Indian steel mills’ operating margins may decline by 200 basis points to 15 percent in the fiscal 2020-21 due to weaker sales and realizations amid the limited cushion available from lower raw material costs, according to the research and ratings agency Crisil.
However, Crisil also pointed out that this may still be better than the previous downturn in the Indian steel industry in 2016 because of the imposition of new antidumping duties since then and the resolution of stressed assets which has helped shore up the debts of some steel producers.
Deferral of capital expenditure in the current fiscal year by several steel companies and the likely demand recovery in the next fiscal year will support the credit profile of these companies, the report said.
The percentage fall in sales volumes year on year is likely to be in high single-digit figures this fiscal year mainly because of the demand evaporation in the first quarter due to the Covid-19 lockdowns, while the likely recovery during the rest of the fiscal year triggered by pent-up demand, government spending on rural housing and roads and the growth in lower-margin exports may not be enough to offset the impact of the hit in the first quarter, Crisil noted.
The report said that the hit to margins reached a 10-year low of nine percent during the previous industry downturn in 2016, but this time local steel producers have got support from antidumping duties, which has set a floor price for steel imports from China, South Korea, Japan and Vietnam.
As a result, domestic prices this fiscal year will be 25 percent higher and aggregate industry operating profits twice that of 2016 fiscal. Steel companies’ gross debt will remain stable after cuts in capital expenditure and they will be able to conserve cash to support financials, the report said.