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 deleveraged balance sheets (stemming from low capital expenditure), CRISIL has stated.
Domestic long steel sales volume is seen declining 12-15% in the current fiscal following the Covid-19 pandemic, a study of 125 CRISIL-rated secondary long-steel manufacturers shows.
"Long-steel consumption is prominently linked to housing projects being implemented through schemes such as 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. Consequently, volume could de-grow 12-15% this fiscal," the rating agency has said.
On the other hand, 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, Crisil has stated.
"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," the rating agency has noted.
Says Mohit Makhija, Director, CRISIL Ratings, "For secondary steel makers, operating margin will test the lower range of 5.5-6.5%, 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."
Says Jaya Mirpuri, Director, CRISIL Ratings, "Leaner balance sheets and improvement in cost efficiencies will help secondary long-steel makers navigate the pandemic. Interest coverage2 is expected to improve to 3.4 times this fiscal from 2 times in fiscal 2016."