Steel industry plans robust capex as leverage remains stable: Crisil
Crisil projects capital expenditure to amount to ₹55,000-60,000 crore per year, nearly double the average annual spending over the previous five fiscal years
PremiumNew Delhi: The top five steel manufacturers in India are planning major capital expenditure over the next few fiscal years, projected to amount to ₹55,000-60,000 crore per year, nearly double the average annual spending over the previous five fiscal years, credit rating firm Crisil in a report .
Despite this planned surge in capex, the credit rating agency anticipates the key players’ leverage, in terms of net debt to Ebitda (earnings before interest, tax, depreciation, and amortization) ratio, will stay below 2.0 times this fiscal year. This forecast comes despite a slight uptick from the 1.6-1.7 times leverage seen in fiscal year 2023. Crisil attributes this to robust balance sheets, significant cash flows, and low project risks related to new capacity additions.
The Crisil study highlighted the five top steel producers, who account for roughly 60% of domestic output, indicating their capacity expansion is driven by robust demand growth and high operating rates. After experiencing growth rates of approximately 11.5% and 13.3% in fiscal years 2022 and 2023 respectively, domestic steel demand is expected to grow steadily at 7-9% this fiscal year. This is largely due to government initiatives to stimulate the infrastructure and construction sectors, which constitute about 70% of steel consumption.
An expected mild recovery in global demand, rising 1-2%, is also set to boost exports, increasing volume growth for the manufacturers by 1-2%. Operating rates of these manufacturers are projected to climb from an estimated 81% in fiscal year 2023 to approximately 83% this fiscal year.
Ankit Hakhu, director at Crisil, stated that about half of the anticipated capex will be allocated towards efficiency improvements, supporting infrastructure, and regular maintenance, while the remaining half will be used to expand capacity by ~25 million tonne per annum.
Crisil anticipates higher cash inflows will be facilitated by volume growth, robust demand, and widening operating margins due to falling coking coal prices, which make up roughly 40% of total production costs. Although higher capex will increase debt incidence, Crisil predicts healthy cash inflows will keep leverage at manageable levels.
Shivaramakrishna Kolluri, Team Leader at Crisil, added that despite higher capex, strong balance sheets and low execution risks linked with new capacity additions will maintain stable credit profiles for steel manufacturers. However, Crisil pointed out that the industry should remain vigilant for weaker-than-expected global and domestic demand, along with possible spikes in input costs, which could affect the outlook for steel manufacturers.
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