India’s five largest steel producers are planning capital expenditure in the range of $6.7-7.3 billion over the next few fiscal years, nearly double over the previous five fiscal years, a report of the Indian credit rating agency Crisil said on Monday, May 29.
According to Crisil, despite this planned surge in capex, the companies’ leverage, in terms of net debt to EBITDA (earnings before interest, tax, depreciation, and amortization) ratio, will stay below 2.0 times this fiscal year.
This forecast comes despite a slight uptick from the 1.6-1.7 times leverage seen in the fiscal year 2022-23, the agency said, attributing this to robust balance sheets, significant cash flows, and low project risks related to new capacity additions.
The Crisil report noted that the five top steel producers, who account for roughly 60 percent of domestic steek output, indicated that their capacity expansion is driven by robust demand growth and high operating rates.
After experiencing growth rates of approximately 11.5 percent and 13.3 percent in the fiscal years 2021-22 and 2022-23, respectively, domestic steel demand is expected to grow steadily at 7-9 percent this fiscal year.
This is largely due to government initiatives to stimulate the infrastructure and construction sectors, which constitute about 70 percent of steel consumption, the report said.
Crisil noted that higher cash inflows will be facilitated by volume growth, robust demand, and widening operating margins due to falling coking coal prices, which make up roughly 40 percent of total production costs.
Although higher capex will increase debt incidence, Crisil predicts healthy cash inflows will keep leverage at manageable levels.