Steel: In transition phase

India Infoline News Service | Mumbai |

Steel prices have been on a downward trend since the start of 2013 due to a decline in raw material costs and subdued demand scenario in EU in H1 2013.

Global steel market in a transition phase

The global steel market, over the last one quarter, has been in a transition phase; on one hand the demand growth in China is slowing down while on the other, developed nations like US and EU are displaying signs of gradual improvement in demand. Economic data emanating out of China over the last two months have accentuated our view that the Chinese economy is slowing down and demand for steel would remain subdued in the region in 2014. This impact on overall demand would be offset by a recovery in the US and Europe. We believe that global steel demand growth in 2014 would be in the range of 3-4% yoy.


Domestic steel prices to decline

Steel prices have been on a downward trend since the start of 2013; however, the decline in steel prices has been quite lower than the fall in its raw material prices. Prices of coking coal and iron ore declined 26.7% yoy and 27.6% yoy, respectively, in the spot market since January ‘13 against a 10% decline in Chinese export HRC. As a result, the spread between steel prices and input costs have jumped sharply to its highest level in the last 30 months. We believe, going ahead, steel prices would be under pressure as the spread would narrow down due to the excess capacity in the system and pull down steel prices in the near term. We believe domestic prices would align with global prices as we have turned into net exporters of steel, which is visible with the sharp correction in the discount of domestic steel prices.


Tata Steel remains our preferred pick in the sector

Amongst the domestic steel manufacturers, Tata Steel remains our preferred pick as we expect a revival in its European operation and volume growth in FY16 from its new Kalinganagar facility. The European business is expected to benefit from the decline in raw material prices and a revival in demand in the region. We maintain our negative stand on JSW Steel and Bhushan Steel due to the tight iron ore market in the region and on expectations of a decline in steel prices. We also maintain our SELL rating on SAIL as its expansion plan continues to get delayed and margins would remain under pressure going ahead. We estimate that the impact on JSPL’s earnings from the new capacities would to an extent be offset by weaker spot power prices and problems related to excavation of power. We believe JSPL is trading near its fair value and maintain our Market Performer rating on the stock.


Financial summary

Company
Reco
CMP
(Rs)
TP
(Rs)
Returns (%)
PAT CAGR FY13-16E (%)
FY16 EV/EBIDTA
FY16 P/E
Bhushan Steel
SELL
449
403
(10.2)
4.2
9.5
21.2
JSPL
MP
265
263
(0.8)
12
5.1
6.1
JSW Steel
SELL
979
830
(15.2)
26.8
5.4
8.8
SAIL
SELL
59
52
(11.9)
3.8
6.7
9.5
Tata Steel
BUY
363
430
18.5
167
4.6
5.5
Source: Company, India Infoline Research
 

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