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In the June edition of Emkay Metals Monthly, we look at how capital discipline by the company managements resulted in improved investor perception. One thing that changed for the better over the cycles is leverage. Following the 2015-16 global commodities downturn, companies shifted their focus on capital discipline—pruning their debt while continuing to grow volumes. In return, they got handsomely rewarded with greater resilience during downturns, less earnings volatility, and enhanced ability to plan through-cycle which inherently helped in improving investor perception.

Through-cycle capital discipline helped in improving investor perception

One thing that changed for the better over the cycles is leverage. Following the 2015-16 global commodities downturn, companies shifted their focus on capital discipline— pruning their debt while continuing to grow volumes. In return, they got handsomely rewarded with greater resilience during downturns, less earnings volatility, and enhanced ability to plan through-cycle which inherently helped in improving investor perception.

Healthier balance sheets than the previous cycles

Over the past decade, net debt to EBITDA averaged at 3.2x for the sector with the peak at 7.2x during the 2015-16 global commodities downturn; the trough was 0.9x in FY22 at the time of post-Covid global economic expansion. The leverage ratio has now steadied around 2x; the leverage ratio for the ferrous segment was 3.1x and for the non-ferrous segment was 1.3x in FY25. Interestingly, despite subdued profitability for the ferrous companies in FY25 with a decline in steel prices which led to higher sector leverage, the market did not lose its nerve. This demonstrates resilience during the downturn that company managements have achieved over the years. In addition, recent downturns appear to have become shallower in timing and magnitude.

Leverage ratios likely to be better with improved profitability expectations in FY26

While we do not necessarily expect absolute net debt to decline, given large-sized capacity expansion projects that require capex commitments from most companies, what we do anticipate is that leverage ratios would turn healthier which is a function of absolute net debt staying at current levels while earnings growth enhances the denominator. We expect the sector net debt to EBITDA to improve to 1.5x by FY28E, from 2.1x in FY25, mainly aided by earnings growth with EBITDA CAGR of 18% for the ferrous segment and 3% for the non-ferrous segment over FY25-28E.

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