Though earnings for domestic steel companies are anticipated to trend upward starting in Q3 FY23 as input cost constraints start to ease, they would still be substantially below the levels observed in FY22, according to credit rating agency ICRA.
"Domestic steel companies face a bumpier road ahead as the external environment becomes more challenging due to elevated inflation, energy prices, and rising interest rates," said ICRA in a press release.
Due to a combination of issues that included declining realisations and rising coal/energy costs in Q2 FY2023, the industry's absolute earnings plunged to a nine-quarter low.
According to ICRA Research, the sector's full-year operational profits are predicted to drop by 45–50 percent year-on-year in FY2023, causing free cash flows to return to negative territory after a two-year gap.
Commenting on the industry trend, Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA, said that going forward, dependence on external finance to fund committed expansion plans is projected to rise, with the steel industry's borrowing levels gradually rising over H1 FY2023.
"Consequently, the industry’s leverage (total debt to operating profits) deteriorated to an estimated 2.7 times in H1 FY2023 as against 1.1 times in FY2022. However, given the expectation of a recovery in earnings in H2 as cost pressures subside, the industry’s leverage levels are expected to remain in the range of 2.0-2.5 times in both FY2023 and FY2024," added Roy.
But according to Roy, this would still make steel companies resilient to endure any deterioration of the financial situation the following fiscal year.
According to the report, World Steel Association’s latest forecast mentioned that the global steel demand is expected to contract for the first time in seven years by 2.3 percent year-on-year in CY2022, and the pace of growth is slated to remain at an anemic 1 percent in CY2023.
While India's finished steel exports are not expected to return to levels experienced in FY2021/ FY2022 even in FY2024, they are expected to progressively rise from the lows reached in November-22 following the removal of export duties.
According to a demand-supply scenario supported by the government's infrastructure-led growth model, domestic finished steel demand grew by 11.9 percent in the first eight months of the current fiscal year and is on track to close the year with a growth of 8 percent.
"However, given the expectation of a slowdown in the pace of economic activity over the next few quarters, domestic steel demand growth is likely to moderate to 6-7% in FY2024," said ICRA in its release.