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India Ratings & Research (Ind-Ra) has revised its outlook on Indian steel producers to 'negative' from 'stable for the second half of the current year.
Move comes on the back of higher-than-expected deterioration in the financial and liquidity profiles of rated issuers. India's macro economy is weak at the moment causing demand also to be weak for the metal.
"The rating levels of Ind-Ra rated steel producers already factor in inherent risks in the steel sector; this contributes to the higher proportion of Stable Outlooks and most of the issuers being rated below ‘IND BBB-’. Some companies with deteriorated credit metrics also have Stable Outlooks as the agency has already taken rating actions to accommodate foreseeable stress," The agency said in a release.
India Ratings expects domestic steel demand to remain muted in the second half of the year; however, growth is likely to gain momentum in 2014 on the back of a recovery in economic growth and expected infrastructure push by the Indian government. World Steel Association has forecasted steel demand in India to grow at 5.9% and 7per cent in 2013 and 2014, respectively.
The Indian steel industry grew by 3.3% in FY13 against 6.9% in FY12 due to the slowdown in the end-user industries.
The agency expects steel producers’ profit margins in FY14 to remain broadly similar to the FY13 levels despite a fall in key raw material prices. Margins will remain under pressure due to the persistent high cost of steel production and steel producers' limited ability to pass on higher costs. "This has been due to the subdued demand from the end-user industries. GoI’s proposed move to increase the iron ore royalty to 15% from 10%, if implemented, could further pressurise the margins. Steel producers’ ability to raise steel prices in the Indian market is also constrained by the global nature of the market, coupled with oversupply and weak demand in the international market," Ind-Ra said in a statement.
