The ferrous sector’s impressive year-on-year price growth for 11 successive quarters, which lasted till December quarter, took a pause as benchmark prices of domestic hot-rolled coil (HRC) and rebar witnessed some correction. However, the recent price recovery of more than Rs 2,000 a tonne for flat steel resulted in per tonne prices increasing to Rs 42,000 as against an average of Rs 41,660 anticipated for the March quarter. Long steel prices, which remain unchanged at Rs 37,500/tonne, are also holding up firm. There’s more support to domestic prices as demand momentum picks pace in China. Rebar and HRC prices in China have gone up by 5 per cent and 3 per cent, respectively, on a month-on-month basis as per recent data from Edelweiss Research. The rising Chinese demand and steel prices
bode well as it will curtail cheap inflows into India. Notably, even domestic steel demand
remains firm. Analysts at Antique Stock Broking expect domestic steel demand
to grow by 7 per cent in FY20 helped by demand from infrastructure, affordable housing and goverment policies favouring domestic procurement. Domestic spot HRC prices have now stabilised at Rs 42,500 per tonne and with this, the brokerage maintains its ‘buy’ rating on steel stocks -- namely, Tata Steel
(Jindal Steel & Power), while retaining positive view on SAIL and JSW Steel.
continues to benefit from its capacity expansions and is likely to post its highest-ever quarterly volume of 1.5 million tonne (mt) in Q4. Improving power sector outlook should also help the company. The expectation for FY20 volume growth is strong with 3.2 mt blast furnace possibly achieving 11,000 tonne per day (tpda). Its 1.8 mt direct reduced iron plant may resume production during the year. Analysts at Edelweiss have revised their FY20 and FY21 sales volume estimates by 8 per cent and 4 per cent, respectively, leading to 4 per cent upwards revision in FY20-FY21 operating profit.
SAIL, too, is expected to benefit from higher capacities installed and clock sales volume growth of 15 per cent in Q4. Realisations, though, may decline by over a per cent due to short-term price disturbance seen in February this year. Revenue growth is forecasted at 14 per cent year-on-year by Motilal Oswal Securities.
For JSW Steel, its good spell is expected to continue in FY20 as well, with Motilal Oswal Securities revising their estimates to account for lower debt and working capital and hence leading to their target price upgrade by about 12 per cent to Rs 336 apiece.
Meanwhile, the upside for Tata Steel
stock is expected from its captive raw material facility, ongoing expansions and turnaround of acquisitions. In Q4, Tata Steel’s domestic sales jumped by 51 per cent year-on-year, leading to a 17 per cent increase in domestic revenues and 8.5 per cent improvement in adjusted operating profit. Analysts say that while restructuring efforts undertaken over the years in the European and South East Asia plants will bode well, enhanced focus on the more profitable Indian operations will drive prospects. Attractive valuations for at 8x-10x FY20 earnings (barring JSPL
at 25x FY20 earnings) also supports the investment case for most stocks.