Operating margins of steel firms to decline by 200 basis points in FY21: Crisil

Primary steelmakers contribute to 58% of the domestic steel production. India had produced 133 million tonnes finished steel in 2019-20.

Operating margins of domestic primary steelmakers’ in 2020-21 is expected to decline by 200 basis points to 15% on lower volumes and realisation over 2019-20. However, this would still be much higher than the decadal low of 9% clocked during the previous steel sector slowdown of 2016, rating agency Crisil said on Thursday.  “We expect operating margins, which had slid 400 bps last fiscal from a peak of 21% in fiscal 2019, to fall another 200 bps to around 15% this fiscal,” said Isha Chaudhary, director, Crisil Research.

Primary steelmakers contribute to 58% of the domestic steel production. India had produced 133 million tonnes finished steel in 2019-20. Crisil said demand for steel is likely to recover during the remaining period of the current fiscal, buoyed by pent-up demand, government spending on rural housing and roads, and growth in lower-margin exports. But that would not make up for the loss in the first quarter of the current loss. “The percentage fall in sales volume on-year is likely to be in high single digit,” it said.

Crisil said steelmakers are likely to defer nearly half of their planned capex this fiscal and conserve cash to fortify financials. Consequently, their gross debt is likely to remain stable. “We foresee a bounce-back in steel demand growth to double digits next fiscal because of likely government push to housing and infrastructure, and recovery in automobile sales. That would improve the steel industry’s profits, increase interest cover to around 2.3 times, and support credit profiles,” Crisil said.