Wary of high rates, metal producers plan to fund capex through cash flows, and not debt

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Major metal producers in the country are likely to hit the pause button on debt-based funding and use internal accruals instead to fund capital expenditure (capex) in FY24. Top executives cited higher capital costs as the reason.

India’s top metal producers – Hindalco Industries, JSW Steel, Steel Authority of India, Tata Steel, and Hindustan Zinc, combined have earmarked around Rs 63,400 crore as capex in FY24. Three of these five companies have indicated capex during the year will be funded through internal accruals, while the other two remain hopeful of a debt reduction despite capex.

Fuelling this aversion to debt are two factors – favourable raw-material prices and an unfavourable interest rate cycle.

“Interest rates have gone up. That's why we do not want to go into the market to borrow at this time. So, we will work with our internal accruals because money costs more now with interest rates where they are,” said Satish Pai, Managing Director at Hindalco Industries in a post Q4 FY23 earnings interview with Moneycontrol.

Hindalco plans to invest Rs 5,000 crore as capex in India and another $1.8 billion in the US, both funded through cash flows.

Hindustan Zinc’s top finance executive echoed similar views. “Unless we feel that we are getting it at a very attractive rate, which is less than what I can yield in the market from our long-term investments, (we won’t raise funds for capex),” said Sandeep Modi, Chief Financial Officer (CFO) for the company which plans to invest $200 million as capex.

Analysts with India Ratings noted balance sheets of steel companies strengthened over FY21-FY22 enabling them to deleverage below three times compared to pre-pandemic levels of above three times. “The increase in debt on account of capex is likely to be partially mitigated by a release of working capital,” they further said in a sector note released on May 29.

Metal companies are now focused on maintaining debt at a healthy level throughout the commodity cycle. “Even in the down cycle I wouldn’t like to violate 1.5 times of net-debt-to-EBITDA,” said Bimlendra Jha, Managing Director at Jindal Steel and Power in an earnings call with analysts post announcement of Q4 FY23 results, on May 22. Jha said the company will share its capital allocation policy in a few weeks.

Tata Steel, which plans to spend Rs 16,000 crore in FY24, is confident of returning to its target of reducing debt by $1 billion every year.

Rating agency Crisil in a note released on May 29 said, higher cash accrual for steel companies is expected to be driven by volume growth, backed by strong demand pull and operating margin expansion (of 100-200 basis points (bps) due to softening prices of coking coal, which accounts for 40 percent of the overall production cost.

JSW Steel plans to fund most of its Rs 19,500-crore capex for FY24 through internal accruals, “….assuming that we are able to get the benefit of raw material costs flowing in,” said Jayant Acharya, Joint Managing Director and Chief Executive Officer (CEO) of the company.

JSW Steel plans to raise funds through different instruments, including non-convertible debentures (NCDs) to the tune of Rs 18,000 crore, most of which, the management said, would be used for debt repayment due this financial year.

The top management at Steel Authority of India Ltd (SAIL) in a post-Q4-FY23 earnings call noted a similar expectation that debt will reduce depending on the decline in coking coal price and realisation, analysts with ICICI Securities wrote in a note on the company. SAIL plans to spend Rs 6,500 crore towards capex in FY24, according to the note.