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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Global weakness a concern, but India stocks discounting a distress scenario
Action: Stocks are building in distress; we recommend buying
After the recent correction, India steel stocks are factoring in steel prices of
USD550/t (current prices ~USD630/t), at which close to 50% of global
capacity should turn unprofitable despite the fall in raw material prices, as
per World Steel Dynamics. We don’t expect such a capitulation in steel
prices to be sustained and hence remain positive on the sector. We prefer
integrated steelmakers such as TATA Steel and SAIL in our coverage
universe, although TATA Steel is our top pick, given near-term catalysts
such as 2.9 mtpa expansion by FY12.
Catalysts: Q3FY12 to be weak, but a recovery likely from Q4FY12
We expect Q3FY12 to be a weak quarter on: 1) a seasonal slowdown and
2) companies still using high-cost raw materials. However, with lower raw
material costs and seasonal improvements in the demand scenario,
Q4FY12 should record an earnings rebound, in our view.
Valuations: Stock price correction sharper than earnings downgrade
We believe steel stocks in general have been de-rated as stock prices
have come off more than the cut in consensus earnings estimates. Current
multiples for global peers are close to 10.5x P/E and 5.6x EV/EBITDA,
while India steel stocks are trading at 5-6x P/E and 4.5-4.7x EV/EBITDA.
India steel stocks have generally traded in the range of 8-12x P/E and 5-7x
EV/EBITDA (during the past five years).
In this report, we cut target prices for steel firms under our coverage by 20-
30%, driven by the 15-25% earnings estimate cuts and 5-10% cut in target
multiples as we believe stocks should trade near the low end of historical
multiples, as we don’t expect a significant recovery in the steel cycle given
headwinds from global economic uncertainties (although nor do we expect
a deterioration in the steel cycle from current levels).
We don’t expect utilization issues for India firms as even 5-6% demand
growth would keep domestic steel demand-supply balanced.
While coking coal prices have fallen to USD240/t (from USD300/t in
Q2FY12), iron ore prices have rebounded to USD140/t (from USD120/t
in Oct-11). This is an ideal scenario for India steelmakers, in our view, as
they are dependent on imported coking coal, but source iron ore locally.
We concur with global concerns, but
Indian firms appear to be in a different
league
India steel stocks have been under pressure on account of concerns over global
economic growth as well as internal issues such as the ban on iron ore mining in
Karnataka. While we acknowledge the deterioration in global steel demand and the
pricing outlook, we believe the INR depreciation has shielded India’s domestic prices.
We believe the market has failed to recognise the two key distinct features of the India
steel industry: 1) high visibility on capacity utilisation (despite just 2.9% growth YTD,
India companies have operated at rated capacity); and 2) profitability advantage from
iron ore integration – India companies don’t face the structural issue of margin
compression on account of higher iron ore prices.
Our China analyst, Matthew Cross, has highlighted that the Chinese steel sector (and we
believe it is true for most of the global steelmakers) is facing structural issues, where any
profit potential is being captured by miners (especially iron ore). Therefore, we can
conclude that Indian companies are structurally better than their global peers owing to
captive iron ore. However, Indian steel stocks have not been treated any differently by
the market, and are in fact trading at a discount to their global peers.
We are building in a weaker steel outlook with: 1) our steel price (HR coil FOB)
assumptions down from USD700/t to USD625/t for H2FY12 and FY13F; 2) lower coking
coal price estimate to USD240/t from USD265/t. We lower our earnings estimates by 10-
20% and TPs by 20-30% for companies under our coverage. However, we remain
positive on India companies as these stocks are building in a much worse scenario. We
prefer integrated steelmakers such as TATA Steel and SAIL in the sector, though TATA
Steel is our top pick on near-term catalysts such as 2.9mtpa expansion at Jamshedpur.
Global uncertainty, coupled with domestic issues, has led to
a steep stock price correction
Globally, steel stocks have been under pressure on account of the debt crisis in Europe
and concerns over a softening in China’s demand, in our view. In India, stocks such as
JSW Steel have suffered from internal issues such as shortage of iron ore due to the ban
on mining in Karnataka. Global steel prices have corrected by more than 10% during the
past two months, driven by the uncertain demand environment in Western countries and
the expectation of a slowdown in China. Even raw material prices have corrected
sharply, with iron ore prices falling by close to 35% to USD120/t during October 2011.
However, iron ore prices have since increased to USD140/t.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Global weakness a concern, but India stocks discounting a distress scenario
Action: Stocks are building in distress; we recommend buying
After the recent correction, India steel stocks are factoring in steel prices of
USD550/t (current prices ~USD630/t), at which close to 50% of global
capacity should turn unprofitable despite the fall in raw material prices, as
per World Steel Dynamics. We don’t expect such a capitulation in steel
prices to be sustained and hence remain positive on the sector. We prefer
integrated steelmakers such as TATA Steel and SAIL in our coverage
universe, although TATA Steel is our top pick, given near-term catalysts
such as 2.9 mtpa expansion by FY12.
Catalysts: Q3FY12 to be weak, but a recovery likely from Q4FY12
We expect Q3FY12 to be a weak quarter on: 1) a seasonal slowdown and
2) companies still using high-cost raw materials. However, with lower raw
material costs and seasonal improvements in the demand scenario,
Q4FY12 should record an earnings rebound, in our view.
Valuations: Stock price correction sharper than earnings downgrade
We believe steel stocks in general have been de-rated as stock prices
have come off more than the cut in consensus earnings estimates. Current
multiples for global peers are close to 10.5x P/E and 5.6x EV/EBITDA,
while India steel stocks are trading at 5-6x P/E and 4.5-4.7x EV/EBITDA.
India steel stocks have generally traded in the range of 8-12x P/E and 5-7x
EV/EBITDA (during the past five years).
In this report, we cut target prices for steel firms under our coverage by 20-
30%, driven by the 15-25% earnings estimate cuts and 5-10% cut in target
multiples as we believe stocks should trade near the low end of historical
multiples, as we don’t expect a significant recovery in the steel cycle given
headwinds from global economic uncertainties (although nor do we expect
a deterioration in the steel cycle from current levels).
We don’t expect utilization issues for India firms as even 5-6% demand
growth would keep domestic steel demand-supply balanced.
While coking coal prices have fallen to USD240/t (from USD300/t in
Q2FY12), iron ore prices have rebounded to USD140/t (from USD120/t
in Oct-11). This is an ideal scenario for India steelmakers, in our view, as
they are dependent on imported coking coal, but source iron ore locally.
We concur with global concerns, but
Indian firms appear to be in a different
league
India steel stocks have been under pressure on account of concerns over global
economic growth as well as internal issues such as the ban on iron ore mining in
Karnataka. While we acknowledge the deterioration in global steel demand and the
pricing outlook, we believe the INR depreciation has shielded India’s domestic prices.
We believe the market has failed to recognise the two key distinct features of the India
steel industry: 1) high visibility on capacity utilisation (despite just 2.9% growth YTD,
India companies have operated at rated capacity); and 2) profitability advantage from
iron ore integration – India companies don’t face the structural issue of margin
compression on account of higher iron ore prices.
Our China analyst, Matthew Cross, has highlighted that the Chinese steel sector (and we
believe it is true for most of the global steelmakers) is facing structural issues, where any
profit potential is being captured by miners (especially iron ore). Therefore, we can
conclude that Indian companies are structurally better than their global peers owing to
captive iron ore. However, Indian steel stocks have not been treated any differently by
the market, and are in fact trading at a discount to their global peers.
We are building in a weaker steel outlook with: 1) our steel price (HR coil FOB)
assumptions down from USD700/t to USD625/t for H2FY12 and FY13F; 2) lower coking
coal price estimate to USD240/t from USD265/t. We lower our earnings estimates by 10-
20% and TPs by 20-30% for companies under our coverage. However, we remain
positive on India companies as these stocks are building in a much worse scenario. We
prefer integrated steelmakers such as TATA Steel and SAIL in the sector, though TATA
Steel is our top pick on near-term catalysts such as 2.9mtpa expansion at Jamshedpur.
Global uncertainty, coupled with domestic issues, has led to
a steep stock price correction
Globally, steel stocks have been under pressure on account of the debt crisis in Europe
and concerns over a softening in China’s demand, in our view. In India, stocks such as
JSW Steel have suffered from internal issues such as shortage of iron ore due to the ban
on mining in Karnataka. Global steel prices have corrected by more than 10% during the
past two months, driven by the uncertain demand environment in Western countries and
the expectation of a slowdown in China. Even raw material prices have corrected
sharply, with iron ore prices falling by close to 35% to USD120/t during October 2011.
However, iron ore prices have since increased to USD140/t.
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