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Volumes stay strong, more price hikes likely

Operational data reported by Indian Steel companies (TATA, JSTL, SAIL, and JSP) indicate that volumes remained strong in 4QFY21, growing 15% YoY/1% QoQ (Exhibit 12). We believe that mix has risen in favor of exports due to strong realization. Exports rose 126% MoM in Mar’21 to 1.3mt (highest in the last eight months). Indian mills have raised flat Steel prices by INR3,500-4,000/t in Apr’21, which has been absorbed by the market. We believe further hikes are in store in the next few weeks as the Indian HRC prices still trade at a discount of ~INR5000/t to import parity prices. Indian spot Steel spreads are at record highs and are INR1,600/INR3,700 per tonne higher than 4QFY21 levels for rebar/HRC, implying a strong industry performance in 1QFY22E as well. Domestic steel inventories to continue slide down which further bodes well for domestic steel prices.

Domestic Steel production continues to rise, inventories fall

* As per provisional data for Mar’21 reported by Steelmint, India’s crude Steel production rose 7% YoY (2% MoM) to 9.98mt (Exhibit 2).

* India’s Steel consumption grew 41% YoY (on a low base of -34% YoY). However, the same declined 6% MoM to 8.74mt in Mar’21 (Exhibit 3) as companies looked to exports to benefit from strong global Steel prices.

* We expect domestic demand to remain strong, led by a pick-up in infrastructure spends from higher Union Budget allocation in FY22 as well as continued strong demand for Consumer Discretionary goods like Auto and Consumer Durables.

* During FY21, India crude Steel production/consumption declined by 6%/7% YoY to 102.5mt/93.5mt due to 42%/57% YoY dip in 1Q from COVID-led lockdowns.

Net exports highest in the last seven months; inventories dip further

* India’s Steel imports rose 33% YoY (9% MoM) to 501kt, whereas exports rose 126% YoY to 1,293kt – the highest in the last eight months.

* As a result, net Steel exports stood at 792kt, the highest in seven months (Exhibit 4).

* During FY21, India’s exports have increased 29% YoY to 10.8mt, whereas imports declined 30% YoY to 4.8mt.

* Domestic Steel inventories were down 5% MoM to 8.9mt. During FY21, inventories declined by 35% YoY to 8.9mt. Lower inventories bode well for domestic Steel prices (Exhibit 5).

Iron ore prices up 8-15% MoM in Apr’21, coking coal prices remain subdued

* NMDC raised iron ore prices by INR250-500/t for fines and lumps in Apr’21. This hike comes on an INR100-250/t price hike announced in the last week of Mar’21. As a result, NMDC’s prices are higher by INR350-750/t (8-15%) MoM in Apr’21 (Exhibit 6).

* The increase in iron ore prices is attributable to higher prices in Odisha, owing to larger bid premiums in recent auctions. Essel Mining, the largest miner in Odisha, raised prices by INR725/INR1,200 per tonne for fines/lumps in Apr’21.

* Coking coal prices continue to remain subdued and declined 2% WoW (9% MoM) to USD129/t CNF India (Exhibit 7).

HRC prices stay strong, rebar prices rise

* HRC prices in the traders’ market stand at INR60,500/t, up INR5,000 MoM (~9%) and are at a premium of ~INR1,000/t to listed prices of primary producers (Exhibit 9).

* During Apr’21, domestic primary producers raised prices by ~INR4,000/t MoM to INR58,500-59,500/t. AM/NS raised prices a second time in Apr’21 by INR1,000/t after raising prices by INR3,500/t at the start of the month, which indicates that the hike has been absorbed by customers.

* Despite the recent hike, domestic Steel prices are trading at a 7% (~INR5000/t) discount to cost of imports from Korea, which provides room for a further increase in prices (Exhibit 10).

* Primary rebar prices have increased by INR3,500/t MoM to INR52,500/t and are at a premium of INR4,700/t over secondary rebar prices (Exhibit 8).

* As a result, spot Steel spreads remain strong ~INR42,000/INR35,800 per tonne for flats/longs – up an average INR3,800/INR1,600 over 4QFY21 (Exhibit 12).

Regional Steel prices at a new high

* Owing to production curbs in China’s Tangshan region, domestic HRC/rebar prices have increased ~6% WoW each to USD864/USD787 per tonne. Domestic HRC/rebar prices in China are up ~23% since the Lunar Year holidays.

* Chinese Steel players have reduced exports owing to uncertainty over rebates (currently 13%), which has resulted in an increase in export offers from countries like India, Korea, and Japan.

* As a result, export prices have increased by 6-8% in Apr’21 over that as of 31st Mar’21. China HRC export offers stand at USD838/t, up 5% over Mar’21 prices, whereas Korea/Japan export prices stands at USD838/t on a FoB basis.

* India HRC export prices have increased ~13% over that as of 31st Mar’21 to USD890/t in recently concluded deals.

* Domestic prices in Europe and US are at an unprecedented high of USD1,026/t and USD1,288/t, respectively.

* We expect tighter production norms in China to keep domestic prices higher, which, coupled with higher domestic prices in Europe, should support regional pricing.

Our coverage universe volumes are strong in 4QFY21

* Our coverage universe reported Steel sales of 14.7mt (+14.7% YoY, +1.3% QoQ) in 4QFY21 (Exhibit 13).

* On a sequential basis, all companies reported 1-3% growth. However, on a YoY basis, JSTL is expected to post the lowest growth at 6%, whereas SAIL/TATA have reported 14%/16% growth. JSPL reported a 37% volume growth in 4QFY21 on the back of a ramp-up in production and a low base quarter due to maintenance shutdowns.

JSP is our preferred pick followed by SAIL

* We expect HRC prices to remain robust, led by strong domestic demand and higher regional prices. We expect another price hike in the Indian market in the next few weeks as domestic HRC prices are still trading at a discount of ~7% to imports. We expect 1QFY22 to be another record-high margin quarter.

* SAIL and JSP are our preferred picks in the sector as the duo: 1) will be the largest beneficiaries of higher Steel prices, 2) are strong deleveraging plays, and 3) trade at attractive valuations.

* For JSP, we estimate 11%/17% CAGR in standalone volumes/consolidated EBITDA over FY20-23E. This, coupled with the Oman divestment, would result in a 70% fall in consolidated net debt to INR116b. Net debt/EBITDA should, thus, decline to 1x, the lowest for India’s Steel sector.

* For SAIL, we estimate 7%/36% CAGR in volumes/EBITDA over FY20-23E. We estimate a net debt reduction of INR224b (INR54/share) to INR309b (INR75/share) over FY20-23E on the back of higher operating cash flows. We expect higher dividend payouts going forward (implying a yield of ~5%), supported by strong FCF. Net debt/EBITDA should decline to ~2.1x by Mar’22E.

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