Steel Sector - PINC Event Update

Raw material prices decline; steel prices firming up

As per industry reports, Q3FY11 contract price for coking coal, as agreed between Japanese producers and BHP Billiton, has declined by 7% QoQ to USD209/tonne. Contract prices for iron ore could also decline by 10-12% QoQ on lower average spot prices during Jun-Aug'10 period. We believe that the profitability of steel producers would improve sequentially in Q3FY11 on reduced raw material cost and likely bottoming out of steel prices.

In India , steel prices are already showing signs of strength, with hike of Rs1,000-1,500/tonne expected in flat products and Rs500-700 expected in long products in Sep'10. We expect further rise in Q3FY10 on increased demand from construction activities post-monsoon and higher demand for homes, autos and consumer durables with the onset of festive season.

Recommendation

We believe that most of the steel stocks are attractively valued at 3.5-5.2x FY12E EV/EBITDA, given improved steel profitability, volume growth over FY10-FY12E on capacity expansion and focus on resource integration. In large-caps, we maintain 'BUY' on Tata Steel (TP Rs690), JSW Steel (TP Rs1,373) and upgrade SAIL (TP Rs184) to 'HOLD'. Our top picks in mid-caps are Usha Martin (TP Rs120) and Godawari Power (TP Rs298).

Source : Equity Bulls

Keywords