Large steel mills grow larger on improved supply-chain efficiencies: Crisil

Market share gain, deleveraging makes room for capex revival

Large steel makers took huge strides in terms of both operations and financial performance last fiscal, increasing their market share by 500 basis points (bps) on-year to 58 per cent despite their share of industry capacity remaining  unchanged, said a Crisil report today.

The improvement was driven by supply-chain efficiencies, higher exports, and captive mines that limited the impact of iron ore shortage, said the report.

Their capacity share is expected to increase this fiscal in FY22 after Sajjan Jindal-led

Dolvi plant expansion of 5.6 million tonne comes on stream.

Higher exports helped counter lacklustre domestic demand for large steel makers (especially in the closing quarter of last fiscal and the first quarter of FY22).

They also gained domestic market share, especially in the long-steel space, said the report.

Consequently, players operated at more than 80 per cent utilisation levels as against sub-optimum levels of 62 per cent by midsized and small steel makers.

Large steel makers also benefited more from the rally in steel prices, given the dominance of flat steel in their portfolio.

Domestic flat-steel prices have nearly doubled to Rs 72,000 per tonne in June 2021 from Rs 38,000 per tonne in  June 2020. In comparison, long-steel prices rose 1.4 times to Rs 57,900 per tonne in the period under review.

The price rally, spurred by China’s green policy, is likely to benefit through the first half of this fiscal, too, with flat steel prices already up 70 per cent since April. While prices will soften in the second half, they would still be 40-45 per cent  higher on-year, said the report.

With blockbuster profits, steel makers embarked on significant deleveraging. Consequently, their net debt/EBITDA reduced to 1.8 times last fiscal from 3.6 times in fiscal 2020 (average for the sample set of 21 companies).

The top four steel makers reduced net debt (in their Indian operations) by Rs 34,000-35,000 crore as their EBITDA pool nearly doubled during the year.

This fiscal, deleveraged balance sheets will drive capacity expansion plans (both brownfield and greenfield) and capex to their previous peaks. Capex deferred during the previous cycle will also kick in. The ongoing capex cycle will continue to be driven by large steel makers, which are expected to add more than 95 per cent of the new capacities coming on stream over the medium term.

Some key capacity expansions by large steelmakers will include the following brownfield additions such as Tata Steel Kalinganagar (5 mtpa), Jindal Steel & Power at Angul (6 mtpa) and JSW Steel Vijayanagar (5 mtpa expansion  and 1.5 mtpa blast furnace revamp)

However, these capacities are expected to be commissioned in or after FY24.