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Duty relief: A respite, but not a bloom

We believe the Government of India’s (GoI) decision to roll back the duties imposed on ferrous and stainless steel products in May-22 (Link) is a welcome step. However, due to the falling steel demand and low prices, globally, the benefits are likely to be marginal. Key points: 1) Exports margin/volume is likely to improve; 2) domestic price hikes may remain muted in view of adverse import parity; 3) margins across secondary steel (DRI-IF) value chain may improve, resulting in iron ore prices bottoming out; and 4) stainless steel players are likely to benefit. Overall, while domestic steel prices are unlikely to increase substantially, we believe a significant sector headwind has been removed. That said, the street would be wary of the likely imposition of duties in future, if prices are sharply up. We perceive the event to be a sector re-rating, and hence, raise the valuation multiples of all ferrous stocks under our coverage by 10%- corresponding to similar profitability level, as pre-export duty. We retain BUY on JSPL with a revised TP of Rs605 (earlier: Rs550), Jindal Stainless- revised TP of Rs210 (earlier: Rs180) and Shyam Metalics- revised TP of Rs425 (earlier: Rs355). We upgrade NMDC to ADD (earlier REDUCE) with a revised TP of Rs120 (earlier: Rs102) and SAIL to REDUCE (earlier SELL) with a revised TP of Rs75 (earlier: Rs65). We maintain SELL on JSW Steel with a revised TP of Rs550 (earlier: Rs475). We keep the TP of APL Apollo unchanged (Rs1,225) as being a downstream convertor, it is unlikely to get impacted by any change in duty regime

* Duty relief might not lead to sharp steel price uptick: In our view, the roll-back of export duties imposed in May22’ is unlikely to lead to any sharp uptick in steel prices as: 1) Export opportunities are restricted as global steel consumption outlook has worsened; 2) domestic prices are at a historic premium to imports; 3) somestic steel consumption has been weak, post festival season; and 4) any sharp uptick in steel prices may prompt the government to re-think about the duty roll-back. That said, we believe low-channel inventory may provide support to prices in near term.

* Stainless steel players and DRI-IF chain would benefit the most: In our view, stainless steel players especially Jindal Stainless is likely to benefit as the production disruption in Europe, owing to the ongoing energy crisis, would enable the company to redeem exports and push volume growth. In case of DRI-IF value chain, the export duty on pellets (45%) had resulted in a crippling blow to the prices through the value chain. The resumption of pellet exports in DRI-IF value chain will benefit Shyam Metalics. Besides, we believe higher pellet price would improve pellet-iron ore spread leading to prices of the latter bottoming out, benefitting NMDC.

* Outlook- valuation re-rating on cards: We perceive the roll-back of export duties as a valuation re-rating event, rather than an earnings upgrade trigger. Hence, we raise our valuation multiples by 10% each for all ferrous companies, factoring in profitability estimates in pre-export duty scenario. We maintain JSPL (TP: Rs605) as our top pick in ferrous space. We upgrade NMDC (TP: Rs120) to ADD and SAIL to REDUCE (TP: Rs75). Among smaller players, we believe Jindal Stainless (TP: Rs210) and Shyam Metalics (TP: Rs425) will be the key beneficiaries.

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