InvestorQ : Is it true that steel companies are looking to reduce debt in a big way?
vidhya Laxmi made post

Is it true that steel companies are looking to reduce debt in a big way?

sarah Leo answered.
1 year ago

With most of the steel companies having a lot of cash flows and not too many investment opportunities, they are looking for the next best thing i.e. to reduce debt. The next big agenda for steel producers is debt reduction on a massive scale. Indian primary steel producers are a concentrated bunch with just about 5 companies accounting for more than 85% of steel output.

Now, these five companies are estimated to reduce their outstanding debt by Rs.35,000 crore by March 2022. This will be done in two tranches with the bigger tranche of repayment in FY21 and a smaller chunk of repayment for FY22. CRISIL, India’s leading rating agency, has estimated that steel producers in India will obviously look to use higher operating profits for prepayment of loans to improve their solvency positions.

Next year, steel companies in India are expected to see a sharp improvement in credit metrics on account of lower debt levels and partial deferral of capital expenditure. The total debt of the steel manufacturers stands at a whopping Rs.215,000 crore and they are expected to repay Rs.25,000 crore in FY21 and Rs.10,000 crore in FY22. A near 15% reduction in leverage would do a world of good for their solvency ratios.

Steel is likely to get a push from higher infrastructure spending by government and recovery in residential realty. This is expected to push up steel demand by 10-12% for FY22. Hot rolled coils or HRC prices have rallied to a multi-year high of Rs.56,000/ton hinting that cash flows would remain robust for steel companies. CRISIL expects cash accruals to surge 40% in FY21 and 10% in FY22 and these could be the triggers for debt reduction.