A surge in global commodity prices in the last 8 months has seen profitability of domestic steel industry hit record highs leading to reduction in debt
Once the focal point of the NPA crisis in the country, the domestic steel industry will be able to reduce its debt by Rs 35,000 crore by fiscal 2022, rating agency CRISIL has said. A surge in global commodity prices in the last 8 months has seen profitability of domestic steel industry hit record highs leading to reduction in debt.
A partial deferral of capex in the current fiscal has also helped. Domestic demand has recovered strongly in the second half of this fiscal, growing 10 per cent between October and January versus against a 30 per cent year-on-year fall in the first half. This is expected to arrest demand contraction to less than 10 per cent for the whole of this fiscal capping a stunning reversal from the distress story of the first half. It is only likely to get better in the next fiscal on the back of higher infrastructure spending by the government and recovery in residential real estate. Together this is expected to improve steel demand by 10-12 per cent in 2021-22.
“The five (primary) steel makers could cut by Rs 25,000 crore of debt this fiscal. Next fiscal, despite capex rising by 15 per cent, they can slice debt by another Rs 10,000 crore,” says Naveen Vaidyanathan, Associate Director, CRISIL Ratings. “That would drive a sharp improvement in credit metrics with financial leverage (ratio of debt to Ebitda) declining below 2.5 times next fiscal compared with above 4.0 times in fiscal 2020”.
The strong recovery in demand has led to higher prices and better margins. Domestic hot-rolled coil (HRC) prices have rallied to a multi-year high of Rs 56,000 per tonne in February from Rs 39,200 per tonne in March 2020. Since last month prices have moderated with iron-ore supplies improving, and the reduction in customs duty announced in the Union Budget but the outlook on demand continues to be bright.
“So while the tailwinds to realisations from higher input costs and global prices could abate going forward, domestic demand growth would provide an offset. Consequently, realisation next fiscal may still be 15 per cent higher than the average of the past five years,” says Manish Gupta, Senior Director, CRISIL Ratings. “That, along with rising volumes and moderate coking coal prices would mean healthy operating margins of 23 per cent next fiscal, compared with 25 per cent likely this fiscal”.
It is a far cry from the downcycle of fiscal 2016 when operating margins had plunged to just 9 per cent. In 2015/16, gross NPAs in the sector amounted to Rs 1.15 lakh crore. The sector accounted for four of the 12 big firms – Essar Steel, Electrosteel Steels, Monnet Ispat and Bhushan Steel – pushed by the RBI for NPA clean-up under the Insolvency and Bankruptcy Code (IBC).
Now that the industry is easily able to pay off its debts, one can safely say it has turned the corner.