The Business Bytes
Mumbai, November 28, 2024 (TBB Bureau): The net leverage of domestic primary steel producers, measured as the ratio of net debt to EBITDA, is set to reach a five-year high of over 3x this fiscal. This surge reflects a 25% increase in debt due to substantial capital expenditure (capex), even as profitability is squeezed by cheaper imports, particularly from China.
Despite the mounting debt, the credit metrics of the industry remain manageable. The net debt per tonne remains below pre-pandemic levels, and risks tied to the ongoing capex projects are minimal. A study of five leading primary steel producers, accounting for 55% of domestic production, highlights these dynamics.
The ongoing capex is projected to add 30 million tonnes per annum (mtpa) of capacity by fiscal 2027, with 20 mtpa expected to come online by the end of this fiscal year. Notably, most of this capex involves brownfield expansions, which are more cost-effective than greenfield projects. Additionally, around a third of the investments focus on enhancing downstream value-added products and efficiency, which should help bolster realisations and improve business profiles.
The current phase of the capex cycle, with planned outlays of Rs 70,000 crore each in this fiscal and the next, aims to support medium-term domestic steel demand, expected to grow at a compounded annual rate of 6-8%. Growth is being driven by infrastructure development, urbanisation, and rising industrial activity spurred by government initiatives.
While domestic demand is robust, global steel demand is set to contract for the third consecutive year, leading to increased imports, particularly from China. This has put downward pressure on domestic steel prices, with hot-rolled coil prices expected to decline by 10% this fiscal to an average of Rs 51,750 per tonne, compared to Rs 57,500 per tonne last fiscal. The first half of the fiscal has already seen an 8% drop in prices.
Ankit Hakhu, Director, CRISIL Ratings, noted, “Falling steel prices will impact the operating profitability of domestic primary steel producers. Even with increased sales volume and lower coking coal prices, operating profit margins are expected to remain flat at 15-16% this fiscal. The absolute EBITDA for primary producers will likely decline by 5-7%, despite substantial growth-oriented capex.”
The large capex investments, combined with subdued profitability, will push debt levels higher, crossing Rs 40,000 crore this fiscal, reaching pre-pandemic levels last seen in fiscal 2020.
Ankush Tyagi, Associate Director, CRISIL Ratings, added, “Higher debt will affect financial metrics, with net leverage rising to a five-year high of 3x and interest coverage dropping below 4x. However, these metrics remain better than pre-pandemic levels due to a 35% increase in annual volumes and a 30% lower net debt per tonne of installed capacity. Additionally, liquidity remains robust, with cash reserves equivalent to 10% of outstanding debt or 25% of annual capex.”
The outlook for fiscal 2025 appears brighter, with net leverage expected to improve to 2.8-3.0x. This optimism stems from anticipated recovery in global steel demand, sustained domestic growth, and incremental contributions from newly added capacities, which will expand earnings bases for domestic steelmakers.
In summary, while the domestic primary steel industry faces near-term headwinds from price pressures and rising imports, its long-term fundamentals remain strong, supported by strategic capex and robust demand drivers.
