SINGAPORE (S&P Global Ratings) March 13, 2023--Major Indian steel producers are starting to rack up more debt after two years of deleveraging. The rise, which we view as temporary, is mainly due to higher working capital and weaker earnings.
"We expect the debt level of these companies for fiscal 2023 to be about 15% higher than last year," said S&P Global Ratings credit analyst Anshuman Bharati.
"That said, we believe the industry's debt levels as of end-March 2023 will still be lower and credit metrics will be much stronger than pre-pandemic levels."
Deleveraging will resume in fiscal 2024 (year ending March 31, 2024), as working capital declines and earnings improve, in our view. Our calculation of working capital includes inventory, receivables, and payables.
Working Capital In Focus Amid High Costs
Steel inventories built up in the first half of fiscal 2023 due to sluggish domestic demand and reduced exports. This resulted in a working capital buildup of Indian rupee (INR) 150 billion (about US$1.8 billion) in the top four domestic steel producers as of Sept. 30, 2022, 50% higher than at March 31, 2022. Although domestic demand is gradually picking up, inventory will likely remain elevated until the second half of fiscal 2024. This is due to the persistently high prices of raw materials, particularly coking coal, and slow recovery of demand for exports.
At the same time, lower revenues in fiscal 2023 will magnify the impact of elevated working capital. We estimate that working capital as a percentage of sales will increase to about 10% in fiscal 2023 from 6% in fiscal 2022.
Chart 1
Higher Input Costs Are Weighing On Cash Flows
Coking coal prices have surged by over 50% since bottoming out in August 2022 due to supply disruptions in Australia. With China showing renewed interest in Australian coal, we anticipate that prices will remain high for now. Prices will likely decline in the next two quarters as Chinese miners ramp up production and supply constraints in Australia ease.
We expect average steel prices in India to rise 10% in the second half of fiscal 2024, compared with the first half. A strong rebound in domestic demand, following the seasonally weak monsoon quarter, and improved export prospects could aid such a recovery.
Chart 2
A rise in steel prices and a reduction in raw material costs would improve Indian steel spreads. This should facilitate a working capital release and improve free operating cash flows at steel companies. Absent any significant inorganic or brownfield expansion, major steel companies will likely resume deleveraging, reducing debt by 8%-10% in fiscal 2024, in our assessment.
Chart 3
Our base-case scenario estimates a 30% increase in EBITDA/ton to INR11,000-INR11,500 in fiscal 2024. This is, however, 40% below the record high of about INR20,000 in fiscal 2022.
The balance sheets of major Indian steelmakers are likely to strengthen, with a ratio of debt to EBITDA of 2.2x, much lower than pre-pandemic level of 3.5x-5.0x. Such strong credit metrics should support the steel industry's expansion plans beyond fiscal 2024.
Related Research
- Weaker Earnings Slow Tata Steel's Deleveraging, Feb. 17, 2023
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analyst: | Anshuman Bharati, Singapore +65 6216 1000; anshuman.bharati@spglobal.com |
| Secondary Contact: | Neel Gopalakrishnan, Singapore + 65-6239-6385; neel.gopalakrishnan@spglobal.com |
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