Steel NPAs: Coverage Indicators Expected To Remain Depressed
The coverage indicators of the steel industry are expected to remain depressed, amongst the ongoing debt crisis. With a total debt of around 1.5 lakh crore as on march 31, 2017, the capital-intensive steel industry is considered to be the largest contributor to the overall NPAs, which is over 9.6 per cent of the system.
The top five troubled steel companies - Essar Steel, Bhushan Steel, Monnet Ispat, Electrosteel Steel and JSPL are seen to have the maximum NPA problems, according to State Bank of India research report.
“The interest coverage ratio of the industry stood at 1.26 times in Q1FY2018 as against 1.53 times in Q1FY2017 and 1.75 times in Q4FY2017, while total debt to operating profits before interest, tax, depreciation, amortisation (OPBITDA) stood at 7.0 times as on March 31, 2017. Therefore, the credit profile of domestic steel companies are unlikely to improve significantly in the near term despite the current buoyancy in steel prices,” according to ICRA.
The insolvency proceedings for stressed accounts begun in the last few months wherein all the mentioned five accounts five accounts out of the first 12 accounts referred under the Insolvency and Bankruptcy Code, 2016 (IBC) were from the iron and steel sector, with a total debt of above Rs 1.5 lakh crore as on March 31, 2017.
Jayanta Roy, Senior VP and Group Head - Corporate Sector Ratings, ICRA mentions that some of these assets have already attracted attention from foreign investors, given the long-term India growth story.
“We believe that stronger domestic steel players with healthy financial profile also remain potential investors for such assets, which could result in industry consolidation to an extent going forward,” adds Roy.
The domestic steel prices have reported a healthy growth of 14 per cent since June 2017, aided not only by a sharp recovery in international steel prices but also by an improvement in domestic demand growth to 4.4 per cent in April-August 2017, from 2.6 per cent in FY2017.
Commenting on the outlook, the SBI report said that the operating margins of the steel companies would increase on the back of domestic demand especially in value added steel, reflecting improvement in capacity utilisation reasonably enough to service debt.
Buoyant international steel prices have also benefitted Indian mills to increasingly tap overseas markets, as reflected in a 57 per cent year-on-year growth in exports during April-August 2017, helping the domestic steel industry operate at a capacity utilisation of above 80 per cent in the current financial year.
ICRA experts anticipate an improvement in the profitability of domestic steel mills in the near term.
