Foreign Institutional Investors (FIIS) are trimming their holdings in Indian steel firms. This is triggered by concerns of a weak profit outlook for the steel sector on account of rise in input prices, analysts said.
The June quarter saw FIIs reduce their holdings in almost all steel firms including the country's largest producer SAIL over the previous quarter. Other big companies such as Tata Steel, JSW Steel, Jindal Steel and Power Ltd and Godavari Power and Ispat Ltd (GPIL), also saw a similar trend. The shares dumped by FIIs have either largely been picked up the domestic institutional investors or non-institutions, including individual shareholders.
The rising input costs such as coking coal and iron ore have hit the steel companies' bottom lines in the recent quarters. Analysts expect the pressure on profitability to continue in the September quarter as well, as prices of these commodities, especially coking coal, were unchanged to a large extent.
Margin pressure
Also, the inability of steel companies to pass the burden to consumers amidst an uncertain demand scenario will add up to the margin pressure. The recent hike in interest rates to curb inflation has cast a spell on the demand side. The demand for steel in India, according to the World Steel Association is forecast to grow by 13.7 per cent in 2011.
“There is a concern on demand side due to the slower pace of infrastructure projects. As a result, there is no pricing power with the steel producers,” an analyst said.
Steel makers have seen a slowdown in demand to an extent from sectors such as automobile, consumer durables and construction. While the global steel prices have seen a margin decline in the recent past, the domestic producers have managed to hold on to prices at this point in time.
Analysts also said the Government's proposal to make mineral companies share benefits with the project affected people could possibly add up to the input costs for metal firms thereby affecting the profit margins.