Published on 24/11/2020 10:54:33 AM | Source: Motilal Oswal Financial Services Ltd

Metal Sector Update - Further hike in steel prices indicates strong demand By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #Metals Sector #Sector Report #Motilal Oswal Financial Services Ltd

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Further hike in steel prices indicates strong demand

Domestic steel producers have raised HRC prices by INR1,000-2,000/t for Oct’20 deliveries. This is contrary to expectations of a decline in prices in Oct’20 as prices in China have dropped by ~4% in Sep’20. As highlighted in our report ‘Bouncing back strongly, stay positive,’ we believe this hike underscores the current strength of domestic demand for flat products (led by recovery in auto and white goods) and tight market supply.


Demand recovery and tight supply leads to hike in flat steel prices

Domestic steel producers have raised HRC and CRC prices for Oct’20 deliveries. Domestic HRC prices now stand at INR43,000-43,500/t whereas CRC prices stand at ~INR52,000/t. On cumulative basis, steel mills have hiked HRC steel prices by INR7,000-7,500/t since Jul’20. The improved demand outlook is driven by strong recovery in automotive, consumer durables and other white goods, etc. We believe the robust demand in flat rolled steel is also driven by replenishing of inventories by end-users amidst tight supply of HRC, even as inventories remain low in the system. Further, export commitments of domestic steel mills for Oct’20 delivery are further likely to keep the supply situation tight in India.


Domestic HRC moving contrary to regional prices

Contrary to China steel prices, which have declined by ~USD25/t in both domestic and export markets during Sep’20, Indian steel mills have raised prices. Domestic HRC prices, which stood at parity to landed cost of imports from South Korea (USD555/t CNF India) are now trading at a ~5% premium post this hike (to USD585/t). China export prices have declined to USD503/t (USD528/t CNF India). The price trend in China, post the national holidays (which will be over in a week), would determine the direction for regional and domestic steel prices. If prices in China do not improve post the holidays, Indian prices could be at risk as 10% premium to Chinese prices would be unsustainable for long. This is because imports would rise substantially.


Expect recovery in long steel prices with demand recovering post monsoons

With monsoons nearly ending, we expect demand for long steel products from construction and infrastructure segments to also start recovering, which should prop up prices of long products (rebar, etc.). The recovery in long steel product prices has remained subdued compared to flat rolled steel as rebar prices are still at INR1,500/t lower YTD FY21 (while HRC is higher by ~INR5,000/t). Our analysis of the past 10-year pricing trend suggests longs have outperformed flats by ~INR1,500/t on average in 2H of the fiscal (i.e. Oct-Mar), driven by a seasonal uptick in demand.


Prefer longs over flats; JSPL is top pick

* We prefer longs over flats in the Indian steel sector as we expect rebar prices to be strong, led by the seasonal (post-monsoon) uptick in construction activity.

* Thus, with ~70% share of long products in its portfolio, JSP is our preferred pick in the sector with TP of INR238 (25% upside). Over FY20-22E, we also estimate strong 10%/16% CAGR in standalone volumes/EBITDA. Coupled with the Oman divestment, this should drive 37% fall in consolidated net debt to INR239b. Thus, net debt/EBITDA should decline to 2.7x, the lowest in India’s steel sector.

* We also rate JSTL a Buy with TP of INR300, but rate Tata Steel (TP of INR380) Neutral on concerns related to its European business.

* We also rate SAIL Neutral with TP of INR35 as leverage remains a key concern.


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