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Rally in steel makers' shares yet to run out of steam

 

Informist, Thursday, Apr 8, 2021

By Nikita Periwal

MUMBAI - Indian steel companies have aggressively invested in expanding capacities and taking over bankrupt steelmakers over the last three to four years as they prepared to take advantage of demand outpacing supply.

Companies held on to their plans even as steel prices crashed, debt on their books ballooned, and shareholders fretted.

While Delivery Trends Of These Companies Show Investors May Not Have Jumped The Bandwagon Yet, Most Brokerages And Rating Agencies Are Betting On Substantial Gains In Shares Hereon.

The sustained buying in shares of these companies over the last three to six weeks follows the trend of rising demand through the year, with the prospect of the trend sustaining as economic activity picks pace.

Shares of the country's two largest steelmakers--Tata Steel and JSW Steel--hit their all-time highs today, while those of Jindal Steel and Power hit their highest level in eight years. Shares of state-owned Steel Authority of India hit a three-year high.

Buttressing the prospects of steel prices sustaining at all-time highs is the robust underlying demand and favourable global dynamics, especially from China. This has seen shares of large Indian steelmakers rally 53-68% since February, with a large chunk of the gains coming over the last few weeks.

Even as capital expenditure by the private sector remains slow, the government's continued thrust on infrastructure, and a reiteration this year even in the mid of a pandemic helped the demand for steel recover rapidly.

Likely production cuts in the largest steel-making region of China, Tanghan, have sparked a rally in regional prices, and China's bellwether status for steel, among other commodities, implies that even as Indian steel prices are up a staggering 60% from June, there is scope for further upside as prices are at a discount to the import parity.

Citigroup Global Markets, however, believes that price hikes could be sharper for flat steel products compared to long, as construction activities could slow down because of the latest wave of COVID-19 infections.

The favourable pricing environment and the likely debt reduction because of the free cash flow generated have led Citigroup as well as CLSA Asia Pacific Markets, Morgan Stanley, UBS India and Jefferies to upgrade their views for the sector over the last month.

The profitability of steel companies rose to an all-time high in Oct-Dec as they raked in the benefits of higher prices because of subdued coking coal costs. Even though prices of iron ore have risen, access to captive mines has shielded these companies. The March quarter is expected to see a considerable sequential improvement.

"The outlook for higher steel prices for longer, benign coking coal costs, improving supply and falling domestic iron ore prices will drive super-cycle spreads for longer periods, in our view," Morgan Stanley said.

Though Tata Steel and JSW Steel are burdened with particularly large debt on books, an extended period of high profitability could help ease the leverage to a considerable extent. Every 1,000 rupees of hike in steel prices will help these companies reduce debt by $235 mln, CLSA estimated.

Primary Indian steel producers are likely to pare their debt by 350 bln rupees or about 15% of their total through 2020-22 (Apr-Mar), CRISIL Ratings said last month.

While the delivery trends of these companies show that investors may not have jumped the bandwagon yet, most brokerages and rating agencies are betting on substantial gains in shares hereon. The futures contracts of these companies for April also showed a build-up of positions.

Centrum Broking sees the scope for "huge upside" in select companies as the valuation of several companies is below their five-year average even after the recent sharp run-up.

Shares of Tata Steel, Jindal Steel and Power, JSW Steel and Steel Authority of India ended 5-9% higher today on the National Stock Exchange. The Nifty Metal Index was up for the ninth straight session and this has been its longest ever winning streak.  End

US$1 = 74.59 rupees

Edited by Akul Nishant Akhoury

Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

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