Domestic steel players poised for strong deleveraging plans as prices surge

With profitability at record levels, even if steel prices correct by 15-20% going ahead, players would still be in a comfortable position to deleverage, says an analyst

With domestic steel prices heading north, a balance between capex and deleveraging of the balance sheet would augur well for the primary steel producers, said analysts.

“Profitability of domestic steel companies is at record levels. Even if steel prices have to correct by 15-20 percent going ahead, players would still be in a comfortable position to deleverage,” Priyesh Ruparelia, vice president, Co-group head, corporate ratings ICRA Ltd said.

Domestic hot-rolled coil prices have jumped almost 80 per cent in the last one year to be at about Rs 66,000 per tonne.

Meanwhile, Tata Steel, in its Q4 FY21 earnings conference call, reiterated its commitment to reduce its debt by at least $1 billion a year, even as it resumes growth capital expenditure (capex).

“The continued strength in steel prices will support Tata Steel Ltd.'s commitment to deleverage,” rating agency Standard & Poor's today said.

With captive iron ore availability, Tata Steel’s Indian operations are a play on steel prices, said brokerages.

“Given the prevailing higher prices, we expect margin to be strong for Tata Steel. Deleveraging should remain strong for the company, despite the resumption of growth capex," said Motilal Oswal in its report.

The company currently is expanding capacity by 5 million tonne at Kalinganagar, in Odisha.

Today, Naveen Jindal-led Jindal Steel & Power (JSPL) announced that it has made a prepayment of Rs 2,462 crore to its term lenders.

“This (prepayment of loan) is in continuation of the company’s financial strategy of debt reduction and building robust balance sheet with the optimum capital mix, it said.

Jindal Steel, over the last few quarters has lowered its debt by over Rs 20,000 crore from a debt level of Rs 45,900 crore as on 31, March 2017.

While, the company has no immediate capex plans, it remains focused on strengthening its balance sheet via various routes.

The Delhi-based steel producer divested entire stake in its Oman asset last year and diverted funds to lower debt. Also, as recent as last month, the company sold its power business for about Rs 3,500 crore, which was again diverted to lower debt level.

Meanwhile, state-owned Steel Authority of India (SAIL) has also significantly lowered its net debt from peak of Rs 52,290 crore as on April 2020 to Rs 44,308 crore as on Dec 31, 2020.

“During the financial year (FY21), the company has continuously enhanced its production volumes and scaled up our performance. SAIL is poised to grow steadily in future with domestic steel consumption having a positive outlook,” Soma Mondal, chairman of SAIL was quoted as saying.

Apart from focusing on volumes, SAIL is also looking to improve operational efficiencies to up its margins.

Tata Steel, state-owned Steel Authority of India (SAIL), Jindal Steel & Power, Sajjan Jindal-led JSW Steel and AM/NS India are among the largest primary domestic steel producers in the country.

Among those steel players looking to expand in the current pricing scenario is AM/NS India which is looking for organic expansion at Hazira facility to 12-15 million tonne from 6.5 million tonne at present.

“Domestic steel consumption is expected to grow double digit in FY22 at about 11-12 percent. Even if we have to revise our forecast in coming months due to the second or perhaps the third pandemic wave (experts are talking about), we do not see a scenario as bad as Q1 FY21,” informed Ruparelia of ICRA Ltd.

Overall analysts were of the view that with steel prices looking strong domestically as well as globally, even a drop in domestic demand would not have much impact as export opportunities remain strong.

“Structurally global steel cost curve would increase by $100 per tonne due to higher cost associated with reducing carbon footprint. This coupled with improved outlook on global demand and reduced supplies from China would steel prices higher,” said Prabhudas Lilladher report.

China’s relentless drive to reorganise supplies on the merit of environment sustainability has lifted the long-term price outlook for steel prices, it said.

India steel consumption declined 9.9 percent in Apr-Feb period compared to same period last year, while exports jumped 22 percent. The country’s imports were also down by 33 percent in the period under review, as per Joint Plant Committee data.