Credit ratings agency India Ratings expects the margins of firms producing flat steel through the blast furnace route to come under pressure if the rupee depreciates further against dollar.
Therefore, the agency expects profit margin of these producers to remain under pressure in 2013, even after effecting a Rs 500-1,000 a tonne rise in output price in December.
Depreciation of rupee against the dollar would increase the cost (in rupee terms) of coking coal, which is imported by these steel firms in bulk. This is despite import price parity for flat steel products.
These steel makers may not be able to pass on the increased cost of raw material as demand for steel remains sluggish and it is expected to remain so for some more time.
Moreover, a weaker rupee raises the financial leverage of steel producers with significant un-hedged foreign currency liabilities, resulting in a decrease in financial flexibility.
However, the agency expects the financial leverage of rated entities to remain within the guidelines stipulated for the respective rating category.
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