India Ratings & Research has maintained negative outlook on its rated steel producers for 2015-16.
The agency expects the credit profile of its rated steel producers to remain weak during the period despite a modest recovery in demand.
A majority (82%) of ratings are on a stable outlook, with most of them being rated below 'IND BBB-' to reflect inherent risks in the steel sector.
The agency expects steel consuming sectors - construction, automobile and mechanical engineering - to grow in 2015-16 with the softening of interest rates and implementation of government policies for the revival of infrastructure and investment in the country.
A better GDP forecast of 6.5% growth for the period supported by industrial growth of 6.5% would gradually increase steel demand in the country, India Ratings stated.
Average prices for steelmaking raw materials are likely to remain low in 2015, in line with 2014 as major global miners are determined to flush small, high-cost producers out of the industry and regain balance in the market, the agency said.
"The Indian iron ore mining industry is undergoing a difficult phase given regulatory intervention in various states," India Ratings, which is part of the Fitch Group said.
"Even though this intervention bodes well for the domestic industry in the long-term, steel producers will continue to face inadequate availability of domestic iron ore in the short-term aggravated by addition of capacities during 2015-16."
Domestic iron ore prices would stabilize with policy reforms in the mining sector in the medium-term, it said. Factors such as global overcapacity, import competition, expected fall in raw material prices and addition of capacities during 2015-16 will prevent a steel price hike despite a recovery in demand, the agency said.
"Profit margins in 2015-16 are likely to remain modest. This is because of limited ability to hike prices and increase in interest cost with capacities (12-14 million tonnes) becoming operational during 2015-16," India Ratings said.
Depreciation in currency could pressurize margins of companies producing flat steel as bulk of coking coal is imported.
In line with India Ratings' expectation, the credit profile of major steel players weakened during 2014. The agency downgraded six issuers and affirmed 13 steel companies, while maintaining Rating Watch Negative (RWN) for two issuers due to uncertainties regarding regulatory stipulations.
Source: The Times of India
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