Steel Sector Analysis - Geojit

Research Notes Steel Sector Update (19 Nov 2013)
Maintain STAB ! o"tloo# on $ndian Steel sector
Weak demand and tight liquidity conditions have kept steel price hikes under check. The recent Rs 1,500-2,500 tonne hikes over !ept-"ct 201# have also not $een taken %ell $y traders and customers in the market. &s a result, manu'acturers have only rolled over prices 'or (ovem$er 201#. The 'estive season demand post the monsoon season has also not $een up-to e)pectations, $ut sharp *(R depreciation should, to some e)tent, $ene'it domestic prices, even i' regional prices 'all - given import parity. While +,- strength has $een one reason 'or the %eak *(R, %eak economic climate in *ndia is equally responsi$le. *n such an environment, steel mills %ould push volumes at a discount to imported steel, similar to .2/011 2discount o' Rs 2,000 tonne3. !teel prices 4 $oth 'lats and longs across geographies 4 have $een relatively sta$le. "n the other hand ra% material prices 4 primarily iron ore and scrap prices 4 have sho%n an up-tick. With 5hinese iron-ore inventories declining 1.506 2%eek-on-%eek3 to 7#.10 mn tones, $uying interest $y 5hinese mills is likely to have led to the iron-ore 'ines price increases. 8etallurgical 9 thermal coal prices have $een relatively sta$le %ith minimal changes. *n the commodities sector it is common %isdom to assume that stock prices %ill move together. :o%ever; %ithin our coverage universe, %hile %e have R<-+5< ratings on !&*= and >!W !teel, %e have a :"=- on Tata !teel. Tata !teel generates a$out ?06 o' its revenue 'rom its <uropean operations. While the 'irst signs o' an economic recovery are visi$le in <urope, amongst our coverage universe, Tata !teel %ould $e the $iggest $ene'iciary o' an economic recovery in <urope. 5urrently capacity utilisation o' Tata !teel@s <uropean $usiness is a$out 706. With an economic recovery around the corner, capacity utilisations are likely to improve, and %ith it, comes the $ene'it o' operating leverage.
Tata Steel 'eatures to $e our top-pick %ithin the *ndian !teel sector coverage universe, on %hich %e are having a %& ' (T( Rs 3)*). !&*= and >!W !teel do not have signi'icant e)posure to the <uropean region and there'ore the risk-re%ard 'or Tata !teel is $etter than the duo, in comparison. &dditionally, individual negative catalysts e)ist 'or !&*= and >!W !teel. SA$ has $een do%ngraded to R!'U+! (T( Rs ,,) 'rom :"=- earlier, on the $ack o' the company@s cost structure continuing to remain under pressure due to the initial proAect commissioning costs 9 higher provisioning 'or sta'' cost renegotiations. R!'U+! (T( Rs )22) has $een maintained on -S. Steel, as there appears to $e no near-term catalyst 'or the stock 9 capacity utiliBation %ould remain capped as progress on commissioning o' iron-ore mines in Carnataka is slo%er-than-e)pected. Diven import parity pricing 'or steel in *ndia, depreciation %eakness o' the *(R is generally 'ound $ene'icial 'or *ndian steel companies, %hose $ene'its have $een priced into our ratings.
DISCLAIMER: Geojit BNP Paribas Financial Services Limited GBNPP! or an" o# its Gro$% com%anies& a##iliates& s$bsidiaries or t'at o# an" o# its s'are'olders do not acce%t an" liabilit" arisin( #rom t'e $se o# t'is re%ort and t'e vie)s and observations contained 'erein* +'ile ever" e##ort is made to ens$re t'e acc$rac" and com%leteness o# in#ormation contained 'erein& GBNPP& or an" o# its (ro$% or associate com%anies or its a##iliates ta,e no ($arantee and ass$me no liabilit" #or an" errors or omissions o# t'e in#ormation contained 'erein* In#ormation contained 'erein cannot be t'e basis #or an" claim& demand or ca$se o# action* -'is material s'o$ld not be constr$ed as an o##er to sell or t'e solicitation o# an o##er to b$" an" sec$rit"* +e are not solicitin( an" action based on t'is material* It is #or t'e (eneral in#ormation o# retail clients o# GBNPP* It does not constit$te a %ersonal recommendation or ta,e into acco$nt t'e %artic$lar investment objectives& #inancial sit$ations& or needs o# individ$al clients* Be#ore actin( on an" advice or recommendation in t'is material& clients s'o$ld consider )'et'er it is s$itable #or t'eir %artic$lar circ$mstances and& i# necessar"& see, %ro#essional advice* -'e %rice and val$e o# t'e investments re#erred to in t'is material and t'e income #rom t'em ma" (o do)n as )ell as $%& and investors ma" reali.e losses on an" investments* Past %er#ormance is not a ($ide #or #$t$re %er#ormance& #$t$re ret$rns are not ($aranteed and a loss o# ori(inal ca%ital ma" occ$r* -'is doc$ment is not #or %$blic distrib$tion and 'as been #$rnis'ed to "o$ solel" #or "o$r in#ormation and m$st not be re%rod$ced or redistrib$ted to an" ot'er %erson* Persons into )'ose %ossession t'is doc$ment ma" come are re/$ired to observe t'ese restrictions* 0%inion e1%ressed 'erein is o$r c$rrent o%inion as o# t'e date a%%earin( on t'is re%ort onl"* +'ile )e endeavor to $%date on a reasonable basis t'e in#ormation disc$ssed in t'is material& t'ere ma" be re($lator"& com%liance& or ot'er reasons t'at %revent $s #rom doin( so* Pros%ective investors and ot'ers are ca$tioned t'at an" #or)ard2loo,in( statements are not %redictions and ma" be s$bject to c'an(e )it'o$t notice* Certain transactions 2 #$t$res& o%tions and ot'er derivatives as )ell as non2investment (rade sec$rities 2 involve s$bstantial ris,s and are not s$itable #or all investors* Re%orts based on tec'nical anal"sis is #oc$sed on st$d"in( c'arts o# a stoc,3s %rice movement and tradin( vol$me& as o%%osed to #oc$sin( on a com%an"3s #$ndamentals and as s$c'& ma" not matc' )it' a re%ort on a com%an"3s #$ndamentals* 0$r sales%eo%le& traders& and ot'er %ro#essionals ma" %rovide oral or )ritten mar,et commentar" or tradin( strate(ies to o$r clients t'at re#lect o%inions t'at are contrar" to t'e o%inions e1%ressed 'erein& and o$r %ro%rietar" tradin( and investin( b$sinesses ma" ma,e investment decisions t'at are inconsistent )it' t'e recommendations e1%ressed 'erein*
+e and o$r a##iliates& o##icers& directors& and em%lo"ees& incl$din( %ersons involved in t'e %re%aration or iss$ance o# t'is material& ma" #rom time to time 'ave 3lon(3 or 3s'ort3 %ositions in& act as %rinci%al in& and b$" or sell t'e sec$rities or derivatives t'ereo# o# com%anies mentioned 'erein* +e or an" o# t'e (ro$% or associate or s$bsidiar" com%anies a##iliated to $s and 4 or to an" o# o$r s'are'olders ma" #rom time to time solicit or %er#orm investment ban,in(& or ot'er services #or& an" com%an" mentioned in t'is doc$ment* +e do not $nderta,e to advise an" c'an(e in o$r vie)s e1%ressed in t'is doc$ment* +'ile )e )o$ld endeavor to $%date t'e in#ormation 'erein on a reasonable basis& Geojit BNP Paribas& its s$bsidiaries and associated com%anies& t'eir directors and em%lo"ees are $nder no obli(ation to $%date or ,ee% t'e in#ormation c$rrent* Also t'ere ma" be re($lator"& com%liance& or ot'er reasons t'at ma" %revent Geojit BNP Paribas and a##iliates #rom doin( so* Pros%ective investors and ot'ers are ca$tioned t'at an" #or)ard2loo,in( statements are not %redictions and ma" be s$bject to c'an(e )it'o$t notice* November 56 & 7859

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Research Notes Steel Sector Update (19 Nov 2013)

Maintain STAB ! o"tloo# on $ndian Steel sector

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