Leverage for primary steel firms may reach five-year high: CRISIL Ratings

Major steel producers have been on an expansion spree. Ongoing capex is expected to boost capacity by 30 mn tonne per annum (mtpa) by fiscal 2027, of which 20 mtpa is to be added by the end of fiscal

Net leverage (ratio of net debt to EBITDA) of domestic primary steel makers will hit a five-year high of over 3x this financial year, a CRISIL Ratings report said on Thursday.

 

According to CRISIL, the net debt to EBITDA ratio of primary steel companies was rising as debt was expected to rise over 25 per cent on continued capital expenditure (capex) even as profitability was impacted by cheaper imports.

 

However, the rating agency believes that the moderation in credit metrics will be manageable given that net debt per tonne was below the pre-pandemic level and the low risk in implementation of the capex supporting volume and efficiency gains.

 

The CRISIL report was based on a study of five primary steel producers – Jindal Steel & Power, Tata Steel, JSW Steel, Steel Authority of India and ArcelorMittal Nippon Steel India – accounting for 55 per cent of domestic production.

 

Ankush Tyagi, associate director, CRISIL Ratings, said, higher debt will impact financial metrics. “While net leverage is expected to rise to 5-year high of 3x this fiscal, interest coverage will fall below 4x.”

 

“Yet, the credit metrics will be manageable and better than pre-pandemic levels because annual volume has grown more than 35 per cent and net debt per tonne of installed capacity remains 30 per cent lower than before the pandemic,” he said, adding that liquidity remains healthy.

 

Major steel producers have been on an expansion spree. Ongoing capex is expected to boost capacity by 30 million tonne per annum (mtpa) by financial year 2027 of which 20 mtpa is to be added by the end of this fiscal.

 

However, the capex risk is low, CRISIL noted, as it is brownfield in nature, involving lower cost per tonne compared with greenfield expansion.

 

“Furthermore, about a third of this capex is to increase downstream value-added products and efficiency benefits, which will support realisations and strengthen business profiles,” the report mentioned.

 

While domestic demand is healthy, global steel demand is likely to contract for the third consecutive financial year. This is resulting in rising imports — particularly from China, where demand remains muted — which are pressuring realisations, CRISIL said.

 

CRISIL expects domestic steel prices (benchmark domestic hot-rolled coil prices) to drop 10 per cent on average this fiscal from Rs 57,500 per tonne last financial year. The first half of this financial year has already seen average domestic steel prices fall 8 per cent from last financial year’s average, it noted.

 

Ankit Hakhu, director, CRISIL Ratings, said, “The fall in steel prices will impact the operating profitability of domestic primary steel producers. Despite an increase in sales volume and lower cost pressures (mainly due to reduced coking coal prices), the operating profit margin will remain at 15-16 per cent this fiscal.”

 

“Lower realisations and flat operating margin will likely drag absolute EBITDA for primary steelmakers 5-7 per cent lower this fiscal, at a time of substantial growth capex,” he added.

 

However, CRISIL expects net leverage to improve to 2.8-3.0x next fiscal on likely better steel prices and demand prospects globally. Incremental volume from new capacities will widen the earnings base for domestic players, it said.

 

But CRISIL also said, any material fall in steel prices due to weak global demand and higher supplies, especially from China, or any increase in import duty will bear watching.  Capex push  

> Net debt to Ebitda ratio rising as debt is expected to increase over 25% on continued capex

> But moderation in credit metrics to remain manageable, says CRISIL 

> Net debt per tonne remains below pre-pandemic level 

> Ongoing capex expected to boost capacity by 30 mtpa by FY27