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Geared to ride turbulence
Translation of earnings to cash
flows key to stock performance
Action: Cutting TPs in view of uncertain economic environment
We believe recent weakness in the share prices of steelmakers has
already priced in the negative surprise of high raw material prices. There
are more drivers of fundamental upside, in our view, and we recommend
investing accordingly. Still, the uncertain economic environment remains
arguably the biggest risk. We revise our target prices and earnings
estimates to take this into account.
Catalysts
Impending volume growth: All the Indian steel companies under our
coverage have expansion plans lined up for commissioning in the next
2-3 years. This will drive volume-led earnings growth, in our view.
Resilient steel prices: With raw material prices remaining high, we don’t
expect steel prices to fall from current levels. Concerns regarding
overcapacity in India are unjustified, in our opinion. We believe India will
have a balanced demand-supply scenario in the near term.
Cash flows to improve: FY11 was a difficult year for steel companies as
high raw material prices not only squeezed margins but resulted in a
sharp increase in working capital. We expect working capital to stabilise
at current levels and incremental cash flows can be used for expansion
and debt payments.
Stock picks: TATA Steel most preferred
TATA Steel is our top pick in the Indian metal space, given the following:
1) with volume growth, we expect its cash flows to improve in FY13F
and debt to decline; 2) its more streamlined European operations; and 3)
its investments in raw material projects will enter production next year.
SAIL is our next pick on inexpensive valuations, together with largescale expansion, modernisation and efficiency improvements (although
the earnings impact is still 2-3 years away, in our view).
Though still a BUY, JSW Steel is our least preferred pick in the Indian
steel universe due to its lack of captive raw materials.
We are cautious on independent iron ore producers in India, and hence
initiate coverage of SESA Goa with a NEUTRAL rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��\
Geared to ride turbulence
Translation of earnings to cash
flows key to stock performance
Action: Cutting TPs in view of uncertain economic environment
We believe recent weakness in the share prices of steelmakers has
already priced in the negative surprise of high raw material prices. There
are more drivers of fundamental upside, in our view, and we recommend
investing accordingly. Still, the uncertain economic environment remains
arguably the biggest risk. We revise our target prices and earnings
estimates to take this into account.
Catalysts
Impending volume growth: All the Indian steel companies under our
coverage have expansion plans lined up for commissioning in the next
2-3 years. This will drive volume-led earnings growth, in our view.
Resilient steel prices: With raw material prices remaining high, we don’t
expect steel prices to fall from current levels. Concerns regarding
overcapacity in India are unjustified, in our opinion. We believe India will
have a balanced demand-supply scenario in the near term.
Cash flows to improve: FY11 was a difficult year for steel companies as
high raw material prices not only squeezed margins but resulted in a
sharp increase in working capital. We expect working capital to stabilise
at current levels and incremental cash flows can be used for expansion
and debt payments.
Stock picks: TATA Steel most preferred
TATA Steel is our top pick in the Indian metal space, given the following:
1) with volume growth, we expect its cash flows to improve in FY13F
and debt to decline; 2) its more streamlined European operations; and 3)
its investments in raw material projects will enter production next year.
SAIL is our next pick on inexpensive valuations, together with largescale expansion, modernisation and efficiency improvements (although
the earnings impact is still 2-3 years away, in our view).
Though still a BUY, JSW Steel is our least preferred pick in the Indian
steel universe due to its lack of captive raw materials.
We are cautious on independent iron ore producers in India, and hence
initiate coverage of SESA Goa with a NEUTRAL rating.
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