fitch09 steel

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 [email protected] Rohit Sadaka +91 33 4006 5885 [email protected] Sankalp Baid +91 22 4000 1792 [email protected] Pavan Kumar +91 44 4340 1724 [email protected]

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

45.849.4

53.157.8 56.6

68.372.2

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 118102

172

128

200225

209225

315285

235210

225

170

35 45 5081 69 61

122 133 127 141169

147165

150 140105 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 68.263.4 66.7

5.6 7.0 3.7 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)

Corporates


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

41111

67

0

35

70

105

140

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

16

Expected Capacity Additions

(million tonnes)

Source: JPC, India Ratings

Corporates


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.

Corporates


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 Profitability

a Capex FCF Credit metrics

b 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


Corporates


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 TrendFY08-FY12

(INRbn)

Source: India Ratings, annual reports

Figure 9

0

5

10

15

20

25

30


SAIL TSL RINL UGSL UML(%)

EBITDA Margin TrendFY08-FY12


Figure 10

-2

0

2

4

6


SAIL TSL RINL UGSL UML(x)

Leverage TrendFY08-FY12


Corporates


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


Corporates


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. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings, India Ratings & Research (India Ratings) relies on factual information it receives from issuers and underwriters and from other sources India Ratings believes to be credible. India Ratings conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of India Ratings factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of India Ratings’ ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information India Ratings relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to India Ratings and to the market in offering documents and other reports. In issuing its ratings India Ratings must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind. A rating provided by India Ratings is an opinion as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that India Ratings is continuously evaluating and updating. Therefore, ratings are the collective work product of India Ratings and no individual, or group of individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. India Ratings is not engaged in the offer or sale of any security. All India Ratings reports have shared authorship. Individuals identified in a India Ratings report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a rating by India Ratings is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of India Ratings. India Ratings does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. India Ratings receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. The assignment, publication, or dissemination of a rating by India Ratings shall not constitute a consent by India Ratings to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction including India. Due to the relative efficiency of electronic publishing and distribution, India Ratings research may be available to electronic subscribers up to three days earlier than to print subscribers.

fitch09 steel

Business