India Materials --9% INR depreciation positive for Indian materials:JPMorgan

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9% INR depreciation broadly offsets LME correction, effectively
increases steel prices: Base metals on the LME have corrected 5-8%
(Aluminum -5%, Zinc -6%, Lead -8%) since July, USD prices of steel
are up 4%, iron ore 8%, while INR has depreciated by 8% during the
same time. Underlying Indian Material equities have corrected sharply
in the same time period on fears of demand/prices for commodities. In
our view, the INR depreciation 'for the time being essentially has
negated the underlying commodity price decline’ and would limit
the impact on the P&L for the Sept/Dec quarter from the
commodity price decline, especially for the base metal companies.
 Import parity pricing model: Indian material companies work on the
import parity pricing model, and hence the USD/INR rate is a key
variable for domestic pricing. For steel companies, domestic steel prices
have not increased in sync with import price increase given weak
demand and increasing domestic supply and have lagged import price
increases. However, we calculate import HRC prices have increased by
12% since July (combination of INR and $ steel price change), while in
our view, domestic HRC prices have only increased by 4% in the same
time period. We expect Indian steel companies to increase prices over the
next 1-2 months (assuming INR does not appreciate sharply from here)
as some of the steel mills also face increasing costs on iron ore (JSW).
 Negative impact on costs and interests: All Indian steel mills import
coking coal, and while $/MT contract prices are coming off ($285 v/s
$330), the INR depreciation would limit the benefits. Foreign currency
debt (across JPY/USD mainly) including convertibles, accounts for 18-
40% of total debt across key companies like TATA, JSW, SAIL, STLT
and HNDL. Hence interest costs would likely increase.
 Net Net EPS impact ranges from: For every 1% INR change, we
estimate the EPS impact at 1-3% across the above companies
(adjusting for higher ASP, costs (raw material and interest) ranges from)
and essentially the benefits far out weigh the costs from INR
depreciation and the highest EPS benefits are for the more levered
companies like JSW (3%) and least for STLT (1%). However, for steel
companies, seasonal demand recovery is very much required for
companies to be able to push through price increases as domestic supply
continues to out strip demand.