Steel Industry Reels Under Debt Crisis:Crisil

Cyclical nature of business and the characteristics of the Indian steel industry posed threats to its profitability, the study said.

A quick legislative action against dumping of steel that companies in other parts of the world enjoy was not available in India, CRISIL explained.

The performance of the Indian steel industry was impacted by a large unorganised sector and by the presence of several small manufacturers, it reasoned, and added that globally, the industry trends were towards consolidation, as seen in the metal sector, and particularly in Europe's steel sector where 60 per cent of the production was controlled by five players.

 

The importance of corporate ownership in India made mergers difficult among large manufacturers, which not only prevented rational pricing as seen in other world economies, but also restricted the steel companies' ability to leverage themselves for both domestic and international markets.

Though several domestic companies had improved their operations in an effort to become globally competitive, it would be their financial status that would determine their competitiveness and ability to withstand shocks.

Companies that had competitive business ability and made use of the current upswing in prices to reduce debt levels will stand better chance of being truly globally competitive, the rating agency said.

More than risk protection, it had been demonstrated that a favourable capital structure and financial profile could serve as a vehicle for growth, CRISIL said.

It added that companies would have better ability as well as opportunity to acquire assets at a low cost when there was a downturn and thereby increase their competitive ability.

"Future threats for the steel industry could arise from say, a slowdown in the US economy, weakness in the euro or devaluation of the Chinese currency," the study explained.

Given the situation of oversupply in the domestic market that was likely to continue for a few more years, firm global prices and demand were necessary for the steel industry, it said, and added that any weakening of international prices reduced the prospects of profitable exports and put tremendous pressure on the domestic market.

CRISIL said an increase in debt of steel companies was on account of fund requirements for modernising facilities or setting up expansion projects. With low internal accruals and poor equity market sentiments for steel projects, companies had to resort to higher borrowings to fund capital expenses.

It believes that finding funds for new steel projects was going to be increasingly difficult as the awareness of globalisation had permeated beyond companies, into funding and equity markets.

It said debt ratings of steel companies could improve if the restructuring and modernisation currently being undertaken resulted in an improvement in operating efficiencies and a reduction in debt.