CRISIL Ratings in a recent report said that India’s secondary long-steel producers may sustain their credit profiles this fiscal despite facing up to 100 basis points decline in profitability because of two supportive factors: central government spending on rural and urban housing, and infrastructure, including roads and deleveraged balance sheets stemming from low capital expenditure. A study of 125 CRISIL-rated secondary long-steel manufacturers shows that domestic long steel sales volume is seen declining 12-15% in the current fiscal following the Covid-19 pandemic

Long-steel consumption is prominently linked to housing projects being implemented through schemes such as Pradhan Mantri Awaas Yojana and construction of roads. While capital expenditure by central government will prop demand from these segments at healthy levels, declining spending by state governments and weak demand from the real estate sector will affect the overall offtake. Consequently, volume could de-grow 12-15% this fiscal.

On the other hand, average steel realisation is expected be steady at INR 40,000-41,000 per tonne on stable supply, given capacity expansion has been minimal over the past couple of years. But with sales volume also foreseen declining, revenue growth, too, will be curbed.

Nevertheless, lower revenue may not materially dent operating profit margin because of favourable cost structure. Variable cost, iron ore and coal, comprise three-fourths of the cost of production. As a result, operating margins tend to be somewhat protected in this business.