Acquisition of stressed steel assets could increase leverage of acquiring companies, which also face the risk of higher imports in the domestic market as trade risks mount according to a new report on the sector by Fitch Ratings.
Domestic steel majors Tata Steel NSE -0.83 % Limited and JSW Steel Limited have acquired steel assets that were under insolvency proceedings, seeing them as an opportunity to gain capacity cheaply and quickly in a fast-expanding market compared with executing green-field projects. “We believe acquisitions could increase TSL’s leverage and that even though JSWS has taken a more conservative approach in terms of transaction structure, a shift from its focus on maintaining investment discipline may also weaken its credit profile,” the report said.
Fitch also believes solid domestic demand has created space to accommodate some increase in imports, but domestic output could be displaced if imports pick up substantially, possibly due to escalation of trade barriers. However, the government could boost the currently inadequate protectionist measures for the domestic industry in such a scenario.
