Ind-Ra maintains stable outlook for H2FY22 on domestic steel sector

Higher coking coal prices could moderate per-tonne EBITDA margins, but absolute EBITDA is likely to be adequately compensated by robust sales volumes and elevated price levels

India Ratings and Research (Ind-Ra) has maintained a stable outlook on the domestic steel sector for 2HFY22.

Higher coking coal prices are likely to moderate the per tonne earnings before interest, taxes, depreciation and amortisation (EBITDA) margins over 2HFY22, although keeping it elevated from FY21 levels (unless the extremely high coking coal prices of end-September 2021 continue which is unlikely), due to softening of iron ore prices amid somewhat stable steel prices.

However, the absolute EBITDA is likely to be adequately compensated by robust sales volumes and elevated price levels.

Coking coal prices increased by 150 per cent year-on-year in mid-September 2021 and are likely to remain volatile. Iron ore prices could correct with supply improving gradually, but remain elevated due to structural changes post mine auctions, said the agency.

Both demand and supply are likely to be strong, except for temporary headwinds, albeit lower each time with each passing Covid-19 wave. Domestic steel demand is heavily reliant on the infrastructure and construction sectors which account for around 60 percent of it. The frontloading of the government’s Rs 111 trillion infrastructure investment plan and the budget emphasis on capex and infra investment is likely to ensure a steady domestic demand.

Ind-Ra has revised the rating outlook to positive for domestic steel companies from stable for 2HFY22 as the rating momentum is likely to be biased towards positive actions due to stronger balance sheets on account of deleveraging over FY21-FY22, despite normalising per tonne margins and increased capex outflow.

The strong cash flow generation over 2HFY21-1HFY22 has enabled steel players to significantly deleverage and embark on the next capex cycle. The proportion of rating actions on the positive side has been higher during this period and it may remain so in the rest of FY22.  The capex intensity over FY22-FY23 is likely to remain steady, while some of the capex is near completion and the balance capex to be incurred would be in a phased manner, however with a bulk of cash outflows in FY24-FY25.

The pace at which the new lessees at the ongoing iron ore mine auctions in Odisha and the upcoming auctions in Chhattisgarh ramp-ups output post allocation, continuance of China’s focus on curbing crude steel output and the sustenance of logistical disruptions including limited container availability, higher port inventories due to Covid-19 norms and resultant higher freight costs are the key items to be monitored, said the agency.