Steel stocks jump amid slow down but growth will be tempered

Steel stocks jump amid slow down but growth will be tempered

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  • Integrated steel players are expected to navigate their way out of the slow a bit better than other steel players
  • Price realisations are better in the export market, and companies are already beginning to increase exports in their sales mix

Stock prices of steel companies have jumped on the likelihood of increase in profitability of the firms in the second half. The lockdown impacted business in the last few months, but production volumes of many steel companies have started to inch up.

That has kindled hopes that a slow and gradual recovery in the second half is on the cards. In fact, integrated steel players are expected to navigate their way out of the slow a bit better than other steel players.

“The large integrated steel companies are better placed in the current cycle vs the previous one, due to market-share gains from secondary producers, and their ability to increase share of exports will likely offset the decline in domestic sales volumes,” said analysts Morgan Stanley in a note to clients.

Some of the steel stocks have already started to inch up with the likes of Tata Steel Ltd, JSW Steel Ltd, and Jindal Steel and Power Ltd rising 3-4% on Tuesday.

Another positive is that profitability is expected to look better in the second half. “We think lower profitability in this cycle will be due to lower fixed cost absorption, while spreads will be better than in the previous cycle. With gradual demand recovery in F2H21 (low base effect) and an inventory re-stocking cycle, profitability should improve sharply,” said the Morgan Stanley report.

But for the moment, steel companies are not yet out of the woods. Prices of steel products have been falling. Domestic hot-rolled coil prices have fell by about ₹300 a tonne last week, while long-product prices have been faring better, note analysts. That is not helping the current situation much.

But a saving grace for the sector is exports. Price realisations are better in the export market, and companies are already beginning to increase exports in their sales mix. Analysts note that exports in the sales mix have gone up about 65%, against the normal 15-20%.

The lacklustre domestic demand and lower prices, though, may drag margins down in the current quarters. “We believe margins of steel companies (particularly flats-heavy manufacturers) would come under pressure. Furthermore, our channel checks indicate that steel companies may offer a discount of up to INR1,500/t on flat products and INR1,000/t on long products in the domestic market to boost sales volume. This might further dent margins,” said analysts at Edelweiss Securities in a note to clients.

Some companies reported a better volume pickup in May, but that could be attributed to dealers’ re-stocking, not to any huge pickup in demand. Even so, the recovery in the sector is going to be slow and gradual. The recent stock price action does not seem to be factoring this.

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