Growth levers intact for steel players as rupee, firm demand support prices

Tata Steel, JSW Steel, SAIL and Jindal Steel to benefit from improving prices helped by better demand and rupee depreciation

The rupee’s depreciation against the dollar and strong domestic demand continue to support steel prices, buoying stock prices for entities in the sector, unlike the volatility seen in most other commodity stocks.

Tata Steel and JSW Steel, the two most favoured ones among analysts, have significantly outperformed the broader indices over the past three months. The trend is likely to sustain, say the analysts, who believe Steel Authority of India (SAIL) and Jindal Steel and Power (JSPL) will also gain.

Flat steel products, used for making automobiles, white goods and the like, saw prices hiked last month by ~500-1,000 a tonne. Analysts expect a similar rise in October, too. Prices of long steel products, which find use in construction, have risen since their August low.

Finished steel consumption growth, up from 3.1 per cent in 2016-17 to 7.8 per cent in 2017-18, is to maintain a high single-digit in FY19, says Fitch Ratings.
 

One reason for the higher steel pricing is rupee depreciation, which is curbing hitherto cheaper import. The government has also increased its restriction on import. Firm prices of raw materials such as coal and iron ore are another reason.

Analysts say China’s customs data for September reinforces their preference for ferrous product companies. The first nine months of 2018 saw Chinese steel export decline 11 per cent from a year before to 53 million tonnes (mt), says Edelweiss Research data; also, domestic inventory is down 44 per cent from March. The brokerage maintains its buy rating on the stocks of Tata Steel, JSW, JSPL and SAIL.

Tata Steel, analysts say, is benefiting from its integrated operations. Its expansion at Kalinganagar in Odisha's Jajpur district are driving volumes at a time when steel prices are ruling firm. Also, (captive) iron ore supplies from Tata Steel have started flowing to the Bhushan Steel plant it had acquired, helping it raise output and profit. Also, the company recently announced acquisition of Usha Martin’s 1-mt integrated capacities. This is expected to add to earnings after a turnaround and improved product mix, once the acquisition is complete.

Notably, Tata Steel’s current net debt to operating earnings is comfortable at 3.6 times, leaving it scope for further such acquiring. An analyst at a foreign brokerage says the country's strong steel demand cycle should continue for another three years, leading to significant debt reduction for Tata Steel in the next two years.

For JSW Steel, analysts see further operational efficiency aiding its profit, while volume would get a boost after 2020-21 from upstream expansion at its Dolvi (Maharashtra) and Vijayanagar (Karnataka) units. Its recent acquisitions abroad are also estimated to add to operating profit from the second half of this financial year.

SAIL and JSPL are in the process of stabilising their expanded capacities and also seen as beneficiaries of the upswing in the steel cycle.