Informist, Monday, May 23, 2022

By Joe Milton and Dhanya Nagasundaram

MUMBAI - Growth prospects of India's steel sector are seen hurt by the government's move to impose an export tariff on some steel products since this will hit profitability of steelmakers and affect their ability to service debt.

Over the weekend, the government announced an export duty of 15% on steel products that cover about 92% of the sector's current exports, making them uncompetitive in the global market. The move was part of a larger group of measures designed to cool commodity prices as inflation has risen to uncomfortable levels over the last two months.

The government's inflation-check measures included removal of import duty on coking coal that is expected to benefit steelmakers, but the export tariff is likely to more than offset any benefit from lower input costs, given that most steel companies export 5-25% of their production.

This could lead to oversupply of steel in the domestic market that, in the worst case, could result in prices falling by up to 10,000 rupees per tn from around 69,000 rupees at present, said Nomura Financial Advisory and Securities.

Analysts have therefore slashed their earnings estimates and ratings for steel stocks.

Due to the government's unprecedented measure, shares of Tata Steel, JSW Steel, Jindal Steel and Power, Steel Authority of India, Jindal Stainless and NMDC today slumped 10-18%.

Shares of Tata Steel hit a one-year low, those of Jindal Steel and Power a near three-month low, Jindal Stainless a 10-month low, and JSW Steel, SAIL and NMDC more than one-year lows.

In the near term, analysts expect shares of ferrous metal companies to be hit adversely.

Prabudas Lilladher and ICICI Securities are among those who have downgraded to 'reduce' the stocks of Tata Steel, SAIL, JSW Steel, and Jindal Steel and Power and cut their earnings projections.

Analysts at Edelweiss Securities see a fall of 20-70% in operating profit per tonne for Tata Steel, Jindal Steel and Power, JSW Steel, and SAIL in the current financial year if steel prices fall by around 10,000 rupees per tn.

Over and above this, the export tariff may force Indian steel companies to cancel orders with European countries.

Around 2 mln tn of orders are pending at various levels of the supply chain, said V.R. Sharma, managing director, Jindal Steel and Power.

DEBT & INVESTMENT IMPACT

The reduced profitability and cash flow is also likely to affect debt repayment targets of the steel companies.

Over the last two years, steel players have managed to substantially reduce their debt levels.

While the current setback may not force them to cancel their debt reduction plans, said Bhavesh Chauhan of IDBI Capital Markets & Securities, it is likely to cause a delay in achieving these goals.

As per current plans, Tata Steel aims to reduce its debt by $1 bln every year, while SAIL plans to go debt-free by the end of the current financial year.

Companies with higher operating leverage, such as SAIL, are likely to be impacted more, said Amit Dixit, Edelweiss Securities.

Similarly, lower cash flows are also likely to impact capital expenditure plans of companies.

According to Motilal Oswal, the current measure will adversely impact the ability and the will of the companies to continue with their long-term capital expenditure plans. Hence, said the analysts, companies are likely to commission 17.5 mln tn in the next three years and may not embark on further capital expenditure.

India has been a steel surplus country where companies have always been encouraged to set up capacities for export.

With this measure, if steel producers defer any further capacity additions other than those committed, then India could turn a net importer of steel in the next four to five years, believe analysts of Motilal Oswal.  End

Edited by Ashish Shirke

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