India Ratings maintain steel producers on negative outlook

India Ratings & Research today said it has maintained its rated steel producers on a negative outlook for 2015-16 despite softening of interest rates and expected growth in consuming industries.
The rating agency expects the credit profile of its rated steel producers to remain weak in next fiscal despite a modest recovery in demand. Majority (82 per cent) of ratings are on a stable outlook, with most of them being rated below 'IND BBB-' to reflect inherent risks in the steel sector.
The agency expects steel consuming sectors -- construction, automobile and mechanical engineering to grow in 2015-16 with the softening of interest rates and implementation of government policies on the revival of infrastructure and investment in the country.

A better GDP forecast of 6.5 per cent growth in 2015-16 supported by industrial growth of 6.5 per cent would gradually increase steel demand in the country, Ind-Ra said in its report here.
Average prices for steel-making raw materials are likely to remain low in 2015, in line with 2014 as major global miners are determined to flush small, high-cost producers out of the industry and regain balance in the market.
The Indian iron ore mining industry is undergoing a difficult phase given regulatory intervention in various states. Even though this intervention bodes well for the domestic industry in the long-term, steel producers will continue to face inadequate availability of domestic iron ore in the short term, the report said.

Factors such as global overcapacity, import competition, expected fall in raw material prices and addition of capacities during FY16 will prevent a steel price hike despite a recovery in demand, it said.

Profit margins in FY16 are likely to remain modest. Depreciation in currency could pressurise the margins of companies producing flat steel as bulk of coking coal is imported.
The rating agency expects a gradual reduction in interest rates by FYE16 (75bp), which should provide some relief in interest costs. Softening of interest rates will support interest coverage. However, the leverage of the companies is likely to remain high, it said.

Ind-Ra rated steel producers include Steel Authority of India Ltd, Tata Steel, Rashtriya Ispat Nigam Ltd, Uttam Galva Steels and Usha Martin.