Outlook for steel producers remains stable in 2013

India Ratings expects credit profiles of its rated steel producers to remain stable in 2013, driven by continued albeit slow growth in domestic steel demand. The majority (92%) of ratings are on stable outlooks and most of them are below 'IND BBB-', which reflects the inherent risks in the steel sector.

World Steel Association has forecasted steel consumption in India to grow at 5% in 2013. Steel producers may see a spurt in demand in the medium-term if the Indian government implements its USD1 trillion infrastructure investment plan in a timely manner. The demand for flat steel from automobile, white goods and capital goods sectors is likely to remain modest in 2013, given the continued slow economic growth. Though Indian steel producers increased prices by INR500-INR1,000 per tonne in December 2012, India Ratings expects profit margins in 2013 to remain broadly similar to 2012 levels. This is due to the persistent high cost of steel production and steel producers' limited ability to pass on higher costs due to subdued demand from end-user industries. The margin pressure will be higher on the producers with no captive raw material linkages. The cost of funding working-capital requirements remains high despite the marginal reduction in repo rate by the Reserve Bank of India in early 2012. India Ratings expects a gradual reduction in interest rates in 2013 which should provide some relief in interest costs. While higher-rated issuers invariably have access to bank funding and capital markets in certain cases, most issuers in the 'IND A' and below categories rely largely on bank financing and are severely affected by high interest costs. Considering the modest demand scenario, a further rupee depreciation could pressurise the margins of companies producing flat steel through blast furnace route as bulk of coking coal is imported. This is despite import price parity of flat steel products. Moreover, a weaker rupee raises the financial leverage of steel producers with significant un-hedged foreign-currency liabilities resulting in a decrease in financial flexibility. However, the agency expects financial leverage of rated entities to remain within the guidelines stipulated for the respective rating category. The Indian iron ore mining industry is undergoing a difficult phase given regulatory intervention in various states. Even though this intervention bodes well for the domestic industry in the long-term, in the short-to-medium term, steel producers will continue to face inadequate availability of domestic iron ore and may have to import for meeting their requirements. India's steel-making capacity is slated to cross 100mt in 2013 which will require about 160-170mt of iron ore. However, there could be a shortage of about 30mt given the on-going challenges in the mining sector. A negative outlook may arise from continued weak macroeconomic environment in India which could adversely affect financial and liquidity profiles of issuers beyond that expected by the agency. Positive rating changes are unlikely in 2013, with India Ratings being more likely to take rating actions on a company-basis rather than on the sector as a whole. In line with India Ratings' expectations, most of the issuers' credit profiles, though weakened in 2012, remained within the rating categories. Steel producers' margins in 2012 contracted due to high input cost driven by high raw material prices and the depreciating rupee. In 2012, due to greater-than-expected liquidity issues and high leverage, India Ratings took negative rating action in two cases and the Outlook on two issuers was revised to Negative. However, the agency upgraded the ratings of two issuers and an issuer's Outlook was revised to Stable from Negative due to an improvement in credit profiles. India Ratings-rated steel producers include Steel Authority of India Limited ('IND AAA'/Stable), Tata Steel Limited ('IND AA'/Negative), Rashtriya Ispat Nigam Limited ('IND AA'/Stable), Uttam Galva Steels Limited ('IND A'/Negative), Usha Martin Limited ('IND A+'/Negative). 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. To read the full report click on the attachment

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