The Business Bytes
Mumbai, October 17, 2024 (TBB Bureau): Secondary long-steel producers are set to witness a 7 per cent rise in revenue this fiscal, up from 4 per cent in the previous year, driven by strong domestic demand fueled by central government expenditure on housing and infrastructure projects. According to CRISIL Ratings, this growth is backed by improved operating leverage and declining prices of key inputs, such as iron ore and coal, which are expected to enhance operating margins by 50-60 basis points to around 6.5 per cent.
A study conducted by CRISIL Ratings on 149 secondary long-steel producers, which account for 30% of the sector’s revenue, points to sustained strong cash generation, low financial leverage, and moderate capital expenditure (capex) as key factors supporting the credit profiles of these producers. The sector’s growth is predominantly driven by domestic demand, particularly in sectors such as rural and urban housing, and infrastructure development.
The central government’s continued investment in initiatives like the Pradhan Mantri Awas Yojana and the National Infrastructure Pipeline is expected to sustain the demand for long-steel products. As a result, industry volume is projected to grow by 7-8 per cent, following a significant 14 per cent increase last fiscal, which was a pre-election year. The sector has already witnessed robust growth in the first half of the fiscal, with expectations for further acceleration in the second half.
Average steel realisation is projected to remain steady at ₹53,000-54,000 per tonne, thanks to stable supply levels and minimal capacity expansion over recent years. In contrast, the previous fiscal saw a 10 per cent drop in steel realisation, aligned with declining raw material costs.
“Steady realisation coupled with increased volume will propel the revenue of secondary long-steel producers this fiscal. Capacity utilisation is expected to rise to 83 per cent from 80 per cent last fiscal, resulting in an increase in EBITDA (earnings before interest, tax, depreciation, and amortisation) per tonne to ₹4,000 from ₹3,700, boosting cash accruals,” said Rahul Guha, Director, CRISIL Ratings.
The sector’s higher cash accruals are also anticipated to help limit long-term debt levels. The producers have plans to invest between ₹6,000 crore and ₹6,500 crore in capacity additions over the medium term, driven by robust domestic demand. These investments aim to improve efficiency through backward integration and the adoption of captive power sources.
Argha Chanda, Director, CRISIL Ratings, added, “Higher cash accrual and deleveraged balance sheets continue to provide sufficient headroom to support rising capex, thus maintaining comfortable credit profiles for secondary long-steel producers. Their gearing ratio is expected to stay below 1x by the end of March 2025, consistent with the previous fiscal. Additionally, improved operational performance is expected to sustain interest coverage at 3.4 times, similar to last year.”
The combination of strong domestic demand, steady profitability, moderate capex, and low leverage will likely ensure a stable and healthy financial outlook for secondary long-steel producers this fiscal.
