Metal companies may trim capex further to avert cash-flow mismatch

To avert cash flow mismatch, have sufficient cushioning and no hiccups in loan repayment, Indian metal companies could further cut their capital expenditure (capex) for this financial year.

Significant revenue decline in the September quarter, an indication of lower cash flow, has already prompted a move in this direction. Tata Steel, JSW Steel, Vedanta and Hindalco Industries have all cut their capex. 

“Steel demand revival in the domestic market post monsoon is only marginal so far. Demand from white goods and the automobiles segment (due to revised contract prices) would help only a bit, as they together form 15-20 per cent of total consumption. Overall, the demand picture is still dismal, with no major confidence building indicator,” says Sushim Banerjee, director-general at the Institute of Steel Development and Growth. 

Tata Steel has revised its planned capex for 2019-20 to Rs 8,000 crore, from the earlier Rs 12,000 crore. Vedanta has reduced its estimate to Rs 8,500 crore, from Rs 10,000 crore earlier. Hindalco trimmed its India operations capex to Rs 2,000 crore, from Rs 2,600 crore. JSW Steel decided to shave its capex by Rs 4,700 crore, to Rs 11,000 crore.

Aluminium producers also say they do not see a demand revival. "We are hoping that domestic demand looks up in the coming months but there is absolutely no sign,” Satish Pai, managing director at Hindalco Industries, said at the latest quarterly earnings conference.

The company’s consolidated net sales at Rs 29,657 crore in the September quarter was down nine per cent from the same period last year. 

“The chance of fast recovery looks remote for overall aluminium demand. Earlier, we were at least relying on export but with the global downturn, that, too, seems dim,” said Anil Agarwal, patron of the Aluminium Secondary Manufacturers Association. 

October to March, the second half of the financial year, is considered a peak demand season for industrial activity, post monsoon, as construction activity picks up and the festival season brings increased demand in almost all consumption segments. 

“The capex cycle is directly linked to cash flow. With excess monsoon this time, demand emerging from rural India needs to be watched, as it might get affected. Also, with GDP (gross domestic product) numbers not being too strong, a further cut in capex is possible,” said Hitesh Avchat, group head of corporate ratings with CARE Ratings. “Cutting capex would mean ensuring sufficient cushioning and smooth loan repayments in tough business conditions,” he added.

Severe contraction in factory output has prompted observers of the economy to downsize their estimate of the pace with which it could have grown in the July-September quarter. Most estimate 4.2-4.7 per cent. State Bank of India has lowered its estimate for GDP growth to 4.2 per cent; for all of 2019-20, it has given the lowest estimate so far, at 5 per cent.