Steel sector outlook revised to positive on continued earnings uptick: Icra

Icra Ratings has revised the steel sector’s outlook to positive from stable following all large listed steel companies reporting their best ever quarterly performance in Q1FY22, and the earnings outlook remaining healthy for the remaining months of the fiscal.

Given the strong earnings growth and capex curtailments following the pandemic related uncertainty, steelmakers started to aggressively deleverage since the second quarter of FY2021.

This trend is reflected by the industry’s consolidated debt levels declining to Rs 2.0 trillion in end-July 2021, from Rs 2.6 trillion in end-July 2020, registering a sharp decline of over 21 percent in a short span of a year.

The industry’s consolidated borrowings today are at its lowest levels since March 2012, said the ratings agency.

“The deleveraging effort of these companies looks sustainable in the current fiscal as well as in FY23 since companies will carry out their already announced capex programs. In FY24, however, capex from Jindal Steel & Power and AM/NS are expected to kick in which will inch up leverage for the sector,” informed Icra team in its webinar today.  

On taking a closer look at the industry’s consolidated borrowing per metric tonne of installed capacity, it stood at $180 per tonne in July 2021, shrinking by almost half from $350 per tonne prevailing in November 2008.

This suggests that domestic steel companies are now significantly less leveraged than in FY2009, when the last steel super cycle ended, following the global financial crises, said the agency.

“After a 7 per cent contraction in steel demand last year following the pandemic, we expect domestic consumption to grow at around 12 per cent in the current fiscal, not only benefitting from a low base, but also from an improving outlook for several steel consuming sectors. The steel production growth in FY22 is likely to be higher at around 14 per cent, getting traction from the increasing trend in net finished steel exports. Our assessment indicates that net exports is expected to increase to around 8 million tonne in the current year from 6 million tonne in FY2021, as domestic mills try to increase their export footprint, given the opportunity to fill-up the vacuum left by the Chinese mills due to the Government’s curbs,” the report quoted Jayanta Roy, senior vice-president and group head, corporate sector ratings as saying.

On the supply front, from JSW Steel and NMDC, 8 mt of new capacities are expected to hit the market in the current year, but the same is likely to be absorbed by incremental steel consumption of 12 mt expected in FY2022, leading us to revise the industry’s capacity utilisation rates to 78 per cent in FY2022 from 72 percent in FY2021.

Within that, the leading mills however are expected to operate at a significantly higher capacity utilisation.

On the business return indicators, the industry’s RoCE climbed to mid-teens in FY2021, and in the current fiscal, it is likely to come close to 30 percent. Due to this, steel mills from big to small have started announcing expansion plans as their balance sheets look much stronger following the aggressive deleveraging efforts over the last four quarters. India has not seen any new capacity addition in the last two years back-to-back, but things are poised to change going forward, as around 34 million tonne of new capacities are expected to come onstream by FY2026 from the leading players alone, adding close to a quarter of its existing installed capacities in the coming four to five years.

Unless the current upcycle extends over several years, these large-scale expansion plans are however expected to lead to a sequential moderation in the industry’s credit metrics over the medium term as industry borrowing levels would go up to fund these growth plans, and steel prices moderate eventually, as is typically witnessed in cyclical sectors.