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Mumbai: Large steel companies will be able to bring down aggregate debt by 35,000 crore this year and next, as profit margins soar, thanks to high global prices for the metal. Primary steel producers in India will use these gains to trim their long-term debt, which they racked up for capacity expansion projects.

Large steel firms are expected to reduce debt by about 15%, or 35,000 crore, between fiscals 2021 and 2022, using the higher operating profits generated for prepayment, a report by credit ratings agency Crisil said. That, and a partial deferral of capital expenditure this fiscal will strengthen the balance sheets and credit metrics of five primary steel producers, which account for 55% of domestic production.

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Domestic demand recovered strongly in the second half of this fiscal, growing 10% between October and January versus a 30% year-on-year fall in the first half. Consequently, demand contraction will be less than 10% for the whole of this fiscal.

Higher infrastructure spending by government, and recovery in residential real estate are expected to improve steel demand by 10-12% next fiscal. Domestic hot-rolled coil (HRC) prices rallied to a multi-year high of 56,000 per tonne in February from 39,200 per tonne in March 2020 as demand improved amid iron-ore supply constraints and high global prices.

Since last month, however, prices have moderated with iron-ore supplies improving, and also because of the reduction in customs duty announced in the Union Budget.

“While the tailwinds to realisations from higher input costs and global prices could abate going forward, domestic demand growth would provide an offset," Manish Gupta, Senior Director, Crisil Ratings, said. “Consequently, realisation next fiscal may still be about 15% higher than the average of the past five years. That, along with rising volumes and moderate coking coal prices would mean healthy operating margins of 23% next fiscal, compared with 25% likely this fiscal."

Operating margins had plunged to 9% in the previous steel downcycle of fiscal 2016. Since then, what has helped are improved raw material linkages, and better operating efficiencies of stressed assets (following consolidation with stronger peers). Cash accruals could surge over 40% year-on-year to 40,000 crore this fiscal, and rise another 10% next fiscal. That, and a reduction in capex this fiscal (to conserve cash and pare debt) will fortify financials amid the pandemic uncertainties.

For much the same reasons, another credit ratings agency India Ratings and Research has revised its outlook on the steel sector to stable for FY22 from negative. The agency expects FY22 steel volumes to improve year-on-year and compensate for a likely moderation in per tonne margins, as steel prices gradually moderate over FY22 from the high levels witnessed over the second half of this fiscal. Once the Odisha iron ore mines ramp-up, the lessees of auctioned mines, given high premiums bid, are likely to try and pass on high premiums to customers, thus providing a further fillip to the prices.

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