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www.indiaratings.co.in 17 January 2014

Metals & Mining




2014 Outlook: Steel Producers
Modest Demand Growth Unlikely to Improve Credit Profile
Outlook Report

Negative Outlook Maintained: India Ratings & Research (Ind-Ra) has maintained a Negative
Outlook on the Long-Term Issuer Rating of Indian steel producers for FY15 (end-March) due to
their weak credit profile. The agency revised the Outlook to Negative in July 2013 from Stable
in January 2013. The high proportion of Stable Outlooks in the Ind-Ras portfolio reflect that the
agency has factored into the ratings the inherent risks in the sector with most issuers being
rated in the non-investment grade (IND BB+ and below). The sector outlook is also negative
as a modest improvement in steel demand from end-user industries would not result in a
significant hike in steel prices in FY15.
Modest Improvement in Demand: Ind-Ra expects domestic steel demand to improve in FY15
on the back of a modest recovery in economic growth and an infrastructure push by the
government of India (GoI). Better GDP growth of 5.6% yoy (Ind-Ras estimates) in FY15 (FY14:
4.9% yoy) on the back of a revival in the industry growth of 4.1% yoy (1.7% yoy) would lead to
slightly improved steel demand. World Steel Association has forecasted steel demand in India
to grow at 5.6% yoy in 2014.
Limited Upside in Price: Ind-Ra does not expect a major hike in steel prices in FY15 due to
prevailing overcapacity in the domestic steel industry which would continue to limit the prices
despite a modest improvement in steel demand. The prices would also depend upon a
correction in the present oversupply in global steel market. However, any contraction in steel
demand could pressure steel prices further.
Pressure on Margins: Margins of steel producers would continue to be under pressure given
the high cost of steel production and their limited ability to pass on hikes in costs as only a
modest improvement in demand is expected in FY15. The availability of iron ore should
improve in FY15, limiting hikes in iron ore costs. However, any further rupee depreciation
resulting in an increase in the landed cost of coking coal, which is mostly imported, could
contract profitability margins.
Overcapacity: Steel producers across the globe are grappling with low capacity use levels,
resulting in a high fixed cost. Indian steel producers capacity use contracted to below 80% in
FY13. Any increase in the capacity use due to an uptick in demand could be limited by
significant new capacities (about 13-15 million tonnes (mt)), scheduled to start in FY15.
Domestic steel producers will have to increase their focus on cost competitiveness and
efficiency of operations to protect their margins.
Credit Profile: Ind-Ra expects Indian steel producers credit profile to remain weak in FY15
due to their large debt for working capital and capex coupled with modest EBITDA margins.
Margins have consistently contracted since FY11 which combined with an increase in debt
have resulted in increased financial leverage. A tightening of credit by Indian banks to the steel
sector due to rising non-performing assets (NPAs) may worsen the liquidity position of steel
producers at the lower end of the credit spectrum given their heavy reliance on bank funding for
operating expenditure and capex.

Rating Outlook
NEGATIVE
(2013 MI D-YEAR:
NEGATI VE)
(2013: STABLE)



Sector Outlook
NEGATIVE
(2013: NEGATI VE)
Modest demand growth
Global and regional overcapacity
Weak pricing dynamics
Weak credit profile

Related Research
Other Outlooks
www.indiaratings.co.in/outlooks
Other Research
Rating Indian Steel Producers - Sector Credit
Factors (September 2012)

Go to appendix for list of select rated entities

Analysts
Ashish Upahdyay
+91 11 4356 7245
ashish.upadhyay@indiaratings.co.in

Rohit Sadaka
+91 33 4030 2503
rohit.sadaka@indiaratings.co.in

Sankalp Baid
+91 22 4000 1792
sankalp.baid@indiaratings.co.in

Pavan Kumar
+91 44 4340 1724
pavan.kumar@indiaratings.co.in

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2014 Outlook: Steel Producers
January 2014
2

Outlook Sensitivities
Sustained Improvement in Demand: A Stable Outlook could result from a greater-than-
expected improvement in the Indian macroeconomic environment leading to superior and
sustained growth in steel demand from end-user industries.
Key Issues
Demand Growth
Ind-Ra expects India to record better GDP growth of 5.6% in FY15 (FY14 estimates: 4.9%),
mainly on the back of a revival in industry growth of 4.1% (1.7%). This should result in a
moderate uptick in steel demand in FY15, given the high positive correlation of steel demand
with GDP growth. The country recorded GDP growth of 5% in FY13 (FY12: 6.2%), one of the
lowest rates in the last decade. The Indian economic slowdown has resulted in depressed
demand for steel from end-user industries.
According to Joint Plant Committee (JPC), steel production grew 5.2% during the first nine
months of FY14 (9MFY14), while the real consumption of steel grew by a modest 0.6%. Lower
domestic demand coupled with a weak rupee resulted in a sharp decline of 29.2% in steel
imports. However, exports driven by rupee depreciation recorded a jump of 9.5% in 9MFY14.
The real consumption of steel in India grew only 3.3% yoy in FY13 as against 6.9% yoy in
FY12, given the slowdown in end-user industries.
Figure 2


Steel consuming sectors like construction, auto and capital goods continue to underperform.
The construction sector which accounts for bulk of steel consumption (about 60%) recorded a
4.3% yoy decline in growth in FY13 (FY12: 5.6% yoy). The growth further fell to 3.5% in
1HFY14 (1HFY13: 5.1%). The GoIs plan to invest USD1trn in the infrastructure sector could
boost steel demand provided it is timely implemented.
The auto sector with the exception of the two-wheeler segment continues to record a decline in
sales volume. According to Society of Indian Automobile Manufacturers, passenger as well as
commercial vehicle sales declined by 8.6% yoy during April-December 2013. High interest cost
has also stemmed demand revival. The capital goods sector continues to show a contraction
since FY11; for April-October 2013, the sector registered a 0.2% yoy decline in sales. Growth
in consumer durables continues to be hammered by the persistent high inflation and high
interest costs.

0
5
10
15
20
25
30
35
FY08 FY09 FY10 FY11 FY12 FY13
Bank Credit (Steel & Iron-ore) GDP Steel Consumption (%)
Growth Trend
Source: Ind-Ra, RBI, JPC
Figure 1

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2014 Outlook: Steel Producers
January 2014
3

Figure 3


Steel Prices
Ind-Ra does not expect a significant price hike in steel prices in FY15. The consistent demand
slowdown in the end-user industries globally has resulted in an oversupply in the steel industry,
leading to depressed steel prices. The domestic steel market is also grappling with
overcapacity and any uptick in demand will result in the use of spare capacities. Moreover, new
capacities of around 13-15mt, scheduled to start in FY15, will also pressurise steel prices. Steel
producers are price takers with prices being determined by variations in end-user demand. This
limits the ability of the companies to pass on cost increases to customers. As a significant
improvement in the domestic steel market remains uncertain, domestic steel producers will be
focussed on efficient cost control to mitigate the risk of a prolonged price recovery.
Figure 4


Indian steel producers increased steel prices in August and September 2013, but subdued
demand from end-user industries prevented a sustained increase in prices. Rupee depreciation
did provide some support to the prices as imported steel mainly flat steel became costlier than
domestic steel, given its import price parity. Steel companies also tried to increase exports as
steep rupee depreciation rendered Indian steel prices relatively competitive globally.

31.8 32.6
45.8
49.4
53.1 57.8
56.6
69.0
73.6 76.7 71.0
72.3
0
20
40
60
80
100
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Nov 12 Nov 13
India's Crude Steel Production
(million ton)
Source: World Steel
-10
-5
0
5
10
15
20
FY09 FY10 FY11 FY12 FY13
Basic Goods Capital Goods Intermediate Goods Cosumer Goods Total
(% Growth)
Index of Industrial Production (IIP)
Source: CSO
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2014 Outlook: Steel Producers
January 2014
4

Figure 5


Iron Ore
Globally, Ind-Ra expects iron ore prices to moderate in FY15 due to strong production
increases in Australia. However, Indian prices for iron ore will continue to reflect the
inadequate domestic supply of iron ore. A partial improvement in supply from Karnataka due to
a ramp up of iron ore production post lifting of the ban by Supreme Court will provide some
relief. The prices could firm up if the demand-supply gap widens due to a regulatory
intervention in Odisha and/or more-than-expected steel demand. According to Fitch Ratings,
the base case assumption for iron ore prices (62% fines CFR China) is USD110/t in 2014
dropping to USD90/t in the long term. Average iron ore prices remained relatively stable in
2013 with occasional increases due to a contraction in supply. About 1.6t of lump iron ore is
required to produce 1t of crude steel through the blast furnace (basic oxygen furnace) route.
Figure 6


Coking Coal
Over 90% of Indias requirement for coking coal is met through imports. However, the landed
price of coking coal for Indian steel producers will remain high given the significant rupee
depreciation since FY13. Any further rupee depreciation could increase the cost of production,
thus driving down the margins. According to Fitch, hard coking coal prices will be about
USD160/t on average over the next 12 months, recovering in the long term to USD175/t, given
the rebound in Australian supply due to a ramp up of new projects.
The average quarterly contract price for hard coking coal (HCC, ex-Australia) declined about
25% yoy to USD159/t in 2013; however, the depreciated rupee offset some advantage that
could have accrued on account of the reduction in input costs. About 0.6t of coking coal is
required to produce 1t of crude steel through the blast furnace (basic oxygen furnace) route.

36,000
40,000
44,000
48,000
52,000
Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13
Hot Rolled Coils (2mm, Mumbai) MS Rounds (Round 16mm, Mumbai) (INR)
Steel Price Trend
Source: CMIE
0
2,000
4,000
6,000
8,000
Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13
Fines Lumps (INR/ton)
Average Iron Ore Prices (>65% Fe)
Source: Indian Bureau of Mines
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2014 Outlook: Steel Producers
January 2014
5

Figure 7


Mining Issues
The iron ore mining industry went through a difficult phase in 2012 and 2013, given regulatory
interventions in various states which resulted in the inadequate availability of iron ore despite
abundant quality reserves in India. The supply of iron ore should improve gradually, given the
lifting of mining ban on category-A (with minor or no irregularities) and category-B mines in
Karnataka. However, the Supreme Court has imposed an annual ceiling of 30mt of iron ore
production in the state. After the lifting of ban, around 17 mines produced about 20-25mt
(including ore produced by NMDC Ltd) of iron ore in 2013. This is insufficient to meet the 35-
40mt requirement of the state. The supply should progressively improve as miners obtain
various statutory approvals and operationalise the mines.
Odisha could also have to face inadequate availability of iron ore if the Justice Shah
Commissions recommendation on seeking fresh approvals for environment clearance for
operating mines in the state is accepted. Mining activities have come to a halt in Goa following
the Supreme Courts ban on mining. However, this had a minimal impact on the Indian steel
industry as the ores produced in Goa were mostly exported, given their low grade which is not
used by the domestic steel industry. In November 2013, the court allowed e-auction of around
11.5mt of the iron ore stock produced before the ban came into effect.
Credit Profile
Ind-Ra expects domestic steel producers credit profile to remain weak in FY15 due to
continuous pressure on margins coupled with expectations of only modest improvement in
steel demand. Consequently, it would be challenging to significantly hike steel prices and pass
on increases in input cost. A decline in coking coal prices would have provided some respite;
however, a sharp rupee weakening has offset some of the advantages that could have accrued
due to lower coking coal prices.
Indian steel producers financial leverage is high due to high debt for funding capex and high
working capital requirements coupled with moderate profitability. However, the liquidity of large
steel producers is adequate. Small and medium steel producers are also dealing with tight
liquidity apart from high leverage. The liquidity concerns are also compounded by steel
producers capex resulting in negative free cash flows. Rupee depreciation has also resulted in
high financial leverage for steel producers, with significant unhedged foreign currency liabilities
limiting their financial flexibility.
The Indian steel industry is one of the largest borrowers from the domestic banking system;
any limited availability of credit given rising NPA levels of banks could further affect the liquidity
of domestic steel producers at the lower end of the credit spectrum. The iron and steel sector is
the largest contributor to the stressed assets of the Indian banking system. According to the
Corporate Debt Restructuring cell as on 30 September 2013, the iron and steel sector
contributed 21.3% (INR418.12bn) to total stressed assets (INR1,962.67bn) under the debt
restructuring mechanism.
0
100
200
300
400
Q110 Q410 Q311 Q212 Q113 Q413
(USD/ton)
HCC Price Trend (FOB)
Source: Industry
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2014 Outlook: Steel Producers
January 2014
6

The cost of funding working capital requirements remains high, given high interest rates. 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.
Long-term Fundamentals Intact
The long-term fundamentals of Indian steel demand remain intact. The per capita use of steel
in India at 57kg (2012) is quite less than the world average of 217kg, indicating huge potential
steel demand in India. However, a recovery in domestic steel demand in FY15 would be a
gradual one rather than V-shaped.
2013 Review
2013 was a difficult year for Indian steel producers. During the year, Ind-Ra took negative
rating actions on six steel companies and revised the Outlook on one to Negative from Stable
due to greater-than-expected liquidity issues and high financial leverage. However, the agency
affirmed the ratings of 15 steel companies while the ratings of 12 steel companies were
upgraded.
Companies with a Negative Outlook (see Annex 1) are affected by uncertainties regarding
timely completion of capex and deterioration in financial leverage. Steel Authority of India
Limiteds (IND AAA) Negative Outlook reflects uncertainties associated with its deleveraging
from FY15 after the expected completion of its on-going capex. Tata Steel Limiteds (IND AA)
Negative Outlook reflects the agencys view that profitability pressures for the company will
persist, given the challenging outlook for the global steel market. Usha Martin Limiteds (IND
A+) Negative Outlook reflects its elevated credit metrics. Uttam Galva Steels Ltd's (IND A)
Negative Outlook also reflects its high financial leverage due to debt-funded capex.

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2014 Outlook: Steel Producers
January 2014
7

Annex 1: Ratings Headroom for Select Steel Producers

Figure 8
India Select Steel Producers Ratings Headroom and Ind-Ras FY15 Expectations

Relative to FY13


Long-Term Issuer
Rating/Outlook Profitability
a
Capex FCF Credit metrics
b

Ratings
Headroom
Steel Authority of India Limited (SAIL) IND AAA/Negative Improve Similar Weaken Improve Low
Tata Steel Limited (TSL) IND AA/Negative Improve Increase Weaken Improve Low
Rashtriya Ispat Nigam Limited (RINL) IND AA/Stable Improve Increase Weaken Weaken Low
Uttam Galva Steels Ltd. (UGSL) IND A/Negative Similar Lower Improve Improve Low
Usha Martin Limited (UML) IND A+/Negative Improve Lower Improve Improve Low
ISMT Limited IND A-/Negative Improve Lower Improve Improve Low
a EBITDA margin
b Total adjusted net debt/EBITDA
Source: Ind-Ra


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2014 Outlook: Steel Producers
January 2014
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Annex 2: Key Financial Trends of Select Ind-Ra-Rated Steel
Producers

Figure 9


Figure 10


Figure 11



432
1,473
91
406
1,024
98
427
1,188
105
463
1,329
133
446
1,334
121
0
300
600
900
1,200
1,500
1,800
SAIL TSL RINL
FY09 FY10 FY11 FY12 FY13
Revenue Trend
(INRbn)
Source: Ind-Ra, annual reports
0
5
10
15
20
25
FY09 FY10 FY11 FY12 FY13
SAIL TSL RINL UGSL UML
(%)
EBITDA Margin Trend
Source: Ind-Ra, annual reports
-2
0
2
4
6
8
10
FY09 FY10 FY11 FY12 FY13
SAIL TSL RINL UGSL UML
(x)
Leverage Trend
Source: Ind-Ra, annual reports
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2014 Outlook: Steel Producers
January 2014
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Appendix

Figure 12
Select Issuer Ratings
Issuer Rating/Outlook (Current) Rating/Outlook (End-2012)
Adhunik Alloys and Power Limited IND BBB-/Stable IND BB+(Suspended)
Adhunik Corporation Limited IND BB+/Stable IND BB/Stable
Adhunik Industries Limited IND BB+ /Stable IND BBB-/Stable
AGR Steel Strip Private Limited IND BB+/Stable IND BB/Stable
Ambica Steel Limited IND BB+/Positive IND BB+/Positive
Anuradha Steels Private Limited IND BB-/Stable NR
Aradhya Steels Private Limited IND BB-/Stable IND D
Aruna Alloy Steels Private Limited IND BB+/Stable IND BB+ / Stable
Asian Colour Coated Ispat Limited IND BBB-/Stable IND BBB-/Stable
Balmukund Sponge & Iron Limited IND BBB-/Stable NR
Beekay Steel Industries Limited IND BBB-/Stable IND BB+/Stable
Bhushan Power & Steel Limited IND A-/Stable IND A-/Stable
Bonai Industrial Company Ltd IND AA/Stable IND AA-/Stable
Feegrade & Company Pvt. Ltd IND AA/Stable IND AA-/Stable
Global Castings Private Limited IND BB-/Stable NR
Goyal Energy & Steel Pvt. Ltd IND BB-/Stable IND BB-/Stable
ISMT Limited IND A-/Negative IND A/Stable
M/s Mangilall Rungta IND A/Stable IND A-/Stable
Mahindra Sanyo Special Steel Private Limited IND BBB/Stable IND BBB/Stable
Mortex Coke Industries IND BB/Stable NR
Neo Metaliks Limited IND BB/Stable IND BB+/Stable
Niros Ispat Private Limited IND BB- /Stable IND B+/Stable
Radha Smelters Limited IND BB+/Stable NR
Radha Steels IND BB-/Stable NR
Rashtriya Ispat Nigam Limited IND AA/Stable IND AA/Stable
Rungta Mines Ltd IND AA+/Stable IND AA/Stable
Rungta Sons Pvt. Ltd IND AA/Stable IND AA-/Stable
Sagar Roofings Private Limited IND BB+/Stable IND BB+/Stable
Sagar Steels IND BB-/Stable IND BB-/Stable
Sai Sponge (India) Limited IND BB-/Stable IND BB-/Stable
Shankara Infrastructure Materials Ltd IND BBB+/Stable NR
Shree Shakambari Ferro Alloys Pvt Ltd IND BB-/Stable IND BB-/Stable
Sowbhagya Ispat India Private Limited IND BB-/Stable IND BB-/Stable
Sri Langta Baba Steels Pvt Ltd IND BB-/Stable IND BB-/Stable
Steel Authority of India Limited IND AAA/Negative IND AAA/Stable
Tata Steel Limited IND AA/Negative IND AA/Negative
Tirumala Balaji Alloys Private Limited IND BBB-/Stable IND BBB-/Stable
Usha Martin Limited IND A+/Negative IND A+/Negative
Uttam Galva Steel Limited IND A/Negative IND A/Negative
Source: Ind-Ra, NR Not rated



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2014 Outlook: Steel Producers
January 2014
10




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