ICRA sees improvement in debt protection metrics post MIP imposition

In absolute terms, agency continues to see some weakness in these metrics with total debt to operating profit seen at above 5 time

With government notifying Minimum Import Prices (MIP) on 173 categories of steel products last week, improvement in debt protection metrics during FY17 from the current levels is likely for domestic integrated steel companies such as JSW Steel, Tata Steel, Jindal Steel & Power and state-owned Steel Authority of India, ratings agency ICRA said in its report today.

However, in absolute terms, the agency continues to see some weakness in these metrics, it stated.

The total debt to operating profit in Apr-Sep of FY16 has also doubled to 8.4 times from 4.2 time in FY15. Though the debt protection metrics of the industry (collection of four large steel players, accounting for over 40% of the domestic capacity), have weakened over the years, and the deterioration has been quite steep in the current fiscal due to declining steel prices, interest coverage ratio has halved to around 1.6 time in Apr-Sep of FY16 from 3.2 time in the corrresponding period last year.

ICRA estimates that even during MIP in FY17, the total debt to operating profit is likely to remain at above 5 time, and the interest coverage is likely to be less than 2.5 time of these four large players.

The agency sees large integrated players having stronger financial profile to take this as an opportunity to moderately increase prices, and grab a greater market share from their weaker competitors. ICRA expects the quantum of increase to be much lower, in the range of $40-50 per tonne (Rs 2700-3400 per tonne).

Operating profit margins for domestic blast furnace players after MIP is expected to improve by around 5% as compared to estimated levels prevailing in the 1st week of February'16, said the agency.

Although the MIP scheme is valid for six months, it can be extended further and ICRA expects this to remain valid throughout FY17 and be withdrawn thereafter.