India Ratings on Wednesday said it expects credit profiles of its rated steel producers to remain stable in 2013, driven by continued albeit slow growth in domestic steel demand.
It said that the credit outlook for Steel Authority of India Ltd (‘IND AAA’) and Rashtriya Ispat Nigam Ltd (‘IND AA’) appears stable in 2013.
But the rating agency felt that the outlook appears “negative” for Tata Steel Ltd (‘IND AA’), Uttam Galva Steels Ltd (‘IND A’) and Usha Martin Ltd (‘IND A+’).
“The majority (92 per cent) of ratings (of producers) are on stable outlooks and most of them are below ‘IND BBB-’, which reflects the inherent risks in the steel sector,” the agency said.
Indian steel producers increased prices by Rs 500- Rs 1,000 per tonne in December 2012. India Ratings expects profit margins in 2013 to remain broadly similar to 2012 levels. This is due to the persistent high cost of steel production and steel producers' limited ability to pass on higher costs due to subdued demand from end-user industries. The margin pressure will be higher on the producers with no captive raw material linkages, the ratings agency said.
At the same time, the agency has cautioned that negative outlook may arise from continued weak macro-economic environment in India which could adversely affect financial and liquidity profiles of issuers beyond that expected by the agency.
The World Steel Association has forecasted steel consumption in India to grow at 5 per cent in 2013. "Steel producers may see a spurt in demand in the medium-term if the Indian government implements its $ 1 trillion infrastructure investment plan in a timely manner. The demand for flat steel from automobile, white goods and capital goods sectors is likely to remain modest in 2013, given the continued slow economic growth," India Ratings said.
The cost of funding working-capital requirements remains high despite the marginal reduction in repo rate by the Reserve Bank of India in early 2012. India Ratings expects a gradual reduction in interest rates in 2013 which should provide some relief in interest costs.
Considering the modest demand scenario, a further rupee depreciation could pressurise the margins of companies producing flat steel through blast furnace route as bulk of coking coal is imported. This is despite import price parity of flat steel products. Moreover, a weaker rupee raises the financial leverage of steel producers with significant un-hedged foreign-currency liabilities resulting in a decrease in financial flexibility. However, the agency expects financial leverage of rated entities to remain within the guidelines stipulated for the respective rating category.
The Indian iron ore mining industry is undergoing a difficult phase given regulatory intervention in various states.
"Even though this intervention bodes well for the domestic industry in the long-term, in the short-to-medium term, steel producers will continue to face inadequate availability of domestic iron ore and may have to import for meeting their requirements. India’s steel-making capacity is slated to cross 100 mt in 2013 which will require about 160-170 mt of iron ore. However, there could be a shortage of about 30 mt given the on-going challenges in the mining sector," the statement said.