'Steel Industry Not Attractive For Investments'

The steel industry in India with its existing profitability is no longer attractive to invest. According to Prateek Agarwal of SBI Capital Markets Limited, the returns available from steel are poor as compared to other businesses.

Returns in percentage terms in the other industries were: paper (14.90) fertiliser (15.40) , cement (19.23), aluminium (25.63), electricity (13.75) pig iron (4.54) and steel (10.01).

This was revealed by Agarwal at the third Indian Steel Conference of Metal Bulletin held in Mumbai on February 24 and 25. In a paper titled `Raising capital for Indian Steel Projects' he told delegates from India and abroad that capital being scarce in India, there is little justification in allocating it to steel. For a green-field project, debt is available in India at around 20 per cent. However, return on capital from the steel industry is less than half of this. This implies that steel industry in India is indeed killing value .

 

This analysis of the steel industry upset some of the Indian delegates, but the paper was candid. Agarwal said India being a capital deficient country allocating around Rs 35 billion for a 1 mtpa steel project employing around 1,500 people directly and another 5,000-10,000 people indirectly cannot be justified, even from the social welfare point of view. Less capital intensive industries like autos/ancillaries, textiles, software can generate much greater levels of employment with the same investment. Investment in steel has also lost much of its strategic importance as the metal is now freely available.

In such a scenario, it is difficult to source funds for steel, he added.

However, it was revealed at the meeting that no significant amount of foreign capital had been invested in the Indian Steel industry so far. Foreigners were more interested in offering technology than finance. Another paper. Investors' Percep-tions About Indian Steel Equities by Sanjay Jain of James Capel, representing foreign financial institutions confirmed Agarwal'/s views. As James Capel operated in the stock market, investors' perception of the steel industry was important and in this field steel equities have under-performed, he said.

Under-performance is noticeable from late 1995 with falling import tariffs and fall in global prices. According to present indications, there would be negative growth in profits and earnings per share for the next two years, Jain said.

Outlining the reasons for the under-performance, Jain said that steel being capital intensive, promoters have repeatedly tapped the equity market diluting the equity, projects have been delayed, returns are poor and high finance cost and depreciation have cut away the profits. Only SAIL and Tisco are genuinely cost competitive. New entrants will yield low returns and would survive on maximising volumes and higher grades.

They will be faced with falling import tariffs without much pricing flexibility . According to Jain, the total cost per tonne for SAIL was $325 , $285 for Tisco, $425 for Essar and $395 for Lloyds Steel.

No doubt demand was growing but supply would increase much more due to large projects coming on stream. The possibilities of sharp increase in world prices, fall in rupee value, lower interest, higher protection were rather dim. All these factors add to the difficult days ahead for the steel industry. But Agarwal gave tips to new project entrants Under the present business environment, of the various units, power plant offers the highest returns. Hence, we recommend that the BF, Coke Ovens or the Corex furnace be set up first along with the power plant (the power plant will use the calorific value of the BF/Coke Oven/ Corex gases) in the first phase. Once the power plant is set up, the power business can be sold off to generate cash for the rolling facilities.

The reduction in financial cost would more than compensate for the increased price that would have to be paid for power by the steel business, he added. The techno-commercial men of Essar, Ispat and Jindal Vijaynagar steel plants in their presentations said that they were spinning off the power plants and oxygen facility to independent producers who are more competent in this field and were concentrating on their `Core Competency