Large Indian steel makers grow larger on higher exports, supply chain efficiencies – CRISIL

Large Indian steel makers took huge strides in terms of both operations and financial performance last fiscal, increasing their market share by 500 basis points (bps) on-year to 58% despite their share of industry capacity remaining unchanged, ratings agency said in a research note.

“The improvement was driven by supply-chain efficiencies, higher exports, and captive mines that limited the impact of iron ore shortage,” it said adding that their capacity share is expected to rise this fiscal after JSW’s Dolvi plant expansion of 5.6 million tonne comes on stream.

According to the note, higher exports helped counter lacklustre domestic demand for large steel makers (especially in the closing quarter of last fiscal and the first quarter of this fiscal). They also gained domestic market share, especially in the long-steel space. Consequently, they operated at >80% utilisation levels as against sub-optimum levels of 62% by midsized and small steel makers, the note added.

Large steel makers also benefited more from the rally in steel prices, given the dominance of flat steel in their portfolio. Domestic flat-steel prices have nearly doubled to Rs 72,000 per tonne in June 2021 from Rs 38,000 per tonne in June 2020. In comparison, long-steel prices rose 1.4 times to Rs 57,900 per tonne.

The price rally, spurred by China’s green policy, is likely to benefit through the first half of this fiscal, too, with flat steel prices already up 70% since April. While prices will soften in the second half, they would still be 40-45% higher on-year.

With blockbuster profits, steel makers embarked on significant deleveraging, the note pointed out, adding that their net debt/Ebitda reduced to 1.8 times last fiscal from 3.6 times in fiscal 2020 (average for the sample set of 21 companies).

“The top 4 steel makers reduced net debt (in their Indian operations) by Rs 34,000-35,000 crore as their Ebitda pool nearly doubled during the year,” the report said.

This fiscal, deleveraged balance sheets will drive capacity expansion plans (both brownfield and greenfield) and capex to their previous peaks. Capex deferred during the previous cycle will also kick in, CRISIL said.

The ongoing capex cycle will continue to be driven by large steel makers, which are expected to add more than 95% of the new capacities coming on stream over the medium term, it added.

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