The spotlight on the steel industry’s woes, understandably, has been on larger companies so far. The state of the industry has improved a bit in recent months, but have the smaller companies benefited too? In fact, if we exclude very large steel companies from the listed steel universe, the rest present a grim picture. Recent output trends also show a declining trend for the smaller companies.
The balance-sheet position of the smaller firms is shaky. Their debt to equity ratio has risen to 4 times in FY16 compared to 3.1 times in the previous year. The increase is chiefly due to lower net worth owing to losses. The larger companies have also seen an increase, but not as much. Debt to equity is calculated by dividing debt by net worth.
In FY16, the smaller steel companies reported an aggregate loss of Rs.12,993 crore, chiefly due to a decline in operating profit, lower other income and higher interest costs. New projects that have started production may have led to interest being charged to profits. Lower steel prices affected profitability. Larger companies fared badly on the operational side but higher other income came to their aid.
How have the smaller companies fared on the stock market? The market capitalisation of large steel companies has risen by 79% over a year ago, as improving steel prices and the government’s efforts to support the industry have revived buying. Smaller firms have also gained but their market cap is up by a much lower 49%. Investors can see the edge larger companies are having over smaller ones.
This edge is becoming evident on the output front too. The Joint Plant Committee’s steel production data shows that finished steel output of the mini/other producers is down by 2.6% in April-May 2016, while that of larger companies is up by 8.8%. In FY16, smaller producers’ output was down by 3.5% compared to a 1.1% increase for the market leaders.
New steel capacity of the larger companies, and a rising trend of selling value added products, could be eating into the share of smaller firms. Exports may also not be viable due to China’s aggression in overseas markets. That has put the smaller steel companies in a tough position. Their high debt to equity levels and strained profitability make them vulnerable to any volatility in steel demand, prices and from bigger companies taking a large share away from them.
Source: Mint.Com