Net leverage of top five primary steel makers, which account for 55 per cent of steel production in India, will reach a five-year high as they continue with their capital expenditure journey despite facing margin pressure because of a decline in steel prices, Crisil has cautioned.
An indicator for financial health of a company, the net leverage (net debt to EBITDA ratio) of these companies would be over 3x in this fiscal, as their debt is expected to rise over 25 per cent. The moderation in credit metrics, however, will be manageable given net debt per tonne is below the pre-pandemic level and low risk in implementation of the capex, which will support volume and efficiency gains, Crisil noted.
Calculations prepared by the agency suggest the debt will rise by another ₹40,000 crore to levels seen before the Covid-19 pandemic (fiscal 2020). Crisil has considered the balance sheets of JSW Steel, Tata Steel, SAIL, Jindal Steel & Power and AMNS India for the study.
The planned capex is estimated at ₹70,000 crore this fiscal and the next and is expected to boost capacity by 30 million tonnes by fiscal 2027. Of this, 20 MT is expected to be added in FY25 only, catering to a domestic demand of 8-9 per cent.
The risk from this capex is expected to be low, Crisil pointed out, as the expansions are all brownfield, which translates into lower cost per tonne compared with a greenfield unit. Moreover, about a third of this capex is to increase downstream value-added products and efficiency benefits.
Crisil says steel prices (benchmark hot rolled coil) will decline 10 per cent in this fiscal from ₹57,500 a tonne in FY24 and it has slid 8 per cent in the first six months due to cheap imports, especially from China.
“Despite an increase in sales volume and lower cost pressures, the operating profit margin will remain at 15-16 per cent this fiscal. This will likely drag absolute EBITDA 5-7 per cent lower this fiscal,” Ankit Hakhu, director at Crisil Ratings, said.
According to Ankush Tyagi, associate director of the agency, credit metrics will be manageable because annual volume has grown more than 35 per cent and net debt per tonne of installed capacity remains 30 per cent lower than before the pandemic.
