Profitability to sustain amid global headwinds, led by healthy domestic demand and reduced input cost
India Ratings and Research (Ind-Ra) has maintained a neutral outlook for the steel sector for 2023-24. The agency forecasts steel demand growth in the range of 7 per cent to 9 per cent year-on-year for 2023-24 (2022-23: 12 per cent; five-year compound annual growth rate (CAGR) ending 2022-23: 5 per cent). This is mainly driven by a sustained increase in the government infrastructure spending for the 2024 general elections coupled with a healthy domestic demand from other end-user industries and a moderate pick-up in export demand post the roll back of the 15 per cent export duty by the government in November 2022. Demand is likely to be supported by a high correlation of 0.8x-0.9x with gross fixed capital formation, which Ind-Ra expects to grow 9.6 per cent year-on-year in 2023-24 (2022-23 estimate: 11.5 per cent). High demand growth in 2022-23 of 12 per cent year-on-year on back of a strong domestic demand outpaced capacity addition in 2022-23, resulting in increased capacity utilisation for the industry. Growth in demand as well as capacity addition are likely to be in line, balancing the demand-supply scenario.
Global steel prices could face headwinds in 2023-24, while exceeding the pre-pandemic levels. Ind-Ra does not consider cheap imports into India as a big threat as China, being the largest supplier of steel globally, might continue with its supply discipline policy and cut on production for 2023 lower than 2022’s. Also, China’s domestic demand could rise, preventing an oversupply scenario. Ind-Ra expects the sector will continue to face headwinds from global macro trends, and a more rigorous enforcement of environmental protection policies will be a key monitorable.
Furthermore, a softening of raw material prices due to a normal demand-supply balance and China’s recent policy to maintain low iron ore price and higher use of domestic coking coal will protect the margins; however, a continued global growth slowdown in the major steel export region mainly European Union and uneven steel demand recovery from China could result in range-bound prices over 2023-24.
Ind-Ra has maintained a stable rating outlook on its rated entities for 2023-24 on the expectation of a stable credit profile as they are better placed with stronger balance sheets on account of deleveraging over FY21-FY22 and a year-on-year improvement in profitability. This is despite the expected volatility in commodity prices and debt-led capex undertaken over FY24-FY25. The agency expects steel players’ margins to have improved marginally from 2022-23, when the profitability was impacted due to inventory loss on account of the expected sharp correction in prices.
The balance sheets of sector participants strengthened over FY21-FY22 enabling them to deleverage below 3x compared to pre-pandemic levels of above 3x. The increase in debt on account of capex is likely to be partially mitigated by a release of working capital. Liquidity is also likely to remain adequate, led by improved operating cash flow generation over 2023-24 year-on-year, albeit lower than 2021-22 levels.