Icra Revises Outlook On Steel Sector To Stable From Positive

The steel industry could therefore be on the way to an accelerated mean reversion as the operating environment becomes far less attractive in the coming months

Ratings agency Icra on Thursday said it has revised its outlook on the domestic steel to stable from positive, mainly on the account mounting input cost amid low steel rates.

After two back-to-back years of earnings surge, the steel companies are now staring at a significant decline in earnings over the next 12 months as the industry faces multiple headwinds emanating from trade barriers from export duty on finished steel, unprecedented coal/energy cost pressures, and muted domestic demand growth so far, Icra said in a report.

The industry could therefore be on the way to an accelerated mean reversion as the operating environment becomes far less attractive in the coming months. Such challenges would be accentuated by high inflation and front-loading of policy rate hikes, it said.

"While domestic demand growth forecast for FY23 is kept unchanged at 7-8 per cent, the industry's overall operating profits for the fiscal is revised downwards by around 30 per cent...as margins get squeezed between lower steel prices and elevated input costs. Consequently, the ratings agency has revised the sector's outlook to stable from positive," the report said.

In the current FY23, the operating profits of steel companies is likely to be lower by 40-50 per cent over FY22 levels.

Jayanta Roy, senior vice-president and group head, corporate sector ratings, Icra said, the steady rise in coking coal costs had started to nibble at the margins of steelmakers even before the export duty was announced. Therefore, the consolidated operating profits per metric tonne for the four leading domestic steelmakers come down by around $110/MT in Q4 FY22 compared to $326/MT recorded in Q1 FY22.

"With domestic hot rolled coil prices correcting by around 9 per cent since the imposition of the export duty, and with coking coal consumption costs poised to spike by around 30-35 per cent quarter-on-quarter, notwithstanding the correction in domestic iron ore prices, the industry's operating profits are expected to sequentially decline by $80-90/MT in Q1 FY23," he said.