Better-Half Saves Essar Steel

Like other any player in the commodity segment, its performance closely follows the trend in the international market. Its first half blues were mainly due to the sharp decline in the international prices of hot rolled coils (HRC) which fell from $ 380 per tonne in March-April 1996 to around $ 270-290 per tonne in June-July 1996. Adding to its woes was dumping from the CIS bloc consequent upon the downward revision in the import duty on HRC by 5 per cent in the union budget 1996-97.

The other reason was the slowdown in the growth of end user segments - automobile, engineering and construction industry, and lack of investments on infrastructure.

 

Firming up of international prices of HRC to levels of $ 320-330 per tonne in the second half facilitated Essar's comeback. From a monthly average of 46,000 tonne in the first half, imports dropped to 30,000 tonnes per month in the second half. And once imports slowed down, Essar could clear off its accumulated inventory of around 1.2 lakh tonnes by almost 50 per cent.

Higher capacity utilisation of 65 per cent at its HRC unit enabled Essar to end the year with a volume growth of 209 per cent. This is quite laudable in comparison to the performance of the other steel majors. Tisco achieved a volume growth of 8.5 per cent whereas SAIL witnessed a marginal dip of 2.6 per cent.

As a result of its volume surge, Essar could report an operating profit margin of 28 per cent. This fares much better than Tiscos 16.2 per cent and SAIL's 16.7 per cent. However, interestingly, though production in the second half was higher by 29 per cent in comparison to the first half, turnover came down by 6.9 per cent. The company attributes this divergent trend to greater exports where price realisation is lower. However, steel analysts say the company could have resorted to massive discounting on price to push its products. Despite this, its second half OPM at 34 per cent fared better than the first half OPM of 26 per cent.

Commissioning of the 3.3 mn tpa pelletisation unit at Vizag provided backward integration to its hot briquetted iron (HBI) unit, and 4 lakh tpa forward integration downstream capacity.

Despite sustaining the OPM, it couldn't transform the same into the bottomline due to drastic hike in depreciation and interest charges. It has an exorbitant debt burden - Rs 4,026.19 crore-- translating into a higher debt equity ratio of 1.6:1. With around 50 per cent of the loans picked up during the tight liquidity situation at higher rates of interest, its interest burden soared from a meager Rs 2.30 crore to Rs 285.71 crore.

As to the reasons for debt accumulation, there are many - inflation in the HRC project which got delayed due to flood and plague in Gujarat in 1994-95; exposure in equity of Essar Power of Rs 217 crore and loan of Rs 356.08 crore to the same; and outflow of Rs 275 crore due to redemption of Euro convertible bonds issued during 1993.

Also, commissioning of the 2 mn tpa HRC unit and 3.3 mn tpa pelletisation unit in the current year led to hike in depreciation by 448 per cent to Rs 248.12 crore.

Its HRC unit is operating at 75 per cent utilisation in the first quarter of 1997-98. The company will also benefit from the commissioning of its 2.0 lakh tpa cold- rolled unit at Indonesia in March 1997. Its plans to tackle the heavy interest burden through partial repayment of high cost loans should also improve its performance in the coming year. The current rally of the stock indicates that the market has taken cognizance of its performance.