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Removal of export duty on steel; long term positive…

In a bid to provide a fillip to the domestic steel industry and boost exports, the government has restored the status quo, which was prevailing prior to May 22, 2022. The government has withdrawn the 15% export duty on steel products (which was earlier levied during May 2022). Steel products now attract nil export duty compared to 15% earlier. The removal of export duty is a significant relief and a long term positive for the domestic steel sector. The government has also withdrawn the export duty on iron ore lumps and fines below 58% Fe content and iron ore pellets. Export of iron ore lumps and fines above 58% Fe content will now attract a lower duty of 30% (reduced from 50% earlier). The import duty concessions on anthracite/PCI coal, coking coal, coke & semi coke and ferronickel have also been withdrawn. All these changes in duty came into effect from November 19, 2022.

Removal of export duty augurs well for domestic steel players

* The removal of export duty augurs well for domestic steel players, albeit over a longer term horizon. Global steel demand has turned subdued since May 2022, which has put downward pressure on steel prices. As steel prices in the global market are currently muted, hence export volumes are likely to pick up notably only when international prices recover. However, the recent step of removal of export duty on steel products does provide an opportunity for domestic players to enhance their export volume notably as and when global steel prices strengthens

* Even though current domestic HRC prices are at a premium to landed cost of imports, the recent relief measure is likely to aid in keeping domestic steel prices stable around current levels in the near term. While we do not expect a major uptick in domestic steel prices, we believe a significant sector headwind has been removed.

* Stainless steel players viz. Jindal Stainless (JSL) & Jindal Stainless (Hisar) (JSHL) are expected to be the key beneficiaries. Currently, the export market is more favourable for stainless steel players compared carbon steel players as European players have curtailed production due to the ongoing energy crisis. With the recent relief, the share of exports is expected to increase for both JSL and JSHL. Earlier, for JSL, the share of exports had declined to 5% in Q2FY23 (25% in FY22) while JSHL’s share of exports had declined to 8% in Q2FY23 (15% in FY22). Going forward, we expect the share of exports to increase from Q2FY23 level. The recent relief also augurs well for volume growth in FY24, as JSL is planning to commission its 1 million tonnes per annum (MTPA) stainless steel capacity in Q4FY23

Valuation and Outlook

The removal of export duty augurs well for domestic steel players albeit over a longer term horizon. Global steel demand has turned subdued since May 2022, which has put downward pressure on steel prices. As steel prices in the global market are currently muted, hence export volumes are likely to pick up notably only when global prices recover. However, the recent step of removal of export duty on steel products does provide an opportunity for domestic players to enhance their export volume notably as and when the global steel prices strengthens. While we do not expect a major uptick in domestic steel prices, we believe a significant sector headwind has been removed. Hence, we upward revise our EV/EBITDA multiple for JSW Steel, Tata Steel and NMDC. We also marginally upward revise our EBITDA/tonne estimate for Tata Steel and JSW Steel and sales volume estimate for JSW Steel. With respect to stainless steel players, we upward revise our EBITDA/tonne estimate for Jindal Stainless and Jindal Stainless (Hisar). We maintain our BUY rating on Jindal Stainless and Jindal Stainless (Hisar) and upgrade Tata Steel and NMDC from HOLD to BUY. We continue to maintain our HOLD rating on JSW Steel and SAIL.

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