The Business Bytes
TBB BUREAU
NEW DELHI, MAR 30, 2023
Domestic demand for stainless steel, which was 4 million tonne (MT) in fiscal 2022, is projected to log a healthy compound annual growth rate of 9% in the three fiscals through 2025, double the 4.5% pace of the past five fiscals.
This will be driven by increasing adoption of stainless steel in railways — a focus area for government infrastructure spending — and rising application in the automobile and construction sectors, said a CRISIL Ratings Report on Thursday.
The demand growth, in turn, will spur capacity additions. However, credit profiles are expected to remain comfortable, given stable profit levels and healthier balance sheets, it added.
“Adoption of stainless steel is increasing because of its higher durability and lower maintenance. Demand from railways is expected to more than triple by fiscal 2025 and constitute 20% of incremental demand for the metal over fiscals 2023-2025. To be sure, the recent Union Budget has doubled the amount earmarked for manufacturing railway coaches to Rs 47,500 crore for fiscal 2024,” said Ankit Hakhu, Director, CRISIL Ratings.
The Report further said that demand from other major sectors with application of stainless steel, including consumer goods (45% of demand) and process industry (25%), is also expected to grow at a healthy clip of 7-9% over the next 3-5 fiscals given higher consumer spends and recovery in consumption.
Strong demand prospects, coupled with the absence of any major supply addition in the last three fiscals, have set the stage for capital expenditure (capex).
Domestic manufacturers are undertaking capex to add ~1 MT of steel melting capacity by fiscal 2024. The industry added ~1.3 MT between fiscals 2009 and 2012, post which utilisation and profitability issues led to a phase of stress build-up.
This time around, we believe the risk outlook is more favourable for several reasons.
First, project execution risk is low, as it is mostly brownfield in nature, with land and supporting infrastructure already in place.
Second, capacity addition is relatively small (15% of existing vis-à-vis 80% in the previous cycle). This, along with buoyant demand, will keep utilisation levels healthy at 75-80% until fiscal 2025.
Third, players have adopted a raft of measures to lower the impact of volatile prices of nickel1 — a key raw material for stainless steel — that can have a bearing on their profitability. These measures include sharper focus on value-added segments and grades that have low nickel content, right-sizing nickel inventory levels, and instituting pass-through mechanisms in contracts to a large extent.
Fourth, companies are also incurring capex to improve downstream capacities (cold-rolled coils and other valueadded products), which will support the product portfolio and enhance operating margins.
“Capex will be supported by two factors. First, balance sheets are strong as no material capacity expansion has taken place in the industry over the past few years. Second, cash accruals will remain healthy as operating margins are expected to be steady given the conversion nature of business and reducing share of high nickel stainless steel grades in the overall demand mix. This will result in lower dependence on debt,” said Ankush Tyagi, Associate Director, CRISIL Ratings.
Credit profiles of domestic stainless-steel manufacturers are expected to remain healthy in fiscal 2024 on the back of lower debt, stable profit and healthier balance sheets, with gearing below 1.0 time (less than 1.5 times in fiscal 2022).
Domestic manufacturers do face a threat of lower-cost imports from Indonesia and China (accounting for a fourth of total consumption). However, this is mainly in the low-end consumer products (utensils and household items) space, which is dominated by the unorganised segment.
Infrastructure and high-end products are expected to drive up demand for stainless steel. The large domestic players mainly cater to these segments, and thus their demand prospects remain healthy.
That said, slower-than-expected economic growth dampening domestic consumption, sharp movements in nickel prices, import risk in the high-value stainless-steel categories, and any significantly debt-funded capex will bear watching.
