Steel industry facing challenges as borrowing levels rise and earnings moderate: ICRA

Domestic steel companies face a bumpier road ahead as the external environment becomes more challenging due to elevated inflation / energy prices and rising interest rates. In Q2 FY2023, the industry's absolute earnings plummeted to a nine-quarter low due to combination factors which included falling realisations and elevated coal / energy costs. While earnings are directionally expected to rise from Q3 FY2023 as input cost pressures alleviate somewhat, they would still remain significantly lower than the levels seen in FY2022. According to ICRA Research, the industry's[1] full-year operating profits are expected to contract by 45-50% year-on-year (YoY) in FY2023, leading to the free cash flows slipping into negative territory after a gap of two years.

Commenting on the industry trend, Mr. Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA said, "Dependence on external financing to meet committed expansion plans is likely to increase going forward, early signs of which can be observed in the gradual increase in the steel industry's borrowing levels during the first half of FY2023. Consequently, the industry's leverage (total debt to operating profits) deteriorated to an estimated 2.7 times in H1 FY2023 as against 1.1 times in FY2022. However, given the expectation of a recovery in earnings in H2 as cost pressures subside, the industry's leverage levels are expected to remain in the range of 2.0-2.5 times in both FY2023 and FY2024. We believe that this would still make steel companies resilient to withstand any worsening of the macroeconomic environment next fiscal."

As per the World Steel Association's (WSA) latest forecast, global steel demand is expected to contract for the first time in seven years by 2.3% year-on-year (YoY) in CY2022, and the pace of growth is slated to remain at an anaemic 1% in CY2023. This, however, does not take into account any further large covid outbreaks in the near term, even though a sharp rise in new infections have been witnessed in recent weeks. Consequently, while India's finished steel exports are expected to gradually increase from the November-22 lows following the withdrawal of export duty, it is unlikely to go back to levels seen in FY2021/ FY2022 even in FY2024. On the other hand, given the limited growth opportunities in key global steel producing hubs of China, Japan, South Korea, CIS[2], Europe, and the USA, finished steel exports to India have been steadily increasing, resulting in India becoming a net finished steel importer in two back-to-back months during October-November 2022. ICRA Research highlights that global steel trade flows, especially from the FTA countries (Japan/ South Korea), Russia, and China, can be redirected in greater volumes to growing markets like India, keeping imports at an elevated level in FY2024 as well.

On the demand-supply scenario, supported by the Government's infrastructure led growth model, domestic finished steel demand registered a double-digit growth of 11.9% in the first eight months of the current fiscal and looks poised to close the year with a growth of ~8%, being at the upper end of the 7-8% growth forecast for FY2023 that ICRA made before the war broke out in Ukraine. However, given the expectation of a slowdown in the pace of economic activity over the next few quarters, domestic steel demand growth is likely to moderate to 6-7% in FY2024. Commenting on this trend, Mr. Roy added: "Fresh steel capacities accumulating to 21-22 million tonne per annum are lined up for commissioning in FY2023/ FY2024. Given the prospect of a moderation in domestic steel demand growth and a lackluster export environment, fresh supplies are likely to outrun incremental demand, which we believe will pull down the industry's capacity utilization levels to 78% in FY2024 from 80% in FY2022. As the industry's earnings become less attractive and leverage levels start to inch up, large aspirational capex programs that have not received financial commitment as yet could get deferred."

Shares of ICRA Limited was last trading in BSE at Rs. 4448.70 as compared to the previous close of Rs. 4501.85. The total number of shares traded during the day was 247 in over 156 trades.

The stock hit an intraday high of Rs. 4560.00 and intraday low of 4434.45. The net turnover during the day was Rs. 1111042.00.

Source : Equity Bulls

Keywords

ICRA INE725G01011 DomesticSteelCompanies Inflation EnergyPrice Q2FY2023