Secondary steelmakers to witness 12-15% decline in FY21, profitability to be hit by 100 bps: Crisil

Mumbai: India’s secondary long steel makers may face a decline in profitability to an extent of 100 basis points for the financial year 2021 as long steel sales volume is seen declining 12-15 per cent in the current fiscal following the Covid-19 pandemic.

“For secondary steel makers, operating margin will test the lower range of 5.5-6.5 per cent, marking a fall of nearly 100 basis points. This is largely due to the pandemic-driven shutdown in the first quarter of this fiscal, which led to a near-complete shutdown of operations for many producers,” said Mohit Makhija, director, Crisil ratings in a report on Tuesday.

Long-steel consumption is predominantly linked to housing projects being implemented through schemes such as Pradhan Mantri Awaas Yojana and construction of roads.

“While capital expenditure by the central government will prop demand from these segments at healthy levels, declining spending by state governments and weak demand from the real estate sector will affect the overall offtake,” the report said.

However, as per Crisil, the average steel realisation is expected to be steady at Rs 40,000-41,000 per tonne on stable supply, given capacity expansion has been minimal over the past couple of years. Long-steel makers haven’t undertaken large capex between fiscals 2016 and 2021.

“Long steel producers may sustain their credit profiles too because of two supportive factors, central government spending on rural and urban housing, and deleveraged balance sheets stemming from low capital expenditure,”Crisil report said.

The companies’ interest coverage, a key metric to determine the company’s ability to repay its debt, is expected to improve to 3.4 times this fiscal from 2 times in fiscal 2016.

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“With working capital forming almost 80 per cent of total debt, repayments are insignificant. Net cash accrual is expected to be around 7 times debt repayments due in fiscal 2021, compared with 2 times in fiscal 2016,” said the report indicating a marked improvement in debt-servicing ability.



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