Early days of optimism for steel firms as prices move up in China

Stock valuations could improve dramatically if demand rebounds and the China policy support comes through

Rising steel prices in China and rising global iron ore prices might mean a rebound for the fortunes of the Indian iron and steel sector. There are expectations that the Chinese government may roll out a stimulus policy which would lead to stronger demand for industrial metals. Domestic demand is also expected to be strong in FY24 due to the infrastructure and construction thrust in the Budget and signs of recovery in automobiles and real estate/ housing. However, there are mixed signals, with domestic HRC (hot-rolled coil) prices declining upon competition from cheap imports.

Optimism about China has led to investor interest in Tata Steel, Jindal Steel & Power (JSPL), JSW Steel, NMDC, and Steel Authority of India (Sail), among others. JSPL in particular is being strongly recommended by influential analysts.

JSPL has projects due for commissioning which would expand capacity by 65 per cent in two phases over the next 12 months while backward and forward integration over FY24-26 should lead to better margins. Some analysts estimate EBITDA and EPS CAGR of 19 per cent and 17 per cent, respectively, over the next three years. A fair amount of the capex will be funded via internal accruals with net debt/EBITDA peaking at a very manageable 0.8x.

The expansion projects are slated to cost Rs 24,000 crore, and be commissioned gradually, starting Q2 of FY24. The projects consist of capacity expansion of 3.3 mtpa (million tonnes per annum) by Q4FY24 and another 3 mtpa in Q2FY26, which will increase JSPL’s total capacity to 15.9 mtpa from 9.6 mtpa currently. The backward integration consists of a 12 mtpa pellet plant, slurry pipeline, and four coal mines which will start commissioning from Q2FY24. The forward integration includes a hot strip mill, thin slab caster, and rail mill to start commissioning from Q3FY24, which would increase volumes and upgrade the product mix. Margins should overall improve by Rs 4,000 per tonne at full capacity. But capex could exceed the announced amount and end up close to Rs 27,000 crore.

JSW Steel reported Q4, FY23 consolidated EBITDA of Rs 7,940 crore, beating expectations due to good returns from Indian subsidiaries. Standalone EBITDA was Rs 6,250 crore, implying an EBITDA per tonne of Rs 11,000 which is up Rs 2,900 per tonne quarter-on-quarter (QoQ) on improved scale of operations. Subsidiary BPSL reported EBITDA of Rs 950 crore in Q4 vs Rs 340 crore in Q3 on account of improved iron ore sourcing. JSW Coated reported EBITDA of Rs 430 crore vs EBITDA loss of Rs 11 crore in Q3. Net debt was down Rs 10,200 crore at Rs 59,300 crore primarily on account of significant improvement in working capital.

The company has announced additional capex of Rs 17,000 crore towards cost savings projects, including a slurry pipeline and sustainable mining. Capex for FY24 is at Rs 19,000 crore as the company continues to aggressively expand capacity.

Tata Steel has consolidated EBITDA of Rs 7,230 crore, and the India business reported sequential increase in earnings due to a decline in raw material costs and higher realisations. Margins in the Europe business remained largely flat on account of lower realisations despite stable costs. Net debt declined sequentially to Rs 67,800 crore (down Rs 3,900 crore QoQ) due to working capital release. The big risk: the UK business will struggle to remain a “going concern” given the economic downturn in Europe and lack of clarity about policy support from the UK government.

It’s early days in the iron and steel cycle. But valuations could improve dramatically if there is a rebound in demand and the China policy support comes through.