1. Corporates
www.indiaratings.co.in 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
ashish.upadhyay@indiaratings.co.in
Rohit Sadaka
+91 33 4006 5885
rohit.sadaka@indiaratings.co.in
Sankalp Baid
+91 22 4000 1792
sankalp.baid@indiaratings.co.in
Pavan Kumar
+91 44 4340 1724
pavan.kumar@indiaratings.co.in

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. 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. 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. 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. 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. 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. Corporates
2013 Outlook: Indian Steel Producers
January 2013
8
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