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India Steel
Steel Price Momentum; Companies’ Transformation Process Picking Up
Retain our Attractive industry view; the new pecking
order is JSW, JSPL, SAIL: We are now more positive
on steel price trends than we were earlier. We are
cutting our rating on SAIL to EW as we push out its
expansion profile. We remain OW on JSW, based on the
likelihood of its gain from supportive steel prices and its
attractive valuations. We upgrade JSPL from EW to OW
on its backward integration in an inflationary RM
environment and improved forecasts for profitability of
its projects which are closer to commissioning.
Why we expect steel prices to touch US$800/t in
F12: 1) Our gobal macroeconomics team expects solid,
if unspectacular, global growth from here. 2) Price rallies
in scrap, coking coal and iron ore look more sustainable.
(3) Effective steel surplus in China is falling. (4) Global
industry utilizations are rising steadily, even if slowly. (5)
Steel inventories globally are low or falling.
Our positive stance runs against the tide of
uncertainty and undue skepticism: 1) The Street
seems to be exaggerating the probability of a slump in
the global economy; the impact is most visible in steel
prices, which underperformed copper, iron ore and
coking coal in CY10 by 10% to 32%. 2) Important
production milestones for companies are being brushed
aside.
What’s new: We push up our iron ore and coking coal
assumptions in line with our global commodities team’s
changes. Our steel price forecasts for F11 fall because
of a low base effect, but F12 rises marginally.Our EPS
forecasts are down 6% to 37% for F11-F13. However,
we are still positive on the group, since we expect that
steel prices will: 1) grow substantially from here; and 2)
run ahead of Street expectations, driving positive
earnings surprises in F4Q11.
Why We Are Positive on the Industry
• CY2011 will likely be marked by solid volume growth
and meaningful process improvement. SAIL too
should begin these processes toward year-end.
• We also think 2011 will mark the beginning of
construction at JSW’s greenfield project sites.
Construction of the steelmaking facility at JSPL’s Angul
project should also start.
• Meaningful progress is likely in JSW’s attempts to
start new captive supply sources for iron ore and
coking coal, which we think should be recognized
properly in their stock prices two to three quarters
from now.
• Indian steel stocks are trading at discounts of 16% to
49% to global peers on F12E P/E and EV/EBITDA. In
our view, this reflects an unduly pessimistic outlook
on steel prices.
• We expect steel prices to touch US$800/t by
year-end, which would imply an increase of about
12% from current levels, yet still be 7% lower than the
earlier peak.
• We raise steel price assumptions by 1% in F12 and
prune F11 by 4%. Yet even reflecting higher coking
coal costs in F13, we see steel companies’ EBITDA
per ton expanding materially in F12 over F11.
• In broad terms, we are cutting our EBITDA/t
forecasts due to the unexpectedly low prices in
F3Q11.
• Nonetheless, we still expect meaningful YoY
improvement in EBITDA/t in both F12 and F13.
• In contrast, the Street seems to be quite negative and
apprehensive about sharp margin compression with
rising raw materials prices.
• Indian steel companies are now even closer to
achieving their large projects in expansion, backward
integration, and cost reduction. We see rerating
potential as these milestones are passed.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
India Steel
Steel Price Momentum; Companies’ Transformation Process Picking Up
Retain our Attractive industry view; the new pecking
order is JSW, JSPL, SAIL: We are now more positive
on steel price trends than we were earlier. We are
cutting our rating on SAIL to EW as we push out its
expansion profile. We remain OW on JSW, based on the
likelihood of its gain from supportive steel prices and its
attractive valuations. We upgrade JSPL from EW to OW
on its backward integration in an inflationary RM
environment and improved forecasts for profitability of
its projects which are closer to commissioning.
Why we expect steel prices to touch US$800/t in
F12: 1) Our gobal macroeconomics team expects solid,
if unspectacular, global growth from here. 2) Price rallies
in scrap, coking coal and iron ore look more sustainable.
(3) Effective steel surplus in China is falling. (4) Global
industry utilizations are rising steadily, even if slowly. (5)
Steel inventories globally are low or falling.
Our positive stance runs against the tide of
uncertainty and undue skepticism: 1) The Street
seems to be exaggerating the probability of a slump in
the global economy; the impact is most visible in steel
prices, which underperformed copper, iron ore and
coking coal in CY10 by 10% to 32%. 2) Important
production milestones for companies are being brushed
aside.
What’s new: We push up our iron ore and coking coal
assumptions in line with our global commodities team’s
changes. Our steel price forecasts for F11 fall because
of a low base effect, but F12 rises marginally.Our EPS
forecasts are down 6% to 37% for F11-F13. However,
we are still positive on the group, since we expect that
steel prices will: 1) grow substantially from here; and 2)
run ahead of Street expectations, driving positive
earnings surprises in F4Q11.
Why We Are Positive on the Industry
• CY2011 will likely be marked by solid volume growth
and meaningful process improvement. SAIL too
should begin these processes toward year-end.
• We also think 2011 will mark the beginning of
construction at JSW’s greenfield project sites.
Construction of the steelmaking facility at JSPL’s Angul
project should also start.
• Meaningful progress is likely in JSW’s attempts to
start new captive supply sources for iron ore and
coking coal, which we think should be recognized
properly in their stock prices two to three quarters
from now.
• Indian steel stocks are trading at discounts of 16% to
49% to global peers on F12E P/E and EV/EBITDA. In
our view, this reflects an unduly pessimistic outlook
on steel prices.
• We expect steel prices to touch US$800/t by
year-end, which would imply an increase of about
12% from current levels, yet still be 7% lower than the
earlier peak.
• We raise steel price assumptions by 1% in F12 and
prune F11 by 4%. Yet even reflecting higher coking
coal costs in F13, we see steel companies’ EBITDA
per ton expanding materially in F12 over F11.
• In broad terms, we are cutting our EBITDA/t
forecasts due to the unexpectedly low prices in
F3Q11.
• Nonetheless, we still expect meaningful YoY
improvement in EBITDA/t in both F12 and F13.
• In contrast, the Street seems to be quite negative and
apprehensive about sharp margin compression with
rising raw materials prices.
• Indian steel companies are now even closer to
achieving their large projects in expansion, backward
integration, and cost reduction. We see rerating
potential as these milestones are passed.
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