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Steels - India
Domestic fundamentals
moderating; lowering POs
„Maintain cautious stance on SAIL, Tata & JSPL; keep Buy on JSW
We lower POs for Indian steel cos. by 3-10% due to moderating fundamentals &
near term margin risks. We expect domestic prices to correct further near term
due to rising headwinds. Lower steel prices & higher coking coal costs should
lead to margin pressure near term. We have cut our FY12e EPS by 1-5% (4-20%
below consensus) as marginally higher steel price est. (on MTM/ higher costs) is
offset by higher costs. Despite recent pull back in Indian steel equities, we stay
cautious near term & stock selective given earnings risks & scope for further derating, though stock-specific factors may lead to divergence in performance.
Further downsides for domestic steel prices
Domestic HRC is now at Rs35,000/t, down 7% from recent peak. We see further
downside risks as seasonally weaker 2H demand is exacerbated by 1)
deceleration in domestic demand led by rising interest rates; 2) high producer-end
inventories & destocking; 3) higher threat of imports as regional prices correct due
to softer demand in 2H and moderation of input costs from current peak levels.
Softer fundamentals: moderating demand + supply increase
Our economist recently cut India’s FY12E GDP to 7.8% (-40bp) on increasing
headwinds from rising interest rates. Infra/ construction capex are lagging and
recent autos sales vols. data show deceleration in growth. Also, destocking has
started earlier than normal, leading to inventory build up at producers’ end. We
expect domestic steel demand to slow to 9.2% (10.3% YoY in FY11) in FY12.
Nearly 12mt of capacity (9.5mt in HRC, 29% of flat product demand) is likely to be
added in FY12, though we expect supply increase to come through mainly in FY13.
Imports have slowed, but remains a threat
Imports have faded over the past six months as higher iron ore costs have set a
floor on Chinese export prices. However, our worry is that softer Chinese demand
in 2H and moderation of iron ore prices from current peak levels may increase
competitiveness of Chinese exports. Also, recent sharp correction in prices in CIS
(15% of India’s imports) has made imports from CIS more profitable (3% discount
to domestic prices). CIS mills are integrated and unaffected by input costs.
SAIL least preferred: Margin concerns, muted growth
SAIL is least preferred due to 1) margin concerns on rising input costs & structural
decline in profitability due to wage hike; 2) muted volume growth; & 3) rich
valuation. We are cautious on Tata Steel on 1) margin concerns at Corus post
June Q due to input cost hikes; 2) decline in margins from peak levels; 3) dilution
risks as capex intensity rises. Maintain Buy on JSW as 1) volume increase should
drive growth despite margin pressure; 2) cost savings may cushion cost pressure;
& 3) negatives are likely priced in post 28% correction over the past six months.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steels - India
Domestic fundamentals
moderating; lowering POs
„Maintain cautious stance on SAIL, Tata & JSPL; keep Buy on JSW
We lower POs for Indian steel cos. by 3-10% due to moderating fundamentals &
near term margin risks. We expect domestic prices to correct further near term
due to rising headwinds. Lower steel prices & higher coking coal costs should
lead to margin pressure near term. We have cut our FY12e EPS by 1-5% (4-20%
below consensus) as marginally higher steel price est. (on MTM/ higher costs) is
offset by higher costs. Despite recent pull back in Indian steel equities, we stay
cautious near term & stock selective given earnings risks & scope for further derating, though stock-specific factors may lead to divergence in performance.
Further downsides for domestic steel prices
Domestic HRC is now at Rs35,000/t, down 7% from recent peak. We see further
downside risks as seasonally weaker 2H demand is exacerbated by 1)
deceleration in domestic demand led by rising interest rates; 2) high producer-end
inventories & destocking; 3) higher threat of imports as regional prices correct due
to softer demand in 2H and moderation of input costs from current peak levels.
Softer fundamentals: moderating demand + supply increase
Our economist recently cut India’s FY12E GDP to 7.8% (-40bp) on increasing
headwinds from rising interest rates. Infra/ construction capex are lagging and
recent autos sales vols. data show deceleration in growth. Also, destocking has
started earlier than normal, leading to inventory build up at producers’ end. We
expect domestic steel demand to slow to 9.2% (10.3% YoY in FY11) in FY12.
Nearly 12mt of capacity (9.5mt in HRC, 29% of flat product demand) is likely to be
added in FY12, though we expect supply increase to come through mainly in FY13.
Imports have slowed, but remains a threat
Imports have faded over the past six months as higher iron ore costs have set a
floor on Chinese export prices. However, our worry is that softer Chinese demand
in 2H and moderation of iron ore prices from current peak levels may increase
competitiveness of Chinese exports. Also, recent sharp correction in prices in CIS
(15% of India’s imports) has made imports from CIS more profitable (3% discount
to domestic prices). CIS mills are integrated and unaffected by input costs.
SAIL least preferred: Margin concerns, muted growth
SAIL is least preferred due to 1) margin concerns on rising input costs & structural
decline in profitability due to wage hike; 2) muted volume growth; & 3) rich
valuation. We are cautious on Tata Steel on 1) margin concerns at Corus post
June Q due to input cost hikes; 2) decline in margins from peak levels; 3) dilution
risks as capex intensity rises. Maintain Buy on JSW as 1) volume increase should
drive growth despite margin pressure; 2) cost savings may cushion cost pressure;
& 3) negatives are likely priced in post 28% correction over the past six months.
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