scorecardresearchSteel industry's operational profit to drop by 45–50% in FY23: ICRA

Steel industry's operational profit to drop by 45–50% in FY23: ICRA

Updated: 21 Dec 2022, 05:53 PM IST
TL;DR.
  • Due to a combination of issues that included declining realisations and rising coal/energy costs in Q2 of FY2023, the industry's absolute earnings plunged to a nine-quarter low.
Domestic steel companies face a bumpier road ahead as the external environment becomes more challenging

Domestic steel companies face a bumpier road ahead as the external environment becomes more challenging

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.

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"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.

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"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.

 

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First Published: 21 Dec 2022, 05:53 PM IST