Operating profits of steel sector to improve in FY19: Report

An expected improvement in capacity utilisation rates in the steel sector, would result in an better operating profitability during FY19, a report said.

"The operational performance of key sector participants to remain strong in the remainder of FY19, in view of a robust steel consumption demand, aided by government spending on infrastructure and housing and a modest recovery in private capex cycle," India Ratings and Research (Ind-Ra) said in its report here.

A likely improvement in capacity utilisation rates would result in an improvement in operating profitability, due to better absorption of fixed cost, amid steady sales realisations during FY19, Ind-Ra said.

Among the leading steel players, JSW Steel (JSWL) and Tata Steel (TSL) EBITDA per tonne remains higher and less volatile compared to those of Steel Authority of India (SAIL) and Rashtriya Ispat Nigam (RINL) through the cycle, due to strong operational efficiencies and better techno-economic parameters with the lowest specific energy consumption and coke rate per tonnes.

TSL's and JSWL's value addition remains higher than that of SAIL and RINL due to their strong portfolio of branded and special products along with a product mix skewed towards flats, thus their realisation per tonne remains higher. While TSL benefits from its highly vertically integrated domestic operations with captive mining operations, JSWL stands out with the highest employee productivity among the players under study.

Despite TSL being a low cost domestic producer, its profitability is impacted by its weak European operations, due to which JSWL has higher EBITDA per tonne, the report said.

Ind-Ra expects EBITDA per tonnes of players SAIL and RINL to improve over FY19-20, supported by the operating leverage benefits with production ramp-up and focus on operational improvements through raw material cost optimisation, manpower rationalisation and enhanced techno-economic parameters.

Ind-Ra has also reviewed its long-term ratings on the steel companies during March-July 2018. While the rating outlook on JSWL was revised to stable from negative, the agency has maintained a negative outlook on RINL.

It has also maintained TSL's rating on Rating Watch Evolving (RWE), and assigned ratings to Bamnipal Steel Ltd, a TSL subsidiary established to acquire Bhushan Steel, it said.