Top five steelmakers in the country are set to pay back Rs 35,000 crore of debt, or 15 percent of their total borrowings, through the current and next fiscal years, a report said on Tuesday. Rising demand and higher prices will boost their operating margins by 23 percent next fiscal, though down from 25 percent this fiscal, leading to improved credit metrics for steelmakers, Crisil said in its report.

Debt cutting will also come from the savings they made in FY21 by partially deferring capex, which has further strengthened the balance sheets and credit metrics of five primary steel producers, which account for 55 percent of domestic production, Crisil said. Domestic demand recovered strongly in the second half of FY21, clipping at 10 percent between October 2020 and January 2021 as against a steep 30 percent on-year fall in the first half due to the pandemic. This will have demand contraction improving to under than 10 percent for the whole of this fiscal.

Further aiding the sector is higher infrastructure spending by the government and a recovery in residential real estate which are expected to improve demand by 10-12 percent next fiscal. On the pricing side, domestic hot-rolled coil prices rallied to a multi-year high of Rs 56,000 per tonne in February from Rs 39,200 per tonne in March 2020 as demand improved amid iron-ore supply constraints and high global prices. Since last month, however, prices have moderated with iron-ore supplies improving, and also because of the reduction in Customs duty announced in the budget.

The five steelmakers could cut Rs 25,000 crore of debt this fiscal. Next fiscal, despite capex rising by 15 percent, they can slice debt by another Rs 10,000 crore. That would drive a sharp improvement in credit metrics with financial leverage declining below 2.5 times next fiscal compared to above 4 times in fiscal 2020, said Naveen Vaidyanathan, an associate director at the agency.

The report is based on Tata Steel (including Bhushan Steel), JSW Steel, Steel Authority of India, Arcelor Mittal Nippon Steel India (erstwhile Essar Steel) and Jindal Steel & Power. While the tailwinds to realisations from higher input costs and global prices may abate going forward, domestic demand growth would provide an offset, said the report.

Consequently, realisation next fiscal may still be 15 percent higher than the average of the past five years. That, along with rising volumes and moderate coking coal prices will mean operating margins jumping to 23 percent next fiscal, but lower than the 25 percent seen this fiscal, said Manish Gupta, a senior director at the agency. Operating margins had plunged to 9 percent in the previous steel downcycle of fiscal 2016. Since then, what has helped are improved raw material linkages, and better-operating efficiencies of stressed assets following consolidation with stronger peers, he noted.

All this will have their cash accruals surge over 40 percent on-year to Rs 40,000 crore this fiscal, and rise another 10 percent next fiscal. That, and a reduction in capex this fiscal will fortify financials amid the pandemic uncertainties, he said.