Indian steel demand growth remained subdued in February 2013 at 3.5% year-on-year (y-o-y), while year-to-date (YTD) demand growth at 4.1% is below our estimate of 4.9%. Indian steel consumption has been 66.7mn tonnes during January – February period of FY13.
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While Indian steel production has picked up over last 4-5 months on the back of commissioning of new capacities, demand growth has remained subdued, resulting in companies focusing on export markets to push higher volumes.
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Exports from India have picked up during February to 613kt (up from 415kt in January 2013) and India was a marginal net importer during the month. However, YTD, India remains a net importer of 2.4mt (imports at 7.2mt and exports at 4.8mt).
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Tata Steel and JSW Steel had earlier indicated that they would be focussing on exports to push surplus production and it is reflecting in increased exports as well.
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While global steel prices have been strong during past 2-3 months (Chinese HRC export prices up $50/t, i.e. 8%, European domestic HRC prices up $50-60/t, i.e. 7%), Indian domestic prices have remained largely subdued.
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Since Indian steel demand still remains weak, companies are finding it difficult to take price hikes despite trading at a 5-8% discount to import parity.
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We believe restocking of inventory is largely over now and we should see a moderation in steel price momentum.
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We expect global steel prices to moderate from current levels given: 1) inventory restocking is largely complete; and 2) we would gradually be moving to seasonally weak demand period. At the same time, we expect global iron ore prices to moderate from current levels of $150/t (to $130/t), thereby reducing marginal cost of production.
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After the recent correction, Indian steel stocks are trading cheap: Tata Steel at 5.8x FY14F EV/EBITDA and 5.4x FY15F EV/EBITDA, SAIL at 7.9x FY14F EV/EBITDA and 6.3x FY15F EV/EBITDA and JSW Steel at 5.3x FY14F EV/EBITDA and 5.1x FY15F EV/EBITDA.
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Though we don’t see a near-term trigger for the stocks to outperform, TATA Steel remains our top pick in the sector given: 1) profitability should improve with the ramp-up of 2.9mtpa expansion; 2) production from coke oven battery; 3) residual benefits of lower coking coal prices; and 4) commissioning of cold rolled mill in 2HFY14F.
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Source: Nomura
