A stretched balance sheet in a persistently hostile business environment has made JSW Steel, the country’s largest producer in the sector, and Tata Steel, a fully integrated alloy producer, the most heavily indebted companies in the segment across the globe.
“The increase in net debt levels of large companies have generally been driven by capacity expansion programs over the past five years, most of which will be commissioned in the next 12 months,” a UBS Securities India report said.
However, it has not been able to bring its balance sheet in a healthy position. In fact, after its recent earnings performance, brokerages decided deleveraging would remain slow as realisations are expected to remain weak due to lower steel prices.
Tata Steel has been unable to keep its revenue moving consistently up in the past three-four years. Operating profits have been on a roller-coaster ride, leading the company into losses in some quarters. All domestic steel firms have been working in a hostile business climate for quite some time. Cheap imports from China, a surplus producer, and via free trade agreements with Japan and Korea have crippled it, says the industry, as the already subdued demand scenario has been getting captured by imported products rather than domestically production.
Though the balance sheet of both, Tata and JSW, look heavy, brokerages feel the two are in a good position to service their debts. “Both have been able to sell whatever they produce. Due to this, JSW as well as Tata Steel have no cash flow issues and are still cash-positive despite the challenging business environment,” said an analyst with a local brokerage. “Also, cost of production for Tata Steel is economical due to captive iron ore and to that extent, there is no alarming situation. Though the balance sheets are stretched for Tata Steel and JSW, they are not bankrupt.”
Tata Steel continues to be in a position to service its debt. At JSW, profitability is not an issue despite the dependence on e-auctioned and imported ore which bloats the expenditure bill.
Most analysts said the two companies have kept the capacity to sail through the current tough business environment and that the problem in the sector is more for smaller entities such as Bhushan Steel and Essar Steel, unable to service their debt.
“The extent of fall that has happened in steel prices, globally as well as domestically, was not predictable. Even the surplus position that China is into and the price crash that has happened there could not be predicted,” said Giriraj Daga, portfolio manager at SKS Capital & Research. “Despite that, both Tata Steel and JSW are not making cash losses. They will continue to float.”
Meanwhile, the brokerages maintain a cautious stance on the metals sector as demand recovery remains elusive, oversupply from China continues and a global price fall is not over. “Balance sheets would likely remain stretched and return ratios dismal despite pruning of capital expenditure. We continue to prefer JSW Steel over Tata Steel,” said Centrum Brokerage.
Tata Steel was not reachable for comment, while JSW refused to comment ahead of its April-June earnings announcement, slated for July 29.