Demand to rise further; pricing pressure to reduce: Star Ferro

Pressure on cement prices as well as rise in coal prices weighed on margins in Star Ferro and Cement's fourth quarter, CEO Sanjay Gupta CEO says. The company’s total income grew 11 percent to Rs 563 crore, but operating profit fell 18 percent to Rs 126.7 crore in the fourth quarter. Operating margin stood at 22.5 percent as against 30.5 percent in corresponding quarter a year-ago. The Q4 volumes were 8.89 lakh units in comparison to 7.34 lakh units in corresponding quarter. The company worked at a 95 percent capacity in the quarter gone-by. Fourth quarter saw pricing pressure on cement, which is expected to reduce in the first quarter of FY17, Gupta says. Cement prices in north east reduced by Rs 15 per bag in Q4. However, a 15 percent jump in demand was seen in Q4. Demand is expected to rise further in coming quarters, he says. Below is the transcript of Sanjay Gupta’s interview with Reema Tendulkar and Nigel D’souza on CNBC-TV18.Reema: If you could help us with the topline performance, what was the sales volumes this quarter as well as the capacity utilisation?A: The sales volume in this quarter was 8,89,000 tonne as compared 7,34,000 tonne corresponding period last quarter. The capacity utilisation for the quarter stands at around 95 percent as against 91 percent for the corresponding quarter last year.Nigel: This 8,89,000 tonne that you are talking about, could you tell us what is the breakup of cement as well as clinker?A: This is only cement. The clinker is additional of around 44,000 tonne which we have sold. So, if I include clinker also, it will become Rs 9,33,000 tonne as compared to 8,08,000 tonne for corresponding quarter last year.Reema: What about the realisations per tonne? Could you help us with that and compare it on a year-on-year (Y-o-Y) basis because your margins have declined on a Y-o-Y basis?A: There is a pressure on prices this quarter also. The prices have almost come down around Rs 15 a bag on a quarterly basis, but on a yearly basis, the prices are down by almost about Rs 10 per bag. In the north-east what has happened is the demand has picked up in Q4. We have seen around 15 percent in demand in the north-east but because the volumes, there was a pressure on volumes from all the players. So, that has impacted the prices a bit in this quarter also and that has also seen significantly impacted the overall margins of the company.Nigel: What about your earnings before interest, taxes, depreciation and amortisation (EBITDA) per tonne, could you give us the numbers for the last quarter, that is Q4? Q3 as well what was that corresponding number and also, could you tell us what it was on a Y-o-Y basis?A: The Q4 EBITDA stands at Rs 1,360 per tonne as against Rs 1,900 for corresponding quarter last year. So, there is a decline of around Rs 500 per tonne on EBITDA. That is primarily coming from pricing front and there is an increase in coal prices in north-east. So that has impacted about Rs 100 per tonne impact is there on the coal side of it. On a full year basis, last year we had EBITDA of around Rs 1,850 and this year we had EBITDA of around Rs 1,450. So there is a drop of around Rs 400 per tonne out of which, as I said, Rs 10-12 is on account of prices. The other contributors were the fuel price and the freight increases we have seen in the last quarter. There is a significant freight increase also in the last quarter. Apart from that we have been able to hold on to other costs. So, what we feel is that once we are seeing the kind of demand, we have seen a 15 percent demand jump in Q4. We expect the same kind of demand to continue in the next FY17 because there is no capacity addition which is happening in the north-east. So, all the capacity, we have full year basis we have operated around Rs 78-79 percent. And most of the other players have also been reaching the similar capacity. And since no capacity is coming up, we expect that the pricing pressure will reduce going forward.Nigel: I need to get some details because Rs 1,360 is a tad bit worrying if it is coming down by more than Rs 500 on a Y-o-Y basis. I wanted to ask you a couple of questions. Coal prices you are saying are going up. Where exactly are you sourcing your coal and from the lows of last quarter, coal prices have gone up further, so could we see further pressure on your EBITDA per tonne and also give us your breakup of your freight. What is your freight usage, rail and roadways?A: Primarily, the coal prices has gone up in the last quarter, because what happens is in Meghalaya, we are sourcing the coal locally. Normally, during the rainy season, the minim does not take place, but after that the mining takes place and then whatever coal procurement we had done in this quarter was higher than the last quarter, so that has impacted. In terms of freight, the freight has gone up approximately about Rs 130 per tonne. That is the freight impact. I am talking in the Q4. Reema: Let me come back to the pricing issue. Rs 15 per bag is how much a decline in Q4 on a Q-o-Q basis, but off late, we have heard in the last few days that cement prices have gone up in other regions, namely the Telangana region. Could you guide us through your expectations on how prices are likely to trend in the current quarter?A: We have not seen any price increase as far as the east is concerned and entire east, even in the north-east and the other parts in the east that is West Bengal and Bihar. So, prices are more or less stable. The demand is there, the growth in other parts of the east, Bengal, Bihar, that market has also grown at around 8 percent, north-east has grown at 7.5-8 percent again. So, our expectation is that the capacity utilisation, since it is peaking out, the capacity utilisation, we will expect that the pricing pressure which is already there, that to come down in FY17.