For domestic players, they too have seen steel prices gaining since November 2017. Indian steel producers had seen domestic demand getting impacted by the implementation of the goods and services tax (GST) during the first half of FY18 (mainly the June quarter). They also had to bear the brunt of higher steel imports in Q2. Steel imports surged 48 per cent year-on-year to 2.6 million tonnes (mt) in Q2. The quarter, however, saw good operational gains, helped by higher steel prices and cost efficiencies.
Domestic realisations have started improving further, after a brief lull. And this should rub off well on their performance. After some price hikes in the current quarter (Q3) and improving long-steel product prices over the past 15 days, analysts at IIFL expect companies
to report an improvement in realisations on a sequential basis. They expect margins to increase for steel producers, on the back of higher blended realisations and strong volumes, as production cuts in China would also mean lower dumping in global markets. Consequently, they maintain a positive view of the sector. Among stocks, they prefer Tata Steel and JSW Steel.
The larger impact of Chinese production cuts will be visible from January. This will rub off positively on global steel prices, thereby benefitting Indian steel producers, say analysts at PhillipCapital. They see the trend helping Indian steel producers from the March 2018 quarter.
The recent surge in raw material prices, including those of coal and iron ore, will also support steel prices globally and in India. But, in such a scenario, domestic players which have secure access to these inputs will tend to benefit more (higher margins), as those which import/outsource raw materials will be pushed to pass on the increases to customers.
Domestic demand, too, is expected to improve. Q3 onwards is seasonally a strong period, as construction activities pick up. Also, the impact of the disruption due to GST is fading, say analysts.
Such are the expected gains that Kotak Institutional Equities expects strong earnings improvement (led by margin expansion) over the next two-three quarters for Indian steel players. This, according to the brokerage, could exceed their full-year estimates on the operating front. The brokerage remains positive on Tata Steel, JSW Steel and Jindal Steel & Power, while PhillipCapital has a buy rating on Tata Steel, JSW Steel and SAIL.
Capacity utilisations on the rise: