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Negative outlook for steel producers: Ind-Ra

Posted on Jan 17 2014 | IBNS

Kolkata, Jan 17 : India Ratings and Research (Ind-Ra) has maintained a Negative Outlook on steel producers for FY15 due to their weak credit profile.

The agency revised the outlook in July 2013 to Negative from Stable in January 2013. The sector outlook is also negative as a modest improvement in steel demand from end-user industries would not result in a significant hike in steel prices in FY15.

Ind-Ra expects domestic steel demand to improve in FY15 on the back of a modest recovery in economic growth and an infrastructure push by the government of India.

Better GDP growth of 5.6pc yoy (Ind-Ra's estimates) in FY15 (FY14: 4.9pc yoy) on a revival in the industry growth of 4.1pc (1.7pc ) would slightly improve steel demand during the year. World Steel Association has forecasted steel demand in India to grow at 5.6pc yoy in 2014.

The agency also does not expect a major hike in steel prices in FY15 due to prevailing overcapacity in the domestic steel industry. This would continue to limit the prices despite a modest improvement in steel demand.

Steel prices would also depend upon a correction in the present oversupply in the global steel market. However, any contraction in steel demand could pressure steel prices further.

The margins of steel producers would continue to be under pressure, given the high cost of steel production and their limited ability to pass on hikes in costs as only a modest improvement in demand is expected in FY15.

The availability of iron ore should improve in FY15, limiting hikes in iron ore costs. However, any further rupee depreciation resulting in an increase in the landed cost of coking coal, which is mostly imported, could contract profitability margins.

Steel producers across the globe are grappling with low capacity use levels, resulting in a high fixed cost. Indian steel producers' capacity use contracted to below 80pc in FY13.

Any increase in the capacity use due to an uptick in demand could be limited by significant new capacities (about 13-15 million tonnes), scheduled to start in FY15. Domestic steel producers will have to increase their focus on cost competitiveness and efficiency of operations to protect their margins.

The agency expects Indian steel producers' credit profile to remain weak in FY15 due to their large debt for working capital and capex coupled with modest EBITDA margins. Margins have consistently contracted since FY11 which, combined with an increase in debt, have resulted in increased financial leverage.

A tightening of credit by Indian banks to the steel sector due to rising non-performing assets may worsen the liquidity position of steel producers at the lower end of the credit spectrum, given their heavy reliance on bank funding for operating expenditure and capex.

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