In an interview with ET Now, CS Verma, Chairman & Managing Director, SAIL, talks about the company's FPO plan, steel industry and different factors associated with the industry. Excerpts:
ET Now: Let's talk about the current environment, demand versus pricing scenario for the entire steel industry?
CS Verma: Demand of steel in India is going up. If you see the data for April to January this year, the real consumption has been somewhere about 46 million tonnes and there is a growth of about 8%. If you see the spend of our country on the 11th five-year plan, which is roughly about $512 billion, that is going to be about $1 trillion in the 12th five-year plan , which is roughly about 10% of GDP. So all these factors indicate that our economy is on a move and we are expecting a GDP growth of about 8.5-9% and thus a lot of things are happening in the economy.
To achieve 1% growth in GDP, we have to have 1% growth or more than 1% growth in steel consumption in the country. So demand for steel is going up. As far as the pricing scenario is concerned, in the beginning of the financial year for long and flat products, the representative product is HR coil for the flat products. The prices are hovering around $697 per tonne, which fell to a low of $550 per tonne in July 2010 and again today they are hovering around the same level at the beginning of the financial year, which is roughly about $750-800 per tonne. The reason why the price level has gone up slightly in the last two months is that input prices have gone up. You are aware that to produce 1 tonne of steel, we require roughly about 1.6 tonne of iron ore and 1 tonne of coking coal. The coking coal prices have gone up in the international market.
The coking coal prices, which prevailed above $125 per tonne in the beginning of the financial year, are hovering today at around $330 per tonne. Even the raw material prices of iron ore have gone up in the international market. In the beginning of the financial year, iron ore prices were of the level of $125 per tonne. Today they are hovering around $180-190 per tonne. As a result of a cost push of this and the increase in the prices of the input items, the steel companies have to slightly upward the moment of the price level and that's why in the last two months, there have been a slight increase in the steel prices in India.
ET Now: Purely on paper, what is the expected impact on your cost front considering there has been a sharp rise in coking coal costs?
CS Verma: We are also definitely impacted by the rise in the coking coal prices. The requirement of the company every year for coking coal is roughly about 14 million tonnes. Of which about 3.5 million tonnes we meet through our indigenous sources and roughly about 10-10.5 million tonnes we are importing every year. There have been an increase in the coking coal prices. So to that extent, our company as any other steel company also gets impacted.
ET Now: By how much?
CS Verma: When we draw the results for the year-end for the financial year as a whole, only then we will be in a position to quantify the impact. But the results are obvious. $225 was a coking coal price in the quarter prevailing, March-ending quarter. Next quarter prices are yet to be settled, but if we see the international level, the prices are hovering around $300-325 per tonne.
ET Now: Give us your outlook for your operating margins going forward?
CS Verma: We had to raise the price level. Certain portion of the cost push, we had to pass it onto the ultimate consumers. If the iron ore prices increase, our company does not get impacted because we are having the captive iron ore mines. So whatever the increase in the iron ore prices internationally have been there, our company does not get impacted, but the coking coal, yes, our company does get impacted. So the increase in the coking coal prices, it had been offset by the increase in the prices of the steel products, but to some extent, it will also have an impact on the margins of all these steel companies.
ET Now: What is the update on your FPO?
CS Verma: Now we have missed the bus this financial year. We intend to file our prospectus for the FPO early next financial year. So sometime in May we are thinking of filing the prospectus for FPO and then we should be in the market soon thereafter.
ET Now: Will you go ahead with your FPO plans irrespective of the market condition?
CS Verma: No, we will have to definitely make an assessment of the market condition. We will have to make an assessment of the market that which are the issues, which are hitting the market. So depending upon our assessment of the market conditions, depending upon which other issues are going to come up in the market, we will make an assessment of the right timing of the issue. But as of now, we are expecting that we should be in a position to launch the issue sometime in the first part of the next financial year.
ET Now: If secondary markets are bad and choppy, will you delay your FPO?
CS Verma: They are bad and choppy as of now, but when we come to a draw of the financial year, whether you take the general economy data, whether you take the GDP data, whether you take the company performance data, everything will be on a positive path. So see that market is choppy because of the international situation, which I hope will soon ease out. So the market should again improve soon thereafter.
ET Now: What about the pricing? Can we expect a considerable discount from you?
CS Verma: As of now, we cannot say. Again everything will depend on the scenario prevailing in the international market, No. 1. No. 2, I am of the firm belief that the present level of the coking coal prices, which are hovering around $300 plus, cannot sustain in the long term in the international market. The price level has to come down of the coking coal and once the price level comes down, the steel prices have to slightly ease out. But as of now, I do not expect any discount or any increase. Let us make an assessment of the market condition. We are dealing in the commodity, which depends on the assessment of the demand-supply position on a day-to-day basis and then we have to take a view on that.
ET Now: If I look at NTPC, PFC, NMDC, all government FPOs have come at a 5-10% discount to the prevalent market price. Should we expect a similar discount?
CS Verma: I am of the firm assessment that our share price is currently undervalue. If you see the mining wealth the company is having, we hare having the total iron ore mining assets from which we are having a total reserve of roughly about 5 billion tonnes. If you see the proven reserves in India for iron ore, it is roughly about 24-25 billion tonnes, of which around 5 billion tonnes reserves our mines are having. So our steel prices or our cost does not get impacted to the tune that we are having the captive iron ore prices. So to that extent our share prices, definitely our market capitalisation is definitely undercapitalized. So when we are coming out with the FPO, about the pricing and all we have to make a demand impact, we have to make a market analysis, we have to see the market intelligence, only then we can comment that how much price we will bring out for the FPO. But I am of firm assessment that our share price as of now is definitely underpriced in the present conditions.
ET Now: If at 156, the market is not really gauging the right value for SAIL, what is the fair value according to you?
CS Verma: It is difficult to assess the fair value. Again fair value keeps on changing depending upon the market condition. I can only make a statement that our share price is definitely underassessed, underpriced.
ET Now: You are confident that your stock is underpriced. So I am sure you have a fair level in your mind?
CS Verma: No, but that is an assessment of all the analysts in the capital market. You ask any analyst, they are of the uniform opinion that the market price of SAIL is underassessed as of now.
ET Now: What about your production target for FY11, which is current year, and then for FY12?
CS Verma: Every government company is supposed to sign an MoU with the ad hoc taskforce and we discussed and we finalised our annual production target. So we have already finalised our annual production target for the next fiscal, 2011-2012. We have finalised the target for the hot metal. We have finalised the target for the crude steel and we have finalised the target for the saleable steel. So we are going to document it. We are going to publish it. Our saleable steel target as we have signed our MoU with the government will be somewhere about 13 million tonnes.
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Source : ET
ET Now: Let's talk about the current environment, demand versus pricing scenario for the entire steel industry?
CS Verma: Demand of steel in India is going up. If you see the data for April to January this year, the real consumption has been somewhere about 46 million tonnes and there is a growth of about 8%. If you see the spend of our country on the 11th five-year plan, which is roughly about $512 billion, that is going to be about $1 trillion in the 12th five-year plan , which is roughly about 10% of GDP. So all these factors indicate that our economy is on a move and we are expecting a GDP growth of about 8.5-9% and thus a lot of things are happening in the economy.
To achieve 1% growth in GDP, we have to have 1% growth or more than 1% growth in steel consumption in the country. So demand for steel is going up. As far as the pricing scenario is concerned, in the beginning of the financial year for long and flat products, the representative product is HR coil for the flat products. The prices are hovering around $697 per tonne, which fell to a low of $550 per tonne in July 2010 and again today they are hovering around the same level at the beginning of the financial year, which is roughly about $750-800 per tonne. The reason why the price level has gone up slightly in the last two months is that input prices have gone up. You are aware that to produce 1 tonne of steel, we require roughly about 1.6 tonne of iron ore and 1 tonne of coking coal. The coking coal prices have gone up in the international market.
The coking coal prices, which prevailed above $125 per tonne in the beginning of the financial year, are hovering today at around $330 per tonne. Even the raw material prices of iron ore have gone up in the international market. In the beginning of the financial year, iron ore prices were of the level of $125 per tonne. Today they are hovering around $180-190 per tonne. As a result of a cost push of this and the increase in the prices of the input items, the steel companies have to slightly upward the moment of the price level and that's why in the last two months, there have been a slight increase in the steel prices in India.
ET Now: Purely on paper, what is the expected impact on your cost front considering there has been a sharp rise in coking coal costs?
CS Verma: We are also definitely impacted by the rise in the coking coal prices. The requirement of the company every year for coking coal is roughly about 14 million tonnes. Of which about 3.5 million tonnes we meet through our indigenous sources and roughly about 10-10.5 million tonnes we are importing every year. There have been an increase in the coking coal prices. So to that extent, our company as any other steel company also gets impacted.
ET Now: By how much?
CS Verma: When we draw the results for the year-end for the financial year as a whole, only then we will be in a position to quantify the impact. But the results are obvious. $225 was a coking coal price in the quarter prevailing, March-ending quarter. Next quarter prices are yet to be settled, but if we see the international level, the prices are hovering around $300-325 per tonne.
ET Now: Give us your outlook for your operating margins going forward?
CS Verma: We had to raise the price level. Certain portion of the cost push, we had to pass it onto the ultimate consumers. If the iron ore prices increase, our company does not get impacted because we are having the captive iron ore mines. So whatever the increase in the iron ore prices internationally have been there, our company does not get impacted, but the coking coal, yes, our company does get impacted. So the increase in the coking coal prices, it had been offset by the increase in the prices of the steel products, but to some extent, it will also have an impact on the margins of all these steel companies.
ET Now: What is the update on your FPO?
CS Verma: Now we have missed the bus this financial year. We intend to file our prospectus for the FPO early next financial year. So sometime in May we are thinking of filing the prospectus for FPO and then we should be in the market soon thereafter.
ET Now: Will you go ahead with your FPO plans irrespective of the market condition?
CS Verma: No, we will have to definitely make an assessment of the market condition. We will have to make an assessment of the market that which are the issues, which are hitting the market. So depending upon our assessment of the market conditions, depending upon which other issues are going to come up in the market, we will make an assessment of the right timing of the issue. But as of now, we are expecting that we should be in a position to launch the issue sometime in the first part of the next financial year.
ET Now: If secondary markets are bad and choppy, will you delay your FPO?
CS Verma: They are bad and choppy as of now, but when we come to a draw of the financial year, whether you take the general economy data, whether you take the GDP data, whether you take the company performance data, everything will be on a positive path. So see that market is choppy because of the international situation, which I hope will soon ease out. So the market should again improve soon thereafter.
ET Now: What about the pricing? Can we expect a considerable discount from you?
CS Verma: As of now, we cannot say. Again everything will depend on the scenario prevailing in the international market, No. 1. No. 2, I am of the firm belief that the present level of the coking coal prices, which are hovering around $300 plus, cannot sustain in the long term in the international market. The price level has to come down of the coking coal and once the price level comes down, the steel prices have to slightly ease out. But as of now, I do not expect any discount or any increase. Let us make an assessment of the market condition. We are dealing in the commodity, which depends on the assessment of the demand-supply position on a day-to-day basis and then we have to take a view on that.
ET Now: If I look at NTPC, PFC, NMDC, all government FPOs have come at a 5-10% discount to the prevalent market price. Should we expect a similar discount?
CS Verma: I am of the firm assessment that our share price is currently undervalue. If you see the mining wealth the company is having, we hare having the total iron ore mining assets from which we are having a total reserve of roughly about 5 billion tonnes. If you see the proven reserves in India for iron ore, it is roughly about 24-25 billion tonnes, of which around 5 billion tonnes reserves our mines are having. So our steel prices or our cost does not get impacted to the tune that we are having the captive iron ore prices. So to that extent our share prices, definitely our market capitalisation is definitely undercapitalized. So when we are coming out with the FPO, about the pricing and all we have to make a demand impact, we have to make a market analysis, we have to see the market intelligence, only then we can comment that how much price we will bring out for the FPO. But I am of firm assessment that our share price as of now is definitely underpriced in the present conditions.
ET Now: If at 156, the market is not really gauging the right value for SAIL, what is the fair value according to you?
CS Verma: It is difficult to assess the fair value. Again fair value keeps on changing depending upon the market condition. I can only make a statement that our share price is definitely underassessed, underpriced.
ET Now: You are confident that your stock is underpriced. So I am sure you have a fair level in your mind?
CS Verma: No, but that is an assessment of all the analysts in the capital market. You ask any analyst, they are of the uniform opinion that the market price of SAIL is underassessed as of now.
ET Now: What about your production target for FY11, which is current year, and then for FY12?
CS Verma: Every government company is supposed to sign an MoU with the ad hoc taskforce and we discussed and we finalised our annual production target. So we have already finalised our annual production target for the next fiscal, 2011-2012. We have finalised the target for the hot metal. We have finalised the target for the crude steel and we have finalised the target for the saleable steel. So we are going to document it. We are going to publish it. Our saleable steel target as we have signed our MoU with the government will be somewhere about 13 million tonnes.
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Source : ET
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