Domestic demand for stainless steel is projected to log a healthy compound annual growth rate of around 9% in the three fiscals through 2025, nearly double the 4.5% pace of the past five fiscals, according to a report by Crisil Ratings. The annual growth of stainless steel demand was around 4 million tonnes (MT) in the financial year 2021-22.

The demand will be driven by increasing adoption of stainless steel in railways — a focus area for government infrastructure spending — and rising application in the automobile and construction sectors, the report noted. The large domestic players mainly cater to these segments, and thus their demand prospects remain healthy.

As per the report, the demand growth will spur capacity additions. Crisil said that credit profiles of domestic stainless steel manufacturers are expected to remain healthy in FY24 on the back of lower debt, stable profit and healthier balance sheets, with gearing below 1.0 times (less than 1.5 times in fiscal 2022).

Ankit Hakhu, director, CRISIL Ratings, said, “Adoption of stainless steel is increasing because of its higher durability and lower maintenance. Demand from railways is expected to more than triple by fiscal 2025 and constitute around 20% of incremental demand for the metal over fiscals 2023-2025. To be sure, the recent Union Budget has doubled the amount earmarked for manufacturing railway coaches to ₹47,500 crore for fiscal 2024.”

Demand from other major sectors with application of stainless steel, including consumer goods (45% of demand) and process industry (25%), is also expected to grow at a healthy clip of 7-9% over the next 3-5 fiscals given higher consumer spends and recovery in consumption, Crisil said in its report.

The report highlighted that strong demand prospects, coupled with the absence of any major supply addition in the last three fiscals, have set the stage for capital expenditure (capex). Domestic manufacturers are undertaking capex to add around 1 MT of steel melting capacity by FY24. The industry added nearly 1.3 MT between fiscals 2009 and 2012, post which utilisation and profitability issues led to a phase of stress build-up.

The agency believes the risk outlook is more favourable due to several reasons such as low project execution and capacity addition. According to Crisil, project execution risk is low, as it is mostly brownfield in nature, with land and supporting infrastructure already in place. Besides, capacity addition is relatively small (15% of existing vis-à-vis 80% in the previous cycle). This, along with buoyant demand, will keep utilisation levels healthy at 75-80% until fiscal 2025.

Adding to it, steel manufacturers have adopted a raft of measures to lower the impact of volatile prices of nickel1 — a key raw material for stainless steel — that can have a bearing on their profitability. These measures include sharper focus on value-added segments and grades that have low nickel content, right-sizing nickel inventory levels, and instituting pass-through mechanisms in contracts to a large extent.

Besides, companies are also incurring capex to improve downstream capacities (cold-rolled coils and other value-added products), which will support the product portfolio and enhance operating margins.

Ankush Tyagi, Associate Director, CRISIL Ratings, said, “Capex will be supported by two factors. First, balance sheets are strong as no material capacity expansion has taken place in the industry over the past few years. Second, cash accruals will remain healthy as operating margins are expected to be steady given the conversion nature of business and reducing share of high nickel stainless steel grades in the overall demand mix. This will result in lower dependence on debt.”

The agency cautioned that domestic manufacturers face risk of lower-cost imports from Indonesia and China (accounting for a fourth of total consumption). However, this is mainly in the low-end consumer products (utensils and household items) space, which is dominated by the unorganised segment, it added.

The other areas of concerns are slower-than-expected economic growth dampening domestic consumption, sharp movements in nickel prices, import risk in the high-value stainless-steel categories, and any significantly debt-funded capex.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.