Roll-back of export duty on steel has no near-term earnings upside: Experts

Analysts perceive the roll-back of export duties on steel as a valuation re-rating event, rather than an earnings upgrade trigger

The government's decision to remove export duty on steel products, and raw materials may not have a positive impact on earnings in the near-term, caution analysts, who fear a worsening global situation may limit upside.

"Global situation is now worse than what it was in May, 2022 -- when the duties were imposed. HRC (hot-rolled coil) exports are still not viable for domestic steel producers – thus, exports would likely remain low," said Ashish Kejriwal and Jyoti Singh of Nuvama Institutional Equities.

According to analysts, low regional prices in foreign countries prompted steel producers to accelerate imports, making India a net importer for the first time in 18 months in October.

Simultaneously, Indian exports have plummeted 55 per cent year-to-date (YTD) in fiscal 2022-23 (FY23). Domestic prices are now at a 6-7 per cent premium to import parity prices, whereas export prices are 25 per cent lower than domestic prices. Given the discount, analysts fear exports are unlikely to increase after the removal of the duty, and do not see any near-term benefit to steel producers.

Those at global brokerage Citi concurred and said that though the decision to scrap export duty on steel is sentimentally positive, and will drive recovery, it won't provide much support to domestic prices in the near-term.

Domestic steel prices have corrected by 25 per cent in the last six months, as against global prices correction of 30-35 per cent, mainly due to weak demand in China amid strict Covid-zero policy, and macro headwinds in the Western world.

Meanwhile, an increase in export duty with a decline in demand from pellet producers, and collapse in iron ore exports due to unviable economics created domestic oversupply, and forced down iron ore prices to almost export parity levels.

"NMDC has cut iron ore prices by 46 per cent YTDFY23, mainly due to the increase in export duty, and a fall in seaborne prices. Now, the reduction of export duty increases the export parity floor by ~Rs 1,000/ton, and should allow miners to take significant price hikes in the near-term," said Sumangal Nevatia of Kotak Institutional Equities.

He has raised NMDC EBITDA estimates by 9 per cent/27 per cent/38 per cent for FY23/24/25E, and has raised fair value to Rs 160 (from Rs 130), as he expects NMDC to be the biggest beneficiary of the government’s move.

The government, on November 18, rolled back export duty on iron ore with grades lower than 58 per cent to nil (50 per cent earlier), while export duty on iron ore with grades higher than 58 per cent has been reduced to 30 per cent (50 per cent earlier).

Export duty on pellets has been rolled back to nil, while export duty on pig iron, hot-rolled/cold-rolled alloy, and non-alloy flat steel products of 600mm or more in width has also been slashed to nil. Further, Centre also reinstated import duty on coking coal, PCI / anthracite coal and ferronickel to 2.5 per cent (nil earlier). Import duty on coke and semi coke has also been reinstated to 5 per cent (nil earlier).

On the bourses, the Nifty Metal, and Nfty50 indices dipped 0.8 per cent each on the National Stock Exchange (NSE) as against 3.4 per cent fall in Welspun Corporation, 2 per cent in Hindalco, 1.7 per cent in JSW Steel , and 1.3 per cent in Tata Steel.

That said, Nuvama Institutional Equities believes with China reopening, demand should improve from FY24, which will help steel stocks to stay afloat. It has increased the valuation multiple of Jindal Stainless, Jindal Steel and Power, JSW Steel, and Tata Steel by 4-10 per cent over FY24.

JM Financial added that the move will likely aid export volumes in the long-term given low base, finished steel inventory build up, and improved competitiveness of India vs Asian countries post roll back of export duty.

ICICI Securities, meanwhile, expects DRI-IF players such as Shyam Metalics; pellet exporters such as Godwari Power & Ispat and Jindal SAW; and stainless steel players like Jindal Stainless to be the key beneficiaries.