 "Steel industry poised for a tougher time ahead")
The road ahead looks tougher, with thin hopes of steel demand revival, coupled with unpredictable trends in the rupee, amid stressed balance sheets due to high debt and poor investment climate, said brokerages.
In the quarter ended June, among the top domestic producers, JSW Steel and Steel Authority of India took a hit on their bottom lines due to the rupee volatility. Tata Steel Ltd and Jindal Steel & Power managed to escape on the back of high deferred tax and increased other income, respectively.
Demand-side challenge
The demand-side challenge for the industry would continue and it might be difficult for the sector to even beat the 3.5 per cent demand growth achieved in 2012-13 (April-March), said Abhisar Jain, equity research analyst-metals from Centrum Broking.
Domestic steel demand grew only 0.3 per cent in April-June.
On the currency front, the depreciating rupee is expected to further hurt the cost of production of steel companies, in turn affecting their margins, said analysts.
Coking coal prices, which have been low at $135-140 a tonne, might only rebound from the current levels, they said.
This, along with the depreciating rupee, is expected to swell the import bill of steel companies, taking their cost of production even higher in the coming quarters, said analysts.
Coking coal, largely imported by the domestic industry, is one of the main raw materials used in the making of steel.
The rupee has weakened by 12 per cent since May-end.
Apart from the slowing economic growth in the country and abroad which is weakening steel demand, high debt levels might keep the balance sheets of most companies under stress, prompting them to lower expansion and focus more on repayment of loans, said analysts.
Among the top producers of the domestic industry, as on June 30, Tata Steel has a net debt above Rs 60,000 crore, while that of JSW Steel is close to Rs 30,000 crore. Steel Authority of India has a debt of Rs 23,300 crore and that of Jindal Steel & Power is Rs 25,500 crore.
High debt levels might also trigger slowing of project expansion among major producers, said brokerages.
Companies are expected to restrain on the capex side till demand returns, said Jain of Centrum. A delay in capex is also likely, he added.
Tata Steel, one of top 10 producers of steel in the world, is setting up a six-million-tonne plant in Odisha and is scheduled to bring the first phase of three million tonnes of this plant on stream in 2014-15 (April-March).
Medium and small-sized steel companies, which lack good product mix and have weak backward integration, might witness some capacity cuts or even shutdowns in the coming quarters, said analysts.
Usha Martin, Monnet Ispat & Energy, Adhunik Metaliks and Godavari Metal Industries, among others, are some of the medium and small-sized steel companies.
Of the various challenges likely to be faced by producers in the coming quarters, brokerages are hopeful that a brief demand recovery in the final quarter of the current financial year could help companies improve their profit-and-loss statement to some extent.
Normally, the final quarter of a financial year is seen as a peak demand season for steel since industrial activity is high during this period. Though the demand this year might not be as high as in the corresponding period last year, some revival is expected which might lend some support to producers this year, said analysts.
Aggressive marketing, exporting of various steel products and correcting of balance sheets could be some of the options the industry could exercise to mitigate the negatives it is set to face in the coming quarters, said brokerages.
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Since the rupee is depreciating, benefit could be derived by the companies exporting steel products, said Giriraj Daga, analyst with Nirmal Bang Institutional Equities. This seems like some greenshoot amid the challenging environment the industry is facing, he added.
Rural demand
Focusing on higher penetration in the rural areas of the country could be another area steel companies could look at to improve sales, said Jain of Centrum.
The current per capita consumption of steel in rural areas of India stands at 13-14 kg, far lower from the 47-50 kg per capita consumption in urban regions. It is this gap producers could tap in the coming quarters to improve their toplines, said analysts.
Refinancing of debt could also be another option companies might exercise to lower its interest cost outgo, analysts suggested.
All in all, the picture continues to look grimmer for the domestic industry but close monitoring for business opportunities and timely decisions could be the key to sail through.