Supply cuts by China to boost domestic steel prices
Analysts expect a robust second half for domestic steel companies on account of supply cuts imposed by the Chinese government beginning November 15 on its key steel producing provinces (forming 50 per cent of total Chinese steel output) due to environmental reasons (read winter), which can extend till May-June. This will result in firmness in global steel prices which, in turn, is expected to boost domestic prices, currently trading at a discount (6-8 per cent) to global prices due to weak domestic demand and higher production.
“China domestic rebar/HRC prices have rallied 21 per cent/7 per cent over the last one month with a large part of the gains coming in after November 15 (the day winter curbs were implemented). We believe this will rub off positively on global steel prices from January 2018, thereby benefiting Indian steel producers. A recent surge in raw material prices (iron ore and coking coal) will also play a role in supporting steel prices globally,” said PhillipCapital.
Also, Q4 is generally a good quarter for the steel sector. Further, demand in developed nations is improving led by the US. Kotak Institutional equities expects domestic steel prices to increase and buoy earnings of domestic steel companies (led by margin expansion) over the next two to three quarters — possibly exceeding its full-year estimates on the operating margin front. Moreover, this looks sustainable as Kotak expects domestic steel industry’s capacity utilisation to improve to close to 90 per cent over the next two-three years.
58% jump in SAIL likely
While Tata Steel and JSW Steel are common brokerage picks with estimated upside potential of 25 per cent and 15 per cent, respectively,, PhillipCapital is extremely bullish on Steel Authority of India. The brokerage has not only upgraded the SAIL stock to “buy’ from “sell” but also feels the stock price could jump 58 per cent from current levels. It has revised its target price to ₹120, almost triple from ₹44 earlier.
“We expect SAIL to see sequential improvement in performance (although gradual) as demand improves and prices recover in a seasonally strong period. Given the government’s focus on improving its performance (mentioned in various media articles), its performance could surprise the market,” PhillipCapital pointed out.
SAIL has tremendously underperformed its private counterparts due to disappointing financial performance and delays in projects for a prolonged period. The three stocks have already gained 45-60 per cent in the last one year and are set for another huge rally.