Fitch09 steel


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Fitch09 steel

  1. 1. Corporates 9 January 2013 Metals & Mining 2013 Outlook: Indian Steel Producers Cautious Recovery Ahead Outlook Report Rating Outlook Stable Outlook for 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. Moderate Demand Growth: 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. Modest Margins: 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. High Interest Cost: The cost of funding working-capital requirements has remained high despite the marginal reduction in repo rate by the Reserve Bank of India (RBI) in early 2012. India Ratings expects a gradual reduction in the interest rate in 2013 which should provide some relief in interest cost. 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. Rupee Depreciation, Mixed Impact: 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. Mining Issues: Iron ore mining industry in India 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. What Could Change the Outlook Global Recession: 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. Figure 1 2 92 6 0 20 40 60 80 100 Positive Stable Negative Indian Steel Producers’ Rating Outlooks Source: India Ratings (%) Rating Outlook SS TT AA BB LL EE Related Research Rating Indian Steel Producers – Sector Credit Factors (September 2012) Analysts Ashish Upadhyay +91 11 4356 7245 Rohit Sadaka +91 33 4006 5885 Sankalp Baid +91 22 4000 1792 Pavan Kumar +91 44 4340 1724
  2. 2. Corporates 2013 Outlook: Indian Steel Producers January 2013 2 Key Issues Moderate Demand: The demand for steel from automobile, white goods and capital goods will remain muted throughout 2013, given the continued slowdown of Indian economy. Any prolonged deferral of corporate capex due to prevailing high interest rate could further impede growth in steel demand. India Ratings expects RBI to reduce interest rates gradually in 2013 and the magnitude of reduction will determine the extent of demand revival from end- user industries. Also, Indian government’s plan to invest USD1trillion in the infrastructure sector could boost demand for steel, provided it is implemented on time. Domestic steel consumption grew by a modest 5.3% yoy over January-November 2012 due to headwinds from the unfavourable macroeconomic environment. During the same period, imports grew by 24.8% yoy to 7mt, while exports increased 15.4% yoy to 4.3mt. Figure 3 26.9 27.3 28.8 31.8 32.6 45.8 49.4 53.1 57.8 56.6 68.3 72.2 67.3 70.1 0 10 20 30 40 50 60 70 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD- Nov 11 YTD- Nov 12 India's Crude Steel Production (million tonnes) Source: World Steel High Iron Ore Prices: Despite global softening of iron ore prices, India Ratings expects domestic prices to rise in 2013 given the inadequate availability of iron ore, consequent to the prevailing mining mess. India’s leading iron-ore miner NMDC Ltd’s shift to import price parity for selling iron ore in the domestic market will result in narrowing of gap between domestic and seaborne prices. In the past, NMDC used to sell iron ore in the domestic market at a huge discount to seaborne prices. High iron ore prices will adversely impact the margins of steel makers having no captive mines while integrated steel makers with captive mines may see some margin expansion. Figure 4 40 42 47 47 56 109 118 102 172 128 200 225 209 225 315 285 235 210 225 170 35 45 50 81 69 61 122 133 127 141 169 147 165 150 140 105 115 253 330 22191818180 70 140 210 280 350 2000 2003 2006 2009 Q310 Q211 Q112 Q412 Hard coking coal Iron ore fines (63% Fe) (USD/ton) Key Raw Materials Price Trend (FOB) Source: Industry Coking Coal Prices to Moderate: The hard coking coal (HCC) market will remain fundamentally tight and production disruption will continue to show in price movements in 2013. Nevertheless, the agency expects prices of benchmark HCC, for which India is mostly dependent on imports, to be about USD200 per tonne in 2013 due to muted demand growth. Figure 2 65.9 68.2 63.4 66.7 5.6 7.03.7 4.3 0 20 40 60 80 Jan-Nov 2011 Jan-Nov 2012 Production Real Consumption Imports Exports Demand-Supply Trend (million tonnes) Source: India Ratings, Joint Plant Committee (JPC) Related Criteria Corporate Rating Methodology (September 2012)
  3. 3. Corporates 2013 Outlook: Indian Steel Producers January 2013 3 This could provide partial relief to domestic steel producers making steel through blast furnace route subject to a stable rupee. The average quarterly contract price for HCC (ex-Australia) declined by about 28% yoy to USD210 per tonne in 2012. However, depreciation of the Indian rupee against major currencies offsets some advantage that could have accrued on account of this reduction in input costs. Modest Increase in Steel Prices: India Ratings expects steel prices to show modest recovery in 2013 due to the cost-push effect. The ability to raise steel prices in the Indian market is also limited by the global nature of the market, coupled with oversupply and weak demand in the international market. Imports, though contained to an extent by rupee depreciation, have already touched an all-time high of 10% of the total production in 2012. Moreover, Indian government’s free trade agreements with Japan and South Korea, under which these countries are eligible for lower custom duties, are resulting in an increase in imports of steel from these countries, thus further pressurising the domestic steel prices. Figure 5 10,000 20,000 30,000 40,000 50,000 60,000 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Hot Rolled Coils (2.0mm, Delhi) TMT (10mm, Gobindgarh) Pig Iron (Delhi)(INR) Steel Price Trend Source: CMIE Overcapacity Risk: The domestic steel industry could face the risk of overcapacity in the medium-to-long-term as Indian steelmaking capacity is slated to cross 100mt in 2013, which could pressure steel prices. However, given the expected shortage of iron ore in 2013 due to iron ore mining mess, most steelmakers who depend on external mines for their iron-ore requirement may not run on full capacity thus limiting the overcapacity concern. Also, the delay in greenfield capacity additions, due to regulatory hurdles such as land acquisitions and the rehabilitation of settlements, will continue to mitigate some of the overcapacity concerns. Liquidity Concerns: Most Indian steel producers’ liquidity will remain stretched through 2013 given the increase in input cost resulting in enlarged working capital requirements. Domestic iron ore prices remain high; however, softening of coking coal prices may give some respite. The liquidity concern is further compounded by steel producers’ expansions resulting in negative free cash flows. Lower-than-anticipated cut in interest rate by RBI in 2012 also stemmed demand growth from end-user industries. However, India Ratings expects interest rate to gradually soften in 2013 giving some relief to the industry. Indian steel industry's is one of the largest borrowers from the domestic banking system; any limited availability of credit could adversely affect the liquidity particularly of lower-rated issuers who do not have access to capital markets. Regulatory Challenges: India Ratings expects Indian steelmakers to import iron ore over 2013 and 2014 to meet the domestic shortfall. Regulatory intervention in the mining industry (particularly in iron ore mining) has thrown up new challenges of securing iron ore supply to steel makers who do not have captive iron ore mines. Though the Supreme Court has lifted ban on category-A (with no or minor illegality) mines in Karnataka, India Ratings expects iron ore deficit to continue in Karnataka in 2013 as the ban on category-B and C mines is still in Figure 6 117 78 411 11 67 0 35 70 105 140 FY11 FY12 FY13 FY14 FY15 FY16 FY16 Expected Capacity Additions (million tonnes) Source: JPC, India Ratings
  4. 4. Corporates 2013 Outlook: Indian Steel Producers January 2013 4 force. Due to a shortfall in iron ore, most Karnataka-based steelmakers will continue to underutilise their capacities in 2013. Odisha, Goa and Karnataka produce bulk (FY12: 68%, FY11: 73%) of iron ore in India. Ban on iron ore mining in Goa will have a minor impact on the domestic supply of iron ore as a bulk of iron ore from the state is exported. Odisha’s (the largest iron ore producer state in India) proposed move to restrict iron ore mining to steelmakers with captive mines in the state could further increase the scarcity of iron ore in the country. Due to the prevailing mining mess, iron ore production in India is already down 18% yoy in FY12 and is likely to fall further in FY13. Greenfield projects continue to suffer due to land acquisition, rehabilitation and resettlement issues. Land Acquisition, Rehabilitation and Resettlement Bill and Mines and the Minerals (Development and Regulations) Bill, which could have alleviated these problems, is yet to be passed by the Indian parliament. 2012 Review 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, India Ratings upgraded the ratings of two issuers and an issuer’s Outlook was revised to Stable from Negative due to an improvement in credit profiles. The companies with a Negative Outlook (see Annex 1) are affected by uncertainties regarding timely capex completion and deterioration in financial leverage. Tata Steel Limited’s (‘IND AA’) Negative Outlook reflects the agency’s view that profitability pressures for the company will persist, given the challenging short-term outlook for the global steel market. Usha Martin Limited’s (‘IND A+’) Negative Outlook reflects its elevated credit metrics, and the likelihood that consolidated financial leverage will remain high in FY13. Uttam Galva Steels Ltd's (‘IND A’) Negative Outlook also reflects its high financial leverage due to debt funded capex.
  5. 5. Corporates 2013 Outlook: Indian Steel Producers January 2013 5 Annex 1: Ratings Headroom for Select Steel Producers Figure 7 India – Select Steel Producers’ Ratings Headroom and FY13 Expectations Relative to FY12 Long-Term Issuer Rating/Outlook Profitabilitya Capex FCF Credit metricsb Ratings Headroom Steel Authority of India Limited (SAIL) IND AAA/Stable Improve Increase Weaken Weaken Good Tata Steel Limited (TSL) IND AA/Negative Improve Increase Weaken Improve Low Rashtriya Ispat Nigam Limited (RINL) IND AA/Stable Similar Similar Improve Weaken Moderate Uttam Galva Steels Ltd. (UGSL) IND A/Negative Improve Lower Improve Improve Low Usha Martin Limited (UML) IND A+/Negative Improve Lower Improve Improve Low ISMT Limited IND A/Stable Improve Lower Improve Improve Moderate a EBITDA margin b Total adjusted net debt/EBITDA Source: India Ratings
  6. 6. Corporates 2013 Outlook: Indian Steel Producers January 2013 6 Annex 2: Key Financial Trends of Select India Ratings-Rated Steel Producers (FY08-FY12) Figure 8 396 1,315 91 432 1,473 91 406 1,024 98 427 1,188 105 463 1,329 133 0 400 800 1,200 1,600 SAIL TSL RINL FY08 FY09 FY10 FY11 FY12 Revenue Trend FY08-FY12 (INRbn) Source: India Ratings, annual reports Figure 9 0 5 10 15 20 25 30 FY08 FY09 FY10 FY11 FY12 SAIL TSL RINL UGSL UML(%) EBITDA Margin Trend FY08-FY12 Source: India Ratings, annual reports Figure 10 -2 0 2 4 6 FY08 FY09 FY10 FY11 FY12 SAIL TSL RINL UGSL UML(x) Leverage Trend FY08-FY12 Source: India Ratings, annual reports
  7. 7. Corporates 2013 Outlook: Indian Steel Producers January 2013 7 Annex 3 Figure 11 Select India Ratings-Rated Issuers Issuer Long-Term Issuer Rating Outlook Adhunik Corporation Limited IND BB Stable Adhunik Industries Ltd IND BBB Stable AGR Steel Strips Private Limited IND BB Stable AKC Steel Industries Ltd IND BB- Stable Ambica Steel Limited IND BB+ Positive Aruna Alloy Steels Private Ltd IND BB+ Stable Asian Colour Coated Ispat Limited IND BBB- Stable Balasore Alloys Limited IND BB- Stable Beekay Steel Industries Limited IND BBB- Stable Bhaskar Shrachi Alloys Limited IND B Stable Bhushan Power & Steel Limited IND A- Stable Bonai Industrial Company Limited IND AA- Stable BTT Industries Private Limited IND BB Stable Cronimet Alloys India Limited IND BBB- Stable Dadiji Steels Ltd IND BB Stable Dhruvdesh Metasteel Private Limited IND BB Stable Feegrade & Company Limited IND AA- Stable Fouress Engineering India Limited IND BB+ Stable Galaxy Exports Private Limited IND B Stable Goyal Energy & Steel Pvt Ltd IND B+ Stable Hansa Metallics Limited IND BB Stable ISMT Limited IND A Stable Kamakshi Steels Private Limited IND BB- Stable Kristna Engineering Works IND BB Stable M P K Steels (I) Private Limited IND B+ Stable Magadh Iron Pvt Ltd IND B- Stable Mahindra Sanyo Special Steel Private Limited IND BBB Stable Mangilal Rungta IND A- Stable Neelkamal Steels Private Limited IND B Stable Neerajaksha Iron and Steel Private Limited IND B Stable Neo Metaliks Limited IND BB+ Stable Niros Ispat Pvt Ltd IND B+ Stable Prakasa Spectro Cast Pvt Ltd IND BB Stable Rashtriya Ispat Nigam Limited IND AA Stable Rungta Mines Limited IND AA Stable Rungta Sons Pvt Ltd IND AA- Stable Sagar Steels IND BB- Stable Sai Sponge (India) Limited IND BB- Stable Sanjog Steels Private Limited IND B Stable Shivam Meltech Pvt Ltd IND B Stable Sowbhagya Ispat India Private Limited IND BB- Stable Sri Gayatri Minerals Pvt Ltd IND BBB- Stable Sri Langta Baba Steels Pvt Ltd IND BB- Stable Steel Authority of India Limited IND AAA Stable Tata Steel Limited IND AA Negative Thangam Steel Limited IND BB+ Stable Tirumala Balaji Alloys Private Limited IND BB+ Stable Usha Martin Limited IND A+ Negative Uttam Galva Steel Limited IND A Negative Vijai Bhavani Power Tech Pvt Ltd IND BB- Stable Source: India Ratings
  8. 8. Corporates 2013 Outlook: Indian Steel Producers January 2013 8 ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://WWW.INDIARATINGS.CO.IN/UNDERSTANDINGCREDITRATINGS.JSP IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. Copyright © 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. 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