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India Equity Research Reports, IPO and Stock News
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INDIA STEEL SUBSECTOR
Shifting sands: Initiating coverage
We argue that sustained hikes in iron ore export duties have subsidised the
domestic steel industry at the expense of miners. This, coupled with the ongoing
mining impasse, make us negative on the iron ore mining space, even as stock
valuations are attractive. We initiate coverage of NMDC and Sesa Goa with a 3-UW.
We see the contours of the Indian steel industry slowly but certainly changing in
favour of the large steel producers. JSPL 1-OW is our top pick, given its superior
business model and strong growth visibility. We rate SAIL 3-UW, given muted
volume growth and cost pressures. Tata Steel (1-OW) offers a favourable riskreward
trade-off, given that peak debt is down (c20%), ROE accretive India
expansion is closer to commissioning and valuations are already factoring in a
negative value for its European operations. We rate JSW Steel as 2-EW, as although
negatives are already in the price, the mining impasse would delay a rerating.
More bullish on the medium-term outlook for Indian steel relative to iron ore mining:
While global iron ore miners have captured value from rising steel prices, rising
regulatory costs in India have capped upside for the Indian miners (read export duties).
In fact, India now has one of the highest taxation regimes on iron ore globally, and could
increase even further if the proposed mining tax and increase in export duties get
implemented. We expect NMDC (3-UW) and Sesa Goa (3-UW) to be negatively impacted
by this trend. Furthermore, ongoing government probes into potential illegal mining is a
further risk to earnings of Sesa Goa (3-UW) and to some extent on JSW Steel (2-EW).
See structural changes in the steel sector benefiting the larger, established players:
While we cannot ignore the short-term risk to steel pricing in India (which has held up
well relative to global prices, due to currency depreciation and supply disruptions), we
expect the larger integrated mills to capture further market share in India at the
expense of the sponge iron producers (whose survival is threatened from declining coal
and gas linkages). The big mills are also forming JVs with technology leaders globally
and improving their product specifications, thus improving long-term margin potential.
Domestic overcapacity is inevitable, but there is an opportunity in sub- segments such
as value-added long products. We see JSPL (1-OW) and Tata Steel (1-OW) benefiting
most from these changes, relative to SAIL (3-UW).
Further increase in regulatory costs and exchange rate are key risks: Over and above
iron ore prices and the risk of increased Chinese exports, we highlight that a further
increase in the regulatory burden for iron ore miners and exchange-rate risks on foreign
currency-denominated debt are two issues investors need to keep an eye on.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INDIA STEEL SUBSECTOR
Shifting sands: Initiating coverage
We argue that sustained hikes in iron ore export duties have subsidised the
domestic steel industry at the expense of miners. This, coupled with the ongoing
mining impasse, make us negative on the iron ore mining space, even as stock
valuations are attractive. We initiate coverage of NMDC and Sesa Goa with a 3-UW.
We see the contours of the Indian steel industry slowly but certainly changing in
favour of the large steel producers. JSPL 1-OW is our top pick, given its superior
business model and strong growth visibility. We rate SAIL 3-UW, given muted
volume growth and cost pressures. Tata Steel (1-OW) offers a favourable riskreward
trade-off, given that peak debt is down (c20%), ROE accretive India
expansion is closer to commissioning and valuations are already factoring in a
negative value for its European operations. We rate JSW Steel as 2-EW, as although
negatives are already in the price, the mining impasse would delay a rerating.
More bullish on the medium-term outlook for Indian steel relative to iron ore mining:
While global iron ore miners have captured value from rising steel prices, rising
regulatory costs in India have capped upside for the Indian miners (read export duties).
In fact, India now has one of the highest taxation regimes on iron ore globally, and could
increase even further if the proposed mining tax and increase in export duties get
implemented. We expect NMDC (3-UW) and Sesa Goa (3-UW) to be negatively impacted
by this trend. Furthermore, ongoing government probes into potential illegal mining is a
further risk to earnings of Sesa Goa (3-UW) and to some extent on JSW Steel (2-EW).
See structural changes in the steel sector benefiting the larger, established players:
While we cannot ignore the short-term risk to steel pricing in India (which has held up
well relative to global prices, due to currency depreciation and supply disruptions), we
expect the larger integrated mills to capture further market share in India at the
expense of the sponge iron producers (whose survival is threatened from declining coal
and gas linkages). The big mills are also forming JVs with technology leaders globally
and improving their product specifications, thus improving long-term margin potential.
Domestic overcapacity is inevitable, but there is an opportunity in sub- segments such
as value-added long products. We see JSPL (1-OW) and Tata Steel (1-OW) benefiting
most from these changes, relative to SAIL (3-UW).
Further increase in regulatory costs and exchange rate are key risks: Over and above
iron ore prices and the risk of increased Chinese exports, we highlight that a further
increase in the regulatory burden for iron ore miners and exchange-rate risks on foreign
currency-denominated debt are two issues investors need to keep an eye on.
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