As a slowdown creeps into India Inc, affecting the capital expenditure plans of several companies, one sector that appears set to feel the heat directly is steel.
As a slowdown creeps into India Inc, affecting the capital expenditure plans of several companies, one sector that appears set to feel the heat directly is steel.
Experts said dragging infrastructure projects and a fall in demand in real estate, automobiles and power would result in a rise in inventories and pressure on margins for steel companies in the coming quarters.
Steelmakers are already expected to post muted first-quarter results due to a hike in raw material cost, especially of coking coal owing to a massive flood in Australia in December-January.
“There is a declining consumption trend across the country. But production has not come down in tandem. So chances are in the coming few months inventories would rise,” said Rahul Singhvi, steel analyst with Bric Securities, a brokerage.
India has already become a net exporter of flat steel after domestic demand declined and experts said the trend is unlikely to reverse for at least two years.
“While a real picture will emerge only after the first-quarter results, it is true there is a general slowdown in the auto sector and infrastructure and this has led to a fall in demand for steel,” said Ashish Upadhyaya, research analyst with Fitch Ratings.
Increased inventory often leads to pressure on cash flows and earnings.
“While enough cash gets converted to make steel, lower sales means cash flows are not in line with operational expenditure needed to invest back in business. This forces companies to borrow more funds,” Upadhyaya said.
Neelkanth Mishra and Riya Bhattacharya, analysts with Credit Suisse, said apparent consumption slowed down from mid-teens growth to just 3.5% last fiscal.
“Medium-term growth for India seems to be reverting back to single-digit again - levels last seen pre-2005. This slowdown seems to be continuing into this fiscal,” they wrote in a note last week.
Sageraj Bariya, managing partner at Equitorials, a new broking house in Mumbai, said steel consumption will taper for at least the next two quarters.
“Prices have corrected by around 10% and there is no remote possibility of a further rise for the next year,” Bariya said.
“Fifteen months of tight monetary policy and high food inflation has led to an all-pervading decline. With capex and consumption down, inventory build-up is a strong possibility,” he said.
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