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India Equity Research Reports, IPO and Stock News
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End of China tightening could be the inflexion point for India steel equities
Domestic demand has improved, prices stabilising
Abatement of cost pressures to support steelmakers’ margins in 2HFY12
Steel valuations look attractive, Tata Steel remains our top pick
Waiting for an inflexion point
End of China tightening could be the inflexion point for steel
Steel equities have underperformed YTD on concerns about policy tightening in
China and high production levels. Chinese steel production continues to surprise
on the upside, staying above the 700m tonnes per annum (tpa) level since
January 2011 despite softening of headline economic indicators. Contrary to our
earlier expectations, output at smaller mills appears to be unaffected by power
cuts. China’s steel exports have also risen in recent months, due partially to
reduced steel output in Japan. While the threat of high Chinese exports could be
a near-term overhang on India steel equities’ performance, an end to the current
tightening –expected by July-August 2011 by our China economics team – should
allow for a recovery in steel demand and drive steel equities’ performance.
Domestic demand has improved; Prices stabilising
Our channel checks with steel dealers indicate that domestic steel offtake has
improved since March 2011, when buyers slowed their purchases in anticipation
of price declines. Steel prices seem to have stabilised over the last month, with
ex-factory HRC prices currently at INR32,000-33,000/tonne. With regional prices
moving up by USD20-30/tonne in the last two weeks, we believe that steel
producers could be looking at small price hikes.
Easing of cost pressures to help 2HFY12 steelmakers’ margins
We expect steelmakers’ margins to come under pressure in 1HFY12 but improve
in 2HFY12 as raw material cost pressure abates. 2QFY12 coking coal contracts
have been settled at USD315/tonne, down from USD330/tonne in 1QFY12.
Furthermore, with our expectation of softening spot iron ore prices beginning
2QFY12 – and consequent drop in 3QFY12 contract prices – we believe the
margin pressure will ease in 2HFY12. We also believe that the impact of a sharp
rise in 1QFY12 coking coal prices should be spread over both 1QFY12 and
2QFY12, as producers are carrying 30-45 days of inventories, especially for
coking coal.
BUY on 6- to 12-month view, Tata Steel stays our top pick
We maintain our ratings on Tata Steel (BUY), JSW Steel (BUY) and SAIL
(HOLD). We have revised our TPs for Tata Steel (to INR758 from INR778), JSW
Steel (to INR1,176 from INR1,154) and SAIL (to INR148 from INR174), based on
our new assumptions (see Exhibits 22-24). While steel equities could stay weak in
the near term, we are positive on the 2H11 and 2012 demand outlook. With
stocks having retreated to attractive valuations – which are below global peers
(Exhibit 25) and close to historical averages – we suggest accumulating steel
names on a 6- to 12-month view. Tata Steel stays our top pick in the sector with
high raw material integration in its Indian business and multiple catalysts over the
next 9-12 months, followed by JSW Steel and SAIL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
End of China tightening could be the inflexion point for India steel equities
Domestic demand has improved, prices stabilising
Abatement of cost pressures to support steelmakers’ margins in 2HFY12
Steel valuations look attractive, Tata Steel remains our top pick
Waiting for an inflexion point
End of China tightening could be the inflexion point for steel
Steel equities have underperformed YTD on concerns about policy tightening in
China and high production levels. Chinese steel production continues to surprise
on the upside, staying above the 700m tonnes per annum (tpa) level since
January 2011 despite softening of headline economic indicators. Contrary to our
earlier expectations, output at smaller mills appears to be unaffected by power
cuts. China’s steel exports have also risen in recent months, due partially to
reduced steel output in Japan. While the threat of high Chinese exports could be
a near-term overhang on India steel equities’ performance, an end to the current
tightening –expected by July-August 2011 by our China economics team – should
allow for a recovery in steel demand and drive steel equities’ performance.
Domestic demand has improved; Prices stabilising
Our channel checks with steel dealers indicate that domestic steel offtake has
improved since March 2011, when buyers slowed their purchases in anticipation
of price declines. Steel prices seem to have stabilised over the last month, with
ex-factory HRC prices currently at INR32,000-33,000/tonne. With regional prices
moving up by USD20-30/tonne in the last two weeks, we believe that steel
producers could be looking at small price hikes.
Easing of cost pressures to help 2HFY12 steelmakers’ margins
We expect steelmakers’ margins to come under pressure in 1HFY12 but improve
in 2HFY12 as raw material cost pressure abates. 2QFY12 coking coal contracts
have been settled at USD315/tonne, down from USD330/tonne in 1QFY12.
Furthermore, with our expectation of softening spot iron ore prices beginning
2QFY12 – and consequent drop in 3QFY12 contract prices – we believe the
margin pressure will ease in 2HFY12. We also believe that the impact of a sharp
rise in 1QFY12 coking coal prices should be spread over both 1QFY12 and
2QFY12, as producers are carrying 30-45 days of inventories, especially for
coking coal.
BUY on 6- to 12-month view, Tata Steel stays our top pick
We maintain our ratings on Tata Steel (BUY), JSW Steel (BUY) and SAIL
(HOLD). We have revised our TPs for Tata Steel (to INR758 from INR778), JSW
Steel (to INR1,176 from INR1,154) and SAIL (to INR148 from INR174), based on
our new assumptions (see Exhibits 22-24). While steel equities could stay weak in
the near term, we are positive on the 2H11 and 2012 demand outlook. With
stocks having retreated to attractive valuations – which are below global peers
(Exhibit 25) and close to historical averages – we suggest accumulating steel
names on a 6- to 12-month view. Tata Steel stays our top pick in the sector with
high raw material integration in its Indian business and multiple catalysts over the
next 9-12 months, followed by JSW Steel and SAIL.
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