FY21 operating margins of Indian steelmakers to fall 200 bps to 15%: Crisil

Companies better placed to ride out slowdown now, than in previous downturn of 2016

Operating margins of domestic primary steel producers are set to decline by 200 basis points (bps) to 15 per cent this fiscal, on weaker sales volumes and realisation, and limited cushion available from lower raw material costs.

That said, producers might still be better off than in the previous downturn of fiscal 2016 because the imposition of antidumping duty by the government and resolution of stressed assets have helped shore up their debt metrics.

Deferral of capex this fiscal and likely demand recovery next fiscal will also support credit profiles, said Crisil in its report today.

The percentage fall in sales volume year-on-year is likely to be in high single digits this fiscal mainly because domestic demand evaporated in the first quarter following the Covid-19-induced lockdowns.

A likely recovery during the rest of this fiscal, stemming from pent-up demand, government spending on rural housing and roads, and growth in lower-margin exports, may not be enough to offset the first-quarter blow.

“Lower volumes and realisations will put pressure on the operating margins of steel producers this fiscal, despite some support from softer iron ore and coking coal prices, which form 80 per cent of their raw material cost. We expect operating margins, which had slid 400 bps last fiscal from a peak of 21 per cent in fiscal 2019, to fall another 200 bps to 15 per cent this fiscal,” the report quoted Isha Chaudhary, director at Crisil Research as saying.

Operating margins had hit a 10-year low of nine per cent during the previous steel sector downturn of fiscal 2016. This time around, domestic steel makers get support from the anti-dumping duty, which sets a floor price for steel imports from China, South Korea and Vietnam, among others.

Consequently, domestic steel prices this fiscal would be 25 per cent higher and aggregate industry operating profit nearly twice that in fiscal 2016.

"Moreover, steelmakers are likely to defer nearly half their planned capex this fiscal and conserve cash to fortify financials. Consequently, we expect their gross debt to remain stable and the decline in interest cover to be restricted to 1.7 times this fiscal compared with 2.3 times in fiscal 2020 and below 1 time in fiscal 2016," the report says.

“We foresee a bounce-back in steel demand growth to double digits next fiscal because of a likely government push to housing and infrastructure, and recovery in automobile sales. That would improve the steel industry’s profits, increase interest cover to 2.3times, and support credit profiles,” the report quoted Naveen Vaidyanathan, associate director at Crisil Ratings as saying.

Better health of steel companies – debt issues of most large stressed capacities have been resolved and they have consolidated with stronger peers – will help them ride near-term headwinds, said Crisil.

The pace of demand recovery and its impact on steel prices would be the key monitorables in the road ahead.