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Profitability Of Indian Steel Mills To Improve In Near Term: ICRA
Buoyant international steel prices have benefitted Indian mills to increasingly tap overseas markets, as reflected in a 57% year-on-year growth in exports during April-August 2017
Photo Credit : Reuters
Indian steel prices have reported a healthy growth of 14 per cent since June 2017, aided not only by a sharp recovery in international steel prices but also by an improvement in domestic demand growth to 4.4 per cent in April-August 2017, from 2.6 per cent in FY2017.
Buoyant international steel prices have also benefitted Indian mills to increasingly tap overseas markets, as reflected in a 57 per cent year-on-year growth in exports during April-August 2017, helping the domestic steel industry operate at a capacity utilisation of above 80 per cent in the current financial year. This is expected to improve the profitability of domestic steel mills in the near term.
Says Jayanta Roy, Senior Vice-President, and Group Head - Corporate Sector Ratings, ICRA, “The sharp rise in domestic steel prices has been fuelled by rising international prices. The Chinese hot rolled coil (HRC) export prices increased by about 40 per cent since mid-May 2017, reaching $ 588 per metric tonne (MT) in the third week of September 2017, supported by China’s resilient domestic demand and its supply-side reforms to check the domestic steel overcapacity”.
Chinese steel production grew at a healthy rate of 5.1 per cent in January-July 2017 and kept the global steel capacity utilisation rates above 72 per cent in the last five months against 68.2 per cent in December 2016.
Operating margins of the steel industry (sample of 22 large and mid-sized steel players, accounting for about 60 per cent of the current domestic capacity) contracted to 12.5 per cent in Q1FY2018 from 15.7 per cent in Q4FY2017 on the back of lower steel prices and increased raw material costs, especially for coking coal in Q1 FY2018.
While the prices of coking coal and iron ore have also increased recently, the extent of increase in domestic steel prices in Q2FY2018 remains higher than that in raw material costs, which points to a sequential expansion in gross contribution levels of steel players.
However, elevated debt levels of most of the steel companies are likely to keep the coverage indicators of the industry depressed. For instance, interest coverage ratio of the industry stood at 1.26 times in Q1FY2018 as against 1.53 times in Q1FY2017 and 1.75 times in Q4FY2017, while total debt to operating profits before interest, tax, depreciation, amortisation (OPBITDA) stood at 7.0 times as on March 31, 2017.
Therefore, ICRA believes that credit profile of domestic steel companies are unlikely to improve significantly in the near term despite the current buoyancy in steel prices.
“Insolvency proceedings for stressed accounts have already begun in the last few months wherein five accounts out of the first 12 accounts referred under the Insolvency and Bankruptcy Code, 2016 (IBC) are from the iron and steel sector, with a total debt of above Rs 1.5 lakh crore as on March 31, 2017. Reportedly, some of these assets have already attracted attention from foreign investors, given the long-term India growth story. ICRA believes that stronger domestic steel players with healthy financial profile also remain potential investors for such assets, which could result in industry consolidation to an extent going forward,” adds Roy.