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Domestic demand continues to improve

Operational data released by steel companies suggest that domestic demand has improved significantly. Capacity utilization has ramped up significantly during 3QFY21. India’s steel consumption increased by ~6% YoY to ~26.5mt in 3QFY21. However, the improvement in domestic demand was much higher at 9% YoY in Nov-Dec’20. Operational data for steel companies underscores the current strength in domestic demand. While demand for flat products started improving in late 2QFY21, the same for long steel has picked up significantly in Dec’20. We expect domestic demand to remain strong, led by an all-round improvement in demand from Auto, White Goods, and Construction and Infrastructure segments.

Domestic steel demand continues to recover

* India’s finished steel consumption improved 6% YoY in Dec’20 to 9.15mt (+5% MoM). During 3QFY21, consumption improved ~6% YoY to 26.5mt.

* India’s finished steel exports declined 19% YoY (+3% MoM) in Dec’20 to 0.62mt, while imports increased 17% YoY to 0.51mt (+46% MoM), which indicates improved domestic demand.

* The strong recovery in steel demand has been largely led by flat steel products (demand from Auto, White Goods, etc.). This has been well supported by pickup in demand from the Construction and Infrastructure segment of late. We expect domestic demand to improve further in 4QFY21 on the back of strong demand trends and low-base effect.

Domestic steel inventories remain lower on strong demand

* Steel inventories with Indian companies have exhibited a declining trend since Apr’20. Finished steel inventories stood at 11mt as of Nov’20 end (v/s 13.9mt in Apr’20).

* We estimate inventories to decline to less than 11mt in Dec’20 (v/s 12.9mt in Dec’19).

Our coverage universe registers flat volumes in 3QFY21

* Our coverage universe reported steel sales of 14.6mt (+0.3% YoY, -3.8% QoQ) in 3QFY21. We note that 3QFY21 has a high base as inventory dilution and greater exports in 3QFY20 and 2QFY21 had led to strong volumes for Indian mills.

* TATA reported a 4% YoY decline (-8% QoQ) in sales volumes to 4.85mt (~5.6% above our estimate) in 3QFY21. However, its domestic sales were higher by 8% QoQ/4% YoY at 4.16mt. The quarter saw share of exports decline to ~11% v/s 24%/15% in 2QFY21/3QFY20. Growth in domestic sales was led by Auto (+48% QoQ) and Retail (+5% QoQ). Production grew by ~4.2% YoY to 4.67mt. Tata Steel Europe (TSE) reported ~10% YoY decline in sales volumes to 2.11mt, despite 4% higher production at 2.61mt. The management said it has built-up inventories in anticipation of a strong demand recovery in 4QFY21.

* SAIL reported a 5.6% YoY growth in 3QFY21 sales volumes to 4.3mt (2% below our estimate). Domestic volumes increased 9% YoY (+14% QoQ) to 4.05mt. Exports comprised ~6% of sales v/s ~9%/16% in 3QFY20/2QFY21. Crude steel production grew by 9% YoY to 4.37mt.

* JSP reported a 11% YoY growth in 3QFY21 sales volumes (excluding pig iron) to 1.78mt (factored in our estimates), with exports share further declining to ~21% v/s 38% in 2QFY21. Production grew 19% YoY (supported by a ramp-up in its Angul DRI plant) to 1.93mt. During Dec’20, it achieved ~100% capacity utilization at its Angul and Raipur plants.

* JSTL crude steel production grew by ~6% YoY to 4.08mt in 3QFY21. We estimate it to report sales of ~3.9mt, a decline of 4% YoY. JSTL’s capacity utilization improved to 91% in 3QFY21 from 86% in 2QFY21.

JSP is top our pick

* JSP, with ~70% share of long products in its portfolio, is our preferred pick from the sector. We have a Buy rating on the counter with a TP of INR375 (27% upside from current levels). We estimate 10%/15% CAGR in standalone volumes/consolidated EBITDA over FY20-23E. We expect the company to reduce its net debt by INR185b (INR181/share) to INR194b (including acceptances) over FY20-22E through strong FCF generation, led by higher EBITDA and lower capex.

* We rate JSTL a Buy with a TP of INR466, but have a Neutral rating on TATA (TP of INR687) and SAIL (TP of INR81).

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