Tata Sponge reported consolidated net profit at Rs 10.5 crore in the first quarter of FY17 versus Rs 7.1 crore on a year-on- year basis (YoY). The company's net realisations dropped 32 percent last quarter but this fall was partially compensated by a fall in raw material costs, said DP Deshpande, MD of Tata Sponge. Raw material costs in Q1 were at Rs 81 crore versus Rs 114 crore (YoY).However, net realisations and production costs may not change significantly in the current quarter, Deshpande told CNBC-TV18. Further, he believes the company's sponge business may turn around in Q3 once steel demand picks up. He expects the sector to grow at 7 percent in FY17 against 3 percent growth in FY16. Below is the verbatim transcript of DP Deshpande’s interview to Latha Venkatesh & Sonia Shenoy.
Latha: Can you take us through the numbers? Lower revenues, but higher earnings before interest, taxes, depreciation and amortisation (EBITDA); is it all a price play?
A: Yes, the production was better than the previous year’s first quarter, in fact it is one of the record productions of Q1 for the last quite a few years. Unfortunately, the net realisations (NR) were not as good as they were in the Q1 of the last year. NRs were about 32 percent lower as compared to the earlier periods. Therefore, the income has actually dropped in spite of the production being higher income has dropped but so also there has been a drop in the cost. So, as the NRs have dropped 32 percent, cost also has dropped significantly by 29 percent.
Sonia: If you can, give us the exact volumes that you clocked in this quarter and the exact realisations compared to what you did last quarter?
A: We have clocked 92,768 tonnes of production. This was about 84,000 the previous year first quarter and the NRs are Rs 11,350 this quarter compared to Rs 16,600 in the previous quarter. The sales were slightly although the production was higher. We sold 84,408 tonnes as compared to around 84,000 tonnes in the previous year first quarter. Now, the sales are lower because of disruptions in the dispatch towards the end of June, so it has nothing to do with market, etc. It is all our internal issues, but that issue is behind us. There were three-four days of disturbance.
Latha: How much did raw material cost fall?
A: Raw material cost has dropped. It is about Rs 81 crore as compared to Rs 114 crore in the previous quarter. So, there is a significant drop in the raw material cost as well. So, to a certain extent, a drop in NR has been compensated or offset by the drop in the raw material cost and the volumes have gone up to and to that extent the income has dropped but the EBITDA and profits have gone up.
Latha: How will things look in the current quarter? Are you expecting your EBITDA to go up, especially EBITDA per tonne to go up? Are you getting any support from the minimum import price (MIP)?
A: The MIP support, we actually got in Q4. Thereafter, the market moved as well as the demand-supply situation became so dynamic that as far the MIP support, the prices are quite low. They have almost reached pre-MIP level prices. So I think the MIP needs to be there. If MIP is not there, it could be even further sliding down. But the MIP impact will not be significant. MIP is up for renewal in August. So MIP, when it gets renewed, the prices would stay stable at current level.
However, our analysis suggests that in Q2, the supply demand picture will not change drastically; in fact they look slightly depressed. So the prices will rule where they have ruled at the exit of Q1. Therefore, we think that the production volumes that will go up in Q2, is a reason for which our performance should improve in Q2, but from the market side, we will not get significant support.
Sonia: I notice that the your losses in the sponge iron business have gone down to less than Rs 2 crore this quarter versus about Rs 7.5 crore on the EBIT line. By when do you think you will be able to break into the black on the sponge iron business and also if you can tell us what exactly the capacity utilisation levels are currently and how ha the demand shaped up?
A: Normally, we have a capacity of 390,000 which works out to about 95,000 per quarter. We produce about 92,768, so it is close to capacity, slightly short of capacity but close. And the losses that we see in the sponge business are essentially on account of differential changes in the price as well as the net realisations and the cost of production. I think the net realisations will not change significantly; cost will not change significantly in Q2. So, maybe the picture will approximately continue. However, when the demand for steel picks up, which is likely to happen in Q3, at that time the prices should show up and this sponge business will, as we report currently, it will come into black.
Latha: What makes you confident of the improvement in demand in Q3?
A: By all signs the infrastructure investment by the Government of India, the readings of the other players who are producing steel including our customers, it suggest that the mood is that the steel demand will go up in Q3. In fact, projections of multiple agencies that steel demand in the country is slated to grow at around 6-8 percent. Last year it grew at 2-3 percent only. So, if it has to grow at 6-8, it will show up at some period or the other. If MIP support exists, it will reflect on prices as well.
Latha: A little bit on your power segment? How is it doing, how is it likely to do in the rest of the year?
A: Power segment is actually normal. We have been producing power and selling power as we have been doing in the previous quarter as well. In the previous quarter, Q4, we had some extraordinary gains in the power business because we got money returned from the government agencies, therefore it is extraordinary gain. But otherwise it is quite normal. We have been producing at the same rate power as much we are able to produce sponge iron.
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