New Delhi: Domestic steel industry earnings over the next 12 months, year ended FY2023, are expected to remain healthy, despite input cost pressures leading to some moderation in earnings over the high watermark of FY2022. With rising steel prices partly absorbing the increase in coal and energy costs, ratings agency, ICRA has maintained the steel industry’s outlook to be Positive. Industry capacity utilisation levels will be around 80% in FY2023, after a gap of eight years, and buoyed by the prospects of large infrastructure spending plans, domestic steelmakers have announced sizeable capacity expansions accumulating to ~34 million tonne per annum (mtpa) to be commissioned by FY2026.
Commenting on the industry trend, Mr. Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA said: “Domestic steel demand registered a healthy sequential pick-up from December 2021 as construction activity gathered momentum, which, coupled with the low base of FY2021, helped close FY2022 with a double-digit growth of around 11%, a feat last achieved way back in FY2011. Supported by the Government’s large infrastructure spending plans, domestic steel demand is pegged to grow at a healthy 7-8% in FY2023. Further, the sanctions on Russia could open new export opportunities for Indian steel mills in geographies like Europe, the Middle East and the US. However, steelmakers will face input cost pressures in the near term as Russia remains a key global supplier of many steelmaking raw materials.”
Given two back-to-back years of strong performance, the steel industry’s consolidated borrowings are today at their lowest levels since March 2011; the industry’s credit metrics, therefore, witnessed a significant improvement, with total debt/ OPBITDA reducing from 4.4 times in FY2020 to around 1 time in FY2022 (F). ICRA notes that notwithstanding the sizeable expansion plans, given the deleveraging that has happened over the last six quarters, and the healthy cash flows likely to be enjoyed, the steel industry today is more resilient to withstand project-related risks, which had significantly weakened the sectors’ credit profile during the previous capex cycle of FY2012-FY2016. With the capital deployment for upcoming projects remaining relatively moderate during the initial years of implementation, the industry’s key leverage ratio of Total debt/ OPBITDA is expected to remain at a comfortable 1 time in FY2023 as well.
However, adds Mr. Roy: “Key downside risk to ICRA’s positive outlook emanates from a sharper-than-expected rise in FED policy rates, a further escalation of the Russia-Ukraine war, keeping raw material supplies under pressure, or a significant deterioration of the Chinese housing sector, all of which have the potential to materially impact global steel demand in the coming quarters.”