India's secondary steel industry is poised for a modest but significant profitability recovery this fiscal year. This improvement stems not primarily from favorable pricing, but from a strategic shift towards backward integration and captive power generation, according to an analysis by Crisil Ratings.
These crucial investments are enabling producers to mitigate persistent inflation in raw material and energy costs. Coupled with robust domestic demand, firmer steel realizations, and disciplined capital spending, the sector's operating margins are projected to increase by nearly 50 basis points (bps) to 6.6% this fiscal, up from 6.1% last year.
Integration: A Key Differentiator
Backward integration is increasingly becoming the defining factor for profitability and credit resilience within the secondary steel sector. With input cost volatility remaining a significant challenge, producers are prioritizing control over raw materials, power, and operational efficiencies over aggressive capacity expansion.
Crisil Ratings Senior Director Rahul Guha notes that planned capital expenditure, estimated at ₹3,000-3,500 crore, will largely focus on captive power and backward integration projects. These initiatives are expected to deliver sustainable cost benefits, helping maintain industry EBITDA at ₹3,200 per tonne, comfortably above the long-term average of ₹2,900 per tonne.
Supportive Demand Environment
Government spending on critical infrastructure projects, including roads, railways, urban development, and affordable housing, continues to bolster demand for long steel products. Furthermore, private-sector capital expenditure is showing early signs of revival across engineering, manufacturing, and industrial segments. Consequently, domestic long steel demand is anticipated to grow around 7% this fiscal.
This stronger demand backdrop, combined with a more balanced supply environment, is also expected to support steel prices. Average realizations are projected to rise approximately 6% to ₹50,000-51,000 per tonne this fiscal, up from about ₹48,300 per tonne last year.
Navigating Cost Pressures
Despite positive trends, significant cost pressures persist. Prices for coal and iron ore, two vital inputs, are expected to increase by 5-7% this fiscal due to sustained demand. Geopolitical uncertainties and disruptions to global commodity supply chains could also keep coal prices volatile. Overall, production costs for secondary steel producers are forecast to rise by nearly ₹2,000 per tonne during the year, underscoring the importance of investments that reduce reliance on external inputs.
Benefits of Captive Power and Integration
Producers with captive power facilities and deeper backward integration typically achieve an incremental EBITDA of ₹1,500-2,000 per tonne compared to non-integrated peers. This advantage is driving a significant trend: the share of integrated capacity in the secondary steel sector is expected to grow to nearly 33% this fiscal year, up from 27% in fiscal 2026. This shift is particularly pronounced in eastern India, a region accounting for over half of the country's secondary steel output and experiencing steep industrial power tariff increases.
Captive power facilities not only reduce energy costs but also enhance operating reliability and minimize vulnerability to grid disruptions, thereby strengthening overall competitiveness. The improved operating performance is also expected to translate into healthier cash generation, with over 60% of the sector's planned capital expenditure likely to be funded through internal accruals.
Strengthening Financial Metrics
Argha Chanda, Director, Crisil Ratings, highlights that higher profitability and robust cash accruals will provide sufficient flexibility to fund ongoing investments while maintaining comfortable credit metrics. The debt-to-EBITDA ratio is projected to improve to around 3.4-3.5 times this fiscal, from approximately 3.65 times over the past two fiscals. Gearing is expected to remain below 1 time, and interest coverage is set to strengthen to nearly 3.3 times.
Potential Risks Ahead
While the outlook is positive, risks remain. A sharper-than-expected decline in steel prices, weaker infrastructure spending, volatility in raw material costs, or delays in commissioning integration projects could impact performance. However, with resilient demand and steadily improving operational efficiencies, secondary steel producers appear better equipped than in previous cycles to absorb commodity-price shocks and maintain stable credit profiles.