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 Rating agency ICRA on Monday said higher input costs coupled with softening steel prices are expected to impact steel companies' profitability from Q3FY22.

Coking coal is one of the key inputs used in the sector.

"Input cost pressures for domestic mills could moderate somewhat towards the later part of Q4 FY2022, as seaborne coking coal prices have declined by 20 per cent since the highs of mid-November 2021, the benefit of which would slowly get reflected in mill margins after a lag of two-three months," the agency said.

Despite the potential impact on profitability, the industry's "absolute profitability" metrics will still remain at healthy levels in the next twelve months, it said.

Keeping the absolute profitability factor in mind, the rating agency, however, maintains a 'Positive' outlook for the sector.

"Though price of iron ore has been coming down, it will not be able to entirely compensate for the steep rise in coking coal costs," said Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings.

Accordingly, the industry's third quarter earnings would be lower than that achieved in Q2FY22, Roy said.