Steel makers weighed down by debt may struggle to meet their March-end debt obligations as they wait for the full impact of supportive policy measures to kick in, analysts say.
Nine of the top 20 indebted steel firms already have a default on one or more of their debt instruments, according to data compiled by Mint. The total debt of these nine firms is Rs.1.59 trillion, or 41% of the total debt of the top 20 indebted steel manufacturers.
Indian makers of the alloy have been struggling in the face of rising imports of cheap steel and slowing global demand, having expanded aggressively in recent years. Their debt servicing obligations overlapped with the downturn in demand.
“The March quarter will see some improvement in terms of profitability but not great. However, overall profitability for the current fiscal will not be good,” said Bijoy Thomas, an analyst at India Ratings and Research Pvt. Ltd. Thomas does not expect the improvement in the March quarter to help steel makers meet debt obligations in a meaningful way.
At a meeting that banks jointly held with promoters of stressed firms this month, most borrowers were steel makers, reflecting the stress the industry is under.
The government has put in place some supportive policy measures to provide them a cushion, but their impact will start showing up only in the first quarter of the fiscal starting in April, analysts say.
The steel and finance ministries are also working on a package for the steel sector that will be finalized in the next two months, steel secretary Aruna Sundararajan said at a CNBC TV18-Mint event in New Delhi on Monday.
Jindal Steel and Power Ltd (JSPL), run by Naveen Jindal, is one steel maker to be hit with a default rating; it is now in talks with banks to refinance loans through the 5/25 route, it informed the stock exchanges earlier this month. The 5/25 scheme allows banks to extend long-term loans of 20-25 years to match the cash flow of projects while refinancing them every five or seven years.
Ratings agency Crisil Ltd has rated JSPL’s debt as default, citing delayed payment of interest on term loans due to weakened liquidity. On 11 March, Credit Analysis and Research Ltd (CARE) downgraded JSPL’s debt instruments to a default rating.
In September, in a bid to arrest the rising imports of cheap steel, the government implemented a safeguard duty of 20% for 200 days. In February, India also imposed a minimum import price (MIP) on a wide category of steel products.
According to analysts and traders, the larger steel firms would be the beneficiaries of the MIP on foreign steel; it will have little impact of the smaller steel companies, they said.
“It is only the top four steel companies who seem to have benefited from the MIP imposed. We do not see the smaller steel mills who cut down capacity utilization increasing it due to the MIP. On the contrary, as domestic steel manufacturers increase prices, the number of buyers are dwindling. You will find fewer buyers if prices increase,” said a Mumbai-based steel trader who did not want to be identified.
According to the steel ministry’s Joint Plant Committee, India’s total steel consumption in February grew 4.7%, with the incremental growth being largely met by large steel producers.
Steel production at large producers grew 1.4% in February while total steel production fell 0.9% in the same month.
“The fortunes of steel manufacturers are also looking slightly better as prices are likely to increase and imports come down after imposition of MIP. This, coupled with the increase in capacity utilization and lower raw material cost, will prop up Ebitda (earnings before interest, taxes, depreciation and amortization) margin of large firms,” said a Crisil Ratings India Outlook report for the next fiscal released this month.
“The improvement will, however, be contingent on MIP continuing beyond the initial six-month period. However, secondary steel manufacturers will remain in the bog as competition from large producers increases,” the report said. It cautioned that despite better profitability, debt servicing ability of the industry will not improve materially and debt will remain elevated.
source: http://www.livemint.com