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We Like Steel; Cautious On Cement
Sector strategy — Steel: Steel prices near bottom with restocking and
construction recovery providing triggers in mid-2011. Non-ferrous metals:
We think that double-whammy of a stronger China and a weaker US$ will
continue to run in 2011 and support prices. Cement: Though less bearish
than a year ago, we are cautious due to rapid capacity increase and not so
cheap valuations.
Steel – limited downside — Steel prices should recover on likely restocking,
construction demand recovery and stable Chinese output. For Indian steel
producers, the outlook is relatively positive as demand remains robust –
steel consumption in 1HFY11 grew 10% to 29.8mt and we estimate growth
of atleast 8-10% during FY11-13E. JSW Steel would be our top pick with
~35-40% volume growth in FY12. Longer term, a global steel recovery would
benefit Tata Steel (improving balance sheet and inexpensive valuations).
Non-ferrous – Hindalco well poised — Non-ferrous metals have been strong
in the past six months and could have downside price risk due to high
inventories, a strengthening dollar (near term) and risk of new supply. We
continue to favour Hindalco in the non-ferrous space as its domestic
business is low cost and Novelis’ margins are relatively insulated from LME
price volatility. Sterlite would look interesting if it corrects further.
Cement – oversupply concerns — Cement stocks have bounced over the last
three months on artificially bolstered cement prices, and also on underownership/
contrarian investing. While there is ‘long-term outlook’ support to
this bounce, with the weak prices/earnings outlook (12 months), high
valuations, and cost pressures, we view that stock prices have run ahead.
We remain cautious on the sector but like Grasim on a relative valuation call.
non-ferrous producers; 2) Steel companies would be negatively impacted by
coking coal short supply due to – supply constraints from existing/new
producers and increasing demand (mainly India); 3) Continued price
strength, delays in capacity and higher-than-expected demand growth would
benefit cement producers.
Top Buys and Sells — Top buys: 1)JSW Steel – strong volume growth,
improving balance sheet; 2) Tata Steel – expected steel price recovery and
demand, inexpensive valuations, stronger balance sheet. Top sell: Ambuja
Cements – relatively expensive at an EV/t of US$159.
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