Debt-to-earnings ratio of steel producers to remain below 2 times in FY24, says Crisil Ratings

Research firm Crisil Ratings on Monday said it expects the net debt-to-EBITDA ratio of domestic steel manufacturers to stay below the level of 2 times in the financial year 2023-24.

The steel makers had reported the ratio of net debt to EBITDA in the range of 1.6-1.7 times in preceding financial year (FY) 2022-23, Crisil Ratings said in a report.

"Domestic primary steel manufacturers are likely to see their leverage, in terms of net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio, remain below 2.0 times this fiscal (compared to an estimated 1.6-1.7 times in fiscal 2023) despite undertaking capital expenditure to cater to growing demand," it said.

With the leverage much lower than the average of 3.5 times, seen during past five fiscals, the median credit quality of the sector is unlikely to be affected as balance sheets of the players will remain healthy. Further, project risks are expected to be low due to the brownfield nature of bulk of the capacity addition, the report noted.

Healthy demand growth, coupled with high operating rates, is driving the need to add capacity by the players. After a strong recovery seen in fiscal 2022 and 2023, with growth of 11.5 per cent and 13.3 per cent, respectively, domestic steel demand is expected to continue to grow at a healthy clip of over 7-9 per cent this fiscal.

This will be driven by government push to the infrastructure and construction sectors, which have 70 per cent share in steel consumption.

Global demand is also expected to recover, though marginally (1-2 per cent), from the lows of last fiscal, which was acutely impacted by war. This should support a recovery in exports, which is expected to add 1-2 per cent in incremental volume growth for players.

Resultantly, operating rates of domestic players, which have steadily risen from 72 per cent in fiscal 2021 to an estimated 81 per cent in fiscal 2023, are likely to inch up further to 83 per cent this fiscal.

Ankit Hakhu, Director, Crisil Ratings, said: "We expect the top five steel makers to incur a capex of Rs 55,000-60,000 crore per annum over the next couple of fiscals, compared with Rs 30,000 crore per annum on average over the past five fiscals.

"Around half of this capex would be towards setting up supporting infrastructure, efficiency improvements, and regular maintenance capex, while the rest would be to add 25 million tonne per annum in capacity. This will be 16 per cent addition over the estimated capacity base in the country as of March 2023."

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