Mr. Kamlesh Bagmar - Deputy Head of Research at Prabhudas Lilladher
We expect EBITDA of steel companies under our coverage universe to grow by 11% QoQ due to higher volumes. Sales volume is expected to grow by 19% QoQ due to strong exports demand and usual seasonal pick up in domestic demand. Steel realisations would fall by 1% QoQ/Rs700/t. Costs are expected to increase by 1% QoQ/Rs490/t on account of higher coking coal cost. Owing to higher costs and lower realisations, EBITDA margins would fall by 6.6% QoQ/Rs1,200 to Rs17,150.
Geo-political tensions boosted global commodities: Steel prices increased sharply by ~20% in last one month due to jump in coking coal prices and disruption in steel supplies coupled with ongoing Russia-Ukraine war. Russia and Ukraine combined had net steel exports of 37mnt in CY21, around 10% of global steel exports. Recent lockdowns in China to curb spread of covid-19 further escalated the concerns on supply disruptions. Both these developments destabilized the normalization of steel supplies which was underway post the tragic waves of covid-19. Unlike past, China resorted to restrict its net exports in range of 50-52mnt/year with a defined strategy focusing on sustainable production level, sufficient enough to meet the domestic demand. Underpinned by this structural reduction in steel supplies and competitive intensity of China, we believe that global steel prices and spreads would sustain at elevated levels. Additionally, it would Indian steel producers to further expand their market share in exports market.
Margins to remain elevated: Activity in China is currently impacted due to stringent lockdowns imposed by authorities to curb the spread of Covid-19. However, the activity would revive back strongly in China post reduction in covid-19 cases as Govt is taking all necessary policy measures, especially housing and infrastructure sectors. Revival in demand and under pressure supplies will keep margins on elevated levels in FY23e. Admittedly, the current abnormal level of steel prices at ~USD1,000/t will significantly impact the domestic demand. However, the recent fall in coking coal prices (below pre-war level) will meaningfully ease the cost pressures and resultantly, the sustainable steel prices. This will support healthy steel margins and sustained demand. We expect EBITDA/t to stabilize at normalized level of Rs15,000/20,000 for non-integrated/integrated producers in FY23e. These normalised margins are 30% higher over the historical averages; lower by 25% over FY22e margins.
TATA Steel remains our top pick.: Comfortable B/S, strong profitability in both India & European operations and attractive valuation (4.8x FY23e EV/EBITDA) drive our BUY rating on the stock with TP of Rs1,745, EV/EBITDA of 6.0x FY23e.
Jindal steel and Power (JSP) delivered ~45% in last three months against 2% return in nifty. Despite sharp run-up, we remain positive on stock due to near debt free B/S, strong growth pipeline (63% capacity growth by FY25e to 16mnt) and significant value addition from coal blocks acquired at attractive prices. We maintained BUY with revised TP of Rs615 (earlier Rs555)
Global steel production fell by 5.5% due to contraction in China's production: World crude steel production fell by 5.5% YoY at 299mnt in Jan-Feb'22 due to 10% fall in China's steel production at 158mnt. While, Rest of World's (RoW) production remained flat YoY at 141mn. China's share in world steel production contracted by 265bps YoY to 52.8% in Jan-Feb'22. India's steel production grew 6.6% YoY at 20.9mnt. Production in EU fell 2% YoY at 23.8mnt due to energy issues. Production in Japan fell by 2.2% YoY at 15.1mnt while production in USA remained flat at 13.4mnt. South Korea's production fell by 2.6% YoY to 11.2mnt.