SAIL, Vedanta jump up to 7% on rise in steel demand, improved FY21 outlook

Analysts at JP Morgan remain positive on the sector amid improving demand scenario
Shares of steel stocks including Steel Authority of India Ltd (SAIL), Jindal Steel and Vedanta, jumped as much as 7 per cent on the National Stock Exchange (NSE) on Tuesday after India turned net exporter of steel on a year-on-year basis for the period between April, 2019 and February, 2020.

Among individual stocks, SAIL soared 6.7 per cent to Rs 29.10 on the NSE, followed by gains in Vedanta (6.4 per cent), Jindal Steel (6.3 per cent), Tata Steel (6.2), National Aluminium Company (5 per cent), and Hindalco (4.4 per cent). Besides, NMDC, JSW Steel, Hindustan Copper, Moil, and Hindustan Zinc advanced between 2.7 per cent and 4.9 per cent.

As per the Joint Plant Committee (JPC), India's steel consumption grew 3.8 per cent YoY in the period April'19- February'20 to 92.6 MT and turned into a net exporter with exports improving 34.9 per cent to 7.8 MT and finished steel imports declining 10.4 per cent YoY to 6.4 MT. Furthermore, domestic steel demand, analysts at Antique Stock Broking say, is expected to recover in FY21e with the thrust on infrastructure and gradual improvement in liquidity.  

"Domestic steel demand is expected to recover in FY21e with the thrust on infrastructure and gradual improvement in liquidity. We lower our steel realization assumptions by 5 per cent over FY21/FY22 to reflect the subdued international pricing scenario and demand risks posed by the corona virus leading to a downward revision in target prices by 29-42 per cent across our
coverage universe," they wrote in a recent sector report. The brokerage firm maintains 'BUY' rating on Tata Steel (target price: Rs 333), JSPL (target price: Rs 145), and 'HOLD' ratings on SAIL (target price: Rs 27) and JSW Steel (target price: Rs 188).

At 10: 55 am, the Nifty Metal index was ruling as the top gainer among the NSE key sectoral indices, up 4.52 per cent, at 1,809.35 level. In comparison, the Nifty50 index was at 9,387.40, up 2 per cent.

Analysts at JP Morgan, too, remain positive on the sector amid improving demand scenario. Even while acknowledging the elevated steel inventories in China and slow demand improvement, analysts at the Brokerage believe India would be limited at least over the next couple of months, supporting domestic steel prices. 

"FY20 was among the weakest years for demand in India. Demand across the board has slowly but surely improved from November onwards, and in our view FY21 should be better than FY20. Admittedly, if credit markets freeze again in India, and flow of credit and finance slows down, demand recovery could get delayed," it cautioned. 

Those at Kotak Institutional Equities, also, expect a sharp recovery in profitability of steel companies in 4QFY20E with Rs 2,500-3,000/ton sequential increase in EBITDA/ton. Higher steel prices (Rs3,000-3,500/ton qoq) and benefits of declining coking coal prices in 2HCY19, they say, would only be partially offset by stronger iron ore.

"We have cut our FY2021E EBITDA estimates by 11/10/8% for Tata Steel/JSW Steel/JSPL mainly led by cut in steel price forecast to US$485/ton (from US$500/ton) for FY2021E. Our fair values consequently reduce—TATA to Rs480 (from Rs560), JSPL to Rs205 (form Rs240) and JSW to Rs270 (from Rs290). JSPL remains our top pick followed by TATA and JSW. Valuations have corrected to 4-5X EV/EBITDA FY2022E or 15-20% below mean and offer attractive risk-reward," they say. 

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