Favourable winds from East signal gains for steel players

Firms witnessing expansion-led volume growth are preferred picks

Steel demand has grown four per cent till August this financial year but the full benefits to manufacturers would accrue now. The June quarter performance was impacted by goods and services tax-led destocking. A correction in international steel prices also weighed on domestic rates. Lower Chinese steel prices meant higher imports into India.

Edelweiss’ channel checks had suggested while demand surged 4.5 per cent year-on-year in August, imports surged 62 per cent at 955,000 tonnes on account of material booked during April-May 2017, when China’s export price dropped to $425430 per tonne. Its export prices are now up 36 per cent at $580 per tonne. Rising prices and expected capacity cuts in China will benefit domestic players.

Deutsche Bank’s analysts say supply-side reforms should reduce China’s total blast furnace capacity by 115 million tonnes by 2018. Moreover, healthy domestic demand should ensure improved capacity utilisation, resulting in recovery of margins of the Indian steel sector.

Domestic per-tonne steel prices in July-August rose ~1,500-2,000 a tonne and by some more in September. Edelweiss says domestic players are expanding their presence in exports, too. These factors should help them to reap benefits of operating leverage in the ensuing months.

Deutsche Bank expects improving asset utilisation and rising margins to drive a 29 per cent compounded annual growth in Ebitda (earnings before interest, tax, depreciation and amortisation) and up to 536 basis points increase in return on equity for Tata Steel and JSW Steel over FY17-19. Analysts’ expectation of demand growing five -six per cent in FY18 also indicates a higher runrate during the second half. This coupled with improving realisations should drive profitability for domestic steel makers but rising input costs (coal) need to be monitored.

Analysts prefer steel players undergoing capacity expansions. Tata Steel, after restructuring of its European business, is likely to concentrate on domestic operations. HDFC Securities says with the lowering of external debt, it can explore both organic and inorganic opportunities domestically.

JSW Steel, too, having expanded capacities and undertaking further expansions, should benefit over time. Analysts at Motilal Oswal Securities have increased their FY19 Ebitda estimates for JSW by four per cent and the stock target price to ~297.

The commissioning of its four-million-tonne blast furnace will double Jindal Steel’s production by the end of FY18 but the Street is watching its debt reduction moves. SAIL is also in the last leg of expansion, but reduction in its per-tonne cost of production is crucial.