Ispat Industries Falls Prey To Rising Interest Burden

Ispat Industries, flagship of the Ispat group recorded nearly a 4 per cent decline in its operating profit in 1996-97. This was despite nearly 2 per cent increase in the sales turnover. Further, due to higher increase in interest burden and depreciation, the company witnessed a fall in the growths profit before tax and net profit around 22 per cent. So, it was no wonder that the recorded lower profitability ratios in 1996-97.

Ispat Industries (formerly Nippon Dendro Ispat), promoted by the Calcutta based Mittals in 1985,has as part of a technical collaboration of Nippon Dendro and Hitachi of Japan, and Midrex Corporation of the US, Ispat Industries expanded its cold rolled steel (CR) coils manufacturing capacity from 1,25,000 tpa in 1987 to present 2,85,000 tpa and became the largest manufacturer of CR coils in south-east Asia. The company also manufactures PVC and colour coated sheets, galvanised coils and direct reduced iron.

 

The company at present utilises nearly 70 per cent of its capacity to manufacture CR coils, 28 per cent capacity to manufacture PVC sheets and more than 100 per cent capacity to produce direct reduced iron.

Sales realisation from CR coils increased more than 8 per cent and from PVC sheets rose 45 per cent in 1996-97. But the sales of iron and steel products declined more than 90 per cent.

Hence, its overall sales turnover increased by only 1.6 per cent during the year compared with the previous year. Export market suffered due to sluggish conditions in the international CR market particularly in the US and Japan. Ispat's export earnings dropped by around 13 per cent during the year. The company's first half performance for the current year was no better. Though the company, was able to increase its export earnings by 42 per cent during the period, its PBT and PAT registered decline due to increased doses of depreciation and interest. Hence, like last year, the company recorded a decline in its profitability ratios during the first half of 1997-98 also.

Vivek Sett, director of finance, Ispat Industries said the steep increase in input costs, particularly for iron ore, general hike in freight rates and recent changes in excise regulations have hit the performance of the company in the first half. Though it recorded an increase of 40 per cent in its net profit in the first half of current fiscal compared with the second half of 1996-97, the performance during the second half of the current fiscal is expected to improve marginally since sluggish market conditions are likely to continue in the steel sector. The company is implementing a 3 million tpa hot strip mill project at Geetapuram, Dolvi, Maharash-tra. The first phase of the project with a capacity of 1.5 million tpa is mechanically complete.

As the first three months after commissioning of the plant will be a trial period, it would have no impact on the profitability of the company in the current financial year. However, the impact on profit margin will definitely be felt in the next fiscal. The company has plans to set up a sponge iron project in Bahrain with a production capacity of 1.2 million tpa. Ispat will put up $80 with Mitsui of Japan as minor partner.The estimated cost of the project is $290 million.

The remaining amount will be raised through banks and financial houses. This plant would cover Middle East and Asian markets.

The company is also studying plans to set up downstream steel-making facilities in Bahrain that will use the sponge iron and produce value-added products. But the company has shelved, for the time being, Thailand sponge iron project of similar dimension due to recent depreciation of south-east Asian economies.

The company also has plans to merge the marketing divisions of its three manufacturing units to operate as an integrated unit. The company hopes, with all these restructuring, it likely to improve its performance in the coming years.