Steel stocks extend rally; JSW Steel, Tata Steel hit fresh 52-week highs

Both production and consumption of steel have consistently been improving since April 2020
Shares of steel companies continued their northward movement with sector giants such as Tata Steel and JSW Steel hitting their respective 52-week highs on Thursday after they reported a strong earnings during the recently concluded quarter.

JSW Steel gained 5 per cent to quote at Rs 354 and Tata Steel rallied 4 per cent to Rs 565 in their intra-day trade today while Steel Authority of India (SAIL) and Jindal Steel and Power (JSPL) were up 7 per cent and 6 per cent, respectively. At 02:37 pm, the S&P BSE Metal index, the top gainer among sectoral indices, was up 3 per cent as compared to a 0.51-per cent gain in the S&P BSE Sensex.

Tata Steel has rallied 38 per cent in the past one month, as against a 10 per cent rise in the benchmark index. The company delivered strong results in India with broad-based, market-leading volume growth, and strong cash flow generation in September quarter (Q2FY21). The company's Ebitda (earnings before interest, taxes, depreciation, and amortisation) from India operations surged 4.1 times sequentially and 49 per cent year-on-year (y-o-y) to Rs 6,025 crore driven by higher volumes, improved realisations, and cost efficiencies.

After 13 years of trying to operate in one of the most difficult environments (stringent carbon norms, weak import controls), Tata Steel is again trying to exit Europe. Its plan to sell the Netherlands business (Ijmuiden) to SSAB is a win-win situation for all, say analysts. Emkay Global Financial Services has upgraded Tata Steel to Buy with target price of Rs 638 per share driven by strong steel and weak RM cost environment. The possibility of the divestment of Ijmuiden operations will deleverage balance sheet faster and re-rate the stock, it said.

Meanwhile, domestic steel production and consumption continued to improve in October 2020 both sequentially as well as on y-o-y basis. Both production and consumption of steel have consistently been improving since April 2020.

"Capacity utilisation levels of crude steel improved with the unlocking of the economy and recovery in demand initially on the back of higher international demand before domestic demand began to pick-up which eventually moderated export. After hitting bottom in April 2020 at 27 per cent, capacity utilisation rate of crude steel returned to year-ago level of 76 per cent in October 2020," CARE Rating said in October month steel update report.

As regards the sector outlook, the rating agency said the domestic steel production and consumption is expected to remain steady going forward in October-March (H2FY21). "For the whole year FY21, we expect crude steel production to be lower by 10-12 per cent and consumption to be lower by 14-17 per cent, mainly impacted by poor first half. While large players have reported faster return to normalcy after covid-19 impact, the recovery by smaller players are expected to be long and protracted due to their limited diversification and weaker financial flexibility," it said.

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