Steel demand firm, but higher input costs to pare margin in H2: CRISIL | Business Standard News

Clipped from: https://www.business-standard.com/article/companies/steel-demand-firm-but-higher-input-costs-to-pare-margin-in-h2-crisil-121122500026_1.html

Next fiscal year, steel demand is expected to grow at a moderate pace of 6.5-7.5%, led by further pickup in construction activity

metals, commodity, steel pricesRepresentative image

Steel demand in India is expected to rise 11-13 per cent this fiscal year, after declining 5 per cent in the last due to the pandemic-induced slowdown.

For the April-November period, demand was up 20 per cent on-year, though offtake in the second quarter was weaker due to a slowdown in construction activities amid the monsoon and a decline in auto production driven by chip shortage.

We foresee steel demand improving on a sequential basis, as construction ramps up and consumption recovers.

Next fiscal year, steel demand is expected to grow at a moderate pace of 6.5-7.5 per cent, led by further pickup in construction activity and continued revival in the automotive, consumer durables, and appliances segments.

Steelmakers logged bumper profitability in the first half of this fiscal year as a global price rally drove realisations higher.

However, with a significant rise in coking coal, iron ore and other input prices, we expect margins to weaken in the second half.

For the fiscal year, we foresee a 350-400 basis points (bps) increase in operating margin, compared with 27.5 per cent in the last.

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Next fiscal year, we expect a moderation in steel prices due to a decline in input prices, which could cap operating margin at 28-30 per cent, though this would be healthy compared with the average of 18-22 per cent for the past 10 years.

Given the robust profitability, and the fact that mills are operating at high utilisation, steelmakers have already doubled their planned capex for fiscals 2022 to 2024, compared with the previous three fiscals. As much as 27 million tonne of capacity — accounting for almost 20 per cent of domestic capacity — is expected to get added by the 2025 fiscal year. This could accelerate further, given the sizeable brownfield opportunities for companies, including acquired assets.

Higher volume and better margins will improve the cash accrual of players, supporting planned capex towards capacity expansion and strengthening balance sheets.

Net debt for the industry — after witnessing around 15 per cent reduction last fiscal — is expected to reduce by a further 20 per cent or so this fiscal year. Net debt-to-Ebitda is expected to be less than 1 time this fiscal year, compared with 1.9 times in the 2021 fiscal year and is expected to sustain below 1 time next fiscal year as well.

Interest cover is forecast to be more than 8.5 times, almost double from fiscal 2021, supporting the positive outlook for the sector.

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