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Steel
Equity Research
N-t headwinds on macro concerns; remove Tata from CL, retain Buy
Sector underperformance driven by rising macro risks
The Indian Steel sector has underperformed the BSE Sensex by 15% ytd.
This, in our view, has been driven by: (1) macro concerns over the
domestic / global economy in a period of rising inflation and tightening
interest rates; (2) concerns over margin compression as steel industry is
not expected to pass through the input cost increase in coking coal and
iron ore, due to a benign demand environment; (3) a few stock-specific
issues - like regulatory actions (JSW Steel), project delays (SAIL), concerns
over leverage in a rising interest rate environment (Bhushan Steel), and
performance of significant subsidiaries (Tata Steel).
Tight raw material markets, high prices imply margin compression
We are revising our FY12-14 EPS estimates by -29% to +1% based on
higher commodity price assumptions for our coverage group. Sea-borne
traded coking coal as well as iron ore markets remain tight due to
continued surge in Chinese steel output and constrained supplies. We
expect a 300bps compression in margins for our coverage group, on an
average. In such an environment, companies with captive raw material
sources will add to their comparative advantage in margins and returns.
European outlook remains uncertain, remove Tata Steel from CL
Our European Steel team has reduced expectations for European steel
demand growth and pricing, in response to the recent cuts to global GDP
growth forecast by our Global ECS Research team. We incorporate these
changes, and cut Tata Steel Europe’s EBITDA/ton estimate for
FY12E/13E/14E to US$55/69/75 (from US$65/75/74), driving a 15%-21% cut
to our EPS estimates. Consequently, we revise our 12-month P/B-based TP
to Rs688 (from Rs774), and given the risks to European outlook, remove
Tata from Conviction List (but retain a Buy rating due to attractive
valuations) as we see better value elsewhere in our coverage.
Buy JSW Steel; Neutral on SAIL, Bhushan Steel
We cut our 12-mo. P/B-based TP for JSW Steel to Rs909 (from Rs1,140) and
retain Buy rating. We also retain a Neutral on SAIL – with a new 12-month
P/B-based TP of Rs132 (from Rs153) and on Bhushan Steel with 12-month
P/B-based TP of Rs425 (from Rs 441)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steel
Equity Research
N-t headwinds on macro concerns; remove Tata from CL, retain Buy
Sector underperformance driven by rising macro risks
The Indian Steel sector has underperformed the BSE Sensex by 15% ytd.
This, in our view, has been driven by: (1) macro concerns over the
domestic / global economy in a period of rising inflation and tightening
interest rates; (2) concerns over margin compression as steel industry is
not expected to pass through the input cost increase in coking coal and
iron ore, due to a benign demand environment; (3) a few stock-specific
issues - like regulatory actions (JSW Steel), project delays (SAIL), concerns
over leverage in a rising interest rate environment (Bhushan Steel), and
performance of significant subsidiaries (Tata Steel).
Tight raw material markets, high prices imply margin compression
We are revising our FY12-14 EPS estimates by -29% to +1% based on
higher commodity price assumptions for our coverage group. Sea-borne
traded coking coal as well as iron ore markets remain tight due to
continued surge in Chinese steel output and constrained supplies. We
expect a 300bps compression in margins for our coverage group, on an
average. In such an environment, companies with captive raw material
sources will add to their comparative advantage in margins and returns.
European outlook remains uncertain, remove Tata Steel from CL
Our European Steel team has reduced expectations for European steel
demand growth and pricing, in response to the recent cuts to global GDP
growth forecast by our Global ECS Research team. We incorporate these
changes, and cut Tata Steel Europe’s EBITDA/ton estimate for
FY12E/13E/14E to US$55/69/75 (from US$65/75/74), driving a 15%-21% cut
to our EPS estimates. Consequently, we revise our 12-month P/B-based TP
to Rs688 (from Rs774), and given the risks to European outlook, remove
Tata from Conviction List (but retain a Buy rating due to attractive
valuations) as we see better value elsewhere in our coverage.
Buy JSW Steel; Neutral on SAIL, Bhushan Steel
We cut our 12-mo. P/B-based TP for JSW Steel to Rs909 (from Rs1,140) and
retain Buy rating. We also retain a Neutral on SAIL – with a new 12-month
P/B-based TP of Rs132 (from Rs153) and on Bhushan Steel with 12-month
P/B-based TP of Rs425 (from Rs 441)
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