Net leverage (ratio of net debt to EBITDA¹ of domestic primary-steel makers will hit a 5-year high of over 3x this fiscal as their debt is expected to rise over 25% on continued capital expenditure (capex) even as profitability is hurt by cheaper imports.

The moderation in credit metrics, however, will be manageable given net debt per tonne below the pre-pandemic level and low risk in implementation of the capex, which will support volume and efficiency gains.

A study of five primary steel producers², accounting for ~55% of the domestic production, indicates as much.

The ongoing capex is expected to boost capacity by ~30 million tonne per annum (mtpa) by fiscal 2027³, of which ~20 mtpa is to be added by the end of this fiscal. However, the capex risk is low as it is brownfield in nature, involving lower cost per tonne compared with greenfield expansion. Furthermore, about a third of this capex is to increase downstream value-added products and efficiency benefits, which will support realisations and strengthen business profiles.

With the current phase of the capex cycle nearing completion, the planned capital outlay is estimated at ~Rs 70,000 crore each this fiscal and the next. This significant capital investment is essential as domestic steel demand is expected to grow 8-9%⁴ this fiscal and at an expected compounded annual growth rate of 6-8% over the medium term, riding on the government’s infrastructure push, rising urbanisation and increased industrial activity.

While domestic demand is healthy, global steel demand is likely to contract for the third consecutive fiscal. This is resulting in rising imports — particularly from China, where demand remains muted — which are pressuring realisations.

Domestic steel prices (benchmark domestic hot-rolled coil prices) are likely to drop ~10% on average this fiscal from ~Rs 57,500 per tonne last fiscal. The first half of this fiscal has already seen average domestic steel prices fall ~8% from last fiscal’s average.

Says Ankit Hakhu, Director, Crisil Ratings, “The fall in steel prices will impact the operating profitability of domestic primary steel producers. Despite an increase in sales volume and lower cost pressures (mainly due to reduced coking coal prices), the operating profit margin will remain at 15-16% this fiscal. Lower realisations and flat operating margin will likely drag absolute Ebitda for primary steelmakers 5-7% lower this fiscal, at a time of substantial growth capex.”

The large capex, along with moderating operating profitability, will lift the debt of domestic primary producers by more than Rs 40,000 crore this fiscal, to levels seen before the Covid-19 pandemic (fiscal 2020).

Says Ankush Tyagi, Associate Director, Crisil Ratings, “Higher debt will impact financial metrics. While net leverage is expected to rise to 5-year high of ~3x this fiscal, interest coverage will fall below 4x. Yet, the credit metrics will be manageable and better than pre-pandemic levels⁵ because annual volume has grown more than 35% and net debt per tonne of installed capacity remains ~30% lower than before the pandemic. Also, liquidity remains healthy, reflected in cash and equivalents of ~10% of outstanding debt or ~25% of annual capex.”

Net leverage is expected to improve to 2.8-3.0x next fiscal on likely better steel prices given that demand prospects should improve globally and remain healthy locally. Also, incremental volume from new capacities will widen the earnings base for domestic players.
 

That said, the financial health of primary steel producers will need to be closely monitored as they navigate challenges. Any material falls in steel prices due to weak global demand and higher supplies, especially from China, or any increase in import duty will bear watching.

¹ Ebitda stands for earnings before interest, tax, depreciation and amortisation
² Jindal Steel & Power Ltd, Tata Steel Ltd, JSW Steel Ltd, Steel Authority of India Ltd and Arcelor Mittal Nippon Steel India Ltd
³ This capacity addition is for the period between FY22 and FY27
⁴ Domestic steel demand witnessed annual growth of 11%, 13% and ~14% in fiscals 2022, 2023 and 2024, respectively
⁵ Average net leverage for 5-year period between fiscal 2016-2020 was over 5 times