See slight improvement in Q4 margins: Tata Sponge

Tata Sponge Iron reported a 68 percent drop in its standalone net profit at Rs 5.24 crore for the quarter ended December 31, 2015. The firm had clocked a net profit of Rs 16.51 crore in the year-ago period.DP Deshpande, MD of the company in an interview to CNBC-TV18 said the drop in profits was mainly to reduction in sponge iron prices, which were down 40 percent in the last three months.  However, according to him the prices seem to have bottomed out in third quarter and currently are inching up on expectation of support from the government.Going forward he expects slight improvement in margins on back of sponge iron prices firming up but does not expect a dramatic improvement becaues the raw material prices are not expected to go down significantly from hereon.Below is the verbatim transcript of the interview.Sonia: Can you start off my telling us how weak or how much of sponge iron price has fallen in the last 2-3 months and do you expect more pressure there?A: The fall in the prices was significant, about 40 percent price fell down in a matter of just 3 months time. That hit the entire industry very badly. The reasons for this is the perceived position that steel is moving slow, steel consumption is not growing. Sponge iron goes for steel making.Second is Chinese imports are next door and therefore if we don't sell it at this price people will buy from China. Against these two perceptions the prices have fallen down.The third reason why was for last one year industry was facing iron ore shortage. Now iron ore mines have opened up and quite a few iron ore mines have come on stream and production of iron ore has actually increased. As the iron ore availability improves the people who were not operating their land for want of iron ore have also come on stream. So, supply also has kind of increased  at least for a short period of time. So, these three factors played into the process. So, prices look like they have bottomed out in Q3, they have moved towards the end of  December, right now they are not as bad as they were in early December.The reason why the prices have notched up is also an expectation that there is a government support potentially available or likely to be available.Latha: What is the likely fall in raw material cost that you will experience in Q4? Will iron ore and coal be better in terms of cost for you? Therefore what can your margins be? You did 1.3 percent in this quarter, in Q3. How much can it improve to?A: It is not going to improve dramatically, probably it will inch forward in my opinion. It is not going to be a significant improvement.Raw material prices have also incidentally fallen down. However there was delay in raw material price movement and the sponge iron price movement and the same proportion of raw material price fall was not as much the proportion of the sponge iron price fall.Latha: That was in the previous quarter. What I am asking you is in Q4 and in next quarter.A:  Now that the lag will go away and the raw material prices will stay low, I expect improvement in the performance, profitability or performance  improvement will be there. I don't really expect a dramatic improvement  that raw material prices will go down further by another 10-20 percent is not going to happen. May be it will go down by about 5 percent. We normally buy imported coal, even the Coal India prices are tagged to imported coal. So, imported coal prices are not going to move down significantly. They will go down by USD 1-2 maximum.So, raw material prices will go down in Q4 compared to what they were in Q3 OR December but they will go down marginally. The time lag between the sponge iron price drop and the iron ore price would disappear and as a result of that our financial performance will improve.