Indian steel players to enjoy better profitability in the near term - ICRA
ICRA expects the domestic steel players to enjoy better profitability in the near term primarily because of improved steel prices in the current year, supported by the imposition of Minimum Import Price (MIP) by the Government of India, says ICRA in its quarterly research update on Steel Industry.
Post the operationalization of MIP, domestic hot-rolled coil (HRC) prices have witnessed a sharp increase of about 25% from their lows reached in February 2016. Moreover, there could be additional gains due to an increase in sales volumes, as imports are likely to reduce in the current year. Although MIP is scheduled to expire in the second quarter of FY2017, buoyant international prices at present, along with the extension of safeguard duty (SGD) up to March 2018 will continue to help Indian steel producers.
“While the prospect of international prices declining again cannot be ruled out, given the still adverse demand-supply equation in the world, the final outcome of the anti-dumping investigations initiated by the ‘Directorate General of Anti-Dumping & Allied Duties’ would be a key determinant of longer term price trends in the domestic market, states Mr. Jayanta Roy, Senior Vice-President and Co-Head, Corporate Sector Ratings, ICRA.
Although India’s steel consumption growth improved to 4.6% during FY2016 from 3.1% in FY2015, driven by the automobile and road construction sectors, a sustained recovery in other steel intensive sectors like capital goods and infrastructure is still not in sight. Domestic finished steel production, on the other hand, de-grew by 1.9% during FY2016, as a substantial chunk of the incremental domestic demand was captured by the burgeoning steel imports. Despite a slowdown post September 2015, India’s steel imports still managed to register over 25% annual growth in FY2016. Moreover, due to the weak international steel prices, domestic manufacturers were reluctant to push exports, which consequently contracted by over 27% during FY2016.
Based on prevailing prices, ICRA estimates that operating margins of the domestic steel industry (collection of seven large steel players, accounting for over 40% of the current domestic capacity) are likely to improve by around 6 percentage points as compared to the estimated levels prevailing in February, 2016. The extent of improvement in coverage indicators of the industry, which witnessed a severe weakening in recent years with the interest coverage ratio falling to 0.5 time in Q3FY2016 from 2.4 time in Q3FY2015, would however be limited. This is because the overall debt levels of domestic steel companies are unlikely to reduce significantly in the near term. Consequently, financial health of domestic steel players is likely to remain a concern in the near term.
Source : India Infoline News Service