.18)
-
(249.18)
-
-
Net Profit / (Loss)
(142.15)
15.08
(448.80)
20.97
(345.91)
Paid-up Equity Share Capital
330.35
330.35
330.35
330.35
330.35
Reserves excluding revaluation reserves
655.98
Basic and Diluted Earnings Per Share for the quarter, period and for the previous year (unannualised) (in Rupees)
(4.30)
0.46
(13.59)
0.63
(10.47)
Notes
The above results were reviewed by the Audit Committee in it's meeting held on 31st January, 2002 and taken on record at the meeting of Board of Directors held on that date.
The qualifications by the auditors in respect of the audited accounts for the year ended 31st March, 2001, which have a material impact on the said accounts, have been extensively & appropriately dealt with in the said accounts.
Interest has been calculated on the basis of approval of the lead Institution.
Consequent to the Accounting Standard 22 - 'Accounting for Taxes on Income' becoming mandatory with effect from 1st April, 2001, the company has accounted for estimated deferred tax credit of Rs. 79.18 crores for the current quarter and Rs. 249.18 crores for the period respectively. Any excess / shortfall shall be appropriately adjusted at the year end. Deferred tax asset / liability relating to the earlier years shall be accounted for in terms of the said accounting standard..
Depreciation in respect of certain Plant & Machinery of HRC Plant has been provided under units of production method in line with the previous year. The Company has re-approached the Central Government seeking approval for such change in the method of depreciation from Straight Line Method to Units of Production Method. The final approval of the Central Government in this regard is awaited.
The Company has only one reportable segment in line with Accounting Standard 17 - 'Segment Reporting'.
Figures have been regrouped wherever necessary to make them comparable.
CORPORATE
