Steel firms to start 2020 on dull note

Profitability will decline due to soft demand, says Moody’s

Updated - December 04, 2019 11:09 pm IST

Published - December 04, 2019 10:28 pm IST - MUMBAI

Demand for steel is likely to be driven by ‘House for all by 2022’ mission to build 19.5 million homes over two years.

Demand for steel is likely to be driven by ‘House for all by 2022’ mission to build 19.5 million homes over two years.

Indian steel players led by Tata Steel, JSW Steel and Jindal Steel and Power Limited (JSPL), are likely to start the new decade on a negative footing as the profitability will further weaken due to softening demand, falling steel prices and rising prices of iron ore, a key raw material.

The profitability of the steel makers, measured by EBITDA per tonne, will decline a further 5% in 2020 following a sharp decline of around 25% in 2019 because of soft demand, according to Moody’s Investors Service, which has negative outlook for the Asian steel sector in 2020. The growth pace of India’s steel demand is likely to slow because of weak auto and manufacturing demand even as India’s demand growth remains the strongest in Asia. However, the country will continue to remain the world's second-largest steel producer behind China, after having overtaken Japan in 2018. According to India Ratings and Research (Ind-Ra), the steel industry’s net leverage and interest coverage are likely to deteriorate in FY20 due to compressed EBITDA margins, a drop in realisations in the face of a demand slowdown and increase in raw material prices in FY20 year-on-year. The demand for steel in India is likely to be driven by the “House for all by 2022” mission to build 19.5 million homes over the next two years and $140 billion spending on railways, roads and metros.

Global brokerage UBS has downgraded Tata Steel to ‘sell’ from ‘buy’ and slashed its target price on the stock to ₹360 from ₹675 as it expects weak India earnings to delay deleveraging. Tata Steel’s net debt to increased from ₹95,000 crore in March 2019 to ₹1,07,000 crore in September 2019 in spite of commitments to cut debt by $1 billion.

India’s oldest steelmaker had to reduce its capex guidance to ₹8,000 from the ₹11,000 committed to at the start of this fiscal. “The slowdown had impact on the working capital. Capex numbers may see more reductions in the coming quarters,” Tata Steel Group CFO Kaushik Chatterjee told The Hindu .

JSW Steel has deferred its capex of ₹4,700 crore to the next fiscal.

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