Domestic steel companies face a bumpier road ahead as the external environment becomes more challenging due to elevated inflation and energy prices, and rising interest rates.
In September quarter, the industry’s absolute earnings plummeted to a nine-quarter low due to fall in realisations and elevated coal costs. While earnings are expected to rise from December quarter as input cost pressures eases, they would still remain significantly lower than the levels seen in FY22, according to ICRA Research.
Contracting profits
The industry’s full-year operating profits are expected to contract by 45 to 50 per cent y-o-y in FY23, leading to the free cash flows slipping into negative territory after a gap of two years.
Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA said early signs of companies using external financing to fund expansion plans was visible in the first half of this fiscal which will increase going forward.
Consequently, the industry’s debt to operating profit deteriorated to an estimated 2.7 times in the first half of this fiscal as against 1.1 times last fiscal.
However, given the expectation of a recovery in earnings in the second half, the industry’s leverage levels are expected to remain in the range of 2.0 to 2.5 times in both FY23 and FY24.
Forecast
As per the World Steel Association’s latest forecast, global steel demand is expected to contract for the first time in seven years by 2.3 per cent y-o-y in 2022 and the pace of growth is slated to remain at an anaemic one per cent next year. This, however, does not take into account any further large Covid outbreaks in the near term. While India’s finished steel exports are expected to gradually increase following the withdrawal of export duty, it is unlikely to go back to levels seen in last two fiscal even in FY24.
ICRA Research highlights that global steel trade flows, especially from the FTA countries (Japan/South Korea), Russia and China, can be redirected in greater volumes to growing markets like India, keeping imports at an elevated level in FY24 as well.
Fresh steel capacities of 21 to 22 million tonnes per annum are lined up for commissioning in FY23 and FY24. Given the prospect of a fall in demand growth and a lackluster export environment, fresh supplies are likely to outrun incremental demand and pull down industry’s capacity utilisation to 78 per cent next fiscal from 80 per cent in this fiscal, said Roy.