More gains ahead for steel stocks

JSW, Tata Steel best-placed to gain most from the sector's re-rating

Steel majors Tata Steel, JSW, SAIL and Jindal Steel (JSPL) saw intra-day gains of two-four per cent on the bourses and closed one-two per cent higher on a day when broader indices closed in the red.  

The trigger was a report by CLSA, which indicated the sector could get re-rated.  The confirmation of anti-dumping duties on some steel products, seen as a  positive for domestic players, improving demand outlook and demand-supply tightening with reduction in capacity expansions should help the sector command higher multiples. The government’s implementation of minimum import price (MIP) has also supported domestic steel realisations.  CLSA sees a high probability of anti-dumping duties on colour-coated steel and wire rods getting extended. Thus, the threat to realisations from cheap imports gets reduced, as various protective measures provide a superior floor price.  

The benefits were evident, as India’s steel imports in FY17 declined 38.3 per cent over a year, while exports surged 102.1 per cent. CARE Ratings data suggest during April-May, exports grew 102 per cent, while imports fell 11.4 per cent, which adds to the confidence. The expectations are that demand, which grew only three per cent annually between FY13 and FY17, should improve, led by infrastructure and housing demand. While CARE expects demand revival in FY18, CLSA feels the government’s affordable housing programme has the potential to add two percentage points to annual steel demand growth starting from the H2 of FY18. CLSA sees demand growth improving to five-seven per cent annually over FY18-21.

 Supply, too, may get constrained, as capacity expansions reduce. The deteriorating global steel industry environment and the highly leveraged balance sheets of Indian steel firms should result in a sharp slowdown in production growth in the coming years, feels CLSA. Thus, while cement sector valuations have expanded from 6x EV/Ebitda over FY08-12 to 18xEV/Ebitda now after confidence increased in better cement price stability, CLSA believes there is a case for re-rating in steel as well.

Among domestic steel players Tata Steel and JSW are best-placed to reap higher benefits. Both have seen significant improvement in operating performance and generate much higher per tonne profitability compared to peers and have better balance sheets. SAIL though lags behind in profitably terms but can see benefits accrue from better demand and realisations.