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Strength in steel prices augurs well…

Domestic steel prices have witnessed strong traction over the last eight to nine months, registering a sharp increase in the aforementioned period. Currently, domestic hot rolled coil (HRC) prices (ex-Mumbai) are at | 62500/tonne, up 71% from the July 2020 low of | 36500/tonne. Healthy traction was witnessed in international steel prices also. Over the last three months, Chinese steel HRC export price has increased by 35% to US$890/tonne in April 2021 from US$660/tonne in January 2021. Healthy demand both on the global as well as domestic front has aided this uptick in steel prices auguring well for steel players.

Upward revise EBITDA/tonne estimates…

On the back of continued strength in both global and domestic steel prices, we upward revise our EBITDA/tonne estimate for Tata Steel, JSW Steel and SAIL. For Tata Steel standalone operations, we now model EBITDA/tonne of | 17135 for FY21E (upward revise from | 16500/tonne earlier), | 18000 for FY22E (upward revise from | 15000/tonne earlier) and | 17250 for FY23E (upward revise from | 15000/tonne earlier). For JSW Steel standalone operations, we now model EBITDA/tonne of | 12715 for FY21E (upward revise from | 11750 /tonne earlier), | 15000 for FY22E (upward revise from | 11500/tonne earlier) and | 14250 for FY23E (upward revise from | 11500/tonne earlier). For SAIL, we now model EBITDA/tonne of | 8725 for FY21E (upward revise from | 8250 /tonne earlier), | 8500 for FY22E (upward revise from | 6750/tonne earlier) and | 7750 for FY23E (upward revise from | 7000/tonne earlier)

Debt reduction drive augurs well

Over the last few quarters, steel companies have reduced debt notably. During FY21, SAIL reduced its gross debts by ~| 16150 crore to | 35330 crore (provisional) as on March 31, 2021 compared to | 51481 crore as on March 31, 2020. During 9MFY21, Tata Steel reduced its consolidated net debt by | 18609 crore to | 86170 crore as on December 31, 2020.

Valuation & Outlook

Domestic steel players are currently in a sweet spot on the back of a) continued strength in steel prices both on the global and domestic front, b) operating at healthy capacity utilisation levels on the back firm demand, c) balance sheet improvement on the back of debt repayment exercise undertaken by domestic players. We value Tata Steel on an SoTP basis and arrive at a target price of | 1150 (earlier target price of | 750), upgrading Tata Steel from HOLD to BUY. We value SAIL at 5.5x FY23E EV/EBITDA and arrive at a target price of | 130 (earlier target price | 90), maintaining our BUY recommendation. We value JSW Steel at 6.5x FY23E EV/EBITDA and arrive at a target price of | 675 (earlier target price | 400), maintaining HOLD recommendation on JSW Steel.

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