JP Morgan: Steel industry hit new low in Oct-Dec

The brokerage house acknowledged that amidst damage to their financials, most companies have likely cut spending sharply, including even maintenance spending

The domestic steel industry, which has been reeling under the burden of cheap imports and lower realisation, hit a new low during the October-December quarter, according to an analysis by brokerage firm JP Morgan of the listed firms.

During the period, only 4 of the 26 listed players reported net profit while only half of them were Ebitda (earnings before interest tax depreciation and amortization) positive. Also the interest coverage capability of these firms weakened further as only four of the listed players made operating profit to cover their “P&L interest”, JP Morgan analysts said in a strategy note on Thursday.

They argued that unless the companies manage to carry out double digit price hikes for several quarters from current levels and simultaneously see a demand pick up, the industry many not be able to pull though from the current degree of leverage. According to their estimates, cumulative gross debt of 28 most leveraged companies, including two unlisted players – Essar Steel and Bhushan Power & Steel- stood at Rs 3.6 lakh crore.

JP Morgan acknowledged that amidst damage to their financials, most companies have likely cut spending sharply including even maintenance spending. “….we do find it difficult for banks to extend fresh credit lines to many of these companies, which would be critical for ramping up operations,” said the research note.

The brokerage house said that the stark deterioration in the financial of the industry was evident from comparing various P&L metric. For instance, in the first half of FY16, when total Ebitda and interest outgo for 26 listed companies stood at about Rs 11,800 crore and Rs 12,000 crore respectively, the sample collectively reported net loss of Rs 4,500 crore. In Q3FY16, however while their Ebitda and interest outgo came in at Rs 9,300 core and Rs 6,300 crore respectively, their collective loss at Rs 8700 of a greater magnitude.