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Steel firms’ profits may improve in H2: Icra

ICRA estimates the industry’s operating margin to decline to around 18% in FY20.

, ET Bureau|
Sep 18, 2019, 08.20 PM IST
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Kolkata: Domestic steel companies can expect improved profitability in the second half of the year with steel prices and demand estimated to pick up in and around the festive season driven by government spending in construction and infrastructure, ratings agency ICRA has said.

However, an overall slowdown in the economy and subsequent fall in GDP growth rate will leave an impact on the steel sector by slowing down its growth to around 5-6% in FY20 as against 7.9% in FY19.

"Our analysis of prevailing trends of 22 companies comprising 60% of industry size indicates that reduced demand and steel prices amidst firm raw material costs have restricted the revenues and operating margins of the industry in Q1FY20," ICRA said in its steel sector report. The decline in steel prices and seasonally weak demand are also likely to keep Q2 financial performance muted for domestic steelmakers, it added. However, the report said a likely pick-up in infra spending in the second half and softer coking coal prices could benefit steelmakers for the remainder of the year. "Profitability may recover somewhat in Q3, with a sharp fall in coking coal prices in August 2019 and expectation of better demand from the construction sector during that quarter," the report predicted.

Given the challenging operating environment at present, ICRA estimates the industry’s operating margin to decline to around 18% in FY20, compared to 23% in the previous fiscal. In line with the deterioration in profitability, the industry’s debt protection metrics have also weakened.

“Demand worries will continue to keep steel prices under pressure, which are at present trading at a discount to imported offers," Jayanta Roy, senior vice-president, ICRA said. Domestic hot rolled coil (HRC) prices have dropped 13% since March 2019, whereas domestic rebar prices have dropped 14% in the same period. Blast furnace players would benefit in secobd half of the current year from a steep correction in coking coal prices in recent months,” Roy added.

While the steel imports by India de-grew by 6% in 4M FY2020, even steeper fall of 23% in steel exports and unrelenting imports from free trade agreement (FTA) countries including Japan and Korea, are likely to keep India a net importer of steel in the near term. With domestic steel prices currently trading at a significant discount of 16% to landed cost of benchmark Chinese HRC and at a discount of 8% to landed cost of Japanese HRC, India’s steel imports would remain low at an absolute level in the coming months, ICRA said.

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