Steel stocks dip after Icra predicts consumption growth to slow in FY20

Steel stocks came under pressure on Thursday after rating agency Icra said domestic steel consumption growth may decelerate to around 5-6 per cent this fiscal, from 7.9 per cent in FY2019, "on the back of an unprecedented slowdown in economic activity".

The country’s GDP growth tapered to 5 per cent in Q1 FY2020. As a result, margin outlook for steelmakers has weakened in Q2 due to a sharp fall in steel prices and firm raw material costs, Icra said in its report.

Consequently, Steel Authority of India (SAIL) dipped 2.6 per cent to Rs 32.50 on the BSE, Tata Steel was down 2.8 per cent to Rs 347.90, Jindal Steel & Power slipped 2.4 per cent to Rs 103.35, and JSW Steel Ltd slumped 2.37 per cent to Rs 216.10. In comparison, the benchmark S&P BSE Sensex was trading 0.77 per cent lower at 10:40 AM.

According to Icra, the demand environment is expected to improve somewhat in the second half of FY2020, following a likely pick-up in infra spending.

“Industry operating environment remains challenging in FY2020 thus far. However, a likely pick-up in infra spending in the second half and softer coking coal prices could benefit steelmakers for the remainder of the year. Profitability may recover somewhat in Q3, with a sharp fall in coking coal prices in August 2019 and expectation of better demand from the construction sector during that quarter,” Jayanta Roy, senior vice-president and group head – corporate ratings was quoted as saying.

Given the challenging operating environment prevailing at present, ICRA estimates the industry’s operating margin to decline to around 18 per cent in FY2020, compared to 23 per cent in the previous fiscal.

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