Tata Steel, JSW Steel are key beneficiaries of the rise in steel demand

Tata Steel and JSW Steel are up 4-6 per cent in the last three trading sessions on improving realisations, expectations of
higher demand and upgrades by rating agencies. Moody’s Investor Service has changed JSW's outlook to positive; Tata Steel’s corporate family moved a notch up (Ba2 from Ba3).

There are more reasons for investors to cheer. Reports indicate that domestic steel prices are going up for a second time in February. Major hot rolled coil steel producers have taken a price hike of Rs 500-Rs 1,000 per tonne after the Rs 750-Rs 1,000 per tonne rise at the beginning of the month. These price hikes in the domestic market arena are coming after a gap of three to four months and should lift investor sentiment. 

This should be a relief for the listed steel stocks, which have been trading at their 52-week lows in recent weeks. The Street was worried about a correction in domestic steel prices on the back of a further slowdown in China and trade war uncertainties. 

Among the reasons for the bearish outlook on steel stocks were volume concerns. While JSW Steel saw its consolidated sales volumes decline by 10 per cent year-on-year, Tata Steel witnessed a 9.04 per cent decline in the December quarter. Analysts at ICICI Securities had revised marginally downward their sales volume estimates for JSW Steel.

The positive, going ahead, is strong demand expectation. Moody's expects India's steel consumption to grow at 5.5-6.0 per cent annually over the next one-two years, supported by domestic demand. Growth is expected to be led by the government's spending on infrastructure projects and revival in demand from the automotive industry. 

Despite volume pressures, companies continued to report strong profitability. 

The other trigger could be the acquisitions made by these companies. The confidence in JSW Steel, which had been acquiring both domestic and international companies, is because of control on costs. Kaustubh Chaubal, Moody’s vice president and senior credit officer, is positive given the improving trajectory of JSW's credit metrics principally due to its competitive and efficient production costs, solid domestic demand conditions and expectation for a supportive ongoing price environment.

JSW’s standalone operations during the December quarter posted a steady Ebitda/tonne of Rs 12,060 versus Rs 9,000 seen in the year-ago quarter and Rs 12,126 in the previous quarter. Consolidated Ebitda, too, rose 16.9 per cent year-on-year to Rs 4,501 crore.

Tata Steel, on the other hand, had reported better profitability (Ebitda/tonne at Rs 16,400) being an integrated player. The company has turned around acquired Bhushan Steel’s operations as Tata Steel BSL (formerly Bhushan Steel) and delivered a strong Ebitda/tonne of Rs 11,000. The acquisitions are driving domestic performance. Analysts at Prabhudas Lilladher said that exit from loss-making European (TSE) and southeast Asian (SEAN) operations would significantly improve the quality of earnings and balance sheet (would reduce debt by 23 per cent or Rs 2,400 crore).

Moody also expects that Tata Steel will remain selective in its acquisitions, funding them with a prudent mix of debt and equity and allowing only a temporary spike in adjusted debt/Ebitda leverage.

The stable demand and price conditions in its domestic market coupled with Tata Steel's strong operating efficiencies and vertical integration were cited as main reasons by Moody’s for the upgrade of Tata Steel's corporate family rating. 

For JSW Steel, Moody's expects adjusted debt/Ebitda in March 2019 to remain flat at 2.6 as in March 2018. Based on sustainable Ebitda/ton of Rs 9,500, Moody's estimates the company's leverage will reach around 2.8- 3.2 times in the financial year ending March 2020.

Meanwhile, the rise in international iron ore prices due to disruption in supplies from Vales will help domestic manufacturers. Rising international steel prices cushion fall in domestic steel prices, as well as, help reduce cheap imports. 

India Ratings and Research believes that an increase in the iron ore import price for China would translate to a $25-30/metric tonne rise in steel price, thereby rendering Chinese steel imports expensive. 

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel