Two Reasons India’s Steelmakers Are Going Slow On Expansion
Industry watcher Rakesh Arora said the “writing was on the wall” for steelmakers given their high debt levels.
Two of India’s major steelmakers have delayed their expansion and capital expenditure plans.
While Tata Steel Ltd. said in a post-earnings call for the quarter ended December that it would go slow on the expansion of its plant at Kalinganagar in Odisha, JSW Steel Ltd. said it would commission its unit at Dolvi, Maharashtra, in the first half of the year ending March 2021 compared with the previous target of March 2020.
Rakesh Arora, the managing partner at Go India Advisors, told BloombergQuint that the “writing was on the wall” for steelmakers given their high debt levels. “The debt-to-Ebitda (ratio) of steel companies is extremely high, well above 4 times. With the recent large acquisitions and ongoing iron mine auctions, the steel companies already have too much on (their) plate,” he said. “Even as steel markets were on the mend, the Coronavirus outbreak (in China) has muddled the picture and with the prolonged slowdown, it’s best to conserve cash.”
Tata Steel, which had in July 2019 targeted reducing its debt by nearly $1 billion through a combination of free cash flows and asset sales in the ongoing fiscal, said in its third-quarter earnings that it may not achieve the target. The company, which was slated to complete the expansion at Kalinganagar by FY21-22, would now prioritise the setting up of a pellet plant and cold-rolled coil mill.
Tata Steel’s capex requirement for FY21 would be lower than that in FY20, Koushik Chatterjee, executive director and chief financial officer of the steelmaker, said in the earnings call. However, the company has spent capex of Rs 9,000 crore so far this year, against Rs 8,300 crore that it had earmarked earlier.
JSW Steel, however, said that an extended and heavy monsoon affected operations and construction activities at its ongoing projects apart from a shortage of skilled manpower.
That comes as prices of hot-rolled coil steel prices rose by more than Rs 1000 per tonne in the past few four months, according to Edelweiss Securities. Demand for steel in Asia’s third-largest economy grew at the slowest pace in nearly three years as economic growth fell to a six-year low. India’s automakers—which account for around 10-12 percent of demand for the alloy—are facing their worst slowdown in over two decades.
Jayanta Roy, senior vice president at ICRA, said that while the reason for delay in Tata Steel’s expansion remains unclear, he attributed JSW Steel’s delay to the extended monsoon.
The delay, he said, would aid JSW Steel’s profitability in the ongoing fiscal, else higher depreciation and interest costs on the money borrowed to fund the expansion would have dented profits in the fourth quarter and the full year, given the drop in their margins so far this fiscal.