Published on 27/10/2020 4:55:37 PM | Source: IANS

Long-steel makers face up to 100 bps hit on profitability

Posted in Top News| #Industry #Steel

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Secondary long-steel producers may sustain their credit profiles this fiscal despite facing up to 100 basis points decline in profitability because of two supportive factors - Central government spending (on rural and urban housing, and infrastructure, including roads) and de-leveraged balance sheets (stemming from low capital expenditure), rating agency Crisil said on Tuesday.

Domestic long steel sales volume is seen declining 12-15 per cent in the current fiscal following the Covid-19 pandemic, according to a study of 125 CRISIL-rated secondary long-steel manufacturers.

Long-steel consumption is prominently linked to housing projects being implemented through schemes such as the Pradhan Mantri Awaas Yojana and construction of roads. While capital expenditure by Central government will prop demand from these segments at healthy levels, declining spending by state governments and weak demand from the real estate sector will affect the overall offtake, the sectoral analysis by Crisil said.

Consequently, volume could de-grow 12-15 per cent this fiscal, the analysis added.

Even on lower volume, average steel realisation is expected be steady at Rs 40,000-41,000 per tonne on stable supply, given capacity expansion has been minimal over the past couple of years. But with sales volume also foreseen declining, revenue growth, too, will be curbed.

Nevertheless, lower revenue may not materially dent operating profit margin because of favourable cost structure. Variable cost - iron ore and coal - comprise three-fourths of the cost of production. As a result, operating margins tend to be somewhat protected in this business.

Mohit Makhija, Director, CRISIL Ratings, said: "For secondary steel makers, operating margin will test the lower range of 5.5-6.5 per cent marking a fall of nearly 100 basis. This is largely due to the pandemic-driven shutdown in the first quarter of this fiscal, which led to a near-complete shutdown of operations for many producers."

Secondary long-steel makers haven't undertaken large capex between fiscals 2016 and 2021. Most of the Rs 5,000 crore spent in the period was to improve efficiencies through backward integration and use of captive power.

"Leaner balance sheets and improvement in cost efficiencies will help secondary long-steel makers navigate the pandemic. Interest coverage is expected to improve to 3.4 times this fiscal from 2 times in fiscal 2016," said Jaya Mirpuri, Director, CRISIL Ratings.

With working capital forming almost 80 per cent of total debt, repayments are insignificant. Net cash accrual is expected to be 7 times debt repayments due in fiscal 2021, compared with 2 times in fiscal 2016, indicating a marked improvement in debt-servicing ability, the rating agency said.

Consequently, credit profiles of long-steel producers are expected to be stable in the current fiscal, it added.