Primary steel producers in India are expected to reduce debt by Rs 35,000 crore, between FY21 and FY22, using the higher operating profits generated for prepayment, according to Crisil.

This reduction in debt and a partial deferral of capex this fiscal will strengthen the balance sheets and credit metrics of five primary steel producers, which account for 55 per cent of domestic production.

The outstanding debt of steel makers is pegged at Rs 2.15 trillion at end of March 2020. The reduction in debt is expected to be Rs 25,000 crore in this fiscal and about Rs 10,000 crore in fiscal 2022.

Rating agency Crisil said domestic demand recovered strongly in the second half of this fiscal, growing nearly 10 per cent between October and January versus a 30 per cent on-year fall in the first half. Consequently, demand contraction will be less than 10 per cent for the whole of this fiscal.

The higher infrastructure spending by government, and recovery in residential real estate are expected to improve steel demand by 10-12 per cent next fiscal, it added.

The domestic hot-rolled coil (HRC) prices rallied to a multi-year high of nearly Rs 56,000 per tonne in February from Rs 39,200 per tonne in March 2020 as demand improved amid iron-ore supply constraints and high global prices. Since last month, however, prices have moderated with iron-ore supplies improving, and also because of the reduction in customs duty announced in the Union Budget.

Manish Gupta, senior director, Crisil Ratings, said, “So while the tailwinds to realisations from higher input costs and global prices could abate going forward, domestic demand growth would provide an offset.”

Consequently, realisation in the next fiscal may still be ~15 per cent higher than the average of the past five years. That, along with rising volumes and moderate coking coal prices would mean healthy operating margins of ~23 per cent next fiscal (Fy22), compared with ~25 per cent likely this fiscal.

Operating margins had plunged to around 9 per cent in the previous steel downcycle of FY16. Since then, what has helped are improved raw material linkages, and better operating efficiencies of stressed assets (following consolidation with stronger peers).

Cash accruals could surge over 40 per cent year-on-year to Rs 40,000 crore this fiscal, and rise another 10 per crnt next fiscal. That, and a reduction in capex this fiscal (to conserve cash and pare debt), will fortify financials amid the pandemic uncertainties.

Source: Business Standard