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Record capacity build out by Indian steel companies
The Indian steel industry is in the midst of its strongest ever capex spend and
capacity addition strategy. The cumulative (India dedicated) capex of four
integrated steel producers over the next two years is estimated at INR600bn. A
combination of brownfield expansions and debottlenecking will see Indian crude
steel capacity rise to by ~34mn tonnes over FY12-14. In this note we analyze the
demand/supply dynamics following this capacity buildup and evaluate the return
ratios of Indian steel companies as they complete this historic build out.
Demand supply gap to turn adverse in short term, but structural supply
shortfall seen after FY14
On the back of an impressive ~10% CAGR in steel demand and constrained
supply over the past 8 years, India has turned into a net importer of steel.
However, following the near simultaneous commissioning of the brownfield
expansions of major Indian steelmakers, we estimate ~82mn tonnes of finished
steel production in India in FY13, which is an increase of 16% YoY – the highest
ever. India is likely to see a modest oversupply which will peak in FY13 before
again turning into a shortfall. The shortfall threatens to turn into a structural deficit,
unless the long delayed Greenfield plants are commissioned. This cannot happen
unless land acquisition related issues are addressed, mining approvals are
expedited and environmental and forest clearances are hastened.
Return ratios to remain impressive relative to global peers
While investors have been concerned about the impact of the aggressive capacity
buildup on steel company’s return ratios, our analysis shows that the Indian steel
companies are likely to continue to report superior return ratios relative to their
global peers – through the capex cycle. We estimate Indian steel makers to report
average ROEs of 18.5%/20.4% for FY12/13, significantly ahead of the
13.4%/15.1% for DB’s global steel coverage universe. The superior profitability
and return ratios of Indian steel companies over the forecast period are attributed
to a combination of factors ranging from (1) captive access to raw materials, (2)
increasing thrust on value addition, (3) obsessive focus on cost reduction, low
fixed costs and superior conversion costs, and (4) gains from modernization of
legacy facilities. Asset turnover ratios, which have been suppressed on account of
the aggressive capex are also likely to improve significantly over FY12-14 as
ongoing expansions are commissioned and start generating cash.
Valuations remain favorable, maintain Tata Steel as top pick
P/BV has traditionally been one of the key metrics for finding support levels for the
global steel stocks. Our analysis of P/BV ratios for major Indian steel makers
indicates JSW Steel, Tata Steel and SAIL are trading at a discount to their long
term avg. P/B levels, suggesting the erosion in stock prices looks overdone. Tata
Steel (Buy, TP: INR708/share) remains our top pick within the sector on acct. of its
low cost positioning in India, high value-added product mix and vol. contribution
from brownfield expansion at Jamshedpur. JSW Steel (Buy, TP: INR1,120/share)
trades close to its FY12e BV and offers a good entry point. SAIL (Buy, TP:
INR185/share) trades below its 15 year P/BV avg. An improving visibility on its
modernization and capacity expansion programme should be a key trigger for the
stock. Risks: Higher than anticipated increase in steel making raw material prices)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Record capacity build out by Indian steel companies
The Indian steel industry is in the midst of its strongest ever capex spend and
capacity addition strategy. The cumulative (India dedicated) capex of four
integrated steel producers over the next two years is estimated at INR600bn. A
combination of brownfield expansions and debottlenecking will see Indian crude
steel capacity rise to by ~34mn tonnes over FY12-14. In this note we analyze the
demand/supply dynamics following this capacity buildup and evaluate the return
ratios of Indian steel companies as they complete this historic build out.
Demand supply gap to turn adverse in short term, but structural supply
shortfall seen after FY14
On the back of an impressive ~10% CAGR in steel demand and constrained
supply over the past 8 years, India has turned into a net importer of steel.
However, following the near simultaneous commissioning of the brownfield
expansions of major Indian steelmakers, we estimate ~82mn tonnes of finished
steel production in India in FY13, which is an increase of 16% YoY – the highest
ever. India is likely to see a modest oversupply which will peak in FY13 before
again turning into a shortfall. The shortfall threatens to turn into a structural deficit,
unless the long delayed Greenfield plants are commissioned. This cannot happen
unless land acquisition related issues are addressed, mining approvals are
expedited and environmental and forest clearances are hastened.
Return ratios to remain impressive relative to global peers
While investors have been concerned about the impact of the aggressive capacity
buildup on steel company’s return ratios, our analysis shows that the Indian steel
companies are likely to continue to report superior return ratios relative to their
global peers – through the capex cycle. We estimate Indian steel makers to report
average ROEs of 18.5%/20.4% for FY12/13, significantly ahead of the
13.4%/15.1% for DB’s global steel coverage universe. The superior profitability
and return ratios of Indian steel companies over the forecast period are attributed
to a combination of factors ranging from (1) captive access to raw materials, (2)
increasing thrust on value addition, (3) obsessive focus on cost reduction, low
fixed costs and superior conversion costs, and (4) gains from modernization of
legacy facilities. Asset turnover ratios, which have been suppressed on account of
the aggressive capex are also likely to improve significantly over FY12-14 as
ongoing expansions are commissioned and start generating cash.
Valuations remain favorable, maintain Tata Steel as top pick
P/BV has traditionally been one of the key metrics for finding support levels for the
global steel stocks. Our analysis of P/BV ratios for major Indian steel makers
indicates JSW Steel, Tata Steel and SAIL are trading at a discount to their long
term avg. P/B levels, suggesting the erosion in stock prices looks overdone. Tata
Steel (Buy, TP: INR708/share) remains our top pick within the sector on acct. of its
low cost positioning in India, high value-added product mix and vol. contribution
from brownfield expansion at Jamshedpur. JSW Steel (Buy, TP: INR1,120/share)
trades close to its FY12e BV and offers a good entry point. SAIL (Buy, TP:
INR185/share) trades below its 15 year P/BV avg. An improving visibility on its
modernization and capacity expansion programme should be a key trigger for the
stock. Risks: Higher than anticipated increase in steel making raw material prices)
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