WAITING FOR A TURNAROUND

It seems that things have been falling in place for India for her to move towards a higher growth orbit after a long time. This is in view of the fact that most of the key indicators have been in the country’s favour. The GDP growth rate seems to be getting revisited and revised upwards by many, based on factors such as sharp cooling off in commodity prices (mainly crude); low inflation which is within the RBI’s comfort zone; contained fiscal deficit; and stable currency. Also, in January this year the RBI cut interest rates by 25 basis points, boosting hope about a reversal in the interest rate cycle. Lower interest rate is expected to revive the capex cycle for corporates and improve consumer sentiments, thereby increasing consumer spending at the individual level.

The markets also seem to have digested the above and hence have been on an uptrend since 2014 with slight consolidation at different intervals. The formation of a majority government at the centre has increased the confidence level of the investors, especially the FIIs which have been pouring money into India to encash on the ongoing Bull Run. As the markets move a year and a half ahead, based on future expectations and sentiments of the market participants, the impact of the quarterly earnings are short-lived. This is because of a knee-jerk reaction on account of the earnings with the momentum building up accordingly. Therefore, despite all the positives flowing around the overall Q3 earnings, the overall picture has not been that great since revenue growth remained muted. Also, margin expansion has not been witnessed either at the operating or PAT level.

The impact of the positive factors though may become visible in the coming quarters after the lag effect has been taken care of. As such, revenue growth momentum and earnings’ upside will be clear for quarters falling in FY16 and FY17. For our observation we have selected Sensex and BSE 500 companies (excluding banks) in both the cases and have also considered consolidated numbers for companies wherever applicable and available.

Revenue & Growth

During the quarter under review the overall revenue growth for BSE 500 companies remained muted both on QoQ and YoY basis with negative bias, with companies reporting overall revenues of Rs 12,08,175 crore. However for Sensex companies the revenue growth was muted on a QoQ basis and a decline of 3.2 per cent on a YoY basis, with such companies reporting revenues of Rs 4,62,892 crore. On a QoQ basis, among Sensex companies, the top five companies which reported highest growth in revenues were Tata Motors, Coal India, NTPC, L&T and Dr Reddy’s with growth of 14.9 per cent, 13.3 per cent, 13 per cent, 12.7 per cent and 7.1 per cent respectively. Similarly the bottom five companies which reported largest drop in revenues on a QoQ basis were Reliance Industries, ONGC, Tata Steel, Bajaj Auto and Sesa Sterlite with drop of 14.8 per cent, 8.1 per cent, 6.1 per cent, 5.3 per cent and 1.6 per cent respectively.

EBITDA, Growth & Margin

On the EBITDA front, the BSE 500 companies reported a decline of 3.1 per cent on a QoQ basis but grew by 2.2 per cent on a YoY basis while reporting an overall EBITDA of Rs 1,88,169 crore for the quarter under review. On the margin front there was a contraction of 43 basis points on a QoQ basis; however on a YoY basis an improvement of 40 basis points was witnessed with an overall EBITDA margin of 15.6 per cent. However, Sensex companies reported an EBITDA of Rs 81,839 crore which was muted on QoQ and lower by 5.7 per cent on a YoY basis.

On a QoQ basis among Sensex companies, the top five companies which reported highest growth in EBITDA were Coal India, NTPC, L&T, Dr Reddy’s and Bajaj Auto with growth of 68 per cent, 44 per cent, 24 per cent, 17 per cent and 9 per cent respectively. Similarly, the bottom five companies which reported largest drop in EBITDA on a QoQ basis were GAIL India, ONGC, Tata Steel, Hero MotoCorp and Reliance Industries with drop of 51 per cent, 21 per cent, 16 per cent, 12 per cent and 11 per cent respectively.

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Depreciation Expense

It seems a gross block addition has been taking place on a regular basis as there has been increase in depreciation both on QoQ and YoY basis. The overall depreciation for BSE 500 companies for the period under review was Rs 49,100 crore - an increase of 6.8 per cent and 10.5 per cent respectively. Similarly, for Sensex companies, the depreciation for the quarter was Rs 23,249, up by 7.4 per cent and 9.6 per cent on a QoQ and YoY basis respectively. Companies among Sensex which witnessed substantial increase in depreciation expense on a QoQ basis were ONGC, Sesa Sterlite, L&T, Tata Motors and NTPC whereas companies which witnessed reduction in depreciation expense on a QoQ basis were Reliance Industries, Bharti Airtel, M&M, BHEL and ITC.

Interest Expense

As it actually takes time for things to materialize on the ground level, the overall operating performance of key companies in BSE 500 did not see any material change in a positive direction during the quarter gone by. Also, with interest rates remaining at the same level and liquidity remaining an issue, the interest expense has increased by 3.2 per cent and 12.3 per cent on a QoQ and YoY basis respectively to Rs 56,137 crore. Similarly, for Sensex companies the increase was 8 per cent and 10.6 per cent on a QoQ and YoY basis at Rs 9,278 crore.

Companies among Sensex which witnessed substantial increase in interest expense on a QoQ basis were Dr Reddy’s, L&T, Bharti Airtel, Reliance Industries and Tata Motors whereas companies which witnessed reduction in interest expense on a QoQ basis were Sesa Sterlite, Tata Power, Tata Steel, TCS and Wipro.

Tax Expense

The performance of key companies remained weak during the quarter under review and this has been reflected in lower tax outgo as well for companies both in BSE 500 and Sensex. BSE 500 companies witnessed a lower tax outgo of Rs 33,027 crore, down by 6 per cent and 3.3 per cent QoQ and YoY respectively. Similarly, Sensex companies also reported lower tax outgo of Rs 17,582 crore, down by 7.2 per cent and 9.5 per cent on QoQ and YoY basis respectively. Tata Motors, TCS, Coal India, Reliance Industries and ONGC were the top five companies among Sensex which had the highest tax outgo whereas M&M, NTPC, Hindalco Industries, Cipla and BHEL were the bottom five companies with the lowest tax outgo during the quarter under review.

PAT, Growth and Margin

Along with revenue growth remaining muted and margin contraction witnessed at the operating level, higher depreciation and interest expense added to the woes on the net profit front. BSE 500 companies reported a combined PAT of Rs 75,363 crore, which was lower by 10.8 per cent and 12.1 per cent on a QoQ and YoY basis respectively. Similarly, for Sensex companies, PAT was lower by 1 per cent and 11 per cent on a QoQ and YoY basis at Rs 42,914 crore. Among Sensex companies, Hindalco Industries, BHEL, Coal India, NTPC and Bajaj Auto were the top five companies which reported highest net profit growth of 356 per cent, 70.3 per cent, 48.8 per cent, 48.4 per cent and 45.8 per cent respectively on a QoQ basis. However, Tata Power, Tata Steel, GAIL (India), ONGC and Hero MotoCorp were the bottom five companies which witnessed  a steep drop of 354 per cent, 87 per cent, 54 per cent, 34 per cent and 24 per cent respectively on a QoQ basis in profitability.

Future Outlook

We believe that the positive vibes (expected improvement in economic outlook and increased liquidity) have kept the markets in an uptrend till now despite an underperformance witnessed in the December 2014 result. There were no major positive surprises; however on the negative side most of the PSU banks reported higher NPAs than expected, which means that the asset quality is still a concerning factor. In realty, things have not improved as expected though there are positive signs that things are on the right track and the results will be seen in a quarter or two. Meanwhile, the government is taking the right kind of efforts so ensure that the improvement in growth rate is not short-lived.

Everyone is awaiting the new government’s first full-fledged Union Budget, which will set the pace at which market will move. The RBI is also expected to take a future rate cut decision based on the economic survey, Railway Budget and Union Budget. The impact of lower crude prices and softening in interest rate cycle is expected to be gradually visible and may show robust revenue growth along with improvement in the operating and PAT margins. This is expected to retain momentum in the stock market unless some global concern has an adverse effect.

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Automotive

The year 2014 was a rollercoaster ride for one of the world’s largest automobile industry considering that the Indian auto markets saw various ups and downs in terms of volume sales. However, the lowering of fuel prices and the beginning of big rate cuts herald good times ahead for this sector. As mentioned in our earlier quarterly result analysis, the automobile industry posted moderate growth for the December 2014 quarter in terms of sales. The topline of the industry showed a growth of 8.66 per cent on a yearly basis while sales showed some volume growth predominantly on account of the commercial vehicle segment.

The government’s thrust to implement the Goods and Service Tax (GST) has created some optimism in the fleet carriers, thereby creating demand for commercial vehicles. Further, the overall volume growth was also supported by increasing sales of passenger vehicles too. Automotive giants such as Tata Motors and Maruti Suzuki launched a few new variants in the mid-segment which received good response from the buyers. On the expenses front, the raw material cost increased 7.24 per cent on a yearly basis in proportionate to the overall sales’ growth.

Further, there has been considerable increase in the overall operating cost of the automobile companies. This dampened the industry’s operating profit, showing flat growth of 0.02 per cent on a yearly basis. Interestingly, the interest charges of the industry showed negative growth of 1.58 per cent on a yearly basis. However, there has been 11.48 per cent yearly growth in the industry’s depreciation cost during the December 2014 quarter. On the net profit front, the industry reported considerable de-growth of 10.75 per cent on a yearly basis during this quarter. This was due to higher depreciation charges and a 38 per cent increase in tax expenses on a yearly basis.

The top five automobile companies by revenue showed 6.98 per cent yearly growth, lower than the industry’s growth rate. Similar to the industry, these companies too faced an increase in the overall operating cost which made them post negative growth of 4.37 per cent in their operating profit. There was further deterioration in their net profit by 13.77 per cent on a yearly basis primarily due to 11.32 and 33.56 per cent higher depreciation and tax charges respectively. While it is expected that rapid policy decisions will lead to economic growth in India, we are still neutral towards the domestic automobile industry and expect moderate volume growth for one more quarter. There has been the beginning of a big rate cut cycle but an increase in automobile sales will take quite a good time till the actual implementation of the reforms begin to make the right impact.

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Banking

For the last ten months that the new government has been in power, a lot of hope has been built around economic rejuvenation and yet nothing has changed in terms of ground realities. This is best reflected in the quarterly performance of the banks. Of the 40 banks analysed (16 private sector banks and 24 public sector banks), the net interest income (NII) has increased by 8 per cent on a yearly basis while on a quarterly basis it has increased marginally by 1 per cent. Muted credit growth along with declining G-sec yields has impacted the interest income of banks.

Credit growth has remained at the subdued level of 10.6 per cent on a yearly basis while the yield on G-sec has fallen by around 100 bps in the last one year. Nonetheless, the fall in the yield has helped the banks to post robust ‘other income’ growth in the form of higher treasury gains, especially for PSBs. For the quarter ended December 2014, the aggregate other income of 40 banks increased by 26 per cent on a yearly basis while for the public sector banks (PSBs) it was 29 per cent.

Except for the other income, the performance of the PSBs has lagged behind their private counterparts. The NII for private sector banks grew by 18 per cent on a yearly basis while the state-owned banks’ NII grew by a mere 5 per cent in the same period. The operating profit of the banks on a consolidated basis has increased by 14 per cent on a yearly basis. The PSBs’ operating profit grew by 11 per cent while for private sector banks it increased by 20 per cent. The growth in operating profit has not translated into good performance in terms of the bottomline. The net profit of the banks increased by 12 per cent on a yearly basis while on a sequential basis it declined by 5 per cent.

Such a lacklustre performance was on account of increase in provisions, which went up by 10 per cent on a YoY basis and 14 per cent on a sequential basis. The asset quality of the banks has continued to deteriorate for both private as well as public sector banks. The gross NPA of 40 banks has increased by 30 basis points on a sequential basis while the net NPA has increased by 22 basis points in the same period. On the back of sluggish economic activity and lack of revival in the capex cycle we believe that the banks will continue to deliver a jaded performance in the next quarter too (Q4FY15). Nonetheless, banks, and especially private sector banks, with more exposure to a retail portfolio will perform better and deliver better results.

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FMCG

Companies engaged in the FMCG sector posted a muted performance with single-digit revenue growth in the December quarter due to weak volume growth. On an aggregate basis, the 27 companies (18 staples + 9 discretionary) in the sector that we analysed have posted topline growth of 8.1 per cent and bottomline (excluding exceptional items) growth of 9.7 per cent on a YoY basis. Consumption continues to be inconsistent, with only a few pockets of strength. Consumer staples’ volume growth seems to have stabilised at the low levels, similar to Q2 FY15, even though the trends were mixed.

If we look on the volume side, HUL has shown disappointing growth in its consumer business at 3 per cent compared to 4 per cent in Q3 FY14; GCPL reported 4 per cent growth in the soap segment as against 6 per cent growth in the corresponding period last year. Marico’s domestic business grew at 5 per cent as against 3 per cent and its Parachute brand coconut oil grew at 8 per cent as compared to 2 per cent. Emami posted 10 per cent growth against 2.5 per cent on a YoY basis and 11 per cent on a QoQ basis. Dabur grew at 7.4 per cent from a corresponding 9 per cent. If we look at the smaller companies, Jyoti Labs reported 10 per cent growth and Bajaj Corp reported growth of 19.2 per cent (double-digit growth for the first time since Q2 FY14).

ITC reported 14 per cent de-growth in its cigarette business due to a huge hike in excise duty announced during the last budget in July 2014; a similar negative impact was seen on VST Industries and Godfrey Philips. In the case of consumer discretionary products, Asian Paints, which had delivered solid growth in 1Q FY15 and 2Q FY15 (11 and 12 per cent YoY volume growth respectively), posted sharp slowdown to 3 per cent YoY volume growth. Even other paint companies posted muted growth by volume. Jubilant Foodworks posted the same store growth of 2 per cent after registering negative growth for the last four quarters.

The overall volume growth for FMCG companies, particularly those with a stronger presence in rural areas, plunged as rural consumers curtailed spends. During this quarter the EBITDA margin expanded by 60 bps to 21.1 per cent on the back of decline in the raw material prices. The prices of some key inputs like crude oil, palm oil, menthol, LLP, TiO2, LAB, HDPE, VAM, etc. have softened during the quarter on a YoY basis and this has benefited most of the consumer staples and paint companies. However, the benefit of the same could not be seen substantially in the current quarter as the companies are holding some inventories at higher prices.

Hence the full benefit of input price correction would be visible from Q4 FY15 onwards. Marico’s EBITDA margin contracted by 40 bps to 16.4 per cent due to a rise of 38 per cent in copra prices on a YoY basis. Going forward, any pick-up in rural consumption will drive growth in the FMCG sector.

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Information Technology

The Indian IT service industry has always been a preferred vendor across several global markets. The country’s IT service is well-known for its global competitiveness, healthy contribution to gross domestic product (GDP), and tackling energy and environmental challenges. The industry employs more than 10 million people and is the world’s largest outsourcing destination. As expected, the Indian IT service industry registered a good performance during the December 2014 quarter, witnessing sequential growth of 2.63 per cent and yearly growth of 11.39 per cent. The sequential growth of the industry was better than street expectations in constant currency terms.

Further, the overall growth was predominantly driven by the US’ geography despite weaker growth in Europe. The Euro zone is currently facing severe problems over Greece’s exit issue. Interestingly though, the IT companies’ managements are positive about the overall demand environment as well as the IT budget in the wake of increasing global liquidity. Surprisingly the operating profit of the industry showed a sequential 5.20 per cent and yearly 10.93 per cent growth, far better than its revenue growth during the December 2014 quarter. This was predominantly due to good operational efficiency, efficient employee utilisation, and a balanced mix of service offerings.

The industry posted marginal de-growth in its depreciation and tax charges. The net profit of the industry showed a flat growth of 0.01 per cent during the December 2014 quarter. It has been facing continuous margin pressure over the last few quarters due to commoditized services. The same margin softening has been seen during the December 2014 quarter too. The top five IT service companies by revenue posted a performance similar to the industry’s performance with a sequential 3.19 per cent revenue growth, which was marginally better than the industry growth rate. The net profit of the top five companies showed a sequential growth of 3.07 per cent during the December 2014 quarter.

Interestingly, there has been a sequential 7.68 increase in depreciation cost, exhibiting increase in capital expenditure on good demand visibility. The performance of these five companies was better than the mid-size IT service companies during the December 2014 quarter. The European market was a promising market for the Indian IT service industry previously. However, due to concerns over the Greece debt issue, performance related to this region was not up to the mark. However, we expect good amount of order flow once this issue gets stabilised. Meanwhile, growth may be moderate in the coming quarter due to continuance of such concerns.

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Oil and Gas: Crude

Declining crude oil prices hit oil companies where it hurt the most. During the third quarter ending December 2014, Brent crude nosedived to USD 60/bbl from a high of USD 115/bbl posted in June 2014. However, this unique and volatile situation proved to be a booster for the Indian economy as a whole considering we import more than 70 per cent of our crude requirements. It played havoc though with both upstream and downstream companies. In fact, it was a double whammy for upstream companies like ONGC and Oil India as on the one hand they have to bear the burden of oil subsidies on account of LPG and kerosene and on the other hand their gross realisation declined drastically owing to a drop in the price of crude.

The downstream companies also posted poor numbers owing to huge inventory losses on account of a sharp decline in crude during Q3. The worst hit were the upstream companies as the country’s biggest explorer, ONGC, reported 50 per cent decline in net profit during Q3 FY15. The company’s PAT declined to Rs 3,571 crore as against Rs 7,126 crore earned during Q3 FY14. The company’s topline also showed a decline of 9 per cent at Rs 18,925 crore during the quarter as against Rs 20,852 earned during the same period last year. Though the company has shown some kind of improvement in terms of physical production of crude oil, the drop in crude price has forced its gross realisation to come down to just USD 76/bbl during Q3 as against USD 102/bbl earned during last year.

Its net realisation also dropped to a mere USD 35.57/bbl from around USD 46/bbl. It really has left the company bleeding. In the same way, Oil India’s profit after tax also halved to Rs 498 crore as against Rs 903 crore earned during the corresponding quarter last year. During this period the company shouldered Rs 1,437.73 crore of subsidy while its topline declined by a whopping 20 per cent to Rs 2,195 crore. On the other hand, downstream companies also remained on the losing side as they posted a huge inventory loss during Q3. Companies like IOC suffered an inventory loss of Rs 12,842 crore during Q3 FY15 while earning Rs 2,454 crore inventory gain last year.

Actually Indian refiners purchase crude from international markets in advance as it takes around 60 days to supply crude to their refineries. During Q3, as crude declined heavily, crude purchased earlier has hit the margins of these companies in a big way. For Q3, IOC has earned a negative gross refining margin of USD 7.73/bbl as against USD 4.56/bbl earned during the same period last year. As a result, the company posted a net loss of a staggering Rs 2,637 crore as against loss of Rs 961 crore posted during the quarter ending December 2014. In the same way, the profitability of  BPCL and HPCL got hit too, yet they were slightly better off as their refineries are near the coastline. BPCL earned PAT of Rs 551 crore as against loss of Rs 1,089 crore last year while HPCL posted loss of Rs 325 crore.

Refining major RIL also experienced sluggishness in topline and bottomline performance owing to decline in crude. The company’s gross refinery margin (GRM) declined to USD 7.3/bbl. Its GRM during the September quarter was at USD 8.30/bbl. The company’s profit dropped by around 8 per cent to Rs 5,085 crore as against Rs 5,511 crore earned during Q3 FY14 while its stand-alone topline declined by 23 per cent to Rs 80,196 crore as against Rs 1,03,521crore.  With crude prices now showing some kind of consolidation in the international market, the situation for the oil and gas sector may improve in the coming quarters though on the whole it will remain weak for some more time.

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Pharmaceuticals

Pharma companies posted a muted performance with single-digit revenue growth in the December quarter due to slowdown in exports, which we had already hinted at in our September quarter results’ analysis issue. On an aggregate basis, the 36 companies (32 Indian + 4 MNCs) in the sector that we have analysed have posted topline growth of 6.8 per cent while bottomline growth (excluding exceptional items) was lower by around 55 per cent on a YoY basis. During the quarter we have not seen any growth in the EBITDA level. The EBITDA margins also contracted by 130 bps point on a YoY basis due to an adverse product mix, coupled with higher raw material and other expenses.

During Q3 FY15 Indian pharma companies grew by around 15.4 per cent in the domestic formulation market. Among large-cap companies, Sun Pharmaceutical and Torrent Pharmaceuticals grew at 21 and 40 per cent respectively while in the small-cap segment Ajanta Pharma grew at 36 per cent, posting growth in excess of the industry average. Cipla, Lupin, Glenmark Pharma and IPCA Lab posted growth in line with the industry average. On the export formulation business front, Indian companies posted slower growth of 11.5 per cent due to US’ sales not witnessing growth as compared to the earlier quarter on the back of a higher base effect, increase in competition of existing products, and slowdown in product approvals from the USFDA. Currency headwinds from emerging economies such as Russia, Brazil and Venezuela are also likely to impact growth from these markets.

There is a significant slowdown in ANDA approvals for all companies. If approval rates do not pick up, US’ growth is likely to be hurt in the near as well as long term. Fewer approvals for ANDA continue to be a major roadblock for Indian generics in the US as there were final approvals for 46 products only in 9M FY15. Lupin and Dr Reddy’s benefited in Celebrex and Valcyte respectively. Overall, there are no meaningful approvals in the US for Indian generics other than the above two products in Q3 FY15. Indian formulations could grow on the back of new launches and normalcy in trade channels post-NLEM price implementation.

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Power

At last the power sector has shown some kind of green shoots with companies starting to build capacities and their financials turning from red to green. It would not be wrong to say that the efforts of the government to drive ahead the Indian infrastructure space, particularly power, have started showing results on the ground. Already power sector reforms are underway and the coal block auction process is going on in full swing. The biggest respite for power companies has come from an announcement by the RBI about cutting interest rates since companies are reeling under the pressure of a huge interest burden that has kept on increasing with each passing quarter.

In the third quarter many companies have posted a good turnaround in terms of topline even though their bottomline continues to be a cause for concern. As far as the present situation is concerned, it continues to be grim for power generation companies due to high interest cost and low PLF and demand. During the nine months of FY15 the total generation jumped to over 793 BU as against 722 BU generated during the corresponding period of FY14 - a decent growth of 9.92 per cent. Thermal power generation led the flock with 657 BU. At the same time, capacity addition during the nine months ending December 2014 has increased by 22 per cent to 10,610 MW as against 8,728 MW achieved during the corresponding nine months ending FY14.

This data clearly shows that companies are now feeling a bit confident. Also, the march of the GDP towards the north has brought in some optimism regarding improvement of PLF (Plant Load Factor), which has remained lukewarm for the last few years. In fact, capacity utilisation still remained a sore point as there was a significant decline in PLF from 68.99 per cent in December 2013 to 65.83 per cent in December 2014. This clearly indicated lower demand and fuel supply problems. During December 2014 the availability of power remained deficient as against the demand of 86,860 MU. Only 84,098 MU of power was available, clearly showing a mismatch.

Meanwhile, NTPC’s net profit rose marginally by 7.4 per cent during Q3 FY15 to Rs 3,074 crore as against Rs 2,861 crore earned during Q3 FY14. During this period fuel cost decreased to Rs 11,439 crore as against Rs 10,139 crore incurred during the same time last year. The total income of the company inched to Rs 18,858 crore as against Rs 18,805 crore - a marginal spurt of 0.2 per cent. The best performance was by Torrent Power with its topline shooting up by 26.5 per cent to Rs 2,501 crore while its net profit reached Rs 235 crore as against net loss of Rs 41 crore during Q2 FY14. Power Grid also showed its mettle with a fabulous performance - its net profit jacked up by 17 per cent to Rs 1,228 crore during Q3 as against Rs 1,042 crore earned during the same period last year. Its topline went up 18 per cent to Rs 4,353 crore. JSW Energy is another company whose PAT rocketed by 115 per cent to Rs 289 crore as against Rs 134 crore earned during the same time last year.

On the whole, interest cost continued to impact the financial health of companies as it ate into their profits. For companies like NHPC, Jaiprakash Power Venture, Reliance Infra, Tata Power and Jyoti Structures the interest cost rose by 93 per cent, 56 per cent, 50 per cent, 28 per cent and 159 per cent YoY respectively during Q3. Due to this drastic increase in interest cost, the PAT of some companies like NHPC and Tata Power declined while Jaiprakash Power Venture continued to show loss.

The macro situation of the power sector clearly indicates lack of enthusiasm. The good part is that the government has already taken note of it and is going all out to improve fuel supply, launch new greenfield projects and push the demand for power, especially in the manufacturing sector. Also on the positive side is the fact that inflation continues to be low and may lead to further cut in interest rates. As such, power sector companies are expected to put up a good show in the coming quarters.

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Steel

Nothing seems to be working right for steel companies in India. Higher imports, lower domestic consumption, and subdued pricing of steel have been adversely impacting the steel industry. The Q3 FY15 results of the steel companies’ stands testimony to the impact of these factors. The net profit on an aggregate basis has witnessed a fall of 180 per cent on a yearly basis for the 45 steel companies that we analysed. Such a sharp fall can partially be explained by the exceptional item of Rs 1,855 crore of Jindal Steel & Power. Even if we remove this exceptional item, there is a fall in the net profit of steel companies at the aggregate level.

The reason for such a subdued performance can be explained by the declining revenue, higher interest cost, and higher depreciation. The revenue of the companies analysed has declined by 4 per cent on a yearly basis. All the top four steel companies based on revenue have posted lesser turnover for the quarter ending December 2014 against what they recorded in the same quarter last year. The fall in turnover is due to both, fall in average realisation as well as decline in volumes. For example, JSW Steel saw its total saleable steel declining by 2 per cent on a YoY basis and a similar fall was witnessed by Tata Steel.

The domestic HRC prices have also declined by 4-5 per cent in the same period. India’s steel industry also continues to suffer from surge in imports, especially from China, Korea, Japan and the CIS. Consumption of domestically produced steel fell by 6.6 per cent YoY as imports increased by 142.3 per cent on a YoY basis. In addition to the surplus capacity internationally, a strong rupee is encouraging for more import of steel. The worsening of the situation is despite a fall in the prices of key raw materials. The prices of both coking coal and iron ore have come down by anywhere between 30-40 per cent internationally in the last one year and are currently trading at their lowest point over the last few years. Domestically we have not seen such a sharp fall in the prices; however, steel companies have witnessed a fall in the raw material prices by 3 per cent on a yearly basis.

Fall in revenue along with a mismatched fall in the raw material prices and higher ‘other’ expense has led to sharper fall in the operating profits. On an aggregate basis the operating profit for the companies analysed is down by 30 per cent on a yearly basis. Th is has led to a fall in the EBITDA per tonne for companies. For example, Tata Steel EBITDA per tonne has declined from  Rs 6,149 per tonne recorded for the quarter ending December 2014 to  Rs 4,905 per tonne for the recently concluded quarter.

Going forward, we do not see much respite for steel companies’ at least in the next quarter. Internationally, China’s economy continues to decelerate and being a major consumer and producer of steel, this has impacted the industry adversely. Although the the new government has shown good intent and is working on various measures to kick-start the economic recovery, a lot depends on the actual uptick.