 "India Ratings downgrades Steel Authority of India; outlook negative")
India Ratings has downgraded state-owned Steel Authority of India (SAIL) with a negative outlook as the steel producer's credit metrics according to the agency are lower-than-expectations.
The steep fall in steel prices since January 2015 led to EBITDA losses for the company in Apr-Dec period and the consequent worsening of its credit metrics, said India Ratings in its report today.
However the agency expects net realisations to increase by Rs 3,000-Rs 4,000 per tonne post the introduction of minimum import price (MIP) for steel in India effective from February 2016.
SAIL's EBITDA/tonne eroded significantly during Apr-Dec to negative driven by the steep fall in net sales realisations,a marginal decline in sales volume, and high fixed costs specially employee expenses. However, the agency expects EBITDA/tonne to improve in FY17 with an improvement in net sales realisations, a volume ramp-up, better absorption of fixed costs and higher contribution margins.
SAIL's gross debt increased substantially to Rs 29,900 crorein FY15 and is likely to have reached Rs 330bn by FY16 (estimates) due to the capex undertaken and cash losses incurred. Even after the expected improvement in EBITDA in FY17, the leverage is likely to remain higher than the category medians. The agency believes increase in net sales realisation is necessary for an improvement in SAIL's overall credit metrics.
Around 80 percent of SAIL's products are covered under MIP and the company has effected price hikes of 10 percent post the imposition and a further hike of 5-10 percent is likely in FY17. However, this will not be enough for a turnaround as steel prices corrected by 35-40 percent in 2015. Also, implementing sustained hikes in steel prices would remain challenging because of the commissioning of additional capacity of close to 12 million tonnes in 2016 and the MIP being currently valid till August 2016. India Ratings also expects SAIL to achieve volume growth of 10-15 percent in FY17.
Regarding financial support the rating agency said the company being state-owned is a strategically important entity for the government.
The Maharatna status of the company provides it considerable financial and operational autonomy. In line with its 'parent subsidiary linkage' methodology, agency has factored into the ratings the potential support of the Indian government to SAIL, if required.
