Outlook for Indian steel producers remains stable for H212

Fitch Ratings says that the Outlook for Fitch-rated Indian steel producers will remain Stable in H212, despite the slowdown in the growth of domestic steel demand. The agency expects steel demand growth to range between 6%-7% for the whole of 2012, with the pace of activity picking up from October after the monsoon. The proportion of Stable rating Outlooks in Fitch's portfolio is 96%.

The slowdown in domestic demand growth stems from India's unfavourable macroeconomic environment. Fitch has revised down its forecasts for real GDP growth to 6.5% and 7.0% for the financial year ending March 2013 (FY13) and FY14, respectively, from previous forecasts of 7.5% and 8.0%. Less-than-normal monsoon could also depress economic growth.
Fitch expects profit margins to remain under pressure in H212, given persistent increases in the cost of steel production and steel producers' limited ability to pass on higher costs - due to subdued demand from end-user industries. The pressure will be greater on non-integrated steel producers. However, most of the rated entities should be able to keep up with the short-term demand slowdown without a major weakening of their credit profiles.
The cost of funding working-capital requirements remains high despite a 50bp reduction in the repo rate in April 2012 by the Reserve Bank of India. Inflation remains high, and Fitch expects a continued, gradual reduction in the interest rate. Indian steel producers will have to use a prudent mix of domestic and international funding to contain interest costs. Lower-rated issuers are affected the most by high interest costs, due to their limited financial flexibility.
The margin of companies producing steel through blast furnaces has been affected by a weaker Indian rupee, despite import price parity of Indian steel and softening of international prices of coking coal, the bulk of which is imported. Fitch expects the weaker rupee to raise the financial leverage of steel producers with significant un-hedged foreign-currency liabilities. However, the financial leverage of rated entities should remain within their rating categories.
Most Indian steel producers are in expansion mode, resulting in negative free cash flows. The liquidity situation is aggravated further by persistent high interest costs resulting in weaker demand for steel from end-user industries. Any limited availability of credit could hurt liquidity - particularly of lower-rated issuers - as the Indian steel industry is one of the largest borrowers from the domestic banking system.
Positive rating changes are unlikely in H212, with Fitch more expected to take rating actions on a company-by-company basis rather than on the sector as a whole. However, a negative outlook may result from a severe global recession coupled with a prolonged weaker macroeconomic environment in India. This would lead to a steep deterioration in domestic steel demand and hence worsen credit profiles beyond Fitch's expectations. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.